Monthly Archives: January 2016

Patent Litigation and NPEs 2015

Lex Machina and RPX have both recently issued reports on patent litigation in 2015. This post provides our take on what the numbers mean. You can see the reports at the following links:

Lex Machina 2015 End-of-Year Trends
RPX 2015 NPE Activity

The Lex Machina report makes it sound like patent litigation is near an all-time high:

Patent litigation in U.S. district courts grew in 2015 with 5,830 patent cases filed, a 15.0% rise from 2014 (5,070 cases).  Except for 2013, which remains the high-water year for patent litigation (6,114 cases), 2015 surpassed all other previous years.

That’s true if you believe the relevant number is “cases filed.” It’s not.

For one thing, number of cases was hugely impacted by the 2011 America Invents Act which put limits on how many defendants a patent owner could put together in one court case. What Lex Machina shows as an “explosion” in patent cases in 2012 – a jump from 3,575 in 2011 to 5,454 in 2012 – is not because there was huge boom in litigation. It’s because Congress changed the rules. If you look at Total Defendants Added to patent cases – the number of entities being sued, from the RPX report – there was actually a decline from 2011 to 2012, from 7,849 to 6,940.

Going by the total defendants added, 2015 was still the second highest year though – after 2011, not 2013.

But there’s another problem with saying that 2015 was nearly an all-time high for litigation: it doesn’t take into account the fact that there are more patents, because there has been a tremendous leap in the number of patents granted every year.  This may indicate a different issue—but not a topic for today.

If there are more patents, “it must follow, as the night the day,” that there will be more patent litigation. Since patents are a right to exclude they must be enforced to have any value, and that will mean more litigation.

The above chart shows what we believe is a more accurate measure of the pace of litigation: the number of defendants added divided by the number of active utility patents, the rate of patent litigation. We took the total active defendants and NPE data from the RPX report (RPX not only collects data from the automated system PACER, it manually scrubs the data) and compared it with the total active utility patents from a post on PatentlyO.  What we see is that while the rate of litigation is up in 2015, 2015 is still the second LOWEST rate of litigation since 2010. The whole concept of an “explosion” in patent litigation fails to take into account the fact that there has been an “explosion” in the number of live patents.

Ignoring the number of live patents would be like ignoring inflation when reporting financial numbers. The highest grossing film of all time is Avatar, with revenue of $2.8 billion. But if you adjust for inflation, the highest grossing film of all time is Gone with the Wind. In 1965 the average house in the US cost $20,300; in 2015 the average car cost $33,000; but that doesn’t mean anything because it doesn’t take into account 50 years of inflation. Houses are still more expensive than cars (generally speaking).

Something interesting did happen in 2015 though – NPE litigation is way up. Total defendants added in NPE cases, 5,349, IS at an all-time high. Operating company litigation actually showed a slight decline from 2014.

What gives? Between the new ways to challenge patents at the patent office (inter partes Review and Covered Business Method Patent Review) and the Supreme Court’s Alice decision, aren’t NPEs supposed to be suffering? In a decline?

2014 had the fewest number of defendants added in NPE cases in the last six years; 2015 had the most. There are several explanations for the growth.

  • Patents are valuable assets. IPRs and Alice may have introduced some uncertainty, but they haven’t (yet) totally destroyed the value of patents. Where there are valuable assets there are smart people who will figure out ways to make money with those assets.
  • IPRs and Alice may have ironically contributed to an increase in litigation. Back in the “good ol’ days” – pre-AIA and pre-Alice – patent owners could often negotiate a settlement with infringing companies. The uncertainty introduced by the changes in the patent environment has simply encouraged “efficient infringing.” Many operating companies figure they have better chances than ever at winning in court, so why negotiate a license? As a result, patent owners who want to protect their intellectual property have no choice but to litigate.
  • Since patent owners cannot allege infringement without risking the infringing company filing a request for a Declaratory Judgment (and taking control of venue) many patent owners choose to file law suits before opening discussions.
  • New rules came into effect in December on what paperwork is required to file a patent lawsuit. The simple “Form 18” that had been used for years to file patent lawsuits is a thing of the past. Filing patent lawsuits now takes more paperwork and is more expensive. As a result, there were more NPE lawsuits filed on November 30 than on any other day in history.

Patent owners are no dummies. Change the rules and they, and their lawyers, will adapt to the changes. It’s good that Congress has lost its zeal for pushing through patent reform. It’s not even known yet what the full impact of the AIA will be. Few would deny that the AIA has generated “unintended consequences,” many of which don’t even show up in these litigation statistics.  IPRs are being used in a variety of “creative” ways, not just as a way to “stop patent trolls.” Operating companies are using them to attack competitors. Pharma wasn’t expecting to be on the receiving end of IPRs when it enthusiastically embraced the AIA.

There is one thing that makes the number of cases filed an interesting statistic: RPX and Lex Machina have wildly different numbers.  According to Lex Machina, there were 5,830 cases filed in 2015. According to RPX there were 5,203 (both are looking at “total” cases). That’s a difference of over 10%, which is a significant difference (for what it’s worth, we think RPX is closer to being right).

Statistics such as these are of no use in guiding policy until you get behind the numbers and truly understand them.  While the carnival barkers like Bessen and Meurer will undoubtedly use this 2015 litigation statistic as “evidence” that we need more “patent reform” we hope that thoughtful people who set policy (at least the ones not on Google’s payroll) will pause and ask a few questions about the numbers.

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January 14th, 2016|Categories: Patents - General|0 Comments

Erich Spangenberg’s Patent Predictions for 2016

About a year ago I posted my Patent Predictions for 2015. Here’s my report card. Hopefully you’ll still be interested in reading my 2016 predictions after you see how poorly I did in 2015.

Patent reform will be enacted and include fee shifting.F (I’m very happy to accept that grade)
IPR filings will increase — but not for the reason you think.A (and not only against pharma, but also competitor-on-competitor)
The number of patent lawsuits will continue to decline.F (This was tied to #1– I should not have doubled down)
Significant GAAP write-downs are coming.F (I continue to believe I simply mistimed this one—doubling down for 2016.)
Major cuts are coming at big law firms focused on IP litigation.B (true for large IP boutiques, not true for all large firms)

So, with my approximately D+ average for 2015, here goes for 2016:

We see the bottom in the IP market

While there are some who argue there’s no such thing as an “IP market,” those of us who buy, sell and license patents know better.

The IP market has been in disarray and steep decline since the high water mark was reached in 2010.  The America Invents Act (AIA), Alice and a number of other simply horrific decisions by the Supreme Court and Federal Circuit have combined to create confusion and uncertainty about the validity of tens of thousands of patents.

Congress and the White House continuing to talk about further “patent reform,” and the judiciary implementing their own reform, further increases uncertainty.

It’s no surprise, then, that the billion-dollar-plus patent deals or patent-driven M&A activity we saw back in 2011 and 2012 seem like relics of the distant past.

I predict that in 2016 we’ll see an event that in hindsight will be acknowledged as the bottom of the fall and the beginning of the turnaround.  There are lots of potential candidates:

  • Intellectual Ventures, with its 70,000 patents, sells at market bottom prices (Yes, the company denies it’s for sale… but so what?)
  • An IP-based investment fund exits the business
  • Several patent assertion companies go bust
  • A major IP-based transaction blows up
  • Some combination of the above

We’ve had a bull market in patents for over 25 years. Nothing lasts forever; we were due for a bad five years to correct the imbalance.

There are several things that are likely to contribute to the recovery:

  • To many people’s surprise, it is becoming easier to enforce patents in China. China could continue to strengthen its patent system. Obviously it’s a huge market, and this would be good for patents.
  • The European Patent Office expects the Unified Patent Court to become a reality late in 2016. If this does in fact happen, Europe will all of a sudden become a much more interesting place for patent monetization – and that will be reflected in the value of patents.
  • Most importantly, many large patent owners are starting to wake up to the fact that what’s good for Google is not necessarily good for them.
    • Pharma has already split with Google on patent reform – likely that’s what happily caused me to miss my first prediction above for 2015. I expect other large players are going to figure out that what they gain in the “efficient infringer” business model – “We’re infringing your patent? So sue us.” — is more than lost when it comes to slowing down their competitors with strong patents.
    • Big companies may actually start to speak out in favor of strengthening our patent system – rather destroying it, as Google et al. have been doing.

A few influential Senators and a handful of respected commentators have begun to question whether Google’s focus on patent reform is really about “protecting the little guy.”  Maybe the light is going off for some politicians and influential thinkers that destroying fundamental property rights is not a prudent path—particularly when the call for action is based on specious drivel published by charlatans like James Bessen and Mike Meurer–clowns that are on the Google payroll.

As a result, by the end of 2016 I expect to see a stronger patent market, with both increased transaction volume and higher prices.

New IP business models will emerge

 There are several factors driving an interest in new business models in the IP space.

  • The stock market has had a great run. Many investors think the market is running out of steam, so they’re looking for “non-correlated” investment opportunities — investments that do not rise and fall with the general stock market.IP-based investments seem to fit the bill. Patents can be enforced in good times or bad, and when the market is down patent assets can often be acquired at attractive prices.
  • The IP market is at or near bottom (see above). Buy low, sell high. It may be time to buy.
  • People in the business have gotten over the shock from factors such as the AIA and Alice and are thinking outside the box about how to respond to a changing environment. Creative business ideas will be able to attract capital.

“Big money” coming into the space could be a game changer. IP-based lending deals at an average value of $5 million each aren’t going to be enough to absorb large amounts of capital. There will be much larger deployments of funds that address perceived critical needs in the market.

Law firms—litigation limps, transaction specialists perk up

 Even though patent litigation filings increased in 2015, in-house counsel have become far more sophisticated in how they use law firms. The result has been a decline in tech-related patent litigation revenue for law firms (based on off-the-record conversations with a number of partners at large firms).

There are several additional factors driving a drop in law firm patent litigation revenue:

  • More patents are being challenged at the patent office with IPRs rather than with litigation. There are fewer billable hours in IPRs than in litigation.
  • Many cases are being knocked out early with motions to dismiss based on the Alice Fewer hours get racked up on both sides.
  • The Octane and Highmark Supreme Court cases have made it much easier for district courts to award attorney fees under 35 U.S.C. section 285. This has caused some trolls concern, and as a result has led them to significantly lower demands and to settle earlier.

At a macro level, I expect to see IP specialty firms continue to struggle.  Large diversified law firms will take a “wait and see” approach, but the fun days of pre-2011 aren’t coming back.  Patent transaction specialists will see an uptick later in the year as the overall market starts to recover.

Congressional patent reform does not pass

It’s an election year and even though there’s significant bi-partisan support in both the House and Senate for patent reform, the issue is no longer a top priority for President Obama. Congress will move on to other issues.

Additionally, some people in Congress are starting to figure out that innovation and patents are a large part of what “makes America great.” Long- (too long) serving politicians may be figuring out that patent reform is not an issue that’s going to make them heroes with their base.

It’s hard to tell where the current front runners for president stand on patent reform.  Ms. Clinton seems closer to trial lawyers (who like a strong patent system and the litigation revenue opportunities) than the other candidates. A few of her likely staffers have made pro-patent comments. Mr. Trump is a bit difficult to predict, but I suspect he will have bigger fish to fry and unless he gets into tort reform, patent reform will not be on his radar.

Perhaps the more significant change coming for patents in the political sphere will be the decline in the influence of Google.  If Halliburton was the most influential company during the Bush presidency, Google was clearly the most influential company of the Obama administration.

As Google becomes an even bigger pariah in Europe, its reputation in the US will also suffer — and the politicians will withdraw the welcome mat.  No matter who the next darling company of DC turns out to be, it’s unlikely to be more anti-patent than Google.

Overall, I’m bullish on patents for 2016. I think it’s going to be a good year.

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January 4th, 2016|Categories: Patents - General|3 Comments