Defending Against NPE Attacks Using Low-Cost IPRs

Chinese companies doing business in the U.S. often face litigation threats brought by non-practicing entities (NPEs), whose business model is to sue for patent infringement and collect settlement/license fees.  Fearing the potentially daunting litigation cost, many Chinese defendants choose to settle without fighting, believing that any counter attacks would only pile up the legal bills.  While it is tempting to settle early and eliminate future uncertainties associated with legal battles, it is not uncommon that NPEs price the settlement to be the same or slightly less than the cost of a regular inter parties review (IPR), which is not insubstantial and normally in the range from a quarter to one half million dollars.  When initial settlement is not economical, a low-cost IPR approach may be considered to force the NPE to lower the settlement amount to a level at least lower than the difference between the initial amount and the IPR cost.

IPR was introduced in the American Invents Act and has become perhaps the most effective way to challenge the validity of an issued U.S. patent.  An IPR proceeding is before the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office.  The proceeding starts when a challenger, called the petitioner in IPR terms, files a petition to challenge the validity of one or more claims of a patent on grounds of novelty and nonobviousness based on patents or printed publications.  The patent owner can file a preliminary response to defend the validity.  If, however, the PTAB decides that the petition demonstrate that there is a “reasonable likelihood” that the petitioner would prevail as to at least one of the challenged claims, the petition will be granted and a “paper trial” will be instituted.  After institution, patent owner needs to file a formal response to the petition, and optionally may file a motion to amend the challenged claim(s).  The petitioner then replies to the patent owner response, and opposes the motion to amend if needed.  The patent owner then has a final chance to reply to the petitioner reply before oral argument is heard by a panel of administrative patent judges of the PTAB.  The final written decision is normally issued within one year of institution.

Generally speaking, the petitioner’s major cost occurs in the petition preparation stage.  A typical petition challenges almost all claims on the grounds of both novelty and nonobviousness based on several prior art references.  To support the ground that a claim is obvious in view of a combination of multiple references, an expert declaration is usually provided.  However, such a “full scale” petition may not be necessary for the purpose of instituting the IPR trial and the cost of preparing the petition can be significantly reduced when the goal of the IPR is to force an NPE to lower the settlement amount.  As long as the PTAB institutes the trial, the NPE is likely to significantly lower the demand and seek settlement to avoid the risk of claim invalidation, which in turn would curtail their ability to sue others. 

In NPE litigations, the odds of instituting a corresponding IPR petition before the PTAB favor the defendant-petitioner for at least two reasons.  First, an NPE normally asserts a patent against multiple defendants and is more likely to adopt broad interpretations of its claims to allege infringement, making it easier to find prior art to prove invalidity.  Second, the PTAB uses the “broadest reasonable interpretation” standard for claim construction, making a patent more likely to be invalidated at the PTAB than in the direct courts.  Therefore, in order to institute the IPR trial, a petitioner needs not to challenge many claims.  Instead, challenging the independent claim(s) should be sufficient for the purpose of institution.  Reducing the number of challenged claims can reduce the cost of petition preparation significantly, because often times the hardest invalidity position is for invalidating a feature-rich dependent claim.

Focusing on the independent claims can reduce IPR cost for another reason.  It is easier to find a single prior art reference to disclose all elements of an independent claim than a dependent claim.  If such a reference is available, challenging the independent claim on the ground of anticipation does not need an expert declaration.  The cost relating to expert declaration is two-folded and constitutes a significant portion of the total IPR cost.  First, including an expert declaration in the petition requires retaining an expert, preparing the declaration, and referencing the declaration in the petition, all of which adding to the initial cost of petition preparation.  If no expert declaration is used in the petition, the initial cost of preparing the petition can be significantly reduced.  Second, once the IPR trial is instituted, the patent owner will almost certainly to depose the petitioner’s expert if a declaration is relied upon, adding the secondary cost of preparing and defending the expert to the total IPR cost. 

Even when the claims are challenged on the ground of obviousness, the risk of omitting an expert declaration is relatively low in some cases, especially when the technology involved is relatively simple.  This is because the administrative patent judges in the PTAB are required to have scientific background to understand the references themselves.  They can also make judgment as to whether it is obvious to combine multiple references.  Therefore, when the challenged patent involves relatively simple technology, the patent judges can be seen as experts themselves.

In sum, challenging only the broadest claims and omitting the expert declaration to the extent of low risk can reduce the initial cost of preparing the petition to a fraction of what a typical IPR budget would require.  If the IPR trial is instituted and the NPE seeks to settle, the cost associated with the later stages of the IPR proceeding is non-existence.  Because of the leverage the petitioner gains after institution, the NPE is likely to lower the settlement amount significantly.  In the end, the defendant-petitioner can be better off than taking the initial offer made by the NPE.