U.S. Patent & Trademark Office. (Photo by Diego M. Radzinschi/THE NATIONAL LAW JOURNAL.)
New legislative and court-driven developments in patent law have increased the risk of securities fraud liability for public company patent owners. Such patent owners and their securities counsel are therefore best advised to understand these developments, their intersection with securities law, and how they may affect some public disclosures.
In 2011, the America Invents Act (AIA) overhauled the U.S. patent system’s statutory scheme. Among its many changes, the AIA created several new post-grant proceedings, which allow third parties to challenge the validity of an issued patent before the Patent & Trademark Office (PTO). Legislators crafted inter partes review (IPR), post-grant review (PGR) and covered business method patent review (CBM), and required these post-grant proceedings to be conducted as administrative trials.
An IPR may be brought only on the grounds that a patent is anticipated or obvious over prior patents and printed publications, while PGR and CBM may be brought on any grounds, including patentable subject matter.
Unlike in federal court, these post-grant proceedings do not accord patents a presumption of validity. Challengers also enjoy broader claim construction standards and a lower burden of proof than in federal court. Moreover, post-grant proceedings are typically cheaper for challengers, provide for quicker resolution than in federal court, and allow challengers to press evidentiary challenges, take depositions and make oral arguments.
Several Supreme Court decisions have further increased the risk in court of an invalidity ruling based on challengers’ obviousness and patentable subject matter arguments. In 2007, in KSR International v. Teleflex, the court replaced the U.S. Court of Appeals for the Federal Circuit objective obviousness test with a more flexible subjective test, making it far easier to invalidate patents based upon obviousness. In the 2012 Mayo Collaborative Services v. Prometheus Laboratories decision, the court placed new limits on the patentability of diagnostic methods, holding that an application of a law of nature that relies solely upon known elements is not patentable.
One year later, in Association for Molecular Pathology v. Myriad Genetics, the court held that isolating DNA does not confer patentability. Most recently, in 2014, the court held in Alice v. CLS Bank International that a claim subject to an “abstract idea” is only patent-eligible if the remaining elements possess an inventive concept.
These recent developments in the PTO and the Supreme Court have had a significant impact. According to the PTO’s AIA Trial Statistics, through Jan. 31, the board found some or all challenged claims unpatentable in 84.25 percent of instituted trials that reached final decision. This means that, in just a few years, more than 17,000 individual patent claims have been invalidated in post-grant proceedings.
Moreover, following the Supreme Court decisions, the PTO has substantially reduced its issuance of new diagnostic, gene, software and business method patents. Federal courts are also examining such patents with greater scrutiny and often earlier in the litigation process, and hundreds of thousands of other existing patents may no longer be enforceable.
Corporate patent counsel are certainly aware of these developments and the implications for their company’s patent portfolio. It may be less obvious, however, that these developments also implicate securities law obligations. A prime example lies in the interaction of Section 11 of the Securities Act of 1933, which imposes strict liability on public company securities issuers that make a material misstatement or omission in a registration statement, and the Supreme Court’s 2015 decision in Omnicare v. Laborers District Council Construction Industry Pension Fund, which held that Section 11′s omissions clause may create liability when a statement of opinion in a registration statement lacks a reasonable basis.
With the recent patent law changes, the “reasonable basis” determination for patent-related opinions may be made more challenging. Consider, for example, a company that opines in a registration statement about the strength, validity or value of its patent portfolio. In the past, if challenged, the company could more readily show a reasonable basis for such an opinion.
After all, patents enjoyed a presumption of validity, and there was often a history of court enforcement for similar patents. But post-grant proceedings now provide an appealing avenue for competitors to challenge patents, with a high success rate and without the presumption of validity. Similarly, judicial enforcement of many patents has become more difficult following the recent Supreme Court decisions. It is thus now more challenging in some instances for companies to opine publicly on their patent portfolio with confidence.
To protect against securities fraud claims attacking such opinions, a company may consider more specific accompanying disclosures. For example, suppose a company intends to represent in its registration statement that it believes its patent portfolio gives it a competitive advantage. Before the recent patent law developments, this company may have protected itself with relatively broad risk disclosures. Now, with additional known risks specifically imposed by changes in patent law and practice, this company may further consider some combination of:
(a) tempering its assertions,
(b) detailing the bases for its belief, particularly in view of challengers’ overall success rate in post-grant proceedings, and
(c) assessing and more specifically describing the risks posed to the company’s patents by recent legislative and Supreme Court developments.
Of course, the specific disclosures a public company patent owner may consider will vary depending on many factors, including the specific public representation, the materiality or essential nature of the patent portfolio to the company’s revenues or prospects, and whether the company has any reason to believe a challenge to its patents is likely.
In any event, by carefully considering how to frame public opinion statements about their patents—keeping in mind the additional risks created in an evolving patent law landscape—companies may avoid securities law claims or, at least, strengthen their defenses to any such claims.