Last week, the Federal Circuit Court of Appeals decided a case that sheds further light on a relatively new phenomenon associated with the term “reverse patent troll.” (Phigenix, Inc. v. ImmunoGen, Inc., January 9, 2017.) The notion of “abusive patent litigation” in the language of the Patent Office has existed for more than a decade. Often, the perpetrators are shell companies who sue or threaten legal action against others and who enjoy relative impunity, as it is difficult to recover fees or assert counterclaims against them. In the traditional sense, an abusive patent litigant is a company that obtains patents – even weak ones that never should have been granted over prior art in the first place – and uses them to extract settlements from companies that sell a product or provide a service. In this newest iteration, however, the victim is the one who owns a patent. The “play” here is that the aggressor will challenge the company’s patent if its demands are not met.

In the case last week, the patent owner was ImmunoGen, Inc. It licensed its patent over a cancer-fighting antibody to Genentech. The challenger was Phigenix, Inc., the new owner of a patent it had acquired only recently, which it claimed overlapped with the ImmunoGen patent. Phigenix threatened to challenge the ImmunoGen patent unless an agreement to license its newly acquired patent was reached, including royalty payments to Phigenix. When its “offer” was refused, Phigenix carried out its threat and challenged ImmunoGen’s patent through a procedure known as inter partes review (IPR) at the Patent Office.Phigenix lost its challenge. Not content with the Patent Office’s Final Written Decision that ImmunoGen’s patent was valid over prior art, Phigenix attempted an appeal to the Federal Circuit. However, at this point, Phigenix’s efforts were stymied, for it could not show an actual injury sustained because of ImmunoGen’s patent. The difference lies in the fact that the Patent Office is a federal agency and not a court. Therefore, to bring an appeal before a federal court, one must establish Article III standing under the Constitution. Ultimately, Phigenix lost at the Federal Circuit because it could not clear this hurdle.

But not from lack of trying. The Federal Circuit seemed to think Phigenix’s theory of injury was a convoluted, speculative web of assumptions. For its part, Phigenix contended that the patent it owned could not be licensed effectively to third parties – because of ImmunoGen’s patent. Of course, when it obtained the patent in 2014 and immediately set about on its challenge, Phigenix would have known all about the ImmunoGen patent, so there was no surprise in that regard. Even so, Phigenix asserted that its patent and ImmunoGen’s patent covered overlapping subject matter, with ImmunoGen already consuming millions of dollars in licensing royalties. Consequently, it argued that ImmunoGen’s patent encumbered Phigenix’s licensing efforts with respect to its own newly acquired patent, and this provided the basis for Constitutional standing. However, the argument failed because a theoretical risk of loss is insufficient to confer standing, absent more. Moreover, in rejecting Phigenix’s appeal, the Court reasoned that it had merely spliced together a string of assumptions in an attempt to connect the dots to actual loss. Because the contentions were so speculative, however, Phigenix lacked standing, and its appeal was dismissed.

In a sense, this case also is interesting for what the Court did not say, as much as for what it did say. The Court stopped short of saying that a party in Phigenix’s position could never appeal to federal court if it disagrees with a Final Written Decision of validity. The Court even acknowledged, “[i]t is possible that, if Phigenix had licensed [its] patent to the same parties to which ImmunoGen had licensed [its] patent,” the opportunity to challenge the other’s patent might increase Phigenix’s revenues, i.e., might provide the sufficient evidence of injury to allow standing. In this sense, the rule remains that a challenger must show a concrete injury (existing or imminent), that is particularized in that it affects the challenger in a personal and individual way. At the end of the day, Phigenix failed to substantiate the contention that it had ever licensed or could have licensed its own patent to anyone, much less to entities that instead elected to take licenses to the ImmunoGen patent. But in a different situation, this type of challenge might be allowed to go all the way to an appeal in federal court.

Some of our prior articles have discussed actions companies can take to protect themselves against abusive patent litigants. But in the face of this new threat, what should be done? First, if you obtain a patent, ensure that it undergoes a quality examination at the Patent Office before it issues. Disclosing all known material information during prosecution not only complies with the Patent Office rules, but also establishes a clear record to show that claims were vigorously examined. In many cases, a strong record will strengthen the issued patent in the face of future challenges based on prior art.

Second, when negotiating licenses, anticipate that what happened to ImmunoGen can and does happen to others. However, not all licenses address who pays for third party challenges brought in the Patent Office. Thus, a licensee might want specific language that it is not required to pay the legal expense of defending the patent against such challenges. In that vein, often a licensor will want to control the defense of the patent, being the more motivated party to have its patent survive the challenge. But there will be cases where an exclusive licensee is just as motivated for the patent to survive. When negotiating a license, it can benefit both parties to look ahead and specifically address who must pay to defend the patent if and when it is challenged by a third party. After all, if a reverse troll comes knocking, the parties to the existing license are probably better served by joining forces than by fighting over the terms of their own license.