The Electronic Frontier Foundation (EFF) wants universities to roll over and play dead when giant corporations steal their intellectual property.
Displaying a shocking level of ignorance about how the patent system works, the EFF has called on universities to sign a “Public Interest Patent Pledge,” calling on universities to promise the following:
pledges not to knowingly license or sell the rights of inventions, research, or innovation made possible by this institution to patent assertion entities, or patent trolls.
The EFF claims that
Governments and educational institutions alike should embrace patent policies that help bring inventions to the public at large, not those that reward a business model of simply suing others.
It all sounds very noble, unless you have some basic understanding of how the patent system works.
Patents are a “right to exclude.” The EFF wants universities to “partner with those who are actively working to bring new technologies and ideas to market.” But a patent doesn’t grant a company the right to bring a new technology to market. It grants the owner/licensee of the patent the right to stop others from using that technology. And as a result of many large companies in the US adopting “efficient infringement” operating strategies, there’s only one way to stop others from using your patents: through litigation.
If universities don’t sue companies that are infringing their patents, those patents are meaningless and have no value. So should universities not enforce their own patents?
Now the EFF may say, no, it’s fine for universities to enforce their own patents. They just shouldn’t hire patent assertion entities to do it for them.
That would be like saying “don’t use FedEx to deliver your packages, you should deliver them yourselves, because we don’t like FedEx’s business model since they use big trucks and not a Prius.” Apparently it is acceptable to outsource HR, accounting and legal functions, but outsourcing licensing is not permitted. Got it.
Most universities are ill-equipped to enforce their own patents. Their focus, rightly, is on innovation. On R&D. On coming up with important and valuable new contributions to the body of knowledge. Patents are a way for universities to both foster new businesses through licensing their technology to startups, and for the universities themselves to generate revenue that can, in turn, be used to generate more research and innovation.
But if universities don’t enforce their patents, they have no value. No one will license a patent if anyone can use it simply by infringing the patent with impunity. If everyone knew that a university was highly unlikely to enforce, why would anyone take a license? Tech transfer and the board of trustees at most universities have other priorities, so why does the EFF want them to become experts at enforcement?
Bringing a lawsuit for patent infringement in the US generally costs well over $1 million—and likely much more. And it’s money at risk – you might not win the lawsuit. Most universities are not set up in a way that encourages them to take risks with such large sums of money.
Given that enforcing patents is a core competency for most universities, isn’t the more financially responsible thing to do to outsource to an expert and minimize financial exposure and maximize the return?
Consequently, the best way for universities to protect their patents is often by teaming up with a patent assertion entity (PAE). PAEs have the expertise, the financial resources available for litigation, and the stomach for risk that is generally absent in the university world.
Telling universities not to work with PAEs is asking them to unilaterally disarm in the face of giant corporations that have no qualms about using technology covered by someone else’s patents until they are sued and forced to stop.
There’s nothing wrong with universities making sure that when they work with PAEs, the PAEs do not engage in unethical behavior, such as using a patent likely to be invalidated to extort nuisance fee settlements from small businesses. But there are ways to guard against such bad behavior (such as review the track record of any PAEs you work with) without “throwing out the baby with the bathwater” and banning working with any PAEs at all.
No doubt Google – and many other “big tech” firms – would love it if universities gave up the strongest tool at their disposal to enforce their patents.
We doubt – we hope – most universities aren’t that dumb.
There is endless drivel published by charlatans attacking patents. Professor James Bessen is perhaps the best known standard-bearer for the “patents hurt innovation” camp. His work is often cited by the popular press (and by the anti-patent clique in Congress). He’s always ready with a pithy quote that obscures the lack of scientific rigor behind his curious views. The popular press is not really to blame—other than for being lazy and favoring the simple narrative that fits their preconceived notions of reality.
Bessen co-authored a paper titled “The Private and Social Costs of Patent Trolls” in which the authors came up with a jaw-dropping $83 billion cost per year to the economy from “non-practicing entity” (NPE) patent lawsuits. That number, and an equally fictitious $29 billion number, has taken on a life of its own and is extensively quoted. The only problem is the number has no relationship to reality. Ron Katznelson did a great take-down of that figure in his article “Questionable science will misguide patent policy ─ The $83 billion per year fallacy.”
Katznelson points out that the $83 billion figure is a fallacy built on more fallacies. It treats a decline in market capitalization of a company as a cost. It isn’t. It then assumes that changes in stock price after a lawsuit are based on the results of the lawsuit. Ignoring a lot of other factors influence stock price, subsequent stock rebounds, etc., etc. But since the number comes from a professor, lazy journalists will assume it must have intellectual rigor.
On the other hand, there is actual scholarly work done that shows patents ARE in fact important. While some in government like to think they are the ones who create jobs and drive economic activity, credible research strongly supports the view that startups and Small-Medium Enterprises (SMEs) are critical in creating positive job growth and economic activity (see for example, The Importance of Startups in Job Creation and Job Destruction). Since startups and SME’s are critical to jobs and economic growth, it is interesting to explore the way in which patents impact startups and SME’s.
If you believe Professor Bessen’s article on “The Direct Costs from NPE Disputes”, you would conclude that patents stifle startups and SME’s, either as a result of “getting in the way” – that pesky right to exclude – or as a result of SME’s being crushed by patent trolls.
A new paper, Patent Rights, Innovation and Firm Exit, by professors Alberto Galasso of the University of Toronto and Mark Schankerman of the London School of Economics shows the importance of patents to innovation in small/medium sized companies.
The authors built a model to show the relationship between the loss of patent rights and incentives to innovate. They tested a hypothesis that as companies grow and have more patents, there are diminishing returns to any individual patent. It also means the impact on the company of losing patent protection is greater the smaller the company and the smaller its patent portfolio.
The authors didn’t want the data distorted by firms that use an aggressive patent enforcement strategy, litigating widely which can also result in a lot of invalidations. To correct for that problem, the authors chose to look only at patents whose validity was reviewed by the Federal Circuit. This serves to weed out patents of lesser value and importance, and helps to randomize the impact of variation in lower jurisdictions.
The paper shows that small firms that have patents that are core to their business invalidated struggle. Subsequent innovation (as represented by new patent activity) drops by 50%. Losing a core patent substantially increases the likelihood that the small firm will exit the market entirely (as indicated by no new patents at all in the field).
To look at it in a positive light, a small company that has a core patent survive a challenge that makes it to the Federal Circuit – indicating it has a strong, important patent – innovates more and has a better chance of survival than companies that have a patent invalidated.
The paper cites research showing different ways in which patent rights are important to small companies:
- Patents shape the nature of competition in both products and technology, especially in markets where small firms are competing with large firms. This makes sense as small firms may only be able to compete effectively in places where they can secure an advantage by protecting technology with patents.
- Research suggests that patents are particularly effective in situations where there is a lot of competition.
- Patents allow small companies to bring innovation to fields with high barriers to entry by making it possible for them to innovate and license those innovations to big players.
- Small firms can use patents to improve access to both debt and venture capital.
- Patents are also valuable because they allow the smaller company to enter into cross licensing deals with larger companies. This is presumably important because larger firms are generally older companies that may have older technology that may be foundational and important to new entrants.
Evidence shows that patents are important to innovation in small companies, and that invalidating patents harms those small companies. Therefore, it follows that actions that have weakened the patent system – such as making it easier to challenge patents at the patent office and judicial decisions raising the bar on what’s considered patentable – harm small companies and harm innovation.
The scholarly work done by Professors Galasso and Schankerman is important because it refutes the populist bunk coming from the likes of Bessen. Since Professor Bessen’s work fits the narrative of organizations such as “The Patent Fairness Coalition” (which would better be called the “Patent Destruction Coalition”) and Google, his views are promoted in the popular press and by politicians that are setting the “reform” agenda.
Because Professors Galasso’s and Schankerman’s work actually requires that you have a basic understanding of math and statistics, it is simply not going to be “popular.” Take the time to read both—and then decide who has more academic credibility. Bessen’s can be read here, and Galasso and Schankerman’s here.
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.