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Panelists at George Mason’s IP conference debate litigation funding

By Kristen Osenga

I recently had the pleasure of participating in a panel on third-party litigation funding (TPLF), which was part of the Annual Fall Conference at George Mason University’s Center for Intellectual Property x Innovation Policy.

The panel included experts from both industry and academia, highlighted the growing debate around TPLF, and crystallized why this financing tool is so crucial for America’s innovators and inventors.

At its core, TPLF enables outside investors to fund litigation, and in return receive a portion of any money recovered. While this practice has applications across many areas of law, its impact has been especially notable in patent litigation, where it helps put small startups on a level playing field with much larger companies.

Without outside funds, small companies with unique inventions are at the mercy of big businesses that copy their products.[1] Large tech companies engage in this so-called “efficient infringement” deliberately, knowing that the smaller competitors can’t afford to pursue them in court. TPLF helps inventors protect their intellectual property rights.

During our panel, opponents of TPLF raised concerns that the practice has national-security implications and leads to frivolous lawsuits. They suggested that foreign adversaries, particularly China, might fund litigation, either to access sensitive information or burden American companies with legal costs driven by frivolous litigation.

However, these arguments don’t withstand scrutiny.

First of all, the notion that foreign entities would fund patent litigation to access confidential information is far-fetched and impractical if not impossible. As we discussed on the panel, courts enforce rigorous protections to make sure information on disputed intellectual property isn’t shared. Violations carry severe consequences.[2]

It’s true that sovereign wealth funds — which are owned by governments — sometimes invest in litigation funding. But they do so as passive investors, with no control over cases (or the law firms hired) or access to information. They’re simply seeking returns, just like any other institutional investor. If foreign adversaries want to steal American IP, they have far more direct methods at their disposal, including cyber penetration and traditional corporate espionage.[3]

Second, the argument that TPLF leads to frivolous litigation isn’t supported by the data. Patent litigation has decreased by nearly 50% over the past decade, even as TPLF has grown.[4] This shouldn’t be surprising, as litigation funders only succeed when their cases have merit. They conduct extensive due diligence and reject the vast majority of potential cases. In fact, a panelist who worked at a major TPLF funder noted that his firm rejected 95.5% of potential cases. Put simply, no one makes money funding frivolous lawsuits.

The most telling moment in our discussion came when we explored the real dynamics at play. Opponents of TPLF, often large corporations, push for mandatory disclosure requirements that would expose funding arrangements, including investors’ identities.[5] This might sound reasonable on the surface, but it’s actually a tactical move designed to disadvantage patent owners. Such disclosures would allow the infringing companies to gauge their opponents’ resources and adjust litigation strategies accordingly — often by attempting to outspend and outlast smaller inventors. Disclosure of investor identities would enable investor harassment, driving investment away from third party funding.  This is what opponents of TPLF really want.

The reality is that TPLF isn’t just about money, but about access to justice. Patents grant the exclusive right to make and profit from one’s invention. But if a startup can’t enforce that right because it can’t afford litigation, the patent is worthless. Without TPLF, we’d be left with a two-tiered system in which large corporations could enforce their rights while smaller inventors could not; and large corporations could misappropriate without consequence.

This would have real consequences for innovation. “Efficient infringement” doesn’t just hurt individual inventors, but undermines the entire patent system. It discourages inventors from starting companies, and small companies from putting time and resources into innovation. TPLF helps maintain the incentives that drive technological progress.

As our panel discussion wrapped up, it became clear that the debate over TPLF isn’t really about national security or frivolous litigation. It’s about whether we want our patent system to work for everyone — or just for those who can afford to participate.

If you’re interested in learning more about these issues, I encourage you to watch the full panel discussion, where we delve deep into the role of TPLF in our intellectual-property landscape.

[1]  https://cip2.gmu.edu/2017/05/11/explaining-efficient-infringement/

[2]  https://www.smartbiggar.ca/insights/publication/the-federal-court-is-back-on-track-ip-holders-will-continue-to-benefit-from-protective-orders-in-intellectual-property-litigation

[3]  https://www.worldipreview.com/trade-secrets/the-stakes-cant-be-overstated-ip-theft-in-the-us

[4]  https://www.aoshearman.com/en/insights/shifting-strategies-in-us-intellectual-property-disputes-lessons-from-2023

[5]   https://www.law.nyu.edu/sites/default/files/CCJ%20Mandatory%20Disclosure%20Book.pdf

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Inventors Patent Law

Qualcomm Founder Dr. Irwin M. Jacobs Delights Attendees at CPIP’s Sixth Annual Fall Conference

2018 Fall Conference flyerBy Kathleen Wills*

On October 11-12, 2018, the Center for the Protection of Intellectual Property (CPIP) hosted its Sixth Annual Fall Conference at Antonin Scalia Law School in Arlington, Virginia. The theme of the conference was IP for the Next Generation of Technology, and it featured a number of panel discussions and presentations on how IP rights and institutions can foster the next great technological advances.

In addition to the many renowned scholars and industry professionals who lent their expertise to the event, the conference’s keynote address was delivered by Dr. Irwin M. Jacobs, founder of Qualcomm Inc. and inventor of the digital transmission technology for cell phones that gave birth to the smartphone revolution. The video of Dr. Jacobs’ keynote address, embedded just below, is also available here, and the transcript is available here.

After beginning his career as an electrical engineer and professor at the Massachusetts Institute of Technology (MIT), Dr. Jacobs’ vision for the future of wireless communications drove him to found his first company, Linkabit, in the late 1960s. In the years that followed, Dr. Jacobs led teams that developed the first microprocessor-based satellite modem and scrambling systems for video and TV transmissions. In 1985, Dr. Jacobs founded Qualcomm, which pioneered the development of mobile satellite communications and digital wireless telephony on the national and international stage.

Dr. Jacobs’ keynote address focused on intellectual property’s role in the development of technology throughout his 50-year career. He began his speech by discussing his background in electrical engineering and academia at MIT and at the University of California, San Diego (UCSD). After publishing a textbook on digital communications, Dr. Jacobs explained that he then transitioned into consulting and started Linkabit, where he learned the importance of intellectual property.

Dr. Jacobs recounted how he later sold the company to start Qualcomm with the “mobile situation” of satellite communications on his mind. At Qualcomm, Dr. Jacobs wanted to break from the standard technology in favor of code-division multiple access (CDMA). CDMA had the potential to attract more users with a system that limited the total amount of interference affecting each channel, and it wasn’t long before Qualcomm was assigned the first patent on the new technology.

Qualcomm’s first product was Omnitracs, a small satellite terminal designed for communicating with dishes that led to the creation of a GPS system. Qualcomm’s patented GPS device used antenna technology to calculate locations based on information about the terrain, and it was very valuable to the company.

Using that source of income, Dr. Jacobs revisited CDMA at a time when the industry pursued time-division multiple access (TDMA) for supporting the shift to second-generation digital cellular technology. However, Dr. Jacobs knew that CDMA had the potential to support 10 to 20 times more subscribers in a given frequency band per antenna than TDMA. Within one year, Qualcomm built a demonstration of CDMA. At that time, the size of the mobile phone was large enough to need a van to drive it around!

Dr. Jacobs explained that commercializing the technology required an investment for chips, and it wasn’t long before AT&T, Motorola, and some other companies signed up for a license. Qualcomm decided to license every patent for the next “n” years to avoid future licensing issues and collect a small royalty. The industry eventually set up a meeting comparing TDMA to CDMA, and CDMA’s successful demonstration convinced the Cellular Telephone Industry Association to allow a second standard. A standards-setting process took place and, a year and a half later, the first standard issuance was completed in July of 1993.

Speaking on the push for CDMA, Dr. Jacob’s explained that there were “religious wars” in Europe because governments had agreed to only use an alternate type of technology. Nevertheless, CDMA continued to spread to other countries and rose to the international stage during talks about the third generation of cellular technology involving simultaneous voice and data transmissions. Dr. Jacobs visited the European Commissioner for Competition and eventually arranged an agreement with Ericsson around 1999 based on a strategic decision: instead of manufacturing CDMA phones in San Diego, there would be manufacturers everywhere in the world.

Selling the infrastructure to Ericsson, Qualcomm dove into the technology, funded by the licenses. The strategic decision to embed technology in chips in order to sell the software broadly has been Qualcomm’s business model ever since. Dr. Jacobs explained that since “we felt we had well-protected patents,” and had a steady income from the licenses, the team could do additional R&D. With that support, they were the first to put GPS technology into a chip and into a phone, developed the first application downloadable for the phone, and looked ahead at the next generation of technology.

Dr. Jacobs said that he’s often asked, “Did you anticipate where all of this might go?” To that question he replies, “Every so often.” Qualcomm was able to move the industry forward because of the returns generated through its intellectual property. Dr. Jacobs early realized that the devices people were carrying around everywhere were going to be very powerful computers, and that “it’s probably going to be the only computer most of us need several years from now.”

“Protecting intellectual property, having that available, is very critical for what was then a very small company being able to grow,” Dr. Jacobs said. Because Dr. Jacobs relied on secure intellectual property rights to commercialize and license innovative products, and in turn used income from licensing patents for R&D, Qualcomm was—and continues to be—able to prioritize high performance computing and to keep the cellular technology industry moving forward.

To watch the video of Dr. Jacobs’ keynote address, please click here, and to read the transcript, please click here.

*Kathleen Wills is a 2L at Antonin Scalia Law School, and she works as a Research Assistant at CPIP

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Innovation Inventors Patents

New “Invalidated” Documentary Highlights the Problems With the PTAB: Free Screening on October 26

a lit lightbulb hanging next to unlit bulbsBy Devlin Hartline and Aditi Kulkarni*

The “Invalidated” documentary will be screened this Friday, October 26, at 5:30 PM in Washington, D.C. To register for this free event, which features a presentation by Bunch O Balloons inventor Josh Malone among others, please click here.

Imagine that you’re a father of eight children who puts everything on the line to bring your invention to the marketplace. After a successful Kickstarter campaign that brings in close to $1 million, you protect your invention by securing several patents on the innovative technology. Your invention is a huge market success, and sales exceed your wildest dreams. When the copycats come along, you think your patent rights will protect you. After all, that’s what the patent system is for. But you quickly realize that the system is stacked against you, the lone inventor, and it instead favors the large companies that willingly violate your rights for profit.

While this horror story may sound farfetched, it’s exactly what happened to Josh Malone, the inventor of Bunch O Balloons. And the unfortunate reality is that Malone is not the only inventor to be let down by the patent system that is meant to protect inventors from unscrupulous infringers. Thankfully, Malone is not taking things lying down. Not only is he fighting for his rights in the courts and at the U.S. Patent & Trademark Office—the very Office that granted him the rights in the first place—but he also has become a vocal activist fighting to reform the patent system. In fact, Malone is now telling his story in a new documentary entitled “Invalidated.” The full video, which prominently features CPIP Founder Adam Mossoff and runs about 50 minutes long, is available at both iTunes and Amazon.

You can watch the trailer here:

Inspired by childhood memories, Josh Malone invented Bunch O Balloons to solve a real-world problem. His invention allows anyone to fill and tie around 100 water balloons in just one minute. As a child, he spent days filling up hundreds of water balloons to play with his friends. Though he eventually stopped playing with balloons, the idea of finding a better way to play never left him. His idea finally materialized through a method to save his children’s time by filling several balloons at once. Malone burned the midnight oil perfecting his invention, and his family also invested their time and efforts backing his venture. After failing through several experiments and exhausting their savings, Malone finally succeeded with Bunch O Balloons.

Patent figure for Bunch O Balloons: fluid source leading to balloons

Ready with the product’s final prototype embodying his invention, Malone shot a video for a Kickstarter campaign to advertise his product and to raise some much-needed funds. The campaign was a hit, bringing in close to $1 million. Malone was even interviewed on the Today Show, where he got into an impromptu water balloon fight with Carson Daly. The purchase orders then started pouring in from toy manufacturers and big retailers like Walmart. They were all interested in profiting from the competitive advantage they would get from Malone’s novel—and fun—invention.

On realizing his invention’s strength and wanting to protect it from potential infringers, Malone filed several patent applications with the U.S. Patent & Trademark Office (USPTO). While the patent applications were pending, Malone came to know that a product nearly identical to his own was being advertised and sold in the marketplace under the name, “Balloon Bonanza.” Investigating further, Malone realized that Telebrands, the marketing company that originated the “As Seen On TV” advertisements, had stolen his idea and begun selling knock-off versions of his invention.

Image comparison of Bunch O Balloons versus Balloon Bonanza

Malone sued Telebrands in the Eastern District of Texas, seeking a preliminary injunction to prevent the marketer from further infringing his rights. The district court granted the injunction, agreeing with Malone that his patent was likely valid and infringed. Telebrands fought back, appealing the injunction to the Federal Circuit and again challenging the validity of Malone’s patent on indefiniteness and obviousness grounds. The Federal Circuit sided with Malone, holding that it was not clear error for the district court to conclude that he was likely to succeed on the merits. The Court of Appeals rejected Telebrands’ arguments as failing to raise a substantial question concerning the validity of Malone’s patent.

Telebrands also challenged the validity of Malone’s patent before the Patent Trial & Appeal Board (PTAB) in a post-grant review (PGR) proceeding. During the pendency of Telebrands’ appeal to the Federal Circuit on the preliminary injunction, the PTAB rendered its final written decision: Telebrands had shown by a preponderance of the evidence that Malone’s patent was invalid as indefinite. Of course, had the issue been decided in the district court, the mere preponderance standard would have been insufficient to overturn the presumably valid patent. But in the PTAB, the rules are different, and they favor challengers such as Telebrands that use the additional venue to game the system.

The Federal Circuit was well aware of the PTAB’s decision to the contrary when it upheld the district court’s determination that Malone was likely to succeed on merits in assessing the propriety of the preliminary injunction. In fact, it mentioned the PTAB proceedings in a footnote, noting that its decision was not binding and that it was nevertheless unpersuasive. When Malone subsequently appealed the PTAB loss, the Federal Circuit finally got its chance to directly address the PTAB’s decision on the merits. The Court of Appeals held that, even applying the PTAB’s more relaxed standard, Malone’s claims were not unpatentable for indefiniteness. The Federal Circuit thus made good on the earlier indications from both itself and the district court that Malone’s patent was indeed valid.

While Malone ultimately has been victorious so far, he’s been forced to spend millions of dollars protecting his rights. He reported in July of 2017 that he’d already spent $17 million, and that it might grow to as much as $50 million before it’s all through. That’s an insane amount of money for most lone inventors, and Malone is fortunate enough to have made enough revenue in sales to be able to afford it. Most people aren’t so lucky. And the battle for inventors is certainly far from over, especially when infringers with deep pockets can repeatedly play the game and wear down their victims in multiple forums. As Malone laments, “the PTAB simply encourages infringers like Telebrands to double down on the expense of litigation, rather than acquiescing to the adjudication by the District Court.”

It’s no wonder that, in his dismay, Malone joined other frustrated inventors to symbolically burn their patents outside of the USPTO in the summer of 2017. Malone’s story is a stereotype example of how the big infringers attempt to overwhelm the little guy by simply outspending them should they dare to challenge the wrong. Such gamesmanship at the expense of inventors is not the purpose of the PTAB. As Professor Mossoff notes in the documentary: “The original argument for why we needed the PTAB is that, every once in a while, there will be a mistakenly issued patent they shouldn’t have issued, and that these patents can clog the gears of the innovation economy. Unfortunately, what Congress created was a completely unrestrained, unrestricted agency whose job is to cancel patents.”

America’s Founders recognized that a stable and effective patent system is vitally important for the innovation ecosystem to thrive. American inventors like Josh Malone have made a significant difference in people’s lives, and the patent system exists to reward them for their efforts. Inventors should be able to trust that the patent system will be there to protect them when others trample on their rights. They need those rights to be meaningful in order to recoup their investments and to realize their just rewards. The Founders understood that benefiting inventors through such private gains would redound to the public benefit. But as Malone’s story demonstrates, we will need to make some changes to the patent system before the Founders’ vision can be fully realized.

*Aditi Kulkarni is working towards an LLM Degree in Intellectual Property at Antonin Scalia Law School, and she works as a Research Assistant at CPIP.

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New CPIP Report: The Global Patent Pendency Problem

dictionary entry for the word "innovate"Why are some of the biggest fights about patent policy almost pointless in some places? Because in many countries, including some of the world’s most important emerging economies, it takes so long to get patents that the rights have little meaning.

The Center for the Protection of Intellectual Property (CPIP) released a report today entitled The Long Wait for Innovation: The Global Patent Pendency Problem. For the first time, this report documents a growing global problem of patent backlogs, which has long been the subject of anecdotal complaints.

In many countries, processing times are eating up much of the 20 year lifespan of patents. Patent offices are failing to keep up with the growth of the innovation economy and the resulting growth in patent applications. It’s a basic governance problem that threatens to undermine the global patent system.

Some of the report’s more surprising findings:

  • It now takes over 14 years on average to get a patent for mobile technology in Brazil. That goes back to days of flip-phones and the infancy of 3G!
  • In Thailand, it takes more than 16 years on average to get a life sciences patent. In fact, Thailand regularly issues patents with mere months or weeks of life left before expiration.

The news isn’t all bad. Japan has become much faster at examining patents in recent years. The U.S. still does a pretty good job — but it’s not the fastest. Interestingly, new leaders in global innovation are emerging, as Korea and China both now examine patents more promptly than the US.

Here are some further details from the new report.

Figure 1 below shows the average granted application age for selected countries 2008-2015 (in years).

patent-pendency-figure-1: Korea 2.8; China 2.9; USA 3.5; Australia 3.6; Egypt 3.8; Japan 5.3; EPO 5.5; India 6.3; Argentina 6.4; Thailand 10.0; Brazil 10.1

Also, our study finds that with regard to specific industries:

  • The issue of lengthy pendency times for patent applications is not confined to cutting edge industries.
  • Lengthy pendency is an issue for both the high tech and life sciences industries.
  • In many industries, some countries’ average wait times render patents largely futile.

Figure 2: Average age of granted life sciences patents 2011-2015 (in years).

patent-pendency-figure-2: China a little above 3; Korea a little farther above 3; USA and Australia around 4; Japan and Argentina closely under 6; Egypt just under 6; EPO slightly beyond 6; India about 7; Brazil just under 12; Thailand around 13

Figure 3: Average age of granted mobile technology patents 2011-2015 (in years).

patent-pendency-figure-3: Australia at 3; USA and Korea about 4; Egypt and China slightly beyond 4; Japan about 4.5; EPO a bit beyond 6; India about 7; Argentina about 8; Thailand just under 12; Brazil around 13.5

The Long Wait for Innovation: The Global Patent Pendency Problem

To read the report, please click here.

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Innovation Inventors Patent Law Software Patent Uncategorized

CPIP Scholars File Amicus Brief in Trading Technologies v. CQG

a gavel lying on a table in front of booksEarlier this month, CPIP Senior Scholar Adam Mossoff penned an amicus brief in Trading Technologies v. CQG, currently on appeal to the Federal Circuit. The brief was joined by nine other IP scholars, including CPIP Senior Scholars Mark Schultz and Kristen Osenga.

The amici argue that Trading Technologies’ graphical user interface (GUI) constitutes patentable subject matter under Section 101 of the Patent Act. Noting the Supreme Court’s holding in Bilski v. Kappos that “Section 101 is a dynamic provision designed to encompass new and unforeseen inventions,” the amici urge the Federal Circuit not to interpret Section 101 so narrowly as to “impede the process of future innovation” by “creating unnecessary and innovation-killing ‘uncertainty as to the patentability of software.’”

The recognition that specific computer-implemented technologies are not “abstract” is wholly consistent with the Mayo-Alice test set forth by the Supreme Court in its recent Section 101 decisions, Mayo v. Prometheus Labs and Alice v. CLS Bank. Under the Mayo-Alice framework, Trading Technologies’ GUI is not merely an “abstract idea” incorporating conventional and automatic processes, but rather it exemplifies the technical innovation and “progress of . . . useful Arts” that the patent system is intended to promote.

The Summary of Argument section of the brief is copied below:

SUMMARY OF ARGUMENT

The trial court’s decision represents a proper application of 35 U.S.C. § 101. See Trading Technologies Int’l, Inc. v. CQG, Inc., No. 05-4811, 2015 WL 774655 (N.D. Ill. Feb. 24, 2015). Because the parties address the relevant innovation covered by Trading Technologies’ patents, as well as the application of the Supreme Court’s recent § 101 jurisprudence, amici offer an additional insight that supports the trial court’s decision: the invention of computer-mediated processes is exactly the kind of innovation that the patent system is designed to promote.

As the Supreme Court recognized in Bilski v. Kappos, 561 U.S. 593 (2010), “Section 101 is a dynamic provision designed to encompass new and unforeseen inventions.” Id. at 605 (internal quotations omitted). Thus, this Court should decline the invitation by Appellant to construe § 101 in a crabbed and antiquarian fashion that would limit patent eligibility only to “processes similar to those in the Industrial Age—for example, inventions grounded in a physical or tangible form.” Id. To do so would contravene the Bilski Court’s warning against limiting § 101 to only non-digital inventions, creating thereby unnecessary and innovation-killing “uncertainty as to the patentability of software,” such as Appellee’s graphical-user-interface invention.Id.

To read the full amicus brief, please click here.

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Biotech High Tech Industry History of Intellectual Property Innovation Intellectual Property Theory Inventors Legislation Patent Law Patent Litigation Patent Theory Patentability Requirements Software Patent Supreme Court Uncategorized

Federal Circuit Brings Some Clarity and Sanity Back to Patent Eligibility Doctrine

By Adam Mossoff and Kevin Madigan

closeup of a circuit boardFollowing the Supreme Court’s four decisions on patent eligibility for inventions under § 101 of the Patent Act, there has been much disruption and uncertainty in the patent system. The patent bar and most stakeholders in the innovation industries have found the Supreme Court’s decisions in Alice Corp. v. CLS Bank (2014), AMP v. Myriad (2013), Mayo Labs v. Prometheus (2012), and Bilski v. Kappos (2010) to be vague and doctrinally indeterminate. Given the moral panic about the patent system that has been created as a result of ten years of excessive lobbying in D.C. for legislation that weakens patent rights, judges have responded to the excessive discretion they have under these cases by invalidating whole swaths of patented innovation in the high-tech, biotech, and pharmaceutical industries. The Patent Office is also rejecting patent applications at record levels, even for traditional inventions outside of high-tech and life sciences directly affected by the recent § 101 case law.

In Sequenom v. Ariosa, the Supreme Court had the opportunity to bring some clarity to the law of patent eligibility and to reign in some of the judicial and Patent Office excesses, but unfortunately it rejected this opportunity when it denied Sequenom’s cert petition this past June. Fortunately, the Court of Appeals for the Federal Circuit is now taking the lead in providing some much-needed legal guidance on patent eligibility to the inventors and companies working in the innovation industries. In two recent decisions, Enfish v. Microsoft and Rapid Litigation Management v. CellzDirect, the Federal Circuit has set forth some important doctrinal guideposts for defining what counts as a patent-eligible invention. Not only do these two decisions bring some reason and clarity back to the law of patent eligibility under § 101, they provide important doctrinal insights on how stakeholders may wish to address this problem if they ultimately choose to seek relief in Congress.

Enfish and the Patentability of Computer-Implemented Inventions (a/k/a “Software Patents”)

At the time it was decided, some commentators believed that the Alice decision was a directive from on high that most, if not all, computer software programs were not patentable inventions. This was a surprising claim if only because the Alice Court did not once use the phrase “software” in its entire opinion. Of course, “software patent” is not a legal term in patent law; the proper term is “computer-implemented invention,” as used by the Alice Court, and so the Court may have been only avoiding vague rhetoric from the patent policy debates. More important, though, this claim about Alice contradicts the Court’s opinion in Bilski just four years earlier, when the Court warned the Federal Circuit not to adopt a bright-line rule that limited § 101 to only physical inventions of the “Industrial Age,” because this created unnecessary and innovation-killing “uncertainty as to the patentability of software.”

Unfortunately, the ambiguities in Alice and in the Court’s prior patentable subject matter decisions, such as Mayo, left enough discretionary wiggle room in applying the generalized patent-eligibility test to permit judges and patents examiners to wage war on computer-implemented inventions. They thus made real again in the twenty-first century Justice Robert Jackson’s famous observation in 1949 that “the only patent that is valid is one which this Court has not been able to get its hands on.” Jungersen v. Ostby & Barton Co., 335 U.S. 560, 572 (1949) (Jackson, J., dissenting). As one commentator remarked several months after Alice was decided, “It’s open season on software patents.” The data over the next several years has borne out the truth of this statement.

The key argument against patents on computer-implemented inventions, such as key components of word processors, programs that run internet searches (like the patented innovation that started Google), and encryption software, is that such inventions are inherently “abstract.” The judicial interpretation of § 101 has long maintained that abstract ideas, laws of natural, and natural phenomena are unpatentable discoveries. In Alice, for instance, the Court held that a complex software program for extremely complex international financial transactions was an “abstract idea” and thus unpatentable under § 101. But beyond claims that something long known is “abstract,” the Court has failed to define with precision what it means for a discovery to be abstract. With little to no specific guidance from the Alice Court, it is no wonder that judges and examiners have succumbed to the recent moral panic about patents and declared “open season” on patents covering computer-implemented inventions.

In this context, the Federal Circuit’s decision in Enfish v. Microsoft is extremely important because it ends the unreasoned, conclusory “I know it when I see it” rejections of patents as “abstract” by judges and examiners.

In Enfish, the Federal Circuit reversed a trial court’s summary judgment that a patent on a computer-implemented invention was an unpatentable abstract idea. The patent covered a type of database management system on computers, a classic incremental innovation in today’s digital world. In its decision, the trial court dissected the invention down into the most basic ideas in which all inventions can be reframed as representing; for example, methods of using internal combustion engines can easily be reframed in terms of the basic laws in thermodynamics. In this case, the trial court asserted that this patent on a computer-implemented invention covered merely the “abstract purpose of storing, organizing, and retrieving” information. The trial court thus easily concluded that the invention was merely “abstract” and thus unpatentable.

The Federal Circuit rejected the trial court’s conclusory assertion about the invention being “abstract” and further held that such assertions by courts are a legally improper application of § 101. With respect to the patent at issue in this case, Judge Todd Hughes’ opinion for the unanimous panel found that

the plain focus of the claims is on an improvement to computer functionality itself, not on economic or other tasks for which a computer is used in its ordinary capacity. Accordingly, we find that the claims at issue in this appeal are not directed to an abstract idea within the meaning of Alice.

More important, the Enfish court cautioned courts against the methodological approach adopted by the trial court in this case, in which “describing the claims at such a high level of abstraction and untethered from the language of the claims all but ensures that the exceptions to § 101 swallow the rule.” The court recognized that adopting a “bright-line” rule that computer-implemented inventions—the “software patents” decried by critics today—are necessarily “abstract” runs counter to both § 101 and the recent Supreme Court cases interpreting and applying this provision: “We do not see in Bilski or Alice, or our cases, an exclusion to patenting this large field of technological progress.”

Further confirming that Enfish represents an important step forward in how courts properly secure technological innovation in the high-tech industry, the Federal Circuit relied on Enfish in its recent decision in BASCOM Global Services Internet Inc v AT&T Mobility LLC. Here, the Federal Circuit again rejected the trial court’s dissection of a patent claim covering a software program used on the internet into an “abstract” idea of merely “filtering content.” The BASCOM court emphasized that courts must assess a claim as a whole—following the Alice Court’s injunction that courts must assess a patent claim as “an ordered combination of elements”—in determining whether it is a patentable invention under § 101. As numerous patent scholars explained in an amicus brief filed in support of Sequenom in its failed cert petition before the Supreme Court, requiring a court to construe a “claim as a whole” or “the invention as a whole” is a basic doctrinal requirement that runs throughout patent law, as it is essential to ensuring that patents are properly evaluated both as to their validity and in their assertion against infringers.

CellzDirect and the Patentability of Discoveries in the Bio-Pharmaceutical Industry

The high-tech industry is not the only sector of the innovation industries that has been hit particularly hard by the recent §101 jurisprudence. The biotech and pharmaceutical industries have also seen a collapse in the proper legal protection for their innovative discoveries of new therapeutic treatments. One recent study found that the examination unit at the Patent Office responsible for reviewing personalized medicine inventions (art unit 1634) has rejected 86.4% of all patent applications since the Supreme Court’s decision in Mayo. Anecdotal evidence abounds of numerous rejections of patent applications on innovative medical treatments arising from extensive R&D, and the most prominent one was the invalidation of Sequenom’s patent on its groundbreaking innovation in prenatal diagnostic tests.

In this light, the decision on July 5, 2016 in Rapid Litigation Management v. CellzDirect is an extremely important legal development for an industry that relies on stable and effective patent rights to justify investing billions in R&D to produce the miracles that comprise basic medical care today. In CellzDirect, the trial court found unpatentable under § 101 a patent claiming new methods for freezing liver cells for use in “testing, diagnostic, and treating purposes.” The trial court asserted that such a patent was “directed to an ineligible law of nature,” because scientists have long known that these types of liver cells (hepatocytes) could be subjected to multiple freeze-thaw cycles.

In her opinion for a unanimous panel, Chief Judge Sharon Prost held that the method in this case is exactly the type of innovative process that should be secured in a patent. Reflecting the same methodological concern in Enfish and BASCOM, the CellzDirect court rejected the trial court’s dissection of the patent into its foundational “laws of nature” and conventional ideas long-known in the scientific field:

The claims are simply not directed to the ability of hepatocytes to survive multiple freeze-thaw cycles. Rather, the claims of the ’929 patent are directed to a new and useful laboratory technique for preserving hepatocytes. This type of constructive process, carried out by an artisan to achieve “a new and useful end,” is precisely the type of claim that is eligible for patenting.

In other words, merely because a patentable process operates on a subject matter that constitutes natural phenomena does not mean the patent improperly claims either those natural phenomena or the laws of nature that govern them. To hold otherwise fails to heed the Mayo Court’s warning that “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas,” and thus to dissect all patents down into these unpatentable foundations would “eviscerate patent law.” The CellzDirect court was explicit about this key methodological point in evaluating patents under § 101: “Just as in [the industrial process held valid by the Supreme Court in] Diehr, it is the particular ‘combination of steps’ that is patentable here”—the invention as a whole.

Conclusion

The U.S. has long prided itself as having a “gold standard” patent system—securing to innovators stable and effective property rights in their inventions and discoveries. As scholars and economic historians have long recognized, the patent system has been a key driver of America’s innovation economy for more than two hundred years. This is now threatened under the Supreme Court’s § 101 decisions and the “too broad” application of the Court’s highly generalized patent-eligibility tests to inventions in the high-tech and bio-pharmaceutical sectors. The shockingly high numbers of rejected applications at the Patent Office and of invalidation of patents by courts, as well as the general sense of legal uncertainty, are threatening the “gold standard” designation for the U.S. patent system. This threatens the startups, new jobs, and economic growth that the patent system has been proven to support. Hopefully, the recent Enfish and CellzDirect decisions are the first steps in bringing back to patent-eligibility doctrine both reason and clarity, two key requirements in the law that have been sorely lacking for inventors and companies working in the innovation economy.

Categories
Innovation Inventors Patent Law Statistics Uncategorized

Do As I Say, Not As I Do: Google’s Patent Transparency Hypocrisy

dictionary entry for the word "innovate"It is common today to hear that it’s simply impossible to search a field of technology to determine whether patents are valid or if there’s even freedom to operate at all. We hear this complaint about the lack of transparency in finding “prior art” in both the patent application process and about existing patents.

The voices have grown so loud that Michelle K. Lee, Director of the Patent Office, has made it a cornerstone of her administration to bring greater transparency to the operations of the USPTO. She laments the “simple fact” that “a lot of material that could help examiners is not readily available, because the organizations retaining that material haven’t realized that making it public would be beneficial.” And she’s been implementing new programs to provide “easy access by patent examiners to prior art” as a “tool to help build a better IP system.”

We hear this complaint about transparency most often from certain segments of the high-tech industry as part of their policy message that the “patent system is broken.” One such prominent tech company is search giant Google. In formal comments submitted to the USPTO, for instance, Google asserts that a fundamental problem undermining the quality of software patents is that a “significant amount of software-related prior art does not exist in common databases of issued patents and published academic literature.” To remedy the situation, Google has encouraged the Patent Office to make use of “third party search tools,” including its own powerful search engines, to locate this prior art.

Google is not shy about why it wants more transparency with prior art. In a 2013 blog post, Google Senior Patent Counsel Suzanne Michel condemned so-called “patent trolls” and argued that the “PTO should improve patent quality” in order to “end the growing troll problem.” In comments from 2014, three Google lawyers told the Patent Office that “poor quality software patents have driven a litigation boom that harms innovation” and that making “software-related prior art accessible” will “make examination in the Office more robust to ensure that valid claims issue.” In comments submitted last May, Michel even proposed that the Patent Office use Google’s own patent search engines for “streamlining searches for relevant prior art” in order to enhance patent quality.

Given Google’s stance on the importance of broadly available prior art to help weed out vague patents and neuter the “trolls” that wield them, you’d think that Google would share the same devotion to transparency when it comes to its own patent applications. But it does not. Google has not mentioned in its formal comments and in its public statements that even using its own search engine would fail to disclose a substantial majority of its own patent applications. Unlike the other top-ten patent recipients in the U.S., including many other tech companies, Google keeps most of its own patent applications secret. It does this while at the same time publicly decrying the lack of transparency in the patent system.

The reality is that Google has a patent transparency problem. Not only does Google not allow many of its patent applications to be published early or even after eighteen months, which is the default rule, Google specifically requests that many of its patent applications never be published at all. So while Google says it wants patent applications from around the world to be searchable at the click of a mouse, this apparently does not include its own applications. The numbers here are startling and thus deserve to be made public—in the name of true transparency—for the first time.

Public Disclosure of Patent Applications

Beginning with the American Inventors Protection Act of 1999 (AIPA), the default rule has been that a patent application is published eighteen months after its filing date. The eighteen-month disclosure of the patent application will occur unless an applicant files a formal request that the application not be published at all. An applicant also has the option to obtain early publication in exchange for a fee. Before the AIPA, an application would only be made public if and when the patent was eventually granted. This allowed an applicant to keep her invention a trade secret in case the application was later abandoned or rejected.

The publication of patent applications provides two benefits to the innovation industries, especially given that the waiting time between filing of an application and issuance of the patent or a final rejection by an examiner can take years. First, earlier publication of applications provides notice to third parties that a patent may cover a technology they are considering adopting in their own commercial activities. Second, publication of patent applications expands the field of publicly-available prior art, which can be used to invalidate either other patent applications or already-issued patents themselves. Both of these goals produce better-quality patents and an efficiently-functioning innovation economy.

Separate from the legal mandate to publish patent applications, Google has devoted its own resources to creating greater public access to patents and patent applications. From its Google Patent Search in 2006 and its Prior Art Finder in 2012 to its current Google Patents, Google has parlayed its search expertise into making it simple to find prior art from around the world. Google Patents now includes patent applications “from the USPTO, EPO, JPO, SIPO, WIPO, DPMA, and CIPO,” even translating them into English. It’s this search capability that Google has been encouraging the Patent Office to utilize in the quest to make relevant prior art more accessible.

Given Google’s commitment to patent transparency, one might expect that Google would at least be content to allow default publication of its own applications under the AIPA’s eighteen-month default rule. Perhaps, one might think, Google would even opt for early publication. However, neither appears to be the case; Google instead is a frequent user of the nonpublication option.

Google’s Secrecy vs. Other Top-Ten Patent Recipients

After hearing anecdotal reports indicating that Google was frequently using its option under the AIPA to avoid publishing its patent applications, we decided to investigate further. We looked at the patents Google received in 2014 to see what proportion of its applications was subject to nonpublication requests. To provide context, we also looked at how Google compared to the other top-ten patent recipients in this regard. The results are startling.

Unfortunately, there’s no simple way to tell if a nonpublication request was made when a patent application was filed using the USPTO’s online databases—nonpublication requests are not an available search field. The same appears to be true of subscription databases. The searches therefore have to be done manually, digging through the USPTO’s Public PAIR database to find the application (known in patent parlance as the “file wrapper”) for each individual patent that includes the individual application documents. Those interested in doing this will find startling numbers of patent applications kept secret by Google, both in terms of absolute numbers but also as compared to the other top-ten recipients of U.S. patents.

By way of example as to what one needs to look for, take the last three patents issued to Google in 2014: D720,389; 8,925,106; and 8,924,993.

For the first patent, the application was filed on December 13, 2013, and according to the application data sheet, no request was made to either publish it early or not publish it at all:

Publication Information: Box One: Request Early Publication (Fee required at time of Request 37 CFR 1.219). Box Two: Request Not to Publish. I hereby request that the attached application not be published under 25 U.S.C. 122(b) and certify that the invention disclosed in the attached application has not and will not be the subject of an application filed in another country, or under a multilateral international agreement, that requires publication at eighteen months after filing.

Since no such request was made, the application would normally be published eighteen months later or upon issuance of the patent. Indeed, that is what happened in due course—this patent issued just over one year after the application was filed, as it was concurrently published and issued in December of 2014.

For the second patent in our small set of examples, the application was filed on April 20, 2012. In this case, Google requested nonpublication by including a letter requesting that the application not be published:

Google thus opted out of the default eighteen-month publication rule, and the application was not published until the patent issued in December of 2014, some twenty months later.

Finally, for the third patent, the application was filed on November 10, 2011, and the application data sheet shows that Google requested the application not be published:

Publication Information: Box One: Request Early Publication (Fee required at time of Request 37 CFR 1.219). Box Two (which is selected here): Request Not to Publish. I hereby request that the attached application not be published under 25 U.S.C. 122(b) and certify that the invention disclosed in the attached application has not and will not be the subject of an application filed in another country, or under a multilateral international agreement, that requires publication at eighteen months after filing.

Google here again opted out of the default publication rule, and the application was not published until the patent issued in December of 2014—more than three years after the application was filed.

We applied this methodology to a random sample of 100 patents granted to each of the top-ten patent recipients in 2014.

In 2014, Google was one of the top-ten patent recipients, coming in sixth place with 2,649 issued patents:

2014 Top-Ten patent Recipients. X-axis: IBM, Samsung, Canon, Sony, Microsoft, Google, Toshiba, Qualcomm, LG, Panasonic. Y-axis: 0 through 8000, at increments of 1000.

SOURCES: USPTO PatentsView Database & USPTO Patent Full-Text and Image Database

We randomly sampled 100 patents for each of the top-ten patent recipients for 2014. We reviewed the file wrapper for each to determine the proportion of nonpublication requests in each sample.

Our results revealed that Google is an extreme outlier among top-ten patent recipients with respect to nonpublication requests. Eight of the top-ten patent recipients made zero requests for nonpublication, permitting their patent applications to be published at the eighteen-month deadline. The eighth-ranking patent recipient, Qualcomm, requested that one application not be published. By contrast, Google formally requested that 80 out of 100—a full 80%—of its applications not be published.

The following chart shows these results:

2014 Nonpublication Rates of Top-Ten Patent Recipients. X-axis: IBM, Samsung, Canon, Sony, Microsoft, Google, Toshiba, Qualcomm, LG, Panasonic. Y-axis: 0% through 90%, increments of 10%. Google goes to about 80%, Qualcomm shows about 1-2&, and the others show nothing.

SOURCE: USPTO Public PAIR Database

Conclusion

Based on this result, Google deliberately chooses to keep a vast majority of its patent applications secret (at least it did so in 2014). This secrecy policy for its own patent applications is startling given both Google’s public declarations of the importance of publication of all prior art and its policy advocacy based on this position. It is even more startling when seen in stark contrast to the entirely different policies of the other nine top patent recipients for 2014.

It is possible that 2014 was merely an anomaly, and that patent application data from other years would show a different result. We plan to investigate further. So, stay tuned. But for whatever reason, it appears that Google doesn’t want the majority of its patent applications to be published unless and until its patents finally issue. This preference for secrecy stands in contrast to Google’s own words and official actions.

As one of the top patent recipients in the U.S., you’d think Google would want its applications to be published as quickly as possible. The other top recipients of U.S. patents in 2014 certainly adopt this policy, furthering the goal of the patent system in publicly disclosing new technological innovation as quickly as possible. The fact that Google does otherwise speaks volumes.

Categories
Economic Study Innovation Inventors Patent Law Patent Licensing Uncategorized

How Strong Patents Make Wealthy Nations

By Devlin Hartline & Kevin Madigan

dictionary entry for the word "innovate"How did the world’s wealthiest nations grow rich? The answer, according to Professor Stephen Haber of Stanford University, is that “they had well-developed systems of private property.” In Patents and the Wealth of Nations, recently published in the CPIP Conference issue of the George Mason Law Review, Haber explains the connection: Property rights beget trade, trade begets specialization, specialization begets productivity, and productivity begets wealth. Without a foundation of strong property rights, economic development suffers. But does the same hold true for intellectual property, particularly patents? Referencing economic history and econometric analysis, Haber shows that strong patents do indeed make wealthy nations.

Before diving into the history and analysis, Haber tackles the common misconception that patents are different than other types of property because they are monopolies: “It is not, as some IP critics maintain, a grant of monopoly. Rather, it is a temporary property right to something that did not exist before that can be sold, licensed, or traded.” The simple reason for this, Haber notes, is that a patent grants a monopoly only if there are truly no substitutes, but this is almost never the case. Usually, there are many substitutes and the patent owner has no market power. And the “fact that patents are property rights means that they can serve as the basis for the web of contracts that permits individuals and firms to specialize in what they do best.”

Turning back to his claim that strong patents make wealthy nations, Haber presents data showing the relationship between the strength of enforceable patent rights and the level of economic development across several different countries. The results are remarkably clear: “there are no wealthy countries with weak patent rights, and there are no poor countries with strong patent rights.” The following figure shows how GDP per capita increases as patent rights get stronger:

Haber - Figure 1: The Relationship Between Enforcable Patent Rights and GDP/c in 2010 (Excludes Oil-Based Economies, 2005 PPP$). X-axis: Strength of Enforceable Patent Rights in 2010 (from 0 to 45). Y-axis: GDP Per Capita in 2010, PPP$ from PWT 8.1 (from $0 to $60,000).

Of course, while it’s clear that patent strength and GDP per capita are related, it’s possible that the causality runs the other way. That is, how do we know that an increase in GDP per capita doesn’t foster an environment where patents tend to be stronger? This is where the evidence from economic historians and econometric analysts comes into play. Exploring what economic history has to tell us about the impact of patent laws on innovation, Haber asks whether the Industrial Revolution was bolstered by the British patent system and whether the United States emerged as a high-income industrial economy because of the U.S. patent system.

To the first question, Haber notes that the consensus among historians is that “from at least the latter half of the eighteenth century, the patent system promoted the inventive activity associated with the Industrial Revolution.” He then cites the recent book by Sean Bottomley that carefully shows how “many of the changes to Britain’s patent laws and their enforcement—the requirement for detailed specifications, patents conceived as property rights, the emergence of patent agents—all preceded, rather than followed, the onset of industrialization.” Haber also cites a research paper by Petra Moser, which finds that countries in the nineteenth century with weak patent systems trailed both Britain and the United States in technological development.

Moving to the United States, Haber notes that three generations of economic historians have agreed that just after it gained independence, the country’s strong patent system played a pivotal role in fomenting the remarkable industrial developments that soon followed. After pointing out that the United States was the first country to call for a patent system in its Constitution, Haber compares the GDP per capita for the United States, Britain, and Brazil from 1700 to 1913. The following figure shows just how quickly the agrarian American colonies caught up with, and ultimately surpassed, Britain in GDP per capita, while the GDP per capita of Brazil, a country that became independent at about the same time but had no patent system, stagnated:

Haber - Figure 2: GDP per capita, 1700-1913 (in Real 1990 Dollars). UK, USA, and Brazil. X-axis: 1700, 1820, 1930, 1840, 1850, 1860, 1870, 1880, 1890,1900, 1913. Y-axis: $0 to $5,500 by $500 increments.

As the figure shows, the GDP per capita in the United States and Brazil were less than half that of Britain in 1700, and by 1913, the United States had overtaken Britain as both countries left Brazil far behind. Noting that “there is uniformity of views among economic historians that the U.S. patent system played a large role” in this success, Haber provides specifics examples of improvements upon the British patent system that contributed to it, including broad access to property rights in technology through low fees and a routine and impersonal application process under the Patent Act of 1790. He goes on to highlight the importance of major reforms to the U.S. patent system introduced in the Patent Act of 1836, including the examination process that “reduced concerns third parties might have had about a patent’s novelty, thereby facilitating the evolution of a market for patented technologies.”

The second half of the nineteenth century saw the development of an active market for inventions in the United States, leading to the emergence of a class of specialized and independent inventors as well as patent brokers, patent agents, and patent attorneys, who would connect the inventors with manufacturers looking to buy or license new technologies. While some of these intermediaries were derided, much like the “patent trolls” of the twenty-first century, as “patent sharks,” Haber contends that this market for inventions played a critical role in the emergence of new industrial technologies and centers: “[O]ne would be hard pressed to make the case that patents in the nineteenth century, or the intermediaries who represented their inventors, did anything but facilitate the rapid development of American manufacturing.”

Haber then shifts his focus to econometric analysis, examining the different ways that economic scholars research the relationship between patent rights and economic progress in different countries over a period of time. He stresses that accurate econometric estimation of causal relationships is a relatively young area of inquiry requiring considerable care. He uses the example of a widely-cited study by Josh Lerner, which looks at “whether the strengthening of patents affects the rate of change of innovation in an economy within a two-year window after a patent reform.” Haber points out that many changes neither begin nor end so quickly. With laser technology, for example, “follow-on innovations” have developed “over decades, not two-year windows,” and Lerner’s study thus discounts much innovation.

Looking at studies that utilize a “very long time dimension,” Haber cites one finding that “there is a significant positive effect of patent laws on innovation rates” and another finding that “patent intensive industries in countries that improve the strength of patents experience faster growth in value added than less patent-intensive industries in those same countries.” Haber praises a recent study by Jihong Zhang, Ding Du, and Walter G. Park, who “not only find that there is a positive relationship between the strength of enforceable patent rights and innovation in developed economies, but that that relationship holds for underdeveloped economies as well.”

In sum, Haber states that “there is a critical mass of multi-country studies” that leads to two conclusions:

First, there is a causal relationship between the strength of patent rights and innovation. Second, this relationship is non-linear: there are threshold effects such that stronger patent rights positively impact innovation once a society has already reached some critical level of economic development. The reason for the non-linearity probably resides in the fact that innovation is not just a product of the strength of patent rights, but of other features of societies, which are necessary complements, that tend to be absent at low levels of economic development.

Finally, Haber looks at whether the innovation landscape of the twenty-first century is somehow so different that the lessons from economic history and econometric analysis no longer apply. In particular, he questions whether the emergence of patent licensing firms, sometimes called “patent assertion entities” or “PAEs,” and the alleged strategic behavior of “patent holdup” with standard-essential patents (SEPs) are really new features of the U.S. patent system that might hinder innovation. Haber concludes that the evidence shows that neither PAEs nor patent holdup is hindering innovation. In fact, there’s little reason to think that patent holdup even exists.

Haber takes on the recent study by James Bessen and Michael Meurer, which claims that PAEs are a new phenomenon that “constitute a direct tax on innovation” to the tune of “$29 billion per year.” This claim has been rebutted, Haber notes, by scholars such as B. Zorina Khan, whose recent study shows that many great inventors of the nineteenth century were themselves PAEs. Haber further cites the recent paper by David L. Schwartz and Jay P. Kesan that carefully demonstrates fundamental problems with Bessen and Meurer’s methodology, including selection bias, the conflation of “costs” with “transfers,” the lack of a benchmark for comparison, and the failure to even consider the benefits of PAE activity.

Turning to patent holdup, Haber points out that products have long been comprised of numerous patented innovations, and he cites a recent paper by Adam Mossoff showing that there’s nothing “new about firms whose sole source of revenue comes from the licensing of essential patents.” As to evidence that innovation is hindered by patent holdup, Haber notes that the “theoretical literature” says it’s possible, but the “evidence in support of this theory, however, is largely anecdotal.” Haber then cites his recent study with Alexander Galetovic and Ross Levine, which looks at the “extensive economics literature on the measurement of productivity growth” and shows that “SEP holders” are not able “to negotiate excessive royalty payments” as predicted by the patent holdup theory.

In conclusion, Haber acknowledges that while “no single piece of evidence” should “be viewed as dispositive,” it’s certainly quite “telling that the weight of evidence from two very different bodies of scholarship, employing very different approaches to evidence—one based on mastering the facts of history, the other based on statistical modeling—yield the same answer: there is a causal relationship between strong patents and innovation.” Haber then challenges the naysayers to make their case: “Evidence and reason therefore suggest that the burden of proof falls on those who claim that patents frustrate innovation.” Given the copious evidence showing that strong patents make wealthy nations, the IP critics have their work cut out for them.

For a PDF version of this post, please click here.

Categories
Administrative Agency Economic Study FTC Innovation Inventors Law and Economics Legislation Uncategorized

Acknowledging the Limitations of the FTC’s PAE Study

dictionary entry for the word "innovate"The FTC’s long-awaited case study of patent assertion entities (PAEs) is expected to be released this spring. Using its subpoena power under Section 6(b) to gather information from a handful of firms, the study promises us a glimpse at their inner workings. But while the results may be interesting, they’ll also be too narrow to support any informed policy changes. And you don’t have to take my word for it—the FTC admits as much. In one submission to the Office of Management and Budget (OMB), which ultimately decided whether the study should move forward, the FTC acknowledges that its findings “will not be generalizable to the universe of all PAE activity.” In another submission to the OMB, the FTC recognizes that “the case study should be viewed as descriptive and probative for future studies seeking to explore the relationships between organizational form and assertion behavior.”

However, this doesn’t mean that no one will use the study to advocate for drastic changes to the patent system. Even before the study’s release, many people—including some FTC Commissioners themselves—have already jumped to conclusions when it comes to PAEs, arguing that they are a drag on innovation and competition. Yet these same people say that we need this study because there’s no good empirical data analyzing the systemic costs and benefits of PAEs. They can’t have it both ways. The uproar about PAEs is emblematic of the broader movement that advocates for the next big change to the patent system before we’ve even seen how the last one panned out. In this environment, it’s unlikely that the FTC and other critics will responsibly acknowledge that the study simply cannot give us an accurate assessment of the bigger picture.

Limitations of the FTC Study

Many scholars have written about the study’s fundamental limitations. As statistician Fritz Scheuren points out, there are two kinds of studies: exploratory and confirmatory. An exploratory study is a starting point that asks general questions in order to generate testable hypotheses, while a confirmatory study is then used to test the validity of those hypotheses. The FTC study, with its open-ended questions to a handful of firms, is a classic exploratory study. At best, the study will generate answers that could help researchers begin to form theories and design another round of questions for further research. Scheuren notes that while the “FTC study may well be useful at generating exploratory data with respect to PAE activity,” it “is not designed to confirm supportable subject matter conclusions.”

One significant constraint with the FTC study is that the sample size is small—only twenty-five PAEs—and the control group is even smaller—a mixture of fifteen manufacturers and non-practicing entities (NPEs) in the wireless chipset industry. Scheuren reasons that there “is also the risk of non-representative sampling and potential selection bias due to the fact that the universe of PAEs is largely unknown and likely quite diverse.” And the fact that the control group comes from one narrow industry further prevents any generalization of the results. Scheuren concludes that the FTC study “may result in potentially valuable information worthy of further study,” but that it is “not designed in a way as to support public policy decisions.”

Professor Michael Risch questions the FTC’s entire approach: “If the FTC is going to the trouble of doing a study, why not get it done right the first time and a) sample a larger number of manufacturers, in b) a more diverse area of manufacturing, and c) get identical information?” He points out that the FTC won’t be well-positioned to draw conclusions because the control group is not even being asked the same questions as the PAEs. Risch concludes that “any report risks looking like so many others: a static look at an industry with no benchmark to compare it to.” Professor Kristen Osenga echoes these same sentiments and notes that “the study has been shaped in a way that will simply add fuel to the anti–‘patent troll’ fire without providing any data that would explain the best way to fix the real problems in the patent field today.”

Osenga further argues that the study is flawed since the FTC’s definition of PAEs perpetuates the myth that patent licensing firms are all the same. The reality is that many different types of businesses fall under the “PAE” umbrella, and it makes no sense to impute the actions of a small subset to the entire group when making policy recommendations. Moreover, Osenga questions the FTC’s “shortsighted viewpoint” of the potential benefits of PAEs, and she doubts how the “impact on innovation and competition” will be ascertainable given the questions being asked. Anne Layne-Farrar expresses similar doubts about the conclusions that can be drawn from the FTC study since only licensors are being surveyed. She posits that it “cannot generate a full dataset for understanding the conduct of the parties in patent license negotiation or the reasons for the failure of negotiations.”

Layne-Farrar concludes that the FTC study “can point us in fruitful directions for further inquiry and may offer context for interpreting quantitative studies of PAE litigation, but should not be used to justify any policy changes.” Consistent with the FTC’s own admissions of the study’s limitations, this is the real bottom line of what we should expect. The study will have no predictive power because it only looks at how a small sample of firms affect a few other players within the patent ecosystem. It does not quantify how that activity ultimately affects innovation and competition—the very information needed to support policy recommendations. The FTC study is not intended to produce the sort of compelling statistical data that can be extrapolated to the larger universe of firms.

FTC Commissioners Put Cart Before Horse

The FTC has a history of bias against PAEs, as demonstrated in its 2011 report that skeptically questioned the “uncertain benefits” of PAEs while assuming their “detrimental effects” in undermining innovation. That report recommended special remedy rules for PAEs, even as the FTC acknowledged the lack of objective evidence of systemic failure and the difficulty of distinguishing “patent transactions that harm innovation from those that promote it.” With its new study, the FTC concedes to the OMB that much is still not known about PAEs and that the findings will be preliminary and non-generalizable. However, this hasn’t prevented some Commissioners from putting the cart before the horse with PAEs.

In fact, the very call for the FTC to institute the PAE study started with its conclusion. In her 2013 speech suggesting the study, FTC Chairwoman Edith Ramirez recognized that “we still have only snapshots of the costs and benefits of PAE activity” and that “we will need to learn a lot more” in order “to see the full competitive picture.” While acknowledging the vast potential benefits of PAEs in rewarding invention, benefiting competition and consumers, reducing enforcement hurdles, increasing liquidity, encouraging venture capital investment, and funding R&D, she nevertheless concluded that “PAEs exploit underlying problems in the patent system to the detriment of innovation and consumers.” And despite the admitted lack of data, Ramirez stressed “the critical importance of continuing the effort on patent reform to limit the costs associated with some types of PAE activity.”

This position is duplicitous: If the costs and benefits of PAEs are still unknown, what justifies Ramirez’s rushed call for immediate action? While benefits have to be weighed against costs, it’s clear that she’s already jumped to the conclusion that the costs outweigh the benefits. In another speech a few months later, Ramirez noted that the “troubling stories” about PAEs “don’t tell us much about the competitive costs and benefits of PAE activity.” Despite this admission, Ramirez called for “a much broader response to flaws in the patent system that fuel inefficient behavior by PAEs.” And while Ramirez said that understanding “the PAE business model will inform the policy dialogue,” she stated that “it will not change the pressing need for additional progress on patent reform.”

Likewise, in an early 2014 speech, Commissioner Julie Brill ignored the study’s inherent limitations and exploratory nature. She predicted that the study “will provide a fuller and more accurate picture of PAE activity” that “will be put to good use by Congress and others who examine closely the activities of PAEs.” Remarkably, Brill stated that “the FTC and other law enforcement agencies” should not “wait on the results of the 6(b) study before undertaking enforcement actions against PAE activity that crosses the line.” Even without the study’s results, she thought that “reforms to the patent system are clearly warranted.” In Brill’s view, the study would only be useful for determining whether “additional reforms are warranted” to curb the activities of PAEs.

It appears that these Commissioners have already decided—in the absence of any reliable data on the systemic effects of PAE activity—that drastic changes to the patent system are necessary. Given their clear bias in this area, there is little hope that they will acknowledge the deep limitations of the study once it is released.

Commentators Jump the Gun

Unsurprisingly, many supporters of the study have filed comments with the FTC arguing that the study is needed to fill the huge void in empirical data on the costs and benefits associated with PAEs. Some even simultaneously argue that the costs of PAEs far outweigh the benefits, suggesting that they have already jumped to their conclusion and just want the data to back it up. Despite the study’s serious limitations, these commentators appear primed to use it to justify their foregone policy recommendations.

For example, the Consumer Electronics Association applauded “the FTC’s efforts to assess the anticompetitive harms that PAEs cause on our economy as a whole,” and it argued that the study “will illuminate the many dimensions of PAEs’ conduct in a way that no other entity is capable.” At the same time, it stated that “completion of this FTC study should not stay or halt other actions by the administrative, legislative or judicial branches to address this serious issue.” The Internet Commerce Coalition stressed the importance of the study of “PAE activity in order to shed light on its effects on competition and innovation,” and it admitted that without the information, “the debate in this area cannot be empirically based.” Nonetheless, it presupposed that the study will uncover “hidden conduct of and abuses by PAEs” and that “it will still be important to reform the law in this area.”

Engine Advocacy admitted that “there is very little broad empirical data about the structure and conduct of patent assertion entities, and their effect on the economy.” It then argued that PAE activity “harms innovators, consumers, startups and the broader economy.” The Coalition for Patent Fairness called on the study “to contribute to the understanding of policymakers and the public” concerning PAEs, which it claimed “impose enormous costs on U.S. innovators, manufacturers, service providers, and, increasingly, consumers and end-users.” And to those suggesting “the potentially beneficial role of PAEs in the patent market,” it stressed that “reform be guided by the principle that the patent system is intended to incentivize and reward innovation,” not “rent-seeking” PAEs that are “exploiting problems.”

The joint comments of Public Knowledge, Electronic Frontier Foundation, & Engine Advocacy emphasized the fact that information about PAEs “currently remains limited” and that what is “publicly known largely consists of lawsuits filed in court and anecdotal information.” Despite admitting that “broad empirical data often remains lacking,” the groups also suggested that the study “does not mean that legislative efforts should be stalled” since “the harms of PAE activity are well known and already amenable to legislative reform.” In fact, they contended not only that “a problem exists,” but that there’s even “reason to believe the scope is even larger than what has already been reported.”

Given this pervasive and unfounded bias against PAEs, there’s little hope that these and other critics will acknowledge the study’s serious limitations. Instead, it’s far more likely that they will point to the study as concrete evidence that even more sweeping changes to the patent system are in order.

Conclusion

While the FTC study may generate interesting information about a handful of firms, it won’t tell us much about how PAEs affect competition and innovation in general. The study is simply not designed to do this. It instead is a fact-finding mission, the results of which could guide future missions. Such empirical research can be valuable, but it’s very important to recognize the limited utility of the information being collected. And it’s crucial not to draw policy conclusions from it. Unfortunately, if the comments of some of the Commissioners and supporters of the study are any indication, many critics have already made up their minds about the net effects of PAEs, and they will likely use the study to perpetuate the biased anti-patent fervor that has captured so much attention in recent years.

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Innovation Inventors Legislation Patent Law Patent Litigation Uncategorized

Changes to Patent Venue Rules Risk Collateral Damage to Innovators

dictionary entry for the word "innovate"Advocates for changing the patent venue rules, which dictate where patent owners can sue alleged infringers, have been arguing that their remedy will cure the supposed disease of abusive “trolls” filing suit after suit in the Eastern District of Texas. This is certainly true, but it’s only true in the sense that cyanide cures the common cold. What these advocates don’t mention is that their proposed changes will weaken patent rights across the board by severely limiting where all patent owners—even honest patentees that no one thinks are “trolls”—can sue for infringement. Instead of acknowledging the broad collateral damage their changes would cause to all patent owners, venue revision advocates invoke the talismanic “troll” narrative and hope that nobody will look closely at the details. The problem with their take on venue revision is that it’s neither fair nor balanced, and it continues the disheartening trend of equating “reform” with taking more sticks out every patent owner’s bundle of rights.

Those pushing for venue revision are working on two fronts, one judicial and the other legislative. On the judicial side, advocates have injected themselves into the TC Heartland case currently before the Federal Circuit. Though it has no direct connection to the Eastern District of Texas, advocates see it as a chance to shut plaintiffs out of that venue. Their argument in that case is so broad that it would drastically restrict where all patentees can sue for infringement—even making it impossible to sue infringing foreign defendants. Yet they don’t mention this collateral damage as they sell the “troll” narrative. On the legislative side, advocates have gotten behind the VENUE Act (S.2733), introduced in the Senate last Thursday. This bill leaves open a few more venues than TC Heartland, though it still significantly limits where all patent owners can sue. Advocates here also repeat the “troll” mantra instead of offering a single reason why it’s fair to change the rules for everyone else.

With both TC Heartland and the VENUE Act, venue revision advocates want to change the meaning of one word: “resides.” The specific patent venue statute, found in Section 1400(b) of Title 28, provides that patent infringement suits may be brought either (1) “in the judicial district where the defendant resides” or (2) “where the defendant has committed acts of infringement and has a regular and established place of business.” On its face, this seems fairly limited, but the key is the definition of the word “resides.” The general venue statute, found in Section 1391(c)(2) of Title 28, defines residency broadly: Any juridical entity, such as a corporation, “shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” Taken together, these venue statutes mean that patent owners can sue juridical entities for infringement anywhere the court has personal jurisdiction over the defendant.

The plaintiff in TC Heartland is Kraft Foods, a large manufacturer incorporated in Delaware and headquartered in Illinois that runs facilities and sells products in Delaware. The defendant is TC Heartland, a large manufacturer incorporated and headquartered in Indiana. TC Heartland manufactured the allegedly-infringing products in Indiana and then knowingly shipped a large number of them directly into Delaware. Kraft Foods sued TC Heartland in Delaware on the theory that these shipments established personal jurisdiction—and thus venue—in that district. TC Heartland argued that venue was improper in Delaware, but the district court rejected that argument (see here and here). TC Heartland has now petitioned the Federal Circuit for a writ of mandamus, arguing that the broad definition of “reside” in Section 1391(c)(2) does not apply to the word “resides” in Section 1400(b). On this reading, venue would not lie in Delaware simply because TC Heartland did business there.

TC Heartland mentions in passing that its narrow read of Section 1400(b) is favorable as a policy matter because it would prevent venue shopping “abuses,” such as those allegedly occurring in the Eastern District of Texas. Noticeably, TC Heartland doesn’t suggest any policy reasons why Kraft Foods should not be permitted to bring an infringement suit in Delaware, and neither do any of the amici supporting TC Heartland. The amicus brief by the Electronic Frontier Foundation (EFF) et al. argues that Congress could not have intended “to permit venue in just about any court of the patent owner’s choosing.” But why is this hard to believe? The rule generally for all juridical entities is that they can be sued in any district where they chose to do business over matters relating to that business. This rule has long been regarded as perfectly fair and reasonable since these entities get both the benefits and the burdens of the law wherever they do business.

The EFF brief goes on for pages bemoaning the perceived ills of forum shopping in the Eastern District of Texas without once explaining the relevancy to Kraft Foods. It asks the Federal Circuit to “restore balance in patent litigation,” but its vision of “balance” fails to account for the myriad honest patent owners like Kraft Foods that nobody considers to be “trolls.” The same holds true for the amicus brief filed by Google et al. that discusses the “harm forum shopping causes” without elucidating how it has anything to do with Kraft Foods. Worse still, the position being urged by these amici would leave no place for patent owners to sue foreign defendants. If the residency definitions in Section 1391(c) don’t apply to Section 1400(b), as they argue, then a foreign defendant that doesn’t reside or have a regular place of business in the United States can never be sued for patent infringement—an absurd result. But rather than acknowledge this collateral damage, the amici simply sweep it under the rug.

The simple fact is that there’s nothing untoward about Kraft Foods filing suit in Delaware. That’s where TC Heartland purposefully directed its conduct when it knowingly shipped the allegedly-infringing products there. It’s quite telling that venue revision advocates are using TC Heartland as a platform for changing the rules generally when they can’t even explain why the rules should be changed in that very case. And this is the problem: If there’s no good reason for keeping Kraft Foods out of Delaware, then they shouldn’t be advocating for changes that would do just that. Keeping patent owners from suing in the Eastern District of Texas is no reason to keep Kraft Foods out of Delaware, and it’s certainly no reason to make it impossible for all patent owners to sue foreign-based defendants that infringe in the United States. Advocates of venue revision tacitly admit as much when they say nothing about this collateral damage. This isn’t fair and balanced; it’s another huge turn of the anti-patent ratchet disguised as “reform.”

The same is true with the VENUE Act, which copies almost verbatim the venue provisions of the Innovation Act. This bill would also severely restrict where all patent owners can sue by making it so that a defendant doesn’t “reside” wherever a district court has personal jurisdiction arising from its allegedly-infringing conduct. To its credit, the VENUE Act does include new provisions allowing suit where an inventor conducted R&D that led to the application for the patent at issue. It also allows suit wherever either party “has a regular and established physical facility” and has engaged in R&D of the invention at issue, “manufactured a tangible product” that embodies that invention, or “implemented a manufacturing process for a tangible good” in which the claimed process is embodied. Furthermore, the bill makes the same venue rules applicable to patent owners suing for infringement and accused infringers filing for a declaratory judgment, and it solves the problem of foreign-based defendants by stating that the residency definition in Section 1391(c)(3) applies in that situation.

While the proposed changes in the VENUE Act aren’t as severe as those sought by venue revision advocates in TC Heartland, they nevertheless take numerous venues off of the table for patentees and accused infringers alike. But rather than acknowlede these wide-sweeping changes and offer reasons for implementing them, advocates of the VENUE Act simply harp on the narrative of “trolls” in Texas. For example, Julie Samuels at Engine argues that the “current situation in the Eastern District of Texas makes it exceedingly difficult for defendants” to enforce their rights and that we need to “level the playing field.” Likewise, Elliot Harmon at the EFF Blog suggests that the VENUE Act will “finally address the egregious forum shopping that dominates patent litigation” and “bring a modicum of fairness to a broken patent system.” Yet neither Samuels nor Harmon explains why we should change the rules for all patent owners and accused infringers—especially the ones that aren’t forum shopping in Texas.

The VENUE Act would simply take a system that is perceived to favor plaintiffs and replace it with one that definitely favors defendants. For instance, an alleged infringer with continuous and systematic contacts in the Eastern District of Virginia can currently be sued there, but the VENUE Act would take away this option since it’s based on mere general jurisdiction. Likewise, the current venue rules allow suits anywhere the court has specific jurisdiction over the defendant—potentially in every venue for a nationwide enterprise—yet the VENUE Act would make dozens of these venues improper. Furthermore, patentees can now bring suits against multiple defendants in a single forum, saving time and money for all involved, but the VENUE Act would make this possibility much less likely to occur.

The “troll” narrative employed by venue revision advocates may sound appealing on the surface, but it quickly becomes clear that they either haven’t considered or don’t care about how their proposed changes would affect everyone else. If we’re going to talk about abusive litigation practices in need of revision, we should talk about where they’re occurring across the entire patent system. This discussion should include the practices of both patent owners and alleged infringers, and we should directly confront the systemic collateral damage that any proposed changes would cause. As it stands, there’s little hope that the current myopic focus on “trolls” will lead to any true reform that’s fair and balanced for everyone.