The Council of Economic Advisers (CEA) recently issued an “Issue Brief” dealing with patents: The Patent Litigation Landscape: Recent Research and Developments.
The CEA is a part of the federal government. It’s part of the White House, tasked with providing the President with objective economic advice that relates to formulating policy.
Considering that this report, prepared by White House staff, is intended to guide the President’s policies toward patents it’s surprising that the report has received very little coverage or comment in the patent community.
Overall, the report has an “anti-NPE” bias, despite not finding much data that would actually support an anti-NPE position. The report also manages to present neutral “facts” without background or context in a way that would cause a casual reader to see something “wrong” with NPEs. Do we smell Google’s money in a report with a bias against NPEs?
A selection of highlights from the report, with our commentary, follows:
The overall number of patent litigation lawsuits appears to have increased over the past 40 years, though it is not clear how much the rate of litigation has increased;
To give the CEA credit, they do acknowledge that there’s a difference between the number of lawsuits and the rate of litigation. They claim “the rate of litigation has increased” although unclear how much. We have news for the CEA: the rate of litigation is DOWN, and it has recently gone down even more.
The proper measure to use when looking at historical patent litigation data is number of defendants per active patent. Just looking at cases is meaningless: if there are more patents, there will be more patent lawsuits. Even looking at cases per active patent can be misleading because the AIA changed the rules on joinder, so there were more patent lawsuits filed in 2012 simply because patent owners had to file more separate lawsuits to catch the same number of infringers.
As we reported in our blog post “Patent Litigation and NPEs 2015,” the rate of patent litigation – defendants divided by number of active patents – has been trending downward. The overall rate was .387% in 2010, and .313% in 2015. The rate of NPE litigation has also been trending downward, although not as dramatically as there is a bit of shift toward more NPE litigation.
The most recent data on patent litigation – UnifiedPatents’ Q1 2016 Patent Dispute Report – shows the decline in litigation has accelerated in 2016. Their report finds that
Patent disputes in Q1 2016 decreased 28% compared to Q4 2015 and 25% compared to Q1 2015, respectively.
Would Obama (or his successor) choose to make patent reform a priority if his own staff told him “patent litigation is down, and decreasing?” There would be no urgency to fix a “problem” (on behalf of Google) if the “problem” was fixing itself.
It’s also striking how the report contradicts itself. On the one hand it claims
a substantial amount of patent litigation in the United States, often with little substantive merit, often arises from certain types of NPEs called “patent assertion entities” (PAEs).
On the other hand, it says that damages collected by NPEs are going up:
Median damages awarded to NPEs also appear to have increased over time and are larger than those awarded to PEs (PWC 2014)…the median award to NPEs increased from $7.3 million during 2005 – 2009 to $8.5 million during 2010 – 2013.
If NPEs are filing lawsuits with “little substantive merit,” how come damage awards for NPE litigation are trending upwards?
The report provides statistics showing that NPE litigation is up:
The share of patent litigation cases brought by NPEs has grown over time, from below 30 percent of all cases in 2009 to over 60 percent in 2014
The report provides no explanation whatsoever for this change. With no background or context, it makes it sound like the business is attracting “trolls” picking on poor innocent operating companies.
There are, in fact, a number of good reasons why NPE litigation is increasing. Here are three:
- Many large operating companies are exiting businesses and finding their patents are the only useful assets left. They often put those patents into an NPE and monetize them, seeking to continue to make a return on their R&D investment.
- The patent environment is complex and getting more complex. Many firms are realizing the benefits of “outsourcing” patent monetization, just as they outsource many other functions from logistics to production.
- The cost of patent litigation continues to increase, and individual inventors and small businesses often have no choice but to team up with a PAE to enforce their patents.
The report claims that
Patent litigation by NPEs appears to have a negative effect on innovation, though the effect on entrepreneurship is less clear, and more research is needed.
What’s the evidence?
Smeets (2014) finds that corporate R&D intensity for defendants drops following patent litigation for small firms that are involved in costly lawsuits.
Well, yes. A small company will have less money for R&D after losing a lawsuit for patent infringement. Should we as a society be concerned that thieves will have less money to buy things if they get caught?
They point out that NPEs and PEs have different targeting strategies…with a “whiff of disapproval” at the idea that NPEs target firms with large amounts of cash:
NPEs also appear to target certain types of firms. A study by Cohen, Gurun, and Kominers (2015) finds that firms with large amounts of cash, or with a recent positive shock to their cash holdings, are more likely to be targeted by an NPE in a patent litigation suit (the authors do not differentiate between NPEs and PAEs). In contrast, they find that cash has no significant effect on the probability of being sued by a PE.
NPEs and PEs often have different motivations for filing lawsuits. NPEs are concerned with getting a return on investment from the patent. As such it makes sense to sue firms that have a lot of cash (as Willie Sutton said, “that’s where the money is”). PEs, on the other hand, are often more interested in stopping a competitor than making a return on investment directly from the patent. Why argue that it’s bad that NPEs are trying to make a return on investment, but it’s somehow OK that PEs are engaging in “anti-competitive behavior?” Neither is somehow a finer or more “ethical” thing to do with a patent.
Similarly, the report makes a statement about a fact (NPEs target older patents), and then makes a completely unwarranted assumption about the cause behind that fact.
Another litigation strategy used by some NPEs is to target older patents (Love 2013). According to Love (2013), NPEs prefer to assert their patents late in the patent term, when the purportedly infringing firms are likely to have amassed greater resources. In contrast, PEs generally enforce their patents at the beginning of the patent term when the incentives to recoup their substantial R&D costs are the highest.
NPEs will naturally use older patents for many reasons, not the least of which is often operating companies don’t decide to monetize patents by working with a PAE until late in the patent lifecycle. Also there is likely to be more infringement of an older patent. PEs enforce younger patents because they are eager to keep competitors out of their market when they have the newest technology. None of this is surprising; and none of it has any particular policy implications.
The report makes a totally unwarranted conclusion:
…current data suggests that further reform—be it from further legislative, judicial or executive actions—may still be warranted, particularly in regard to the high concentration of litigation in certain judicial districts.
Current data would actually suggest no such thing! The data shows litigation is down, and things are generally working in the way we would rationally expect them to work.
They do, at least, acknowledge:
Any reforms, however, should take into account the changes that have already occurred and are ongoing in the patent litigation landscape.
The changes that have already occurred suggest the opposite of their conclusion. Any system as complicated as the patent system can benefit from ongoing tweaking. But additional major reforms at this time are unwarranted, unnecessary, and inadvisable.