Monday, 15 October 2012

AIA and IP investment: how will things change?

The IP Finance weblog is pleased to host the following piece which it commissioned from Monica Winghart (Executive Vice President and General Counsel for Article One Partners, Palo Alto, and a former Senior Corporate Counsel for The Clorox Company). 

As usual, readers' comments and responses are invited.  If features of this nature are found to be helpful, the IP Finance weblog will endeavour to commission similar pieces addressing the IP investment consequences of other major items of national legislative reform of the IP infrastructure.

Monica writes
How the AIA Will Change the IP Investment Environment: 
As Companies Adapt, Investors Can React 
The Leahy-Smith America Invents Act (AIA), arguably the biggest change in the U.S. patent system in 60 years, brings important changes in the way businesses secure patents and how IP investors vet and research patent portfolios. As businesses revamp their IP policies to retain competitive advantage in the patent space, investors will consider how these changes also affect the financial environment: 
First to Invent Becomes First to File  
What changed: Before AIA, companies could prove they were the first to invent a product by submitting internal data such as lab notebooks, prototype sketches and e-mails that show the date of an invention. Beginning next March, those who are quickest to file a patent application – not necessarily the first to invent – will become the patent holders as a result of the US shifting to a first to file (FTF) system. 
How businesses will adapt: “File often and early” is now the name of the game. Companies that can move most quickly from concept to invention disclosure to filed patent application will win; devoting years to perfecting a product before filing a patent is no longer a viable strategy.  Companies with specialized IP legal teams and larger patent budgets who can file frequently also have an innate advantage. Provisional patent application filings, which act as placeholders until a regular patent application is filed, will likely see greater use under the FTF regime and will enable companies to stay ahead of the competition. 
Information relevant to investors: Companies that use provisional filings, file patents often and early in the innovation process, and have IP legal teams who can quickly file on innovations will be well-equipped to retain a competitive advantage in the IP space. 
Patent Quality Will Increase 
What changed: Increasing the quality of patents was a significant driver behind the implementation of AIA. Recent changes increase the level of review and scrutiny that patents undergo, both during the application review process and after a patent has been granted. For example, the AIA codifies administrative review alternatives such as post grant review and inter partes review to assess patent validity.  While a patent is under administrative review with the USPTO, AIA now provides definitive guidelines to courts on when to stay any related litigation on the patents. These administrative review alternatives allow the USPTO to assess patent quality while offering ways for any litigation on the patents to be stayed by the courts.  AIA further provides for a supplemental examination procedure that enables a patent owner to present previously undisclosed information to the USPTO for consideration to correct a patent and to forestall inequitable conduct challenges that might be raised in subsequent litigation. 
How businesses will adapt:  Offering an administrative review and the staying of litigation may be disruptive to many NPE assertion models.  Allowing a patent owner to thoroughly vet patent assets with the experts of the USPTO will increase the value of the assets and the confidence of companies that their IP portfolios are of a higher quality standard. 
Information relevant to investors: Investors can gain confidence in buying assets which have been vetted and rely on administrative review techniques to modulate risk for companies which are heavily reliant on IP and often the target of NPEs.  Investors may also increase the traditional level of due diligence to include administrative reviews when IP rights are fundamental to the value of a deal. Over time, the increased level of review offered by these AIA changes will increase the level of confidence investors have in the validity of the patent assets they are purchasing. 
Expanded Definition of Prior Art  
What changed: Jurisdictional boundaries, which precluded some disclosures from being considered prior art, will disappear with AIA. The definition of prior art no longer relies on where a prior disclosure or sale may have occurred and any public knowledge or use, including foreign applications, can be considered for prior art. 
 AIA also brings U.S. patent law in line with other countries by allowing pre-grant oppositions by third parties. The timeframe for third parties to challenge a patent application, as well as the types of information contestants can use, are now extended.  
How businesses will adapt: With FTF, it becomes key to disclose all information, including global prior art, before filing. Companies can build a wall against the threat of third-party challenges by performing the most thorough possible prior art searches before filing and proactively disclosing all information to the US Patent and Trade Office (USPTO). 
 Information relevant to investors: Companies that have conducted thorough prior art searches, prepared their patent applications and disclosed the relevant art to the USPTO during prosecution are hedging against the risk of future litigation and later invalidation of key assets through third party oppositions or review proceedings. 
NPEs and Portfolio Monetization 
What changed: The new AIA rules affect both non-practicing entities (NPEs) and how companies monetize their patent portfolios. Multiple unrelated defendants can no longer be joined into a single complaint simply on the allegation that all defendants infringe the same patent. In order to permit joinder in a single case, there must be additional overlap between all of the defendants, for example in technologies or business practices. 
How businesses will adapt: NPEs, which profit almost solely by enforcing patents, now face multiple instances of litigation and trials rather than a single combined suit, increasing costs and complexity and potentially disrupting the NPE business model. 
Information relevant to investors: Companies that have strategies in place for coordinating litigation with other entities and for dealing with NPEs in general will be better equipped to effectively manage their patent infringement risks and costs. 
 Changes in IP Budget 
What changed: The USPTO has revised a number of its fees. The AIA provides for many filing fee increases across the board.  However, AIA includes pricing features that favor small players, such as a 75 percent decrease in many patent fees for micro entities including solopreneurs and small entrepreneurial ventures.  
How businesses will adapt: Companies will revisit their IP budget projections in accordance with the new fee schedule and adopt processes designed to best match desired patent prosecution techniques with budget constraints. 
Information relevant to investors: As enterprises re-tool their IP budgets, investors can take into account how these projections may impact the timing and scope of patent assets. 
 Updated Rules, Updated Portfolio  
In summary, the AIA offers a number of changes which impact the way companies execute their IP strategies. By taking measures to ensure that companies are proactively addressing these changes, investors can ensure that asset portfolios contain quality assets and are appropriately valued.

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