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.
Bigger, Badder “Patent Trolls”
When the America Invents Act (AIA) was being pushed through Congress in 2011, proponents of the changes in the patent system claimed it would “help stop patent trolls.” As we will show in this post, instead what it may have done is created “bigger, badder patent trolls.”
The AIA induced change that has the greatest impact on already issued patents is the inter partes review (IPR). It’s also the change that has had the most unintended consequences.
The IPR turns a long-standing principle of America’s patent system on its head.
For many years, the “rules of the game” have been that once a patent has been issued, it is assumed that the patent office did its job right, and that the patent is valid. In 1934 the Supreme Court held, in a unanimous decision, that in patent disputes “there is a presumption of validity, a presumption not to be overthrown except by clear and cogent evidence” (Radio Corp. of Am. v. Radio Engineering Laboratories).
This is a reasonable standard. Once an inventor has invested many thousands of dollars and months or years of time in securing a patent, it’s only reasonable that she should be able to assume the patent is valid: the burden of proof should be on someone seeking to invalidate the patent.
Presumption of patent validity
The IPR in essence does away with the ability of patent owners to assume their patents are valid.
While the federal court system still relies on the “clear and cogent” standard of evidence, anyone, at any time, for any reason, can challenge a patent at the Patent Trial and Appeal Board (PTAB) with an IPR. The PTAB is an administrative court that is part of the US Patent and Trademark Office (USPTO). The PTAB makes its decisions based on a “preponderance of the evidence.”
The difference between “clear and cogent” evidence and a “preponderance of evidence” may sound like a techy – nerdy thing that only a lawyer could love, but it has had enormous impact in the patent world.
In many ways there is as much “art” as “science” in granting patents. While certain facts may be clear, when a patent examiner grants a patent he or she must also use judgment. Different people may have different understandings of whether a particular invention is truly “novel” or not. It’s not always a cut and dried decision on whether a particular piece of “prior art” clearly invalidates an invention. By requiring only a preponderance of the evidence the IPR subjects every already issued patent to being subject to what amounts to a review by another examiner who may have a different opinion that is not necessarily better or more clear than the original examiner’s – it’s just different.
Broadest reasonable interpretation of patent claims
There is another “technicality” in the IPR process that weakens patents. An important part of patent litigation is what’s called “claim construction.” Claim construction is looking at the claims in a patent and clarifying exactly what they mean. The district court interprets the language in a patent’s claims according to their “ordinary and customary meaning.” IPRs instead use the “broadest reasonable interpretation.” Now one might think that the “broadest reasonable interpretation” would be a good thing for patent owners – it means the patent covers more possible products. But in fact it can be a bad thing – because it means that there is more “prior art” that can be used to invalidate a patent. This further weakens patents.
As if these features of the IPR aren’t enough to weaken patents, the Supreme Court has further muddied the waters for patent owners with recent court rulings, most importantly its ruling in Alice v. CLS Bank. The Alice ruling has cast the validity of tens (or even hundreds) of thousands of patents into doubt. The ruling affirms that “abstract ideas” are not patentable, but provides no clear guidelines that can be consistently applied by the district court. Alice has effectively wiped out billions of dollars’ worth of patents.
So far, all of this may make it seem like “big tech” has gotten exactly what they wanted: a weakening of the patent system so they can use other people’s inventions without having to pay for the privilege.
Many VERY smart people pay attention to patents. Many billions of dollars of value are locked up in patents. What the AIA and Supreme Court rulings have done is changed the rules of the game, but they haven’t done away with the game. Not surprisingly, some people have figured out how to adapt to the changes in the rules – in ways not at all anticipated when the rules were changed.
IPRs—Hmm, didn’t see that coming
Unanticipated consequences have been numerous, but two that stand out are that IPRs have been far more numerous than anticipated and have been used in a way that many corporate fans of the AIA never considered. IPRs and Alice are being used in competitor patent disputes in game changing ways.
As a result of bestowing hundreds of millions of dollars a year on both sides of the aisle branded pharma has become accustomed to getting every law they want promoting their corporate welfare initiatives. In a fit of honesty, it was incredible to hear one of the chief architects of the AIA recently state that “[pharma] was fine with how the IPR program was working until pharma patents started to be challenged in IPRs.” Let me get this straight: as long as your ox is not getting gored, you are fine with everyone else’s ox being gored?
Wonder how HP felt—the same HP that dropped out of the Patent Fairness Coalition because it was too soft on patent reform—when four of its patents were recently held invalid under Alice. Perhaps next time significant patent legislation is being considered big companies will want Congress to hear from executives other than the usual list of Google and Cisco bobble heads intent on destroying the patent system.
Goliath v. Goliath
By making it so easy to challenge patents what the IPR has done is to make it very, very difficult to enforce a single patent. A patent owner has no idea if a single patent is enforceable. But some patents DO survive IPRs. Patents DO still have value. It’s just harder to pick which patents will survive all these new challenges.
The solution is obvious. If you want to monetize patents, don’t monetize a single patent – monetize a portfolio of related patents. If you launch a monetization campaign with ten patents, selected for strength, you will have a pretty good chance that at least some of them will survive all the challenges.
What it means is aggregation is now the name of the game. As Michael Friedman of Ocean Tomo recently said on a panel we both sat on, “David versus Goliath is dead. It’s now going to be Goliath versus Goliath.” An individual inventor with one or two good patents isn’t going to have an easy time finding anyone willing to enforce those patents on a contingency basis. He’s going to have to sell them to an aggregator, who can combine them with other patents, and launch a monetization campaign that will have a chance of success.
Smart money is very interested in the patent space right now. There is a general sense that if the patent market hasn’t hit bottom it’s “close enough.”
Many people believe the stock market’s bull run is running out of gas. Many investors are looking for “non-correlated investments,” investments that go up or down independently of trends in the overall market.
The combination of lots of money looking for a home and the patent market hitting bottom means there is a lot of money available to invest in good patents. There will be some consolidation in the industry.
Instead of getting rid of “patent trolls,” what big tech is going to discover is that when patents are enforced against them – and patents will continue to be enforced – the opposition is going to have more weapons (bigger portfolios of patents) and more ammunition (money to finance monetization campaigns).
I’m glad to see that the brakes have been put on the rush to further patent reform. Everyone is best served by going slow and letting the full impact of changes already made play out before making more changes.
Guest blog first posted on IPWatchdog:
Have We Hit the Bottom in the Patent Market?
The short answer: No. Longer answer follows.
The patent market—and I disagree with those who argue that there’s no such thing and that patents are not an asset class—had an amazing bull run from the late 1980’s through 2012. The peak was 2011 to 2012 when we saw a number of multi-billion dollar patent sales and patent-driven acquisitions.
The bull run is over – for my thoughts on the causes for the end of the good times and on how we will tell when we’ve hit bottom, please see the post on IPWatchdog.