Lets talk “prior art!” Sounds like “lets talk gasoline composition” doesn’t it? While not necessarily the most entertaining subject matters, a similarity exists in that declaring and/or clearing prior art references can be every bit as important to a patent case as gasoline is to getting you from point A to B (hopefully someday that will change significantly). In this case Worlds Inc. (WDDD) is suing Activision (ATVI) for violation of its patents. If you are new to the game of patent litigation, you may want to know (at a high level) what Worlds needs to do to win its case: (1) WDDD needs to plead ownership of the patents. (2) It needs to prove that Activision infringed those patents; and (3) it needs to show that the infringement of its patents has resulted in measurable damages and it needs to prove those damages. So this is the basic setup for the Worlds case against Activision. (1) above is a layup; WDDD says in its complaint that it owns the patents involved in the case and that ownership is recorded with the United States Patent and Trade Office (“USPTO”). (2) At this point WDDD has figured out (we sure hope) what Activision is doing, has compared it to the patents in suit and must have a good sense that Activision is indeed infringing; and (3) likewise WDDD will have a damages expert build a damages model that will show how much the infringement has cost them.
If all this sounds too simple to you, your instincts are good! Proving infringement is not easy because you are arguing that the defendant is practicing the patents without a license. So it is actually (1) above that is often the problem in a patent case. Once the Plaintiff alleges that it owns the patents the defendant asserts various defenses based on the alleged invalidity of those patents. ATVI will say that the patents in suit are all invalid. Why? They will argue that the inventions claimed do not qualify under the applicable statute pursuant to which the USPTO grants patents and are thus invalid because, among other things, the inventions are not “novel,” they are not “new” and/or they were obvious to industry participants – and if any of these turn out to be true, the patents are indeed invalid. (In case you were going to ask whether or not the fact that the USPTO has granted the patents actually matters, in many ways the answer is “no.”) The primary way that a defendant (who has the burden of proof on invalidity) shows that the invention was not novel, new or obvious is to point to evidence that other people knew about the invention or all of its elements prior to the date the plaintiff filed it. To do this they can point to anything under the sun as evidencing the “state of the art” prior to the time the application was filed by the Plaintiff. This is what is called “prior art.”
For investors it is critical to get a sense of the prior art cited by the plaintiff as well as by the defendant who is arguing against infringement. The first thing to note are inconsistencies and absences. If a defendant cites “prior art” not cited by the plaintiff in a patent is that a bad thing? Not necessarily. Often times defense counsel will throw a veritable “prior art bonanza” at the plaintiff in response to a complaint. The plaintiff may well not include a reference if they do not deem it to be prior art. Additionally, numerous references to the same subject in prior art cited by the defense may be captured in fewer citations by the plaintiff on the same subject. Although the Markman Hearing is not until June 27th (now just about 75 days off), the playbook for the defendant’s invalidity claim has already been published. Ropes & Gray, counsel for Activision, in their pleadings on invalidity of Decmber 20, 2012 have cited a considerable amount of alleged prior art, much of which was considered by Worlds in their earlier patents and even more in their 998 patent (the most recent patent cited in the suit-which is one of the reasons inventors get continuing patents). As I will lay out next week, some of what is included by ATVI does not seem like prior art at all. Make no mistake however, this will be a battle of some very competent attorneys much like the Google v. Vringo battle.
Worlds has asserted many claims in its infringement suit and we remain convinced after our review that it will be an uphill battle for Activision to clear all 59 of them. Still, a sense of the value of the WDDD case really starts (and could end) with the invalidity analysis. I will let you judge what we have uncovered for yourselves next week.
Disclaimer: While those in my group have spent dozens of hours on our review it should be noted that Susman Godfrey, counsel for Worlds, has likely spent 50 times as much and will undoubtedly spend more. What we do is for the success of our group and since we believe it provides enhanced direction for us we are happy to share it with others. I want to point out that no one should consider this anything like a final word on this subject nor do we endorse people making investment decisions without spending some time doing their own analysis and/or consulting with a financial advisor. We are long WDDD.