Monthly Archives: February 2016

More Economists Who Are Promoting the Google Agenda

Two economists from Washington University in St. Louis, Michelle Boldrin and David Levine, ask “Whither the patent system?” in an opinion piece on the Congress Blog on The Hill website.  The opinion piece is a solid effort on Boldrin and Levine’s part to take the carnival barker mantle from Beesen and Meurer — it is otherwise devoid of any useful information or insight.    Perhaps there is a simple “follow the money explanation” for what appears to be otherwise credible academics associating their names with such drivel in a publication that is not exactly known for its editorial quality.

In any event we’ll be happy to answer them, as soon as we get over our shock that two people highly educated enough to both be “Distinguished” professors of economics can get so much wrong about patents in only 421 words. It’s quite an accomplishment!

The authors claim that

We report here the consensus among academic researchers of the patent system that the system as currently constituted is failing, serves to discourage rather than encourage innovation, and is in desperate need of reform.

The authors cite “two dozen empirical studies on patent litigation.” Perhaps there is a “consensus” among academic researchers that are sponsored by Google and other cheerleaders in the efficient infringer lobby, but a simple google search quickly demonstrates there is no consensus among independent academic researchers that the patent system discourages innovation or is in desperate need of reform.

We have previously pointed out how flawed many of those studies are; see “The Mythical $83 Billion/Year Damage to the Economy from Patent Trolls” and “More Bogus Patent Litigation Statistics” for a discussion of some the very highly flawed studies these ersatz scholars are relying on.

Let’s take on the key points made in their editorial one at a time:

The number of defendants in patent lawsuits filed in 2009 was five times the annual number during the 1980s.

The authors did not provide specific numbers or the source of their data, but we’ll accept their numbers. They sound about right. But that does NOT mean there has been an “explosion” in patent litigation.

As we pointed out in our post “Patent Litigation and NPEs 2015,” it’s relatively meaningless to look at the number of lawsuits in a vacuum. What’s important is the RATE of litigation per active patent.

Patents are a “right to exclude.” That means if someone is infringing your patent you have a right to sue them. Therefore, the more patents you have the more patent litigation you will have.

In 1980 there were 112,379 patent applications and 66,170 patent grants. In 2009 there were 482,871 patent applications and 191,927 patent grants (statistics courtesy of the USPTO). Not far off the “five times” increase the authors cite on the application side, and if you take into account the 20-year life span of most patents and the accumulative effect of a nearly continuous rate of increase in patent applications and grants, it’s clear there is no real increase in the rate of patent litigation.

Our above referenced article shows that the rate of patent litigation actually declined from 2010 to 2015 (after peaking in 2011). The “explosion” in patent litigation is a myth if you take into account the fact that there has been an “explosion” in the number of active patents.

It’s a good thing that there are more active patents: it means creative people are busy inventing new things that benefit all of us!

…the more R&D a firm performs, the more likely it is to be hit with a patent lawsuit, all else equal.

Well, duh! The more R&D a firm performs the more likely it is in an R&D intensive field. In any R&D intensive field there will be more patents. More patents = more patent lawsuits. The authors quoted, without attribution (sloppy for academicians?) data from the “mythical $83 billion” study mentioned above.

Another study associates lawsuits from PAEs with a decline of billions of dollars of venture capital investment;

The “study” was based on a flawed survey. Figures from PWC show that venture capital investment in the first quarter of 2009 was $3.8 billion, and in the first quarter of 2014 it was $9.5 billion. Does that sound like a decline in venture capital investment?

Many hundreds of invalid patents, many already involved in litigation, have been revoked.

Those patents were valid UNTIL they were revoked. Why were they revoked? Several reasons:

  1. We agree there are some patents that should not have been issued in the first place. That may be the only thing we agree with the authors on. The answer to that problem is to give the patent office the resources it needs to do a more thorough job of vetting patents before issuance. We’re all in favor of not issuing weak patents.
  2. The Supreme Court changed the rules of the game with its Alice v. CLS Bank Many patents that would have been considered valid prior to that decision became invalid overnight. See “Did the Supreme Court Intend to Kill Software Patents?” for more on the impact of Alice.
  3. A little too technical to go into detail here, but the new procedures for attacking patents at the patent office use a method for determining what’s covered by a patent that makes it much easier to invalidate patents than the method used in the court system.

The authors cite two “basic facts” that “need to be contended with” via legislation.

The first was the creation of a special patent court more than three decades ago. Not surprisingly this court – made up primarily of patent attorneys – loves patent litigation.

In the first place, this claim is somewhat inaccurate. There is no “special patent court.” Patent cases are heard in federal district courts all around the country. There is a special court of appeals that handles patent cases – the Court of Appeals for the Federal Circuit (CAFC). Are the authors claiming that somehow the existence of an appeals court that specializes in patents encourages patent litigation? Or that the decisions of the judges are somehow biased because they have expertise in the subject matter, patents? This is a totally nonsensical statement.  But for the minor potential Constitutional issue—we absolutely would support specialized patent courts in the US such as exist in other jurisdictions.

The second is the technique of carrying out patent litigation by selling patents to patent trolls. While real firms with real products have every incentive to collaborate and avoid mutual destruction through patent litigation, patent trolls have no such incentive.

The authors jump on the bandwagon that there’s something wrong with making money from patents in ways other than manufacturing products.

Not every great inventor is a great manufacturer. Not every patent owner (whether large or small) is great at licensing. Some choose to outsource this function, just as they outsource many other functions from manufacturing to logistics.

Patents are designed to protect inventions, not manufacturers. That, in fact, was one of the great revolutions of the American patent system. Compared with the British system that pre-dated it, the American system opened patents to “the little guy,” who could come up with an invention, and then license it to someone else to manufacture. Or, as they say in the software business, “that’s not a bug, it’s a feature!”

Thomas Edison licensed the vast majority of his patents. Does that make him a “patent troll?”

If you’re an individual inventor and Google decides to start infringing your patent, how do you stop them? Where do you get the millions of dollars it takes to pursue substantial patent litigation against a corporate giant that is stealing your intellectual property? Individual inventors and small companies generally have no alternative to working with a “Patent Assertion Entity,” a.k.a. “patent troll,” if they want to get paid for their inventions. Many big tech companies engage in “efficient infringement.” They knowingly infringe patents, maybe hoping they won’t get caught, or that the patent owner won’t have the resources to pursue the case. Try and ask them for a license and they basically say “No way. You don’t like it, sue me.”

Scholars are supposed to be objective. Why don’t the authors cite the study put out by the patent office itself that shows “Patents are Rocket Fuel for Startups?”

Because it doesn’t fit their biased, anti-patent agenda. Facts can be inconvenient at times.

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February 19th, 2016|Categories: Patents - General|4 Comments

Killing Patents and Enabling Foreign Competition

When the America Invents Act (AIA) was passed in 2011 it was heralded as a way to fight “patent trolls.” Typical sentiments are expressed in an article from Forbes: A Powerful New Weapon Against Patent Trolls.  Google did its usual excellent job of claiming—with absolutely no credible evidence – that the AIA would “promote innovation and protect the little guy.” All it cost Google to get politicians to buy into this fictitious plan was some money – a few well-timed and well-placed donations to politicians on both sides of the aisle. And Google has plenty of money. The more impressive “sale” Google made was getting other large corporations to buy into into their malarkey.

In a classic case of “unintended consequences,” one of the great “troll-killing” tools, the inter partes review (IPR), is increasingly being used not only by operating companies in general, but by foreign operating companies in particular.

It’s a little bit like “cutting off your nose to spite your face.” Operating companies that were so in favor of “patent reform” to stop “patent trolls” are now finding their own patents being challenged by foreign competitors eager to enter the US market.

One day’s data is more anecdotal evidence than a statistically rigorous study, but it’s interesting to note that on one day, February 10, 2016, there were nine IPRs filed with the Patent Trial and Appeal Board (PTAB). All nine were filed against patents owned by US-based operating companies not typically thought of as “trolls” by anyone’s definition.

Not only that, six of the nine IPRs were filed by competitors from Germany, Holland, and South Korea.

The IPR was created by the AIA as a way to challenge patents at the patent office with an administrative procedure that is faster and cheaper than litigation in court. The bill of goods that was sold to all of us—including large corporate patent owners – was that the AIA was supposed to help the “fight against patent trolls” by making it easier to kill the supposedly “weak” patents they were thought to use to “target” poor innocent operating companies. One of the key features of the IPR is that unlike litigation in court there is no starting assumption that the patent is valid. Furthermore, the claim terms are construed using a methodology that makes claims easier to invalidate. The bottom line—no matter how the USPTO attempts to skew and obfuscate the real data—is that the IPR process makes it MUCH easier to kill patents in an IPR than in court.

The inability to count on a patent’s validity hurts ALL patent owners, not just “NPEs.” As many operating companies are starting to find out to their chagrin.

Here’s one day’s list of who’s trying to kill whose patents:

  • Three web-based companies, Kayak, OpenTable, and Priceline are going after two IBM patents.
  • Fitbit is trying to knock out a patent owned by its competitor Aliphcom, aka “Jawbone.”
  • Two Europe-based companies, ASML Netherlands and Qioptic Photonics (Germany), and Qioptic’s American parent, Excelitas, filed IPRs against two patents owned by US-based Energetiq Technology.
  • South Korea-based Nautilus Hyosung is going after four patents owned by US-based Diebold.

So in summary, we have nine patents owned by US-based operating companies being challenged by their competitors – including companies from Holland, Germany, and South Korea that no doubt are looking for ways to enter the US market.

While all of these patents are in litigation, we’ve also seen operating companies use IPRs as “preemptive” strikes against competitors. We’d love to see some academician do some real research on the way IPRs are being used by competitors, especially by foreign competitors.

Just wait until Trump finds out that Congress passed a law that makes it easier for foreign companies to enter the US market and take away US jobs and deter US R&D spending.  He’ll go ballistic.

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February 16th, 2016|Categories: Patents - General|1 Comment

Patents are Rocket Fuel for Startups

The US Patent and Trademark Office (USPTO) Chief Economist has released a report, “The Bright Side of Patents,” that counters a lot of myths about patents and startups.

Given the amount of very poor data out there – see “More Bogus Patent Litigation Statistics” for examples – it’s nice to have some reliable data from reputable scholars (Harvard, NYU) that highlights the importance of patents.

A lot of people in tech, especially in software, have an “anti-patent” mentality. The herd thinking is “open source is the way to go.” Even Google has jumped on that bandwagon, famously giving away some 150 patents to the public with its “Open Patent Non-Assertion Pledge.” Just try infringing one of the company’s 20,000+ other patents though and see what happens.

A crazy blog post Arguments you can make as a startup CTO against filing for software patents claims “Most software engineers believe that software patents are bad for innovation, and shouldn’t exist.” The author goes on to list a bunch of reasons NOT to file for patents including they are expensive, take a long time to get, are expensive to enforce, force you to disclose your ideas to your competitors, etc.

The authors of “The Bright Side of Patents,” Harvard Business School’s Joan Farre-Mensa, and Deepak Hegde and Alexander Ljungqvist of NYU, have a much better argument in favor of startups filing patents: you’ll make more money.

They took an interesting approach to their research. They studied over 20,000 companies that applied for patents, and compared the ones that were granted patents with the ones that were denied patents. Almost no one has bothered looking at companies that were denied patents before. The comparison between the two sets of companies is striking.

The authors say

Our analysis shows that patent approvals help startups create jobs, grow their sales, innovate, and eventually succeed.

Companies that received patents enjoyed:

  • 36% higher employment growth
  • 51% higher sales five years out
  • Much likelier to keep innovating with more, better patents
  • Twice as likely to go public

What is it about patents that helps startups succeed?

The authors believe it’s because patents help startups get past “financing friction.” Large, established companies that are doing well usually have a pretty easy time raising money. They have a track record, profits, predictable cash flows. Startups are nothing but a pile of question marks.

Startups not only have no revenue, potential investors don’t know if the technology will actually work, if there will be demand for the new product, or whether the technology could easily be copied by competitors.

The authors claim that patents help reduce “financing friction” for startups in four key ways:

  1. Patents can facilitate transactions and give investors greater confidence that the company will be able to monetize the invention.
  2. Investors often are not eager to sign non-disclosure agreements before committing to a company. It can cause headaches if they have other portfolio companies in similar technologies. Patents allow companies to disclose their technology without needing NDAs.
  3. Patents give a credible way to communicate the technical details of the product.
  4. Patent are an indicator of quality to investors.

Patents are especially important to early stage startups:

Beyond the second round, the effect of patent approval on access to VC funding all but disappears.

The reason is pretty easy to understand – by the time a company is going into its third round of financing, investors on the board of the company have a lot of information about the company and the founders, and the company usually has some results. There are other things on which to base investment decisions.

It’s also interesting that patents are especially important for inexperienced founders:

Patent approval increases a startup’s likelihood of raising VC funding in the next three years by 44.5 percentage points for inexperienced founders; for experienced founder teams, the effect is virtually zero.

If a founder has a track record as a successful entrepreneur, the investors are putting their money behind the entrepreneur more than behind the idea. Lacking an experienced founder, the investors are placing a heavier bet on the company’s IP, and a patent serves as a form of government backed due diligence for the IP. Prospective investors know that at a minimum there is something novel that can’t be immediately copied by the competition.

Patents also seem to be more important in certain fields than in others. Totally contrary to the blogger arguing against “software patents,” patents are especially important in the IT space.

Evidence from interviews at semiconductor firms suggests that the primary function of a patent in that industry is “securing capital from private investors [for firms] in the startup phase” (Hall and Ziedonis 2001). In addition, recent evidence by Galasso and Schankerman (2015) indicates that patents are particularly effective in blocking downstream innovation and imitation in the IT sector.

Patents substantially increase an IT startup’s chances of raising money, but don’t seem to have much effect on biochemistry startups. The authors speculate that this could be because biochemistry startups are usually founded by scientists with a lot of experience and a scientific track record.

The authors also found that delays in getting patents harm startups. Each year of delay in the first patent being granted results in:

  • 19% lower sales and employment growth
  • 14% decline in number of future patents and 19% decline in citations (an indicator of patent quality)
  • Reduction in the chances of the company going public or being acquired

Given the importance of patents to startups, the authors urge caution on patent reform:

We find that patents offer a substantial bright side to entrepreneurs and small inventors, especially if processed in a timely manner. In particular, patents appear to play an important role in reducing uncertainty and alleviating information asymmetries in the market for entrepreneurial capital. Reforms of the patent system that do not take this role of patents into account run the risk of negatively impacting the availability of capital for innovative startups.

The patent system is doing one of its jobs – helping small companies and startups use their innovative ideas to compete against much larger and more powerful competitors, benefiting the entrepreneurs and society at large.

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February 10th, 2016|Categories: Patents - General|Tags: |0 Comments