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Best Defense For Small Innovators Is A Substantive Patent Portfolio

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If you have been following the news about patent infringement complaints filed against tech giants, something interesting might have caught your attention. Within a span of a couple of days, each of Facebook, Google, and Apple were hit by patent infringement suits filed by companies that allegedly were in either a technology development partnership or were having technical discussions with the larger counterpart previously. The general pattern is one where the smaller rival in each case alleges that the large competitor was evaluating their technology under an NDA for possible cooperation but then copied the patented technology once they got a peek under the hood – without paying for tech transfer or taking a license to the patents. There is no way to know just yet what the underlying facts are and how the three suits may conclude. It is, however, a reminder that this type of thing is not rare, and moreover, reliance on NDAs alone to preserve critical information is not an effective strategy.

Below is a broad stroke summary of the three cases as described in the complaints.

Sonos, Inc filed a patent infringement complaint against Google on January 7th alleging that the two companies had a partnership for integrating Google Play Music into the Sonos platform and that Google has learned about Sonos’s wireless multi-room technology during that partnership in 2013. The complaint further alleges that Google has misappropriated Sonos’s technology and incorporated into Chromecast Audio and numerous other Google products starting in 2015 despite warnings from Sonos that it is infringing on Sonos’s patented technology.

On the same day, January 7th, Voxer, Inc filed a patent infringement suit against Facebook and Instagram. In the complaint, Voxer describes that the co-founder of the company had served in Afghanistan in the wake of September 11th terrorist attacks where he saw shortcomings of the existing communication technology. Later, he and his team developed the Voxer Walkie Talkie app in 2011, which was named Best Overall App and received an award in 2013. Voxer alleges that Facebook approached Voxer about a potential collaboration in 2012, and during discussions, Voxer disclosed its proprietary technology and its patent portfolio to Facebook. Voxer alleges that Facebook subsequently revoked Voxer’s access to key Facebook components and launched its own Facebook Live and Instagram Live features in 2015-2016, which Voxer believes infringe Voxer’s patent portfolio.

Masimo Corporation filed a patent infringement case against Apple on January 9th. Masimo describes in the complaint that it developed a technology for non-invasive monitoring of physiological parameters, such as heart rate, arterial oxygen saturation, and many others, and that Masimo developed other advanced technologies that are in use at hospitals and save lives of patients including infants. Masimo also describes that it has an established Trade Secret Program to safeguard its technologies. Masimo alleges that Apple contacted the company in 2013 for potential collaboration and to integrate Masimo’s technology into Apple’s products. After that, the complaint alleges, that Apple started hiring key executives and key employees from Masimo and employed them in its own efforts to develop similar technologies as that of Masimo, and moreover, the same employees started filing for patent applications on behalf of Apple shortly after. Masimo alleges patent infringement by Apple and it also challenges inventorship of Apple patents.

As stated in the beginning, there is no way to know the underlying facts in these three cases or how they may be resolved eventually. The important thing to note is that such cases do happen. In the absence of a substantive, well-planned, well-prosecuted patent portfolio, there is very little that any company can do if it believes its technology is being copied or misappropriated by a competitor.

Non-disclosure agreements are a pre-requisite in any exchange with a potential partner or a competitor, however, you can trust an NDA as much as you can trust the person signing it. In other words, NDAs keep honest people honest. It is notoriously difficult to prove a violation of an NDA with intent, and equally difficult to receive damages awards for the same. Patent protection, however, is always a good defense. However, an effective patent portfolio does not materialize simply because patent applications are filed. An effective patent portfolio can only be built through expert oversight of the invention collection and patent filing, as well as ongoing expert management of the portfolio. As innovative companies embark on commercializing their technologies and build commercial partnerships, it always pays to have an air-tight defensive patent portfolio.

Inventor Rights Act introduced

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In the closing days of 2019, a new bill was introduced that ought to be very much of interest to individual inventors. The proposed Inventor Rights Act, H.R.5478, amends some aspects of the existing patent law and introduces some new provisions, all with the goal of fixing shortcomings of the existing law and to bring clarifications where needed. The Act fundamentally aims to bring more of a balance of interests to the law by addressing those aspects that are widely seen as onerous or counter-productive by especially the small innovators and individual inventors. In particular, the very high rate that the Patent Trial and Appeal Board (PTAB), a USPTO agency, invalidates patents that were issued by the USPTO itself has been a consistent point of criticism of the current law.

Accordingly, here are some of the changes proposed in the Inventor Rights Act.

  1. The Act prohibits inventor-owned patents from being reviewed for validity by the USPTO after issuance, unless consented by the inventor. This applies only to those patents that are owned by inventors or by entities controlled by the inventors. The aim of this provision is to remove the cost and burden of having to fund Inter-Partes Review (IPR) defense of patents by inventors, who typically lack the resources to do so effectively. It does not prevent patents owned by anyone from being challenged in District Court cases, however.
  2. Expands venue choice for District Court action to include a jurisdiction where the inventor had a place of business or conducted research, development, manufacturing. The aim of this expansion of venue compared to what the Oil States case prescribed is to reduce the cost and burden of bringing an action for inventors. It is usually the case that the defendants have vastly larger resources than individual inventors.
  3. Requires that the courts presume that any infringement causes irreparable damage to the inventors, and hence injunctions should be issued in those cases where infringement has been proven.
  4. For inventor owned patents, the Act simplifies the damages and provides for disgorgement of profits from infringing products. This is in contrast to the reasonable royalty based damages calculations. This allows individual inventors to have the ability to use profit disgorgement available to patent holders with products that practice the patented invention. The rationale is that the individual inventors with transformative inventions do not always have the resources to build and market their inventions, and hence should not be prevented from access to the damages calculations based on lot profit.
  5. Recovery of attorneys’ fees in cases where the fees substantially exceed the damages award. This provision is aimed at discouraging a well-resourced defendant from engaging in practice aimed at running up litigation costs in order to exhaust the inventor’s resources.

Three Cardinal Rules of Patent Portfolio Management

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We have been building and managing patent portfolios for over two decades, either as technology developers who had to rely on IP protection for durability and protection of our product business, or as IP portfolio managers on behalf of innovative companies and ivy league universities. Although no two technologies and no two patents are the same, there are some best practices that one can observe to serve well in every situation. There are three rules of patent portfolio management that are especially important and constant over changes in the regulatory environment as well as changing technology trends.

First rule is to never close patent prosecution on key patent families no matter the cost. This also implies that one has to be immersed in the technology and IP enough to be able to judge which exactly are likely the key patents. It is rather rare that the initial set of claims filed/issued in a patent family are the most valuable claims. In practical terms, that never happens absent a fluke. One can point to exceptions in endeavors such as bio or pharma where years of research culminates in a mega patent application with hundreds of patent claims. But again, those are exceptions. For most technologies, the initial set of claims that issue in a patent family do not anticipate and cover the state of technology several years down the road. Even for patent applications with robust patent specifications and lots of enabling detail, the applicant has to select one specific group of embodiments for the initial set of claims. Once the patent prosecution is closed, there is no ability to claim any other aspect of the invention disclosed in the patent specification. The game is over. However by keeping open prosecution in a patent family, in other words making sure that there is always at least one patent application pending at any time based on the same specification, the applicant can assure that the rightful patent rights will not be lost due to a technicality. Filing and prosecuting patent applications continually does represent expense, of course. So the rule should be applied selectively only to those patent families that one expects to become key.

The second rule is to trim the patent portfolio time to time. No organization has endless resources. One can perhaps consider some of the largest corporations as exceptions to this statement, but again, we are not concerned with the largest corporations here. Given the limitations on resources, it is prudent to review the patent portfolio time to time and trim it by either not pursuing patent applications any longer or even considering not paying patent maintenance on patents that are not likely to represent economic value any time soon. It is really as simple as maintaining a stock portfolio in that you should know what you have and why you have it. Every patent family should have a rationale as to why it does or will represent economic value for the company. At any point in time if the rationale no longer holds true, either because the technology or the market evolved in a direction that made the patent irrelevant, then one should not spend any more resources to pursue or maintain assets in that patent portfolio – regardless of the sunk cost.

The third rule is to allow certain level of resources to be spent on pursuing technologies and seeking patent protection on initiatives that fall outside of the first and second rule. In other words, one should build speculative ‘long-shot’ technology initiatives and respective patents in their portfolio by spending a certain portion of their resources. What that portion ought to be is dependent on the nature of the business and risk tolerance of the patent holder. A rule of thumb may be around 15%. One can view this investment as insurance policy against abrupt shifts in technology or product trends, as well as high-risk high-return investment that can create strategic options for the business. Either way, the portfolio ought to include some number of long-shot investments. The critical thing is to avoid such speculative investment from being confined to the pet projects of certain managers in a company.

As we started this piece by saying that no two situations are the same, we will finish repeating the same. The rules above are general guidelines that emerged from managing portfolios and observing others’ mistakes for years. They provide the basis for at the least avoiding the biggest mistakes that companies make in protecting their intellectual property.

Small Businesses and Startups Are Still the Main Drivers of Innovation

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It does sound like a political trope but it is worth stating that the small businesses, startups, and universities still drive majority of the innovation in our economy. If you follow the mainstream reporting of technology, you may be misled into thinking that innovation only happens at large conglomerates that also bring you the end products that we all use day to day. That would be a fair conclusion based on what gets the most mindshare, but it would also be far from reality.

As the industrial revolution of 19th century was underway, a very powerful realization has happened – namely, that production and economic benefits can be levered by separating innovation from production. Innovating was delegated to an increasingly smaller part of the work force while the majority was put to work on production lines embodying assembly-line process, where small, specialized tasks are performed repeatedly by individuals who are specialized in that one specific task. That’s still the basis of our economy, as well as the economy of most developed and developing nations. The question remains however whether the large companies, including those that are the behemoths of technology products today, are innovating efficiently. This is a point that can be argued either way, but it is informative to look at some of the most recognized, and largest innovators in the US.

Take a household name such as Google that some argue to be among the innovative large tech companies. Google was founded more than twenty years ago in 1998. Today the company employs more than 100,000 people and yet it is still primarily a search engine advertising business. It generates well over $100 Billion a year revenue but only a fraction of that revenue comes from all of its non-search engine businesses. Arguably, the only innovative businesses Google owns are the Pixel phones and Nest cameras, both of which resulted from large acquisitions, not native Google innovations. As for cloud computing or Google Home, Google is firmly a follower, never led these product categories. Picking on large companies such as Google is easy, but not the main point here. They bring convenience to a large number of consumers and employ a lot of engineers, after all. The main point is that innovation under the umbrella of large companies is not nearly as efficient as innovation undertaken by thousands of startups and small innovators. The reason: Small companies have to innovate to survive, whereas large companies can innovate much less and still remain dominant due to their pricing power and established market position.

The recognition that innovation happens all over our economy and that it is not confined to the ranks of the largest tech companies is the driver of our business at Armada. Each of the largest tech companies employs hundreds of people in their IP department just to manage their patent portfolio. The only way that smaller innovators can even stay in the game is by employing the help of likes of Armada, whereby bringing in expertise and capital to their corner, by employing the same best IP management practices that the largest players employ, and by starting to treat their innovations as their most valuable assets rather than something that can be put off and addressed in the future.

Our Work Starts

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This is our inaugural blog entry. We have launched Armada IP Capital to close the expertise and financing gap that hinders many innovative companies, startups, and university tech transfer offices from commercializing their innovations and benefiting from the fruits of their inventions. Following the founding and growth of one of the premier IP financing firms in the US over the last five years, we are embarking on this new venture to expand our reach into the vibrant innovator community and to build the preeminent IP management and financing firm.

As the founder of the firm, I am penning this initial blog entry with anticipation and pride. In our leadership team and in the extended advisory board we combine expertise in technology, patent law, finance, and management of IP – without all of which one can not succeed in building and managing a portfolio of inventions. Our aim will be to work with tireless innovators of our economy to assure that they spend their resources wisely in the generation as well as the protection of technology and product innovations.

I look forward to an exciting first year of operation and a lot of hard work that will make a difference for innovators.

Fatih Ozluturk
Founder, Managing Principal