VLSI v. Intel: A Microcosm of Patent Litigation Today
This March, a jury in western Texas awarded $2.175 billion in damages to VLSI technologies for patent infringement committed by Intel Corporation. The verdict was reached less than two years after VLSI began the lawsuit and includes one of the largest ever damages awarded over patent infringement in the U.S. On the surface, it seems like an important milestone in the effort to address “efficient infringement” (through which larger companies willfully infringe to improve their market positions as tech makers instead of tech innovators). However, beneath the façade, this case only exemplifies some of the fundamental issues with today’s patent litigation, and underscores how detrimental they can be to American innovation and how—like many other things in today’s overall market system—it’s the smaller business and smaller companies that ultimately pay the highest price.
To understand why, let us first focus on one of the most fundamental issues throughout the patent litigation landscape: NHK-Fintiv. NHK-Fintiv is a framework consisting of a series of court rulings/decisions that were given precedential status by the PTAB to guide judges to allow/deny inter-partes review (IPR) requests by defendants. IPR requests are essentially challenges to the validity of the patents related to the litigation. Currently, this framework allows judges to use their own discretion and deny IPR based on court schedule and or parallel proceeding considerations, regardless of the presence (or lack) of any technical merit. It is easy to see how such a framework can lead to specific court biases and predetermined subjectiveness. Indeed, VLSI intentionally filed their case in the western district of Waco, Texas to ensure it will be heard by Judge Albright, a judge who has stated publicly he will enforce a tight schedule to his cases and will not allow pending IPRs to stay his cases. His track record with IPRs is consistent with this, and it is certainly not a coincidence he is now overseeing approximately 20% of all patent cases in the U.S. (and over 85% of those are filed by NPEs).
Given the problematic nature of NHK-Fintiv, and how it can be exploited towards favorable litigation outcomes, it is also not a surprise its procedural validity is being challenged in court. Apple, Google, Cisco, and Intel filed a lawsuit against the USPTO, arguing that NHK-Fintiv’s discretionary nature violates the America Invents Act (AIA) and allows judges too much discretion in their denials of IPRs. Of course, the Small Business Inventors’ counterpoint, who filed to intervene in this NHK-Fintiv challenge, is the polar opposite – that NHK-Fintiv does not provide judges with enough discretion to more broadly deny IPRs.
Both arguments have merit, as both sides seek to eliminate exploitation of judicial discretion. For us, it matters less which side is more in the right, and more that indeed a more structured and firm guidance is established and replaces the discretionary framework that is NHK-Fintiv. As reality proves, discretion ultimately leads to subjective judgment, which is not desirable for anyone in the long term. The court-specific discretion exemplified by Judge Albright is also a big part of the reason why there is a significant likelihood the judgment will be overturned and the damages dramatically reduced upon appeal. The U.S. Court of Appeals for the Federal Circuit has a track record of doing precisely that—as was the case in 2019 when it wiped out the $2.54 billion in damages initially awarded to Idenix/Merck (Against Gilead), with the underlying patent claims invalidated.
And this brings us to the actual silver lining here: Intel will likely come out just fine at the end of the legal fight, but in the meantime, VLSI can and will use this judgment as leverage in their other lawsuit, and in forcing favorable licensing/royalty terms with other companies who may not have the resources to fight back. In other words, the smaller operating companies will be the ones that pay the highest relative price.
This conclusion also touches upon another important issue. This case and this judgment are not about forcing Intel to pay the price for ignoring the little guy’s rights. VLSI is not representative of the small business or the small innovator. For one, they are a Non-Practicing Entity (NPE). NPEs are entities that do not make anything or compete in the product marketplace, but instead look to monetize the innovation they own. Sure, these entities can serve a good purpose in the overall system – by keeping bigger operating entities honest and by providing small innovators with a possible outlet through which to ensure their IP is adequately protected. But NPEs are not small businesses, and their litigation victories do not necessarily improve market competition, nor do they necessarily help or protect the consumer. In fact, NPEs are usually backed by large financial groups such as hedge funds and can also be indirectly backed by other tech giants looking to hobble their competition.
Sure enough, that is precisely the case here. Not only is VLSI a subsidiary of Fortress Investments, a private equity firm owned by SoftBank, but the patents in question were assigned to them by NXP in 2019 (The original VLSI was an operating company acquired by Phillips. The current re-incarnation is an NPE spun off by NXP). Furthermore, from NXP’s non-usage of the patents, it stands to reason they saw an opportunity to monetize dormant IP assets, while at the same time landing blows against one of their direct operating competitors.
Ultimately then, VLSI vs. Intel is not about keeping the “big guy” honest and protecting the rights of the small innovator. It is about exploiting the current judicial framework and an ongoing battle between direct rivals in the semiconductor space to gain leverage and reap monetary rewards.
It is a clear example of a trend that is overall detrimental to American companies as those who have the least resources will be the ones paying the most. While these issues and these types of litigation battles are not going away anytime soon, one can only hope that eventually, proper changes are made to the system and allow it to focus harder on what it should: promoting American technology and protecting American innovations.