The difficult environment for monetizing patent rights

Ashley Keller

Ashley Keller

I recently had the opportunity to chat on the record with Ashley Keller, a co-founder of Gerchen Keller Capital, about monetizing patent rights and the patent market in general. Gerchen Keller Capital is the largest investment and advisory firm exclusively focused on legal and regulatory risk. Gerchen Keller provides capital and other financing solutions to companies and law firms involved in complex litigation, including patent litigation. Ashley serves as the firm’s Managing Director. Gerchen Keller Capital, LLC.

Prior to founding Gerchen Keller, Ashley was a litigation partner at Bartlit Beck Herman Palenchar & Scott LLP, where he handled a variety of patent litigation matters, among other things. Ashley also has the distinction of being a member of a relatively small club of Supreme Court law clerks. He served as a law clerk for Judge Richard Posner at the U.S. Court of Appeals for the Seventh Circuit and Justice Anthony M. Kennedy at the Supreme Court of the United States.

Over the past several years, at least, Ashley Keller has had a front row seat to witness the changing patent marektplace. I initially met him at the IP Dealmakers Forum in New York City in November 2014. Ashley will again take part in the 2015 IP Dealmakers Forum in New York City from December 7-8, 2015, participating in a panel titled All About Patent Quality — How to Invest in Powerful Patents. The panel will be moderated by Michael Renaud, and Ashley will be joined on the panel by Dr. Dipanjan Nag, Changhae Park, and Erich Spangenberg.

I reached out to Ashley to see if he would do an interview and he agreed. Our conversation took place on Thursday, November 5, 2015. In part one, which follows, we discuss the many challenges facing the patent system, in particular a series of patent decisions by the United States Supreme Court that date back to the eBay decision.

Without further ado, here is part one of my interview with Ashley Keller.


QUINN: Thanks, Ashley, for taking the time to chat with me today I really appreciate it. I know you are intimately involved in the patent marketplace, generally speaking. So maybe a good place to start might be with a discussion of what is the market like these days, where is it going, what do you see on the horizon, good, bad or indifferent?

KELLER: Sure. And I’ll add my thanks to you for taking the time to speak with me I really appreciate it. I think the market is challenging right now. I wouldn’t say it’s deteriorating—it’s more stable than it’s been—but I think it’s a challenging market. There has been a fair amount of court activity, with a lot of it potentially negative for patent monetization and patentees. In terms of things on the horizon, Congress seems to perhaps have decided not to pursue patent reform this year, but that is always something that’s looming large in the background. And some of the reform proposals had some decent ideas in them, but they were sandwiched between some ideas that were potentially going to weaken patent rights even further. So until that risk is decidedly off the table, I think the patentees have to be cognizant of it. All of that leads to a difficult environment for monetizing IP rights for the moment.

QUINN: Yes, I suppose to some extent that might even be an understatement, right? If you were going to compare it to the high point, when do you suppose the high point of the patent market was and where would you say we are compared to then now?

KELLER: I would say eBay, which was decided in 2006, marks the point where things went from pretty darn good for patentees in the U.S. to trending negative. And there have been a slew of negative decisions since then, as well as a change in attitude towards patent rights. All of that has led to where we are now, which I hope is the nadir. We have seen some recent green shoots or signs of hope. The Supreme Court has taken the Section 284 willfulness standard. You have the unanimous Federal Circuit decision in Akamai on divided infringement. So there might be a few things that show that we’ve come off the bottom. But I think since eBay, things have deteriorated pretty rapidly, and the environment went from very good for patentees to pretty tough.

QUINN: You know I always point to eBay myself as that real turning point. But to those folks who are maybe a little less familiar with the industry, it’s a little hard for them to understand or believe that eBay was a big turning point. I suppose that is because there were deals being done after eBay and some that were quite large. How do you explain that these deals were still getting done despite eBay for a few years?

KELLER: I don’t think eBay by itself is what did the patent market in. If you had high-quality patent assets post-eBay, there was still an opportunity to do very substantial deals. But eBay was tremendously significant because it took away the ability of a patentee to get an injunction almost as a matter of course once infringement was proved up and the patents were found valid. Now, all of this talk about the hypothetical negotiation—which really is hypothetical, as I’ve never been in a negotiation that actually mirrors the conditions of the hypothetical negotiation—all of that stuff is very difficult to prove. And the Federal Circuit has made it exceedingly more difficult to prove with the labyrinth of rules they’ve come up with that seem to apply only to patent cases and no other civil actions. The entire market value rule and the smallest salable patent-practicing unit—that whole labyrinth that you have to navigate to prove up damages now, you never really had to deal with that before eBay.

Of course, a great way to get the defendant to cut to the chase and say ‘here’s what I’m willing to pay for the patented feature of my product’ is to enjoin them from selling their products using the patented feature. An injunction always cuts to the quick and is a very powerful mechanism to get to a rational clearing price for the invention. You know when defendants say ‘I’ve got a cheap workaround,’ often that’s just a defense posture. But when there’s an injunction in place on pain of contempt if you violate it, they’d better really have a workaround and it had better really only cost what they say. Otherwise, someone’s leaving money on the table and customers aren’t going to get product. So eBay really changed the landscape and made the game a lot more difficult.

You’re right that deals still got done post eBay, but I think that was the beginning of the turning point to a more difficult patent market. And then you saw a lot of other changes come down the pike, none of which were particularly great for patentees. The availability of IPRs through the America Invents Act, which in theory could have been neutral or maybe even positive for patentees, but in practice has proven to be very challenging. KSR and the obviousness standard and whatever “common sense” means. The Federal Circuit’s decisions on damages, which create a lot of confusion. The Supreme Court’s decision in Nautilis related to Section 112 and indefiniteness. All of these things have created a lot more uncertainty in a market that used to be pretty certain. And when you have uncertainty, it becomes much more difficult for a deal to get done because both sides can rationally cling to a particular price that they think is the fair one. So instead of coming to a resolution, they fight. If the value of patents can’t be quantified with some level of precision so there’s an opportunity for both sides to recognize that value and settle, then you’re going to have protracted litigation, and to the extent the rules have been tilted against patentees compared to the pre-eBay environment, you’re going to have lower deal values, lower settlements, and lower judgments.

QUINN: And that’s the insidious part of what has happened to the patent market over the last decade, all of these incremental changes, small though they may be themselves, have created an environment increasingly where dispute resolution is pushed into litigation and litigation only, because achieving any kind of resolution outside of a litigation context seems virtually impossible.

KELLER: I think that’s spot-on. And defendants are emboldened too—to fight longer and harder, because statistically they’re more likely to win than they used to be.

QUINN: Yes. And I personally wouldn’t care if we used the four-factor injunction test to determine whether to issue an injunction, but I don’t for the life of me understand how you can do that in a way that doesn’t take into account as overridingly important that the right is supposed to be an exclusionary right to start with. That seems to be the real problem.

KELLER: Yes, that’s the first thing you learn as a student of patent law in law school, right? A patent is a right to exclude. And when you eliminate the ability to get an injunction in almost every case—I mean for goodness sake, Apple can’t get an injunction against its fiercest competitor Samsung, according to the Federal Circuit. If that’s the standard, forget NPEs, injunctions may not be available, period, or they’re exceedingly difficult to obtain. eBay really marks a transition from patents being thought of as akin to real property rights (where you have the claim set forth the metes and bounds of your property, and of course you can always enjoin someone from trespassing on your land) to just another economic interest where, just like in a breach of contract case for example, you don’t get an injunction most of the time you get money damages.

That transition is significant because there have been incremental changes to other areas of law like the law of damages that make it very difficult for patentees to prove up their case. If you would have only said you can’t get an injunction, that wouldn’t be great for patent-holding competitors who are trying to compete in the marketplace, but if it were easy for them to prove up damages or if patent cases followed the same rules as other civil litigation where jurors had pretty wide latitude to decide facts based on a variety of different methodologies when considering damages, then the consequences wouldn’t be as severe. But you have eBay coupled with Laser Dynamics and KSR and Alice and Nautilus, and all of those things as a confluence of factors have gotten us to where we are.

QUINN: Yes. Now, if you could change any one of those decision points to do the most good to equalize the playing field it would be eBay? I would undo that decision and I think that is the critical decision to overrule to level the playing field. Would you agree with me or do you think maybe I’m overstating that a little bit?

KELLER: I would agree with that. The only thing that I’d add is that I’m going to defend my old employer the Supreme Court. I think the Court’s decisions have been pretty narrow in this area, and I thought the Chief Justice’s concurring opinion in eBay highlighted this. But the way the lower courts have run with those decisions has often been as much of the problem as the Supreme Court itself. Alice is being heralded as a sea change, but if you read the Alice decision, it’s really not that different from Bilski. In fact, I think the Court was straining to be exceedingly narrow, because if you listen to the oral argument, they were struggling and they didn’t want to announce a bright-line, broad, sweeping rule when the parties hadn’t given them the tools they needed to weigh the pros and cons of that rule. So they basically said, ‘We don’t need to talk very much about what the 101 standard is. All we know is, we decided this Bilski case, and this Alice case looks kind of like it, so same outcome.’ But what the Federal Circuit and the district courts have done with that has been to dramatically shift how 101 cases and 101 motions are coming out compared to the post-Bilski period. So I think you are seeing a lot of small moves by the Supreme Court being magnified many times over because the lower courts feel like they have to run with it.

QUINN: I initially wrote that I thought the Alice decision was atrocious and I think it’s lived up to everything that I was afraid it was going. And it wasn’t so much the decision itself because if you read the decision it’s not terribly bad. But I thought it was incredibly predictable how the PTAB and many district courts were going to interpret the decision. So that’s, I guess, one of the reasons why I blame the Supreme Court. Maybe they were trying to be measured, I don’t think they wanted quite the chaos that has come out of this, but I also don’t know that they really understood what the chaos could wind up happening. What do you think about that? I mean do you think they were intending to cause this or they were surprised?

KELLER: No, I don’t think they were intending to cause this. Again, maybe my loyalties lie with my friends at One First Street because they were so good to me. But in assigning responsibility, I’d put it squarely at the feet of the Federal Circuit. The Supreme Court could not possibly have avoided the Alice case when you had a 6-to-6 divided en banc Federal Circuit announcing a standard that would have truly reaped chaos. And the Federal Circuit’s inability to get its act together there and articulate what the law is with respect to 101 really forced the Supreme Court’s hand. The Justices are generalists, not patent experts, and no one articulated for them exactly what the standard ought to be. So they decided it narrowly to try to just resolve that one case and not much else, and here we are. That’s not to say the Supreme Court doesn’t bear some responsibility—I mean, they decided Alice and the original 101 exception is a made-up, a textual exception. There’s nothing in the Patent Act that talks about abstract ideas not being patent-eligible. So you can certainly fault the Supreme Court for that. But I think the Federal Circuit bears at least an equal amount of the responsibility for the chaos that has ensued.

QUINN: It just seems to me that the Federal Circuit, which you would expect them to maybe – “moderate” is too strong a word but to kind of tailor the decision and the reasoning of the Supreme Court and figure out what that means in different factual context, is just not doing that. It feels like they got a message that these are things that the Supreme Court does not want patented, but I’m not sure that is correct message.

KELLER: I don’t disagree. Their job is not to read extra words into Supreme Court opinions and say, ‘the Supreme Court has announced as a policy matter that certain things aren’t patent-eligible.’ That’s not what the Supreme Court tends to do, particularly when it’s reading reticulated statutory schemes like the Patent Act. The Supreme Court interprets the law and applies it to the facts of the case in front of it, and they tell you when they want to announce some big broad sweeping rule. But in most cases, they’re just trying to provide incremental guidance.

CLICK HERE to CONTINUE READING... In the final segment of our interview we talk more directly about the future of the patent market (spoiler, Ashley is mildly bullish), the uncertainty that is holding the patent market back and more discussion about the Supreme Court.


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