Patents – General

EFF Calls on Universities to Unilaterally Disarm in Patent Fights

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:

[School name] 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.



August 30th, 2016|Categories: Patents - General|Tags: , |0 Comments

Patents and Innovation

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:

  1. 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.
  2. Research suggests that patents are particularly effective in situations where there is a lot of competition.
  3. 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.
  4. Small firms can use patents to improve access to both debt and venture capital.
  5. 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.

August 9th, 2016|Categories: Patents - General|0 Comments

CEA on Patents

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.

April 18th, 2016|Categories: Patents - General, Uncategorized|0 Comments

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.

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.

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.

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

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.

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.

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