The migration to the cloud and transformation to digital now so visibly under way are moving intellectual property (IP) centre stage as all businesses become software companies.

In past blogs, we looked at the rising tide of software patent claims brought by NPEs (Non-Practising Entities, typically businesses that buy patents to monetise by litigation not operations) and the risks they pose to Cloud service availability.[1]  That tide is now ebbing: according to NPE deterrence entity Unified Patents’ first quarterly report for 2018, NPE patent lawsuits are decreasing and fell below non-NPE lawsuits for the first time for many years.[2]  This trend was recently confirmed by Unified Patents in its second 2018 report for the first half of the year.[3]

The ebbing tide of NPE claims is attributable to recent policy changes affecting US patent litigation and derives in the main from three decisions of the US Supreme Court. First, in its June 2014 Alice judgment,[4] the Court raised the bar on patent eligibility for computer-related inventions, effectively making it easier to revoke software patents already granted, many of which have been acquired by NPEs as they geared up their portfolios for action; second, the May 2017 Heartland case[5] has made it more difficult for NPEs to sue in the traditionally plaintiff-friendly District Court of the Eastern District of Texas; and third, the April 2018 decision in Oil States[6] kept open the route to revocation at modest cost by upholding the jurisdiction of the US PTO’s Patent Trial and Appeal Board to reassess and revoke mistakenly granted patents through inter partes review.

However, reflecting growing competitive tensions in the industry sectors most affected by the cloud and digital transformation, commentators are reporting an increase in cloud patent and IP litigation between competitors at all levels – leaders, mid-tier and new entrants. For example, security leader Symantec settled a claim against it by Finjan for an initial payment of $65m and is suing Zscaler; virtualisation developer Citrix is suing Avi Networks; and digital transformation specialist BMC Software is suing Chertwell Software.[7] Companies are starting to think differently about their IP, looking for ways to secure their next wave of innovations, which are likely to be digital in many industries.

IP is also moving centre stage in the startup world as startups increasingly look to IP to secure their future and as some CSPs start to compete with them after partnering. Harking back to 2009 when Amazon launched its AmazonBasics to compete with its private label e-commerce customers, AWS has started to compete with startups who host their software on AWS or provide services and tools to AWS users. Examples include Amazon QuickSight/Tableau (data visualisation), Amazon X-Ray/New Relic (monitoring), Amazon Chime/WebEx (conferencing) and AWS CodeStar/Heroku (software development and deployment).[8]

The combination of US patent litigation policy changes and growing competition in the cloud are making patent countermeasures providers re-think their approach to patent defence mechanisms and focus more on operating companies. In May 2018, LOT Networks (the ‘LOT’ stands for ‘license on transfer’) introduced a new Patent Program aimed at operating companies and augmenting LOT’s existing program by raising the free membership tier from S5m to $25m revenues and offering three free patents. This suggests that LOT thinks startups value owning a few patents more than LOT’s protection against NPE claims.  Microsoft’s Azure IP Advantage program (a combination of unlimited indemnity, patent pick and springing licence)[9] has been available to Azure customers since launch in February 2017.

The LOT Networks Patent Program also raises some interesting legal considerations. First, how strong are the free patents on offer? Press reports have suggested that LOT enterprise members have transferred patents they didn’t need to save costs.[10]  Second, how will startups use the patents? Waiving LOT membership fees suggests expectations are defensive rather offensive. In this use case, access to a large defensive portfolio like Microsoft’s Azure IP Advantage should also be considered.  Third, it’s foreseeable that some startups will become insolvent and in this situation a buyer of the insolvent company’s assets may (outside the USA) try to persuade the startup’s liquidator to disclaim the licence as onerous property as a condition of buying the patent (for example in the UK, under section 178 Insolvency Act 1986).[11]

As a new tide starts to flow in cloud patent litigation between competitors just as the old NPE tide ebbs, a host of new strategic, tactical and legal questions evolves.

Richard Kemp and Nooreen Ajmal
Kemp IT Law
July 2018

Footnotes

[1] ‘Cloud Computing: Software Patent Claims and the Risks to Service Availability’ February 2017 – http://www.kempitlaw.com/blog/cloud-computing-software-patent-claims-and-the-risks-to-service-availability/;

[2] ‘Q1 2018: Patent Dispute Report’, March 30, 2018 – https://www.unifiedpatents.com/news?month=March-2018.

[3] ‘1st Half 2018: Patent Dispute Report, June 28, 2810’ – https://www.unifiedpatents.com/insights/2018/6/28/1st-half-2018-patent-dispute-report.

[4] Alice Corporation Pty Ltd v CLS Bank International et al., 573 U.S. __, 134 S. Ct. 2347 (2014) – https://www.supremecourt.gov/opinions/13pdf/13-298_7lh8.pdf

[5] TC Heartland LLC v Kraft Foods Group, 137 S. Ct. 1514 (2017) https://www.supremecourt.gov/opinions/16pdf/16-341_8n59.pdf

[6] Oil States Energy Services v Greene’s Energy Group, LLC, 584 U.S. __ (2018) https://www.supremecourt.gov/opinions/17pdf/16-712_87ad.pdf

[7] ‘Cloud Computing Patent Litigation Trends – Competitor Cases, Open Source Targets, Cloud Customers’, Bart Eppenauer, Shook Hardy & Bacon LLC, May 15, 2018 – https://cloudipq.com/2018/05/15/cloud-computing-patent-litigation-trends-competitor-cases-open-source-targets-cloud-customers/

[8] ‘Startups Beware: If You Use AWS, Amazon May Have You in Its Crosshairs – SaaS startups love the AWS platform — and Amazon has a habit of using it to eat those startups’ lunches’, Sonya Mann, Inc.com, April 24, 2017 – https://www.inc.com/sonya-mann/aws-startups-conflict.html

[10] ‘Tech Giants Are Offering Startups Free Patents in a Bid to Foil Lawsuits’, Susan Decker, Bloomberg Technology, ‎‎May, 10‎ ‎2018 – https://www.bloomberg.com/news/articles/2018-05-10/tech-giants-offer-startups-free-patents-in-bid-to-foil-lawsuits: ‘Lenovo is shedding unneeded patents as a cost-saving measure to avoid paying maintenance fees. [Lenovo’s VP of IP and Litigation] said the company’s options were to either let them fall into the public domain or donate them — there was no thought to sell them like other big companies have done.’

[11] http://www.legislation.gov.uk/ukpga/1986/45/section/178