A New Front in the IP Wars

December 2016

- by scott graham by scott Capital One has gone 10 for 10 for One has gone Capital nuclear, gone has bank the So and Trademark Office, with at least with at least Office, Trademark and 20 of these matters ending adversely Supreme the U.S. Meanwhile for IV. Court in 2014 tightened eligibility lead- standards for software patents, ing to a series of invalidations in court. asserted IV that patents the on 10 and now, Virginia first in against it, in Mary- pending appellate review, that says company the But land. could be just an opening skirmish, claim to 3,500 patents given IV’s covering the financial industry and its threats to keep asserting them until Capital One pays $131 million for a portfolio license. of Ventures accusing Intellectual deliber by laws antitrust breaking the monopolize to out setting ately market for patents on technology to using. “locked in” the banks are IV that patents volume of “The

felt pretty confident when felt pretty confident when ve But much has changed in patent But much has changed in patent

Intellectual Ventures must Ventures Intellectual must ha it launched its patent enforcement it launched its patent enforcement larg- campaign against the nation’s sum- that Over 2013. in banks est the patent monetization giant mer, sued about a dozen financial institu- & Chase JPMorgan including tions, PNC America Corp., Bank of Co., on NA One Capital and NA Bank York, the banks’ home turfs of New Alexandria, Pittsburgh and Charlotte, the IV accused respectively. Virginia, banks of infringing patents that cover credit and ATMs, technology used in and online and debit transactions, mobile banking. and law over just the last three years, worked hasn’t surely campaign the The banks out as IV envisioned. America the invoked allies their and petitions 30 filing some Act, Invents business covered or partes inter for Patent method review at the U.S.

property, Capital One fired back with an antitrust suit. Capital property, a new front in the in front a new

When a patent holder sued banks for infringing its intellectual banks for infringing its intellectual When a patent holder sued ip wars americanlawyer.com

Shutterstock/Supphachai Salaeman Litigation Report

has acquired is so large that IV has from others. Even then, Capital One achieved hold-up power even though may have to prove that IV is engaging the portfolio contains patents that are in “sham litigation,” which the U.S. invalid, not infringed and individu- Supreme Court has defined as claims ally weak,” Latham & Watkins partner that are objectively baseless, and filed Matthew Moore contends in court fil- with the subjective knowledge of their ings for Capital One. baselessness. Capital One is the only bank to file “I can count on one hand the cases antitrust claims so far, though others that have been successful on that have assembled high-powered legal theory,” says Orrick, Herrington & teams to fight the patent claims in court Sutcliffe partner John Jurata, whose and before the PTO. Wilmer Cutler practice focuses on patent law and Pickering Hale and Dorr; Jones Day; antitrust and who is not involved in Reed Smith; Goodwin Procter; Keker the case. “It’s a long shot.” & Van Nest and Durie Tangri are A spokesman for Intellectual Ven- among the law firms representing the tures said that the company had no banks, along with Latham. Kirkland & comment on the litigation at this time. Ellis is co-counsel in each case. (Kirk- In court papers, IV argues that Capital land is also representing IBM Corp., the One is trying to have it both ways, call- vendor of the targeted software, in a suit ing its patents worthless but at the same to invalidate the IV patents in adminis- time crushingly monopolistic. “Presum- trative proceedings at the PTO.) Sidley ably, even when a bank does the math, Austin represents insurance companies the collective ‘value’ of any number of that were sued in a second wave of suits patents each having zero value is still over some of the same patents. zero,” Funk & Bolton partner Michael For IV, Feinberg Day Alberti & McCabe writes for IV in court papers. The power of IV’s Thompson is spearheading the bank portfolio is not rooted litigation, with help from several other Intellectual Ventures was firms: Freitas, Angell & Weinberg; founded in 2000 by former Microsoft in the value or lawful Funk & Bolton; Goldstein & Rus- Corp. executives Nathan Myhrvold scope of its constituent sell; Sterne, Kessler, Goldstein & Fox; and Edward Jung and joined soon patents,” Capital One Knobbe Martens Olson & Bear; and after by former Intel Corp. IP chief argues in court papers, Nix Patterson & Roach. Peter Detkin and Perkins Coie part- Capital One’s antitrust claim likely ner Gregory Gorder. In a little over “but in the sheer size of faces long odds, but it holds the poten- a decade, the company raised more the portfolio.” tial to disrupt Intellectual Ventures’ than $5 billion from investors, includ- business model and further reset the ing tech giants Apple Inc., Microsoft playing field on patent litigation. It’s Corp. and Google Inc. and universi- also forced the privately held IV to ties including Stanford University and hand over discovery about its inves- Northwestern University. IV describes tors, licensees and litigation strategy. itself as an “invention marketplace” ‘‘ “It’s an interesting and aggressive where investors, government entities, theory,” says Rutgers law professor businesses, academia and inventors Michael Carrier, who has written about can buy, sell and license IP assets. The the case. “The fact that they’re invali- company has acquired 70,000 patents dating patents supports their claims that and applications, with 40,000 in active these patents are weak and designed to monetization programs. be used in a collection as a bludgeon.” For 10 years, the company did its Shutter s tock/ O melchenko To succeed, Capital One will have licensing outside of the courtroom, to prove that IV has vacuumed up all striking a $350 million deal with Veri- of the patents on the technology at zon Communications Inc. in 2008 and issue, leaving it no options whatso- a $120 million license with Intuit Inc. ever for designing around IV’s patents the following year. Myhrvold told The or licensing alternative technology Wall Street Journal in 2008 that the Diego M. Radzinschi could license thefivepatentsIVwas Capital Oneapparentlyrefused tomake. with interpartesreview, aguarantee that Capital Oneagreednotto attack them only 100ofthem, andeventhenonlyif ing. Buttheexecutiveswouldidentify with about1,000relatedtoretailbank- held 3,500 financial services patents, and LefflerinformedthebankthatIV according tocourtfilings. Van Arsdale Timberlake in August ofthatyear, ciate GCsHeatherCaputoandBrent litigation, Stephen Otero, and asso- with Capital One’s chiefcounsel for director ofpatentlitigation, met opment, and Cris Leffler, then its dent of strategic business devel in 2013itturnedtothebanks. first targeting the tech industry. Then suits forpatentinfringementin2010, these,’” hetoldtheJournal. and youcan’t affordtodefendonall can’t afford to sue you on all of these, keys toitslicensingsuccess. “I say, ‘I size ofIV’s inventorywasoneofthe IV gavethebank severaloptions:It Cory Van Arsdale, IV’s vice presi- The company began bringing law- - of Appeals for the Federal Circuit Trademark Office. patent validityattheU.S. Patentand for quickly and cheaply challenging established administrative procedures ever since. more challengingforpatentowners the litigationenvironmenthasbecome Nortel Networks Corp.’s patents. But panies paidawhopping$4.5billionfor Apple, Microsoftandthreeothercom- 2011, when a consortium formed by ing patentsprobablyhititsapexin ing for.” ing CapitalOnewhatitwouldbepay- $100 million without ever even show to makeCapitalOnepayinexcessof One’s courtpapers, “IV wasattempting tion Fundsfor$131.7million. 35,000 patentsheld in IV’s two Inven- take aglobalfive-year licensetothe for $75 million. Or Capital One could others assertedagainsttheotherbanks asserting againstCapitalOneplussix Then, inMay2013, the U.S. Court First, the2011 America Invents Act The businessofacquiringandassert- “In effect,” MoorewritesinCapital - related inventions. ing downonpatentabilityforsoftware- decision in Alice v. CLS Bank, clamp the Supreme Court’s landmark 2014 ent eligibility. That setthestagefor splintered ontheissueofsoftwarepat- but bythenIV hadalreadyopeneda ent Act. patenting underSection101 ofthePat- ents weretooabstracttobe eligiblefor April 2014thatthefourth and fifth pat- Judge Anthony Trenga then ruledin infringement ofathird. U.S. District eral courtcaseandstipulatedtonon- that itwasassertinginthe Virginia fed- in court. IVdroppedtwoofthepatents Capital Onechose to fighttout Latham & That endedthe Virginia litigation, censes to patentslicenses to that ed to forceMoore:IV triedto Capital One to pay more than $100millonfor refused to W atkins’ Matthew identfy. it - Litigation Report

new front, suing Capital One in U.S. That traditionally requires defining a district court in Maryland over five specific region or set of products. But other patents. Capital One has pre- Capital One doesn’t compete against vailed there too—one by stipulation of IV in any market, the judge noted, and noninfringement, four others on Sec- if IV’s patents are as shabby as the bank tion 101—but Capital One counsel alleges, then there’s no commercial Moore says that there’s nothing to stop market for them at all. Or as IV has IV from suing over and over again, put it: “The proposed relevant mar- each time costing the bank extraordi- ket is defined to include all, but only, nary time and expense. those financial services patents that are “The power of IV’s portfolio is not owned by Intellectual Ventures. This rooted in the value or lawful scope of is not a market definition cognizable its constituent patents, but in the sheer under antitrust law.” size of the portfolio and IV’s conse- Toshiba Corp. has made a simi- quent ability to impose litigation costs lar antitrust counterclaim before U.S. and uncertainty on its victims,” Moore District Judge Sue Robinson in Dela- argued in Capital One’s 2015 antitrust ware, saying that IV is unfairly wield- complaint. ing a 3,700-patent portfolio in the IV says that it’s doing nothing dif- semiconductor market. Robinson at ferent from other NPEs or operating first allowed Toshiba’s claims to pro- companies that set out to construct ceed alongside IV’s patent claims, but and enforce patent portfolios. “No case then put them on hold last fall. The has ever found it unlawful to acquire judge said that Toshiba was focusing I can count on one even an entire portfolio of patents,” IV too much on the quality of IV’s pat- counsel McCabe writes in IV’s opposi- ents, which under patent law must be hand the cases that tion. If it were so, then surely the feds presumed valid until proven otherwise. have been successful would have stepped in to block Apple Toshiba would have done better to on that theory,” says and Microsoft from acquiring Nortel’s focus on the numerosity of IV’s patents one observer, Orrick, 6,000 patents in 2011, he says. and its allegation that IV builds its pat- IV’s lawyers also suggested in a court ent portfolios around technology that’s Herrington & Sutcliffe hearing this summer that the money already been widely adopted, the judge partner John Jurata. that Capital One has spent defending suggested. “It’s a long shot.” its patent suits is “chump change” com- U.S. District Judge Paul Grimm in pared to what it pays its CEO and on Maryland has been more hospitable. He other operational expenses—hardly the looked to a U.S. Supreme Court case kind of expense that might cripple Cap- that held that Eastman Kodak could be ital One’s ability to compete. liable for monopolizing the aftermar- ket for spare parts to Kodak copying Three judges have taken at machines. “Like the Kodak customers ‘‘ least an initial pass at anti- with no choice but to seek parts and ser- trust claims against Intel- vices directly from Kodak … the banks lectual Ventures. All have no choice but to pay licensing fees three have come out in to the Intellectual Ventures companies” different places. to operate online banking, he wrote, Trenga dismissed according to Capital One’s allegations. Capital One’s anti- “At this prediscovery stage in the trust claims in the litigation, counterclaimants adequately Virginia action. have alleged a plausible relevant mar- The bank failed ket,” Grimm said in a March 2015 to allege that IV order denying IV’s motion to dismiss is monopolizing a the antitrust claims. “Moreover, discov- “relevant market” ery is necessary to determine whether, under Section 2 of in this case, a need to avoid endless the Sherman Act. litigation is a business necessity.” Rutgers’ Carrier says that defining a relevant market remains one of the tall- est challenges of Capital One’s theory. “The difficulty with this whole area is that it’s tough to figure out what a patent covers,” he says. “Just by looking, it’s not easy to know if there are alterna- tives out there.”

“Discovery” is probably the last thing that IV wanted to hear from Grimm. Intellectual Ventures is known for holding its cards close to the vest, although in December 2013—three months after Capital One filed its first antitrust complaint against IV—the company began listing most of its patents on its website. IV has since been forced to turn over information from its customer database about licensees, investors and litigation targets, and emails from Myrhvold, Detkin and other executives that discuss licensing policy or strategy. IV claimed attorney-client privilege on a whop- ping 13,000 emails, with Capital One demanding hundreds that involved patent acquisitions, negotiation strate- Or, as Grimm told the IV and Capi- Of the judges who have gies or decisions about which patents tal One lawyers this summer, “if a lawyer considered antitrust to assert. “Because litigation is at the wears two hats, [giving] business advice claims against Intellectual ventures, U.S. District judge ‘core’ of the IV’s operations, documents as well as legal advice, the primary pur- Paul grimm has been the discussing IV’s general use of litigation pose for the communication has to be most receptive. to further its business interests are not legal” for the privilege to apply. automatically shielded by the attor- Ultimately, Grimm ordered IV to ney-client privilege,” Troutman San- turn over many of the disputed docu- ders partner Mary Zinsner, who is run- ments, in part because the company had into SCM v. Xerox, a Second Circuit ning discovery for Capital One, wrote waived privilege by failing to provide a case that held “where a patent has been in an Aug. 5, 2016, letter to Grimm. sufficient factual basis for it. lawfully acquired, subsequent conduct That rationale makes patent asser- permissible under the patent laws can- tion entities “second-class citizens who IV and Capital One are expected to not trigger any liability under the anti- possess lesser rights with respect to litigate discovery for several more months, trust laws.” privileged attorney-client communica- with summary judgment motions due in But the tectonic shifts in patent tion” than other litigants, Freitas Angell May 2017 and a trial by year’s end. law over the last few years have cast & Weinberg partner Robert Freitas Orrick’s Jurata sees a lot of hurdles doubt over that maxim too. The U.S. replied a week later for IV. remaining for Capital One. Its antitrust Supreme Court didn’t mention the Orrick’s Jurata says that these kinds claims are “difficult claims to pursue, and case explicitly, but the logic of its 2013 of disputes arise frequently in licensing I think Capital One’s lawyers have done Actavis decision on reverse settlement cases, where lawyers are often the people a nice job keeping them alive,” he said. payments seems to have shaken its making business decisions. A lawyer’s gut They could provide useful leverage if IV foundation. reaction might be that documents should files yet more patent claims and Capital Says Jurata: “The antitrust IP space be shielded because they’re written by or One wants to strike a licensing deal “to for the next few years will continue to to an attorney, he says, but “when you make IV go away,” he says. be an active area.” actually take a look at why they were Jurata also notes that for 30 years,

. R a d zin s chi Diego M . created, it’s for a business function.” antitrust claims like Capital One’s ran Email: [email protected].

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