The Tax Code of the United States tax law is frequently indicted for being too complicated. But the patent rules are not much better. Patent practitioners will typically tell you that the rules governing applying for a patent before the United States Patent and Trademark Office ("USPTO") are a dense morass of arbitrary rules, regulations and laws. Despite this, most patent cases turn on their underlying merits, but every so often, they can turn on the inventor's failure to dot his i's and cross his t's.
Such may be the plight of Worlds, Inc. (OTCQB:WDDD). Worlds has accused Activision (NASDAQ:ATVI) of infringing five of its patents, but on June 18, 2013, Activision fired back with a very technical, but potentially deadly motion for summary judgment-one with the potential to stop World's patent monetization campaign in its tracks.
Worlds was established in 1994, when it began developing technology required for thousands of players to simultaneously play online games. As early as 1995, Worlds launched at least two software products embodying its technologies, including AlphaWorld and Worlds Chat. During that time, Worlds also acquired a number of patents directed to this technology, including U.S. Patent No. 7,181,690, directed to a "highly scalable architecture for a three-dimensional graphical, multi-user, interactive virtual world system." The proximity in time between launching its products and filing for its patents is what may have jeopardized Worlds' success in enforcing those patents.
For the last ten years, WDDD has been trading under one dollar. Recently, perhaps in an effort to monetize its technologies that could not be monetized through commercial activity, Worlds turned its sights on enforcing its patents. On March 30, 2012, Worlds sued Activision Blizzard, Inc., Blizzard Entertainment, Inc., and Activision Publishing, Inc. ("Activision") in the United States District Court for the District of Massachusetts for infringement of five of its patents. The patents include U.S. Patent Nos. 7,181,690; 7,493,558; 7,945,856; 8,082,501; and 8,145,998.
Activision is responsible for blockbuster online games Call of Duty and World of Warcraft, which Activision has claimed to be "two of the most commercially successful video games in history." [Brief at 1]. Thus, the stakes in Worlds' accusations that Activision stole the technology needed to build its online gaming empire make its case a potential blockbuster. Since bringing its lawsuit, WDDD has been trading almost five times what it was before, indicating high expectations in the market for the outcome of this case. Given this, the merits of Activision's recent summary judgment motion are likely to be an important consideration for investors long in WDDD.
Last year, the District Court scheduled the Markman hearing for June 27, 2013, and in anticipation of that date, the parties filed claim construction briefs. As we have previously reported elsewhere, the Markman hearing can be a critical turning point in patent infringement cases. And as we recently saw with the market's reaction to On Track Innovations' (NASDAQ:OTIV) (a patent play we have covered extensively on Seeking Alpha here and here) Markman win, a successful decision can be a huge catalyst for a stock. In a move that is sure to have disappointed investors, on June 18, 2013, the District Court pushed off the Worlds' Markman hearing until later this summer, to August 23, 2013, which means the parties-and the market-will have to wait a few more months before the Court weighs in on the scope of Worlds' patents.
In the meantime, however, Activision launched what may prove to be a deadly assault on Worlds entire patent portfolio. On June 20, 2013, Activision moved for summary judgment on the grounds that each of Worlds' asserted patents are invalid. Such a move is not unusual, and typically follows the court's claim construction opinion. Accused infringers attempt to invalidate asserted patents on the grounds that earlier-filed patents and publications already disclosed the invention. In other words, the argument is that the asserted invention was simply not novel. In this case, however, Activision fired an unusual strike against the validity of Worlds' patents based on a rather esoteric provision buried within earlier versions of the Patent rules.
Specifically, Activision has argued that Worlds' asserted patents are not valid because Worlds was publicly using products embodying those patents-including AlphaWorld and Worlds Chat-more than one year before the patents' priority date.
An invention's patentability will often turn on the application's priority date. The priority date is the date on which the application is treated as filed. For invalidity purposes, a patent does not have to contend with any other patents or publications filed after that date. Thus, establishing an early priority date is always imperative for patent applicants. In the case of litigation, accused infringers often marshal as much prior art as possible against the asserted patent to render it invalid. Yet, what counts as prior art and what does not depends on when the priority date for the asserted patent falls. For this reason, parties often hotly contest the priority date for a patent.
Sections 102 and 103 of Title 35 of the United States Code establish the laws governing whether an invention is novel. In effect, these laws determine when an application for an invention needs to be filed in order for it to be novel against existing technologies. In particular, section 102(b) provides that an application for a patent will not be novel if the invention disclosed in the application was in public use more than one year before the date the application was filed. That means, if Worlds was using AlphaWorld and Worlds Chat more than one year before it filed for its patents, they may all be invalid.
In this case, Worlds has admitted that it was publicly using AlphaWorld and Worlds Chat as early as September 1995. (Activision's Summary Judgment Br. at 6-9). However, Worlds has claimed that it filed a provisional patent application disclosing these inventions in November 1995, which is less than one year after the first public use. A provisional application is something like a place-holder. It is not an actual patent application, because it will not be examined by the patent office, and by itself, it cannot result in an issued patent. However, it must nevertheless disclose the invention, and by doing so, allows the inventor to secure the filing date. After that, the inventor has the choice to file a full-fledged application-which is conveniently termed a "non-provisional" application. This "non-provisional" application typically claims priority to the provisional application so as to gain the benefit of that filing date.
In other words, Worlds has claimed that the priority date for its patents is early enough not to be barred by its own public use (via AlphaWorld and Worlds Chat). However, Activision's motion argues otherwise. Activision claims that Worlds has forfeited its rights to that November 1995 filing date. Put another way, the argument is that the priority date for Worlds' patents is not November 1995 because Worlds cannot claim the benefit of its earlier-filed provisional application. Why? Because the first two non-provisional applications filed after the provisional application failed to make a specific reference to the provisional application within their specifications.
As we cautioned at the outset of this article, Activision's motion is based upon a very technical, rather esoteric patent rule (which is in fact an earlier version of the rules, which have subsequently been amended). It is not a substantive motion regarding the underlying novelty of Worlds' alleged inventions. But for the purpose of defeating Worlds' patent infringement case against Activision, it may be all that is needed.
The patent rules previously required that, when an inventor files a "non-provisional" application that claims priority to an earlier-filed provisional application, then a "specific reference" to that earlier-filed provisional application had to appear in the specification. In other words, the "non-provisional" application has to specifically state something to the effect that it claims the benefit of the priority date to the earlier-filed provisional application. For patents subject to those earlier rules, failing to have that specific reference will not render the patent unenforceable, but it does mean that the patent cannot claim the priority date established by the provisional application. This has been confirmed by the Court of Appeals for the Federal Circuit. Encyclopedia Britannica, Inc. v. Alpine Elecs. of Am., Inc., 609 F.3d 1345, 1352 (Fed. Cir. 2010).
In many cases, that will not be a problem. In Worlds' case, it could be a big problem. Worlds has admitted to publicly using its inventions at least as early as September 1995. If it cannot claim the benefit to the priority date of the provisional application (November 1995), then the earliest priority date it can claim for any of its patents would be November 1996 (the filing date of the first non-provisional application.) But, in that case, its patents are possibly invalid because it was publicly using its inventions in September 1995, which is more than one year before its priority date in November 1996. This violates 35 U.S.C. Sec. 102(b), which provides that with respect to novelty, patents are invalid if the invention was publicly used more than one year before the priority date. (It does not matter if the public use was performed by the inventor himself, rather than a third-party. The patent will still be invalid.)
One final wrinkle. Patents can have children. One patent can claim the benefit to an earlier-filed patent application, be it "provisional" or "non-provisional". Inventors do this to limit the scope of potential prior art that can render the patent invalid by continually claiming the earliest possible priority date. This is exactly what Worlds did. It has six patents that each claim priority to previously-filed patent applications. The first two patent applications failed to include the specific reference to the provisional application, but the last four did include the reference. Nevertheless, according to Activision, this will not resuscitate these later-filed patents. Once the first application in the chain of priority failed to include the "specific reference", none of the subsequently-filed patent applications could cure that defect.
In sum, Activision appears to have brought a potentially case-dispositive motion. In our experience, these types of highly-technical procedural motions are not common. Despite the common perception that the scales of justice move on the basis of "technicalities," Judges typically prefer to decide cases on their substance and merits. Activision motion may be the exception that proves the rule.
What is particularly worrisome about Activision's motion is that the District Court should, in theory, be equipped to decide this motion on the papers alone. The argument does not turn on witness testimony, the understanding of persons of skill in the art, expert declarations or any other issues of fact that typically make it difficult to win on summary judgment. Nor does it depend on the claim construction hearing's outcome. At this stage, it appears that Worlds asserted portfolio hangs in the balance of a technicality. It will be necessary to review Worlds' response to Activision's motion before adequately assessing the likelihood of the motion's success. Investors considering or already in WDDD have something other than a delayed claim construction hearing to contend with as they evaluate this case.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.