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Bloomberg
Rackspace Hosting, a computing services provider in Texas, hopes an inter partes review will fend off what it calls a dubious patent-infringement challenge.

Companies sidestep courts to combat patent claims

Bloomberg
The U.S. Patent and Trademark Office in Alexandria, Va., directs inter partes reviews, a trial process that allows companies to bypass court proceedings in patent challenge cases.

– Rackspace Hosting lawyer Van Lindberg is fed up with what he considers dubious patent-infringement lawsuits – such as when licensing company Rotatable Technologies demanded $75,000 to settle a case.

Many companies will pay the petitioning company to go away, since it’s cheaper than what may become a lengthy court battle.

Instead, Lindberg – using a procedure called inter partes review, created by the 2011 America Invents Act – petitioned the U.S. Patent and Trademark Office for a new examination of the computer-image display patent.

If Rackspace persuades the agency that the patent never should have been issued, the suit will be dismissed.

“We said no, thanks,” to Rotatable’s demand, said Lindberg, head of the intellectual property section of web computing services provider from San Antonio. Rackspace decided “to stand up and not be pushed around.”

Rotatable says in court documents that its patent is valid. Its lawyer, Austin Hansley in Dallas, didn’t return calls.

Companies including Google, NetApp and Oracle see the review as a way to fend off royalty demands by patent-assertion entities, sometimes derided as trolls.

They like the process for the reasons patent-licensing firms don’t: They offer quicker rulings at less cost than litigation and shift the burden of proof to patent owners.

“We are looking at the most cost-effective way of dealing with dubious suits,” said Doug Luftman, chief intellectual property counsel of NetApp, a Sunnyvale, Calif., data-storage company.

Tech companies say patent lawsuits, especially targeting end users or one aspect of a business, drain resources and innovation. Patent-licensing companies say litigation protects inventions, though Congress is considering curbs on abuse.

At least 592 petitions have been filed since reviews began a year ago, exceeding the 520 the agency expected. Costs run as much as $300,000, less than half of the minimum $650,000 for a court challenge.

Patent owners win more than half of trials, while the median damage award for patent-licensing companies in 2012 was $11.2 million, a PricewaterhouseCoopers LLP study found.

Under the new patent law, the patent office in Alexandria, Va., set up processes to look at some finance-related business methods, such as SAP’s challenge of Versata Software’s patent for customized pricing, and to streamline the older procedure for anyone challenging a patent’s validity.

Decisions on whether a patent is valid are required within 12 months. Under the old rules, patent re-examinations ordinarily take years.

Patent office officials had no comment for this story, said Paul Fucito, an agency spokesman.

Scott Cole, of the law firm McKool Smith in Austin, Texas, says the agency’s rules can work against patent owners, whom he often represents.

Courts presume patents are valid, while the patent office doesn’t. Patent holders can’t demand company emails or depose employees, as they can in court. The focus is technical evidence, such as whether earlier inventions invalidate the patent. And unlike most jurors, examiners have patent backgrounds.

“The odds of winning a validity challenge are orders of magnitude higher than in other current forums,” Cole said. The patent office “wants to be heavily involved in assessing validity of their patents because they get political criticism when they issue a bad patent. It takes the heat off.”

Nothing prevents multiple review requests for the same patent, so challengers can “come back and try to win again on the same arguments or different arguments,” Cole said.

Michael Fleming, a former chief administrative patent judge who helped set up the new reviews, said the patent office can combine related cases and disallow baseless challenges.

“When you file your petition, you’re required to show that there’s a reasonable likelihood that, indeed, there is one claim that would be invalid,” Fleming said.

Google wants Congress to expand the quick review for business methods beyond finance because it allows a broader range of arguments, such as whether the idea is an abstract concept ineligible for legal protection, said Laura Sheridan, Google’s patent counsel.

Some of the nation’s biggest companies, including General Electric, 3M and Johnson & Johnson, oppose expanding business-method patent reviews. It could risk patents covering data processing for cancer therapies and safety systems for cars, they told lawmakers.

There’s no guarantee of winning at the patent office, and there’s the risk that losing will damage your court case, Google’s Sheridan said. “If you’re not successful, the jury will hear about that,” she said.

Offsetting the risk, the reviews have helped some companies sued for patent infringement persuade litigants to settle, sometimes for less money than they originally demanded.

Forty-one patent challenges have been settled so far. Google settled two lawsuits filed against it after asking for reviews. One, against licensing company EMG Technology LLC, was announced last month and involved dismissal of legal actions.

The reviews also are being used by competitors involved in litigation.

Real estate listing company Trulia filed a petition with the patent office after being sued by Zillow and persuaded a federal judge to put the case on hold until the patent-validity review is completed. Zillow said Trulia was “employing gamesmanship” after it couldn’t get the case dismissed by the trial judge.

Rackspace is planning another 10 challenges, despite the cost of as much as $300,000 each.

A federal judge already found one element of Rototable’s patent invalid. Rotatable is appealing that order, as well as the judge’s interpretation of key terms of the patent. Rackspace seeks to have the suit put on hold until that appeal is decided.

For small companies that may be unable to finance patent challenges, Google and NetApp started Unified Patents Inc. to help them pool resources.

“All of these companies are seeing litigation on the same patents across all of their products,” said Kevin Jakel, a former Intuit patent counsel who founded Unified Patents.

Almost every review filed in the past year involves patents also in litigation, said Scott Daniels, a lawyer with Westerman Hattori in Washington.

Daniels, who blogs about new requests, said an increasing number involve drugs and medical devices, though most are for computer-related technology.

“If you try to sue a ton of companies and make a mint off each one, you have to expect you’re going to get some pushback,” Daniels said.

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