Q1 in Review: Patent Litigation Surged as Third-Party Funding Further Unshackled NPEs

The first quarter of 2021 saw a marked increase in patent litigation as many of the same trends that drove filings last year continued to crystallize.

In particular, more US patent litigation was filed in Q1 2021 than in any first quarter since 2015, with NPEs also making their strongest showing since that same period. Although operating company filings also increased in the first quarter, that uptick is entirely the result of litigation targeting counterfeiters, while more traditional patent litigation was slightly down.

Meanwhile, the Patent Trial and Appeal Board (PTAB) has continued the exercise of its controversial discretion to deny institution in America Invents Act (AIA) review trials based on the status of parallel district court litigation, as the Federal Circuit made it much more difficult to appeal such rulings—causing some defendants to take a second look at reexaminations. Furthermore, Congress spared some of its attention for Section 101 reform, with certain senators resuming their advocacy for a new approach to patent eligibility and Alice.

With respect to standard essential patents (SEPs), the first quarter also saw jurisprudence over fair, reasonable, and non-discriminatory (FRAND) licensing move further in a patent owner-friendly direction. Most notably, Germany’s Federal Court of Justice issued a follow-up ruling related to a landmark decision from last year, raising the bar even higher for the licensing conduct expected of accused infringers. On the domestic front, moreover, the Federal Trade Commission (FTC) declined to appeal last year’s FTC v. Qualcomm decision to the US Supreme Court.

Additionally, a robust pipeline of operating company-to-NPE divestments continued to fuel the patent marketplace, with COVID-19-related economic pressure likely to prompt businesses to sell their patents to generate revenue. With the ever-increasing availability of litigation finance, more NPEs now have the means to acquire significant patent portfolios and more readily enforce them—and indeed, have already been doing so.

A PDF version of this report can be downloaded here.

As RPX has extensively reported, the rise of the Western District of Texas—the top patent district of 2020 by a wide margin—is largely the work of District Judge Alan D. Albright, whose courtroom has become such a popular destination due to his rather plaintiff-centric posture toward certain types of early motions, including transfer requests and Alice challenges. Moreover, his district’s lack of divisional standing rules allows plaintiffs to file directly in their preferred division—specifically, Waco, where they are guaranteed to get Judge Albright as the division’s only judge.

For this reason, it is perhaps not surprising that Judge Albright presided over by far the largest share of patent litigation in 2020—accounting for 19% of all defendants sued in 2020, leading Eastern District of Texas Judge Rodney Gilstrap, who took a distant second place with 6%. While Judge Albright was narrowly outpaced in Q1 2021 by Western District of Pennsylvania Judge Mark R. Hornak, due to the aforementioned Doggie Dental case, he was the top judge for NPE matters by a significant amount, as shown below—presiding over nearly a third of such litigation. Judge Gilstrap again held the number-two spot for NPE filings, with less than half of Judge Albright’s defendant count. Just behind Judge Gilstrap were three of Delaware’s district judges: Maryellen Noreika (herself a former patent litigator, like Judge Albright), Colm F. Connolly, and Richard G. Andrews.

With respect to Judge Albright’s treatment of early motions, convenience transfers—a form of relief that he has rarely granted since taking the bench in 2018—spurred the most debate in Q1. In particular, a rift has grown between Judge Albright and the Federal Circuit over the handling of such transfer requests, a divide that has drawn attention to both how he weighs the various factors in any convenience analysis and, increasingly, his tendency to let those motions sit undecided for months while proceeding with other issues, particularly claim construction. The latter trend finally came to a boil in March 2021, following a series of rulings in which the Federal Circuit highlighted those delays with increasing firmness—leading Judge Albright to announce that he will now rule on interdistrict transfer motions before holding a Markman hearing.

That first-quarter wave of Financial Services litigation included lawsuits from a variety of familiar NPEs—among them IP Edge, which began a mobile point-of-sale campaign in September 2020 through its affiliated NPE Kwality IP LLC, initially targeting online payment service providers. In February, fellow IP Edge NPE Xylon Licensing LLC rebooted the campaign with a fresh wave of litigation targeting financial institutions. Another monetization firm, Dynamic IP Deals, LLC (d/b/a DynaIP), launched its own Financial Services campaign in Q1 as well through subsidiary mCom IP, LLC, also hitting several financial institutions—here over their use of digital banking platforms, focusing in part on certain analytics and marketing features.

One more NPE that joined the fray in the first quarter was Caselas, LLC, one of several entities controlled by prolific inventor Raymond Anthony Joao, which in late January sued a group of banks and credit unions over the provision of financial payment cards. Additionally, inventor-controlled NPE Proxense, LLC launched a new mobile payments campaign in March, with allegations calling out biometric authentication features in particular. Mobile payments are also at issue in the latest round of lawsuits from inventor William Grecia, filed in January and February—his latest pivot in a long-running campaign that has also encompassed streaming services and cloud storage.

For more coverage of litigation hitting this sector, see RPX Insight.

Also, Financial Services is not the only space to see a sizeable uptick in recent NPE activity, as the Automotive sector experienced an even greater increase last year, despite the dip seen in Q1 2021. In 2020, NPE litigation targeting the Automotive sector rose by 120% compared to 2019, and with new entrants flocking to the scene, historically aggressive plaintiffs active in the space, and cars becoming increasingly high-tech, sustained activity in the sector looks likely. The effects will be felt by a broad range of defendants, from car makers and their suppliers to tech companies and wireless technology providers. See RPX’s fourth-quarter review for a deep dive on notable Automotive litigation filed by NPEs in Q4 and 2020 as a whole.

However, AIA review institution rates have been on the decline. The institution rate in Q1 2021 was 58%, compared to 58.9% for the whole of 2020—which, in turn, was 2.2% lower than in 2019, when 61% of petitions were instituted.

One of the most noteworthy factors contributing to this downturn is the PTAB’s increased exercise of discretion to deny institution in AIA review trials for reasons other than the merits, based on circumstances laid out in a steadily expanding body of precedential decisions. The most impactful of these has been the NHK-Fintiv rule, a set of factors established by the PTAB that allow it to consider the status of parallel district court litigation in deciding whether to institute. Perhaps most controversial of these factors has been one that allows the Board to deny institution when a parallel district court trial has been scheduled in close proximity to the deadline of the Board’s final decision. When litigating in venues that are more aggressive about scheduling early trial dates, such as the Western District of Texas, this factor shrinks the window in which an AIA review petition can be effectively filed to one smaller than what is practically allowed by statute.

In the first quarter, the Federal Circuit made it much harder for such defendants to appeal the denial of an AIA review petition due to NHK-Fintiv. On March 13, the appellate court ruled in Mylan Laboratories v. Janssen Pharmaceutica that petitioner-defendants cannot directly appeal such a decision, and that they may only challenge one through a mandamus petition—further holding that such petitions must raise “colorable constitutional claims”, a high bar to clear.

As the NHK-Fintiv rule makes AIA reviews a less attractive option, it is perhaps no surprise that some defendants seeking to challenge validity have increasingly been turning to ex parte reexaminations, which are not subject to discretionary denials. Indeed, in some cases, reexaminations have allowed companies to work around NHK-Fintiv denials and win stays in parallel district court litigation when IPR petitions have failed. Notably, this includes two recent rulings by District Judge Rodney Gilstrap of the Eastern District of Texas, one of which stayed litigation filed by NPE AGIS Software Development LLC and another that did the same in a case brought by Ramot at Tel Aviv University Limited. Beyond those strategic advantages resulting from NHK-Fintiv, reexaminations also offer other relative benefits, including that they tend to be much less expensive and the lack of estoppel—which for IPRs, bars companies from asserting in district court an invalidity argument that they “raised or reasonably could have raised” before the PTAB. That said, there are also significant disadvantages compared to IPR: in part, a third party requesting reexamination is essentially shut out from the process after the USPTO grants its request, and thus will not have the opportunity to rebut arguments subsequently raised by the patent owner.

Meanwhile, the debate continues over NHK-Fintiv on both sides of the issue, including through litigation that spread to a new forum in Q1. Last year, Apple, Cisco, Google, and Intel sued then-USPTO Director Andrei Iancu in the Northern District of California, seeking to side aside the NHK-Fintiv rule—arguing that the rule conflicts with the AIA and is undermining the IPR regime. A growing coalition of companies spanning a wide range of industries aligned themselves with the California plaintiffs in Q1, including a group of 17 companies and industry associations operating in market sectors such as Automotive, Mobile Communications and Devices, Networking, and Semiconductors that recently filed a brief in support. Also, in February, the plaintiffs beat back a motion to intervene from a coalition of entities supporting the rule; those would-be intervenors, including inventors’ industry association US Inventor, have since filed suit against acting USPTO Director Andrew Hirshfeld in the Eastern District of Texas, seeking to halt all AIA reviews until the rule gets formally codified.

The Supreme Court Considers APJ Appointments in Arthrex

The first quarter also saw a key constitutional question proceed before the US Supreme Court in the ongoing appeal of Arthrex, in which the Court will decide whether the appointment of the PTAB’s administrative patent judges (APJs) violated the US Constitution’s Appointments Clause. In Arthrex, the Federal Circuit held in October 2019 that APJs were unconstitutionally appointed, concluding that under the applicable statute they were “principal officers” requiring Senate confirmation. However, rather than eliminate the PTAB altogether, the Federal Circuit chose a more targeted solution to the constitutionality issue by severing a portion of the statute restricting the Director’s removal authority over APJs, seeking to render them inferior officers.

Both the Appointments Clause question and the proper remedy, should the Supreme Court agree that the current regime is unconstitutional, remain at issue—and were both addressed by the Court during oral arguments, which were held on March 1 and revealed no clear consensus among the Justices. Stay tuned for more.

Limiting the data to decisions that turned on Berkheimer or Aatrix, meaning that a plaintiff asserted that a factual issue precluded early resolution and the court’s order actually addressed that issue, further shows how the impact of Berkheimer varies by procedural stage. This analysis shows that courts found sufficient facts to rule about half of the time for Rule 12, compared to 23% for summary judgment.

Furthermore, adding a plaintiff type filter to that analysis, as shown below, illustrates again how plaintiff type affects outcome. In particular, NPEs succeed less often at blocking Rule 12 challenges under Berkheimer/Aatrix, with courts finding sufficient facts to issue a ruling 57% of the time for motions against NPEs but 40% of the time for those against operating companies. NPEs fare even worse at the summary judgment stage, as courts found sufficient facts to rule in 75% of Alice summary judgment motions against NPEs—whereas for summary judgment motions against operating companies, courts found sufficient facts just 4% of the time.

Additionally, the top five most popular districts for NPE litigation diverge sharply in their treatment of Alice motions, as shown below. Of those five, the Northern District of California is the most likely to grant an Alice challenge, with a per-patent invalidation rate of 70%. The District of Delaware and the Central District of California, each of which has an invalidation rate of 52%, are the closest to the national average of 57%.

The Western District of Texas has the lowest invalidation rate of the group at just 25%, though it should be noted that just 21 patents appear to have been adjudicated in that venue under Alice since it was decided in June 2014. This small number of reviewed patents, and their low invalidation rate, are at least partly attributable to two factors: the district’s relatively recent rise in the rankings as a patent venue, and Judge Albright’s stated inclination against granting early patent eligibility motions.

Moreover, a breakdown of invalidation rates by market sector (specifically, by the RPX market sector assigned to the litigation in which the patents were asserted and then challenged under Alice) reveals that parties filing Alice motions prevail far more often in litigation targeting certain industries. Subject matter eligibility challenges succeed most often against patents asserted in Financial Services suits, in which 79% of asserted patents adjudicated under Alice have had all challenged claims invalidated; followed by Automotive (72%), Biotech and Pharma (70%), and Semiconductors (69%). Sectors with the lowest invalidation rates include Medical (33%), Networking (38%), and Industrial (45%).

Policy Update

One of the most persistent criticisms of Alice is the difficulty that courts face in applying the decision consistently. Among the most frequent critics of this uneven jurisprudence has been Senator Thom Tillis (R-NC), the former chair and current ranking member of the Senate IP Subcommittee, who has argued persistently in favor of legislative reform but hit a wall in 2019 after stakeholders in the life sciences and tech industries failed to reach a consensus.

While Senator Tillis has since continued to speak out on this issue, the first quarter brought signs that he and some of his colleagues are gearing up for a new run at reform. On March 5, Senator Tillis and three other members of the IP Subcommittee—Senators Tom Cotton (R-AR), Christopher Coons (D-DE), and Mazie Hirono (D-HI)—sent a letter to Acting USPTO Director Drew Hirshfeld, stating that it was “past time that Congress act to address this issue” and asking for his assistance as they “consider what legislative action should be taken to reform our eligibility laws”. To that end, the senators asked that Hirshfeld “publish a request for information on the current state of patent eligibility jurisprudence in the United States, evaluate the responses, and provide [them] with a detailed summary of [his] findings”—with emphasis on current caselaw’s adverse impact on “investment and innovation in critical technologies like quantum computing, artificial intelligence, precision medicine, diagnostic methods, and pharmaceutical treatments”.

Weeks later, Senators Tillis and Cotton sent Hirshfeld another letter asking him to consider revising the patent examination process to conduct the Section 101 inquiry last, rather than in conjunction with Sections 102, 103, and 112. The senators expressed a concern that under the current system, “patent examiners may be issuing Section 101 rejections without the benefit of addressing prior art, clarity and enablement issues that may well inform the examiner that the claim is eligible under Section 101”. Hirshfeld has since indicated that an official response to the letter is forthcoming, stating that the USPTO is considering a pilot program “to that effect”.

In March, Senator Tillis also took the unusual step of cofiling an amicus brief with former Federal Circuit Judge Paul Michel and former USPTO Director David Kappos in American Axle & Manufacturing v. Neapco, a patent eligibility case presently before the Supreme Court that has ignited a heated debate over the bounds of Section 101 jurisprudence. In American Axle, a divided Federal Circuit found that a patent related to a quieter automotive driveshaft was unpatentably directed to a natural law, Hooke’s Law, in contrast to decisions like Diamond v. Diehr that found a mechanical process implementing a natural law to be eligible. The full Federal Circuit was split 6-6 on whether to rehear the panel decision—falling short of the threshold for en banc review. Several other amicus briefs have also been filed in that case from a range of other stakeholders, including others from the academic community, business trade associations, and the NYIPLA. When asked about his amicus brief in a recent interview, Senator Tillis underscored that while he has not yet given up on the prospect of legislative reform, it is both the hardest path forward and the slowest—emphasizing that the quickest way forward is for the Supreme Court to take on the issue itself.

The flow of operating company patents to NPEs may accelerate as a result of COVID-19. Per prior RPX coverage, if past is precedent, the financial crisis triggered by the pandemic may well be followed by years of increased patent divestments by operating companies as those patent owners face pressure to preserve and augment balance sheet cash, with some of those assets ending up in NPE hands. One result of that activity could very well be a further rise in NPE litigation.

Indeed, such transactions continue to fuel NPE activity today, with some divestments sparking new litigation campaigns in the first quarter of 2021. Take for example the portfolio of nearly 30 patents, mostly focused on network security, that Pennsylvania-based CyberSoft, Inc. assigned in early February to NPE Cybersoft IP LLC, a subsidiary of patent monetization firm Dynamic IP Deals, LLC (d/b/a DynaIP). Cybersoft IP has since launched its inaugural campaign, targeting network security software products in a pair of lawsuits filed against BlackBerry and FireEye. That plaintiff is among a trio of Texas-based NPEs formed by DynaIP in late 2020, another one of which—AML IP LLC—has continued to file new cases in the e-commerce campaign it began just before the start of the new year.

Meanwhile, in early March, 2BCom, LLC, an NPE that has targeted automakers as well as networking companies with litigation over former Toshiba patents, received yet more patents from the Japanese conglomerate. That assignment, which includes patents related to wireless communications, could signal a plan to “refresh” a campaign that saw a string of dismissals in late 2020. Also during the first quarter of 2021, Scramoge Technology Limited—an Irish NPE linked by public records to the hedge fund Magnetar Capital, as detailed further below—received over 120 US patent assets from LG Innotek, including assets related to wireless charging and NFC communications.

A number of operating company-to-NPE divestments executed in Q1 include patents related to semiconductors. In late February, California-based fabless chipmaker NEWRACOM—formed in 2014 by a group of over 20 individuals from the Electronics and Telecommunications Research Institute (ETRI)—assigned hundreds of homegrown US patent assets, as well as a number of counterparts in Asia and Europe, to Atlas Global Technologies LLC, a subsidiary of Acacia Research Corporation. Additionally, IPValue Management (d/b/a IPValue) subsidiary Future Link Systems, LLC acquired another set of patents from NXP Semiconductors in mid-January, after filing its first litigation in late 2020 over patents from the same source. Also notable are two late-December assignments, recently made public by the USPTO, from Teleputers, LLC to Coresecure Technologies, LLC, two NPEs apparently controlled by the same Princeton professor. While Coresecure has not yet filed any litigation, Teleputers kicked off a semiconductor campaign of its own in June 2020.

NPEs and Third-Party Litigation Funding

Since 2019, RPX has reported on the practices of a new breed of NPEs—one with sufficient resources to acquire relatively robust portfolios of patents for assertion in expensive, often multi-front, and potentially protracted enforcement campaigns. Now, with the litigation finance industry flush with capital amid the COVID-19 pandemic, and with a number of third-party backed campaigns maturing, the effects of litigation finance on the patent space are becoming apparent.

Litigation funding is typically provided on a nonrecourse basis, with the funder collecting a return on its investment only in the event of a successful outcome. If a funded plaintiff fails to recover in litigation, that plaintiff is generally not obligated to repay the funds advanced for the litigation.

Given that a nonrecourse funding arrangement comes with the risk of a total loss for the investor, litigation funders are spending substantial time and effort evaluating patents for assertion. As litigation finance continues to permeate the patent space, the character of the assets asserted by third-party funded NPEs may reflect additional due diligence and portfolio selection.

Among the most notable campaigns with third-party backing are those being waged by a growing web of affiliated Irish NPEs backed by Magnetar Capital, a hedge fund with $12.3B in assets under management. The most established plaintiffs in that group include Data Scape Limited, litigating patents originating with Sony; Neodrón Limited, asserting patents received from Microchip or subsidiary Atmel; and Solas OLED Limited, waging a multi-front litigation campaign since April 2019 over display panels, including both district court litigation and actions brought before the International Trade Commission, and also with former Microchip patents. Amid a recent trial victory against Samsung, Solas OLED filed two new complaints against Samsung (including Samsung Display) during the first quarter. Moreover, another two related NPEs—Arigna Technology Limited and Sonraí Memory Limited—launched their first campaigns in February, wielding former HP Enterprise (HPE), Mitsubishi, or Microchip (Atmel) patents in suits targeting automakers and device makers. Meanwhile, as recently covered by RPX, USPTO records indicate that yet more well-funded Irish NPEs are waiting in the wings—some with former operating company portfolios already in hand.

Another active NPE with outside backing is Fundamental Innovation Systems International LLC (FISI), which in March added two new cases to the USB charging campaign that it has been waging since 2016 over patents acquired from BlackBerry. FISI’s current management team is reportedly behind two other Irish NPEs holding significant portfolios of former operating company assets—Pictiva Display International Limited and Valtrus Innovations Limited—with USPTO records reflecting the recent movement of a large portfolio of patents from HPE to Ocean Tomo (OT Patent Escrow LLC) to Valtrus Innovations. More well-funded litigation from this team, again over former operating company patents, looks headed for the courts in 2021.

Additional RPX Patent Market Intelligence

For further analysis and up-to-date information on patent litigation and market trends, visit RPX Insight.