Category: Legislation

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Commercialization Economic Study High Tech Industry Innovation Law and Economics Legislation Patent Law Patent Licensing Patent Litigation Software Patent Uncategorized

Cohen et al. “Patent Trolls” Study Uses Incomplete Data, Performs Flawed Empirical Tests, and Makes Unsupportable Findings

PDF summary available here

I.   Introduction

A recent draft study about patent licensing companies entitled “Patent Trolls: Evidence from Targeted Firms” is making the rounds on Capitol Hill and receiving press coverage. This attention is unfortunate, because the study is deeply flawed and its conclusions cannot and should not be relied upon. If the draft paper is ever published in a peer reviewed journal, it will certainly need to be greatly revised first, with its most notable results likely changing or disappearing.  In sum, the study should receive no credit in policy debates.

The study, by Lauren Cohen, Umit G. Gurun, and Scott Duke Kominers, finds that non-practicing entities (NPEs) are “opportunistic” because they target defendants that (1) are cash-rich (particularly compared to practicing entity patentees), (2) operate in industries that “have nothing to do with the patent” in suit, (3) are staffed by small legal teams, and (4) are busy with numerous non-IP cases. Additionally, the authors conclude that defendants that lose in patent litigation with NPEs on average have marked declines in subsequent R&D expenditures, on the order of $200 million per year. On this basis, the authors suggest “the marginal policy response should be to more carefully limit the power of NPEs.” One of the authors has been circulating this unpublished study to congressional staffers to make the case that NPEs have a large negative effect on US innovation.

II.   Critique of the Study

Professor Ted Sichelman, University of San Diego School of Law, and an expert in empirical studies of patent litigation, critiques the most recent, publicly available version of the Cohen et al. study in detail in his response paper, “Are Patent Trolls ‘Opportunistic?”.[1] He finds that the study’s dataset is incomplete and unrepresentative, its theoretical model is flawed, and its empirical models are unsound. Professor Sichelman concludes that neither their findings nor policy prescriptions are justified. Major weaknesses in the study are as follows:

  • The study’s public firm defendant dataset in current version of paper is incomplete and unrepresentative
  • The study relies on proprietary, unverified coding from PatentFreedom that groups together numerous NPE types (including individuals, R&D shops, and IP holding companies of operating companies), but in making its policy recommendations, the study assumes all NPEs are patent aggregators
  • The study’s finding that NPEs sue cash-rich defendants may simply be driven by the fact that NPEs tend to target software, Internet, and finance-related companies for reasons unrelated to cash holdings, but these companies simply happen to have larger cash-holdings than the average publicly traded company
  • When comparing NPE behavior to that of operating companies, the study improperly includes operating company suits in which the patentees primarily seek injunctions, which are not cash-driven suits
    • Our belief is that NPEs and operating companies alike that primarily seek royalties are likely to seek defendants with enough cash to pay likely damage awards and—like a seller of goods ensuring that a buyer has sufficient cash to pay for those goods—there is nothing “opportunistic” in this behavior
  • NPEs asserting patented technology that is different from the primary industry of the accused infringer are typically not going “after profits unrelated to the patents”
    • For instance, the use of patented computer hardware, software, or technical equipment may occur in any industry and provide a competitive advantage relative to others using non-patented technology
  • The study’s datasets and variables to determine the size of law firm and the number of pending cases are incomplete and flawed
  • The authors’ finding that R&D of accused infringers is differentially affected by a “loss” is based on a very small dataset of “wins” (n=35)

In sum, there is no support for the study’s policy recommendation “to more carefully limit the power of NPEs.” In this regard, we reiterate our view that any plaintiff targeting defendants with enough cash to satisfy a damages judgment is simply ordinary litigation behavior. According to Professor Sichelman, there is “massive risk aversion by many small NPEs” and “large uncertainty in [patent] cases” that may cause any patentee primarily seeking money damages to assert its patents against defendants who can pay their bills.

Finally, in making their policy proposals to restrict NPEs, Cohen et al. rely on the discredited study of Bessen and Meurer (2014) to argue that NPEs do not channel a large percentage of funds received back to inventors. As Schwartz and Kesan (2014) have shown, Bessen and Meurer’s study is inapplicable to most NPEs, because only 12 publicly traded aggregators were examined, and even for those 12 aggregators, Schwartz and Kesan persuasively argue that Bessen and Meurer’s findings are wrong. Indeed, there is ample evidence that many patent aggregators return 50% of net recoveries in litigation or licensing (i.e., after paying for attorneys’ fees and related costs) and that many NPEs are individuals, R&D shops, and other entities that effectively keep 100% of the net returns from recoveries.

As such, the Cohen et al. (2014) study should receive no credit in congressional policy debates. Indeed, another leading academic at a recent conference expressed surprise and dismay that this early-stage study was being circulated by its authors throughout Congress.

Notes:

[1] The authors presented new material in response to Sichelman’s critique at a recent conference, but as far as we know, they have not made any of it available to the general public. As such, we focus on Sichelman’s critique of the most recent, publicly available version of the study.

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Legislation Patent Law Patent Litigation Supreme Court Uncategorized

Supreme Court Revises Fee-Shifting Rules in Patent Cases: Weeding out Bad Actors in a Level Playing Field

By Adam Mossoff* and Brian O’Shaughnessy†
Originally published in LES (USA & Canada)’s weekly e-newsletter, Insights.

On April 29, 2014, the Supreme Court handed down two unanimous decisions in Octane Fitness v. ICON Health & Fitness and Highmark v. Allcare Health Management System, which radically overhaul the rules governing court-awarded attorneys’ fees in patent cases. In brief, the Supreme Court has empowered district courts with greater authority to discourage bad actors in patent litigation. Yet, the Octane Fitness and Highmark decisions preserve valuable incentives for innovation in an equitable system for patent owners who properly assert valid property rights.

Octane Fitness and Highmark confirm that it is the proper role for courts to address problems created by bad faith patent litigation. This is a lesson that should be heeded by Congress, as it works toward new legislation further modifying our patent laws, including mandating fee-shifting in patent cases. Octane Fitness and Highmark counsel Congress to reconsider revising our patent laws, and instead allow courts to do what they do best —manage their dockets and craft rules and procedures to ensure the just and efficient resolution of disputes under federal law.

The legal issue in Octane Fitness and Highmark centered on what is the proper application of 35 U.S.C. § 285, which authorizes courts to award attorney fees “in exceptional cases” to the prevailing party. Since its inception, § 285 has been recognized as an exception to the “American Rule” (i.e., each party pays its own attorney fees regardless of the outcome). The Federal Circuit has construed § 285 as permitting fee-shifting in only two limited circumstances: An award of attorneys’ fees is permissible only when it is proven by clear and convincing evidence that (1) “there has been some material inappropriate conduct,” or (2) the litigation was “brought in subjective bad faith” and was “objectively baseless.”

The Octane Fitness Court found the Federal Circuit’s construction of § 285 imposed “an inflexible framework onto statutory text that is inherently flexible.” More specifically, the Octane Fitness Court struck down the Federal Circuit’s test because it conflated the “exceptional case” standard with other legally independent bases of punishing misconduct by a patent owner, such as the inequitable conduct doctrine that is similar to factor (1) of the Federal Circuit’s § 285 test. In accord with its plain meaning, the Court construed an “exceptional case” to mean simply a case that “stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”

Following its construction of “exceptional case” based on both its plain meaning and the legislative history for § 285 (Justice Scalia refused to join the three footnotes in Justice Sotomayor’s opinion that discussed the legislative history), the Octane Fitness Court held that a district court should have the discretionary authority to award attorney fees if the prevailing party has proven by a preponderance of evidence that the “totality of the circumstances” justify such an award. The Octane Fitness Court thus lowered both the evidentiary and the substantive legal requirements for a district court in awarding attorney fees under § 285—it is now a case-specific, holistic, equitable analysis more in accord with the approach traditionally taken by courts.

In a companion case, the Court in Highmark bolstered the authority of district courts to manage their dockets and to punish bad actors by revising the standard of review employed by the Federal Circuit in reviewing fee-shifting decisions under § 285. The Federal Circuit has reviewed de novo fee awards under § 285. Highmark holds that this was contrary to the fact-specific nature of § 285. Thus, Highmark reversed the Federal Circuit, holding that the discretionary award of attorneys’ fees under § 285 should be reviewed by an appellate court only for abuse of discretion.

Standing together, Octane Fitness and Highmark empower district courts to hold accountable those who engage in improper or abusive litigation. This is a valuable reminder that patent infringement suits are merely another form of federal civil litigation, and abusive behavior may be addressed with rules and practices traditionally employed by federal courts.

The carefully crafted holdings in Octane Fitness and Highmark stand in stark contrast to broad legislation pending in Congress. For example, in December 2013, the House passed H.R. 3309, which would impose mandatory fee-shifting to the non-prevailing party. Fees must be paid by the losing party unless it can prove that its position was “substantially justified” or that “special circumstances” would make an award of attorney fees unjust. This would create the same “inflexible framework” and inequitable “generalizations” for which the Supreme Court criticized the Federal Circuit in its prior application of § 285.

H.R. 3309 would penalize patent owners by creating an exception to the American rule. This would affect all patent owners, not just bad actors, and would increase risk, and therefore harm individual inventors, start-ups, small companies, universities, and other entities that create and license patented inventions. The risk of bearing the financial burden of both parties’ attorney fees would be an enormous disincentive for any poorly capitalized patent owner in enforcing its legitimate property rights in court; this would thus discourage, rather than promote, the progress of the useful arts.

Octane Fitness and Highmark will promote more responsible behavior among patent litigants.  Under the principles enunciated in these two cases, patent owners must be more careful in conducting pre-litigation due diligence.  Before bringing suit, patent owners would be well advised to retain objective and competent counsel to conduct a thorough infringement investigation, and to document the bases on which a suit might be brought.  Failure to procure such an opinion before bringing suit would increase a patent owner’s exposure to a challenge that the suit was brought without the requisite good faith basis, and with that, a claim for attorney fees.

A legislative approach that mandates fee shifting is a dramatic shift from the traditional American rule. It hinders a judge’s discretion and the court’s inherent power to impose appropriate sanctions. It will limit remedial measures that judges might otherwise employ to promptly and cost-effectively resolve cases and discourage litigation abuse. Further, it will invite gamesmanship to protect the bad faith litigant from suffering the fate of a “non-prevailing party.”

Case by case implementation of the Octane Fitness and Highmark decisions will afford equitable and predictable enforcement of legitimate patent rights, promoting innovation while preserving the power of the courts to punish bad actors. Overly broad legislation, however, will increase uncertainty and risk in patent enforcement, weaken the patent property right, diminish the commercial value of patents, and discourage innovation. This will have devastating consequences on the innovation economy, and will suppress economic development and job creation. Octane Fitness and Highmark show that judges, who witness abusive behavior firsthand, are in the best position to address and remedy bad faith litigation and abusive tactics. This is why we have traditionally left it to the courts to address such tactics. The Supreme Court has now clarified and enhanced that power. Congress should defer to the courts in exercising it.

* Professor of Law at George Mason University School of law. Professor Mossoff is also co-founder and Co-Director of Academic Programs of the Center for the Protection of Intellectual Property at Mason Law. Thank you to Steve Tjoe for his assistance with this essay.

† Regional Vice President, USA, of the Licensing Executives Society (USA and Canada), Inc.; and Shareholder in the law firm of RatnerPrestia, Washington, DC.

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Commercialization Conferences High Tech Industry Innovation Intellectual Property Theory Law and Economics Legislation Patent Law Patent Licensing Patent Litigation Patent Theory Software Patent Uncategorized

The Unintended Consequences of Patent "Reform"

By Steven Tjoe

Much of today’s patent policy debate focuses on the dynamics of patent litigation.  Sensational anecdotes of abusive demand letters, litigants strategically exploiting bad patents, and tales of so-called “patent trolls” (reinforced by now debunked empirical claims) have captured the public’s imagination and spurred Congress to rush to revise the patent system.  Unfortunately, the fervor to address perceived patent litigation abuses often overlooks the substantial unintended consequences of recent and proposed legislation.

CPIP and WARF’s recent conference, From Lab to Market: How Intellectual Property Secures the Benefits of R&D, featured a panel designed to fill this void in the conversation.  Instead of myopically focusing on trolls and litigation abuse, the panelists, Eb Bright, Robert Sterne, and Carl Gulbrandsen, brought the discussion back to reality and addressed the greater context of how recent and proposed changes to patent law impact our innovation ecosystem at large.

First, an understanding of how ideas are developed and brought to market is crucial to evaluating the ramifications of patent legislation.  Eb Bright, Executive Vice President and General Counsel of ExploraMed, illustrated this often-overlooked process from the perspective of the medical device industry.  In the world of medical device development, the financial risks of bringing an idea to market are very high.  The cost from conception to market can range from approximately $75 million for low-risk devices to approximately $135 million for high-risk devices.  Additionally, it takes 8-10 years on average to begin seeing a return on investment.

The result is that innovators in the medical device space – mostly small start-up companies – must secure significant financing from venture capitalists and other investors to keep their companies alive during this lengthy process.  Strong patents are fundamental to securing this financing.  They are essential to keeping competitors from free-riding on a company’s work and poaching its investors’ returns.  Investors are loathe to finance a start-up without confidence that the company can protect its intellectual property (which often accounts for a significant portion of the company’s value) from free-riders.  In this fragile innovation ecosystem, legislation that weakens patents and makes it harder for small companies to enforce their patent rights could have devastating consequences on start-ups’ ability to secure essential financing.

Carl Gulbrandsen, Managing Director of WARF, discussed proposed patent legislation from the perspective of a large university technology transfer office.  As the University of Wisconsin’s licensing arm, WARF licenses university patents and returns approximately $80 million a year to the university to support further research.  This symbiotic relationship fuels research and also adds significant value to the university’s inventions.  By marketing and licensing inventions to companies (often small start-ups) that take on the substantial effort of turning those inventions into actual products, WARF plays a crucial role in moving innovation from the lab to the marketplace.  Importantly, strong patent rights lie at the center of this virtuous cycle.

Mr. Gulbrandsen observed that proposed legislation would disrupt this process by making it substantially more difficult for universities to enforce their patents, and therefore substantially more difficult for universities to license and commercialize their inventions.  While established organizations like WARF may be able to handle the increased costs and risks, at the margin fewer universities would be able to license their intellectual property.  The result is that fewer inventions would move from lab to market, and universities would have less revenue to fuel future research.

It is against this backdrop that efforts to revise our patent system occur.  Overbroad “patent abuse” legislation that fails to appreciate the economic realities of our innovation ecosystem can lead to significant unintended consequences.  Robert Sterne, Director of Sterne Kessler, illustrated some unintended consequences from the last major patent “reform” legislation, the America Invents Act of 2011 (AIA).  In particular, Mr. Sterne addressed issues arising from the Inter Partes Review (“IPR”) and Covered Business Method Patent Review (“CBM”) procedures implemented under the AIA.

Mr. Sterne spoke about trial practice before the USPTO Patent Trial and Appeal Board (“PTAB”), noting that Rule 42.1(b) establishes that the rules should “be construed to secure the just, speedy, and inexpensive resolution of every proceeding.”  While the resulting procedures are certainly speedy (cases proceed through the USPTO and through appeal at the Federal Circuit within 2 years) and are cheaper than District Court proceedings, the procedures are far from just, and have proved particularly unforgiving for patent owners as a result of vast departures from well-established rules and procedures utilized by the courts.

Mr. Sterne explained how the new IPR procedures include more limited claim construction rules, less stringent burdens of proof to invalidate a patent, and less opportunity to adequately prove non-obviousness.  Of particular concern to patent owners is the inability to show non-obviousness.  In District Court, patent owners generally show non-obviousness by telling the story of the invention.  Inventors recount the state of the technology prior to their invention and the contributions their invention made.  By contrast, PTAB’s narrow time limitations and constraints on responses filed strip patent owners of the ability to do the same in IPR proceedings.

Consequently, the trial outcomes under the new system have yielded startlingly negative results for patent holders.  As of March 7, 2014, the PTAB had issued 19 Final Written Decisions on the merits for IPRs and CBMs.  In all but three of these proceedings, the Board cancelled all claims for which trial was instituted.  In total, 95.2% of all claims for which trial was instituted were cancelled and 82.9% of all claims that were initially challenged by the petitioner were cancelled.

Furthermore, IPR proceedings are always available and may stand alone or exist as part of a litigation strategy.  A patent owner does not have to take any action before being challenged.   New business entities, such as subscription services designed to work around the estoppel provisions, are already being formed to capitalize on the lopsided nature of the process.  It’s important to note that the constant threat of IPR and the risks and costs associated with it are not only detrimental to patent owners, they also affect our entire innovation ecosystem.

The central takeaway from the panel was this:  As we consider patent legislation ostensibly designed to curb abusive litigation, it is crucial to consider the potential unintended consequences of weakening patent rights across the board.  We must recognize the economic realities of our innovation ecosystem, and we must narrowly tailor any solutions to address the limited instances of abuse without harming start-ups, universities, and all the other patent owners that fuel our innovation economy.

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Commercialization Copyright Copyright Licensing Copyright Theory High Tech Industry Internet Legislation Uncategorized

Taking a Whack at the DMCA: The Problem of Continuous Re-Posting

By Steven Tjoe

On Thursday March 13, the House Judiciary Committee held a hearing on the Digital Millennium Copyright Act’s (DMCA) notice and takedown system.  Among the witnesses testifying at the hearing was CPIP Fellow Professor Sean O’Connor (Washington University School of Law), who offered his insights on Section 512 from his unique position as a law professor, former musician, and counsel to web businesses.  Professor O’Connor observed that while the notice and takedown system may have operated effectively in the late 90s, today it no longer works for any of its intended beneficiaries.

Professor O’Connor traced the shared problems faced by websites and creators today to an unfortunate and unintended consequence of Section 512: the incentive for web businesses not to monitor content.  According to Professor O’Connor, this incentive has emboldened bad actors and fostered a culture of copyright contempt.  Under current law, web businesses (including the small, start-up web businesses Professor O’Connor counsels) are generally given an odd piece of advice by their attorneys: “don’t monitor the content on your site.”  The rationale is that there are serious potential downsides to monitoring content, but no upsides.  Monitoring content can expose web businesses to knowledge or awareness of infringement, and they risk losing their safe harbor under Section 512.  The end result is that web businesses don’t monitor (or even look), and as they turn a blind eye, bad actors are emboldened to upload and continuously re-post stolen works regardless of how many times they are taken down.

Professor O’Connor proposed two solutions to return some sanity to the process and encourage all parties involved to “do the right thing.”  His proposals target the most egregious cases: continuous re-posting of wholesale copies of creators’ works (not mash-ups, parodies, or excerpts, but infringing copies of the entire work).  Targeting these egregious cases makes sense given that the continuous re-posting of blatantly (really, inarguably) infringing wholesale copies accounts for the vast majority of takedown notices.

First, Professor O’Connor proposed a “notice and stay-down” system.  In such a system, once a business receives a takedown notice for a given work, it would monitor for re-posted copies of the same work (which it has already been notified is infringing) and take them down without having to receive additional notices for that work.  Ideally, web businesses should adopt voluntary best practices to monitor and immediately remove re-posted works.  Absent a voluntary adoption, Professor O’Connor believes that Congress should consider amending the DMCA to add an affirmative duty to monitor and remove re-posted infringing works.

This solution reflects the technological advances that have become a reality since the DMCA was passed in 1998.  Automated systems like the YouTube Content ID System (YouTube is owned by Google) can now effectively identify copyrighted works.  Adapting such technologies to identify works that have already been taken down under Section 512 and adding those works to a filter catalog would be one way to automate a notice and stay-down system to deter repeat offenders.  This would not only alleviate the cost (on both sides) of repeated takedowns for the same re-posted works, but would also systematically curb instances of blatant, wholesale copyright infringement.

Second, Professor O’Connor proposed revisiting and strengthening the DMCA’s red flag provisions by codifying a stronger version of the “willful blindness” doctrine that courts have narrowly interpreted.  Some courts have failed to find willful blindness even in cases involving very high volumes of infringing activity on a website.  In his written testimony, Professor O’Connor notes that “[t]he ‘don’t monitor’ advice and glamorization of a piracy culture means that many websites are in fact turning a blind eye to extensive infringement on their sites.”  By defining willful blindness to discourage today’s common “do not look” policy, we could combat the culture of copyright contempt that emboldens bad actors and repeat infringers.

Testimony by some of the other witnesses at the hearing corroborated the significant problems with the current notice and takedown system.  Paul F. Doda, Global Litigation Counsel for Elsevier (a premier publishing company), noted that despite rigorously issuing takedown notices, Elsevier encounters a growing number of copyright infringements each year.  The same literary works that are taken down are repeatedly re-uploaded on the same sites hundreds of times after being taken down.

From a more general standpoint, the sheer volume of takedown notices each year is staggering.  Katherine Oyama, Senior Copyright Policy Counsel at Google, testified that Google received 230 million takedown notices in 2013 alone (acting on 99% of those).  As instances of infringement continue to increase, the expense of locating, identifying, and then sending (or acting on) separate takedown notices for each infringing file has become increasingly significant and prohibitive, especially for creative up-starts and smaller web businesses.

From an artist’s standpoint, Maria Schneider (three-time GRAMMY-winning composer, conductor, and producer of jazz and classical music) testified to the real-world harm artists suffer despite the current “solutions” offered by Section 512.  Ms. Schneider described her experience with the notice and takedown system as an “endless whack-a-mole game” where, immediately after being taken down, her work reappears on the same sites she sent takedown notices to, offering her no relief from constant infringement.  She observed that independent artists are “hemorrhaging red ink” on their intellectual property.  Worse yet, policing the constant re-posting of stolen copies of their work is incredibly time-consuming and defers the ability of independent artists to focus on artistic endeavors, an effect Ms. Schneider fears will prove disastrous to young, aspiring artists and the future of the industry.

Simply put, it is time to update the notice and takedown system to reflect the realities of our digital age.

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Copyright Copyright Licensing High Tech Industry Internet Legislation Uncategorized

Improving the DMCA's Notice and Takedown System

In conjunction with today’s House Judiciary Committee hearing on the DMCA, CPIP Senior Scholar Prof. Mark Schultz published a critique of the notice and takedown system this morning on AEI’s TechPolicyDaily Blog.

In his critique, Prof. Schultz discusses CPIP’s policy brief by Prof. Bruce Boyden, which details the failures of the DMCA – despite the massive number of takedown notices sent, not a single day goes by when the infringing content is not readily available online. Prof. Schultz also highlights the written testimony of CPIP Fellow Prof. Sean O’Connor, a witness at today’s hearing, who proposes two simple, focused solutions – “notice and stay-down and codified “willful blindness” – to improve the notice and take-down process for all parties involved.

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Commercialization Copyright Copyright Licensing Legislation Supreme Court Uncategorized

Summary of Kirtsaeng v. John Wiley & Sons by Professor Chris Newman

Kirtsaeng v. John Wiley & Sons, U.S. Supreme Court, decided March 19, 2013

Chris Newman
Assistant Professor of Law
George Mason University School of Law

This is best described as a decision in which the Court felt compelled to choose between two readings of the Copyright Act, either of which led to unpalatable results.   One reading would eviscerate the exclusive importation right that Congress had sought to grant copyright owners.  The other would insert a huge loophole into the first-sale doctrine, which denies a copyright owner the right to control how people dispose of copies of protected works once they lawfully acquire ownership of them.   The argument was largely couched in the language of statutory interpretation, but at the end of the day the question was which horrible did more of the Justices fear more.  

The majority, in an opinion by Justice Breyer, chose to sacrifice the importation right.  This means that U.S. copyright owners may not rely on copyright law to aid them in segmenting the world market into domestic and foreign exclusive distribution zones.   Which is nice—at least in the short run—for U.S. consumers who want to buy cheap gray market imports.  It may turn out to be less nice in the long run for petitioner Kirtsaeng’s fellow citizens in Thailand, to whom U.S. textbook publishers may no longer be willing to sell books at prices that support arbitrage.  As Justice Kagan frankly acknowledged in concurrence, this is a suboptimal result that might have been avoided had the court taken a different route in an earlier case.  

The three dissenters would have opted to preserve the importation right, and in terms of straightforward textual interpretation, this commenter thinks Justice Ginsburg got the better of the argument.   What cost her the day was her inability to read the statute in a way that definitively closed the potential loophole in first sale doctrine, so as to dispel the spectre of permitting copyright owners to move all their manufacturing overseas and thereby gain the right to control all downstream distribution and display of copies even after they had been legally sold.   To be sure, this would indeed be an undesirable result, and Justice Ginsburg certainly did not believe it to be a correct or desirable application of copyright law.  But the only way she could avoid it while preserving the importation right was to argue that first sale doctrine is not really governed by the language in which it was codified in the statute.  Her solution makes sense as a matter of policy, but there was no way for the Court to adopt and make it stick in the context of this case, which would have left the spectre seemingly at large and triumphant.

 

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Legislation Patent Law Patent Licensing Patent Litigation Uncategorized

Scratching my Head Over the SHIELD Act

By Michael Risch

[The following is a blog posting by Michael Risch, a patent law scholar at Villanova Law School, that he originally posted on March 10, 2013 at the law professor group blog, Madisonian.net, where Professor Risch regularly blogs.  Professor Risch kindly gave us permission to repost his blog posting here.]

Scratching my Head Over the SHIELD Act
By Michael Risch

I get that many people hate patent trolls. I get that many people would like to find a way to limit NPE activities in enforcing patents. But I’m scratching my head over the rhetoric and content SHIELD Act, which was reintroduced last week. For the uninitiated, the proposal would mandate fee shifting for all losing NPEs. Carved out of this group are initial assignees of a patent (that is, individuals and companies who obtained the patents themselves), universities, and companies that spend “substantial” resources making something. Further, NPEs must post a bond for the fees before they can even get into the courthouse.

I should start by saying that I don’t have a strong position on fee shifting. I think that mutual fee shifting might actually do some good to reduce litigation costs and force more reasonable licensing negotiations. I’m also in favor of all sorts of behavior based fee shifting: filing frivolous cases, demanding license fees that far exceed reasonableness, ridiculous claim construction arguments, frivolous discovery requests, unrealistic damages expert reports, etc. I think the threat of fee shifting is a stick that could be used to tame costs. But note that all of these proposals are based on behavior, not identity.

This leads to my concerns with the SHIELD Act, which leave me scratching my head. As a taste of my further thoughts, I’ll note that the EFFs poster child for the act, a podcasting NPE, is actually excluded from the act, and would not have to pay fees on loss.

Rhetoric

Let’s start with the rhetoric. It seems like few people have actually examined the act in detail, and thus support for it sounds like a propagandistic echo chamber. I joined Twitter only recently, and originally attributed this to the 140 character limit. Get rid of trolls! $29 billion in costs! Meritless patents! However, it turns out that longer discussion also repeats the same claims without much analysis, albeit with more words. Indeed, very few of the reports actually link to the text of the act, which is here, but instead link to each other, all saying the same thing.

I have a problem with this rhetoric for two reasons. First, the facts are way, way more complicated than that (see Kesan & Schwartz, for example, for a critique of the $29 billion estimate, and see the PWC study on patent judgments since 1995 for discussion about how often and how much NPEs and practicing entities win).

Furthermore, there are many types of NPEs out there, from pre-adoption technology houses to the most abusive frivolous claim filers. The SHIELD Act and its proponents consider none of this nuance.

This leads to my real problem with the rhetoric: it is driven by large companies and presented as if it will benefit small companies. If we were so worried about small companies, why wouldn’t we make the act apply to all patent plaintiffs? After all, large companies routinely assert their patents against smaller, disruptive entities in order to stake out market position or even put them out of business. Just compare the Barnes & Noble submission to the FTC about Patent Assertion Entities with the Barnes & Noble complaints about Microsoft’s licensing practices. The complaint is the same, so it is unclear why the solution should not be the same.

I am bothered by any rhetoric purportedly intended to “protect innovation” that does not, well, protect innovation by its own terms. The EFF campaign focus on a patent that would not actually be subject to the act is just one example. And the fact that no one pushing the SHIELD Act—many of whom I respect even though I disagree—is asking these questions makes my knees jerk to oppose it.

Content

My general point of view is that we should address the behavior, not the owner. Yes, it’s bad that an NPE has asserted what many think is a meritless podcasting claim against Adam Corolla. (I won’t address the merits here, but I will note that the initial patent application was filed in 1996, not last year).

But would we really feel better if it were a product company making the same claim? A meritless claim hinders innovation no matter who makes it. That’s about all I will say about the core question of whether NPEs should be required to post a bond just to get into the courthouse. I think they should not—nor should anyone,—even if fee shifting were mutual. But defending that statement is more than I can do in this blog post. I’ve written at least two articles that address the topic and there are a multitude of other studies that address the role of NPEs in licensing as well as the parallels between NPE and product making patentee behavior.

Thus, my questions about the Act relate to the particulars and their unintended consequences. Note that the text of the act has been carefully written to carve out everyone who might object to it, except NPEs. This is the root of the problem, because “patent troll” means different things to different people.

Some points:

1. The act mandates a fee award to any party victorious on noninfringement or invalidity. This means that a company can sue for declaratory relief and force fee shifting, even though the patentee never filed suit. I realize that many people would say, “Great! No more demand letters!” But consider two things. First, there are many, many transactions – millions, if not billions of dollars worth – that are undertaken between technology licensing companies and product companies without the imprimatur of “trollishness.” This provision could disrupt that ecosphere in an effort to fix a different one. Second, this provision could have a perverse effect of multiplying the number of litigations. I don’t believe that patent holders should overclaim in order to seek higher licenses, but I also don’t believe that potential infringers should underclaim in order to force litigation.

2. The act excludes parties that have a “substantial investment” in the exploitation of a patent via production or sale. This is fraught with difficulty. First, what does “substantial” mean? Presumably it is intended to ensnare NPEs that decide to make things, but not make enough (or good enough) things. But why should a court get to decide what is enough? And what do we do about start-ups who have patents but have not yet commercialized their invention? Are they trolls, too?

And what is to stop NPEs from becoming distributors? They could buy competing products wholesale (perhaps products where they have secured licenses) and sell them. This only makes sense; by being resellers, they can claim that the competition of the infringing product is harming their sales business. This points to the general complexity of licensing in the first place: companies might license patents when their opponents do not in order to gain a competitive advantage, even if the patent is old.

3. This exploitation prong leads to other questions. What if a claim construction goes against the patentee, and the patent isn’t quite as broad as the owner thought. This happens all the time, to patentees of all types. Does this mean that the product selling patent holder is no longer exploiting the patent? The language seems to say so, and even the biggest producer would be ensnared.

4. The potential for producers to be liable doesn’t stop there. Consider Palm, which developed WebOS, and made stuff. Consider HP, which has spent billions of dollars in research and development. HP bought Palm, and made WebOS tablets. For various reasons, maybe in part due to patent claims from other tablet makers like Apple, HP decides to stop selling WebOS tablets. HP then decides to enforce Palm’s patents. Mind you, HP didn’t just buy the patents, it bought the company. And then it made stuff, it researched, it developed, and it has even licensed WebOS out to LG try to resurrect it for televisions. Is HP a troll now? It falls under the text of this act. I think that just cannot be right, and yet there it is, in black and white. By the way, HP sold some patents to HTC, who then asserted them against Apple. Soon after, HTC and Apple settled a long running, very costly litigation. Would the SHIELD Act change the dynamic of this dispute? I hope not, my family bought HTC phones.

5. Universities and technology transfer organizations are excluded. This offers a potential way for NPEs to avoid the law. They can become technology transfer organizations for small colleges that cannot afford them, or perhaps coordinate with each other to offer 1 year programs that satisfy the higher education requirements. This latter likelihood is a longshot, I think, but when money is at stake, you never know. This exception also ignores the role of universities in the patent ecosystem; do universities really never assert meritless claims? What happens when they start bringing more lawsuits? Maybe NPEs should team with tech transfer organizations and the tech transfer folks can bring suit instead; it would only take a few large university related intermediaries to make the entire bill fall apart.

6. Excluded are “original assignees,” which are assignees prior to patent issuance that appear on the face of the patent. This leads to two issues. First, what if the assignment is done late, even at a product company? It happens. I suppose they would rely on the “investment” prong, but the company might not be making the patented product.

Second, many NPE patents are assigned to the NPE as the initial assignee. NPEs often buy patents while they are in process and assign continuation applications to themselves; those continuations are often the broadest claims (and thus the least likely to be meritorious as a matter of logic). In other words, the patents we worry about most are the patents that are least likely to fall under the rule. Some of the most highly-litigated, most-litigated patents were originally assigned to the NPE enforcing them now. This brings us to the point I made above, Personal Audio, with its podcasting patent, is initially assigned to….Personal Audio. Sorry folks, this is not the SHIELD you are looking for.

Furthermore, to avoid this issue, NPEs can simply buy shell companies that continue to hold the patents, while the original owner, if still active, can spin off any business to a new entity. I think Acacia does a fair amount of this already, and will surely do more. The more I think about it, the more I think that this rule, intended to protect “real” inventors, will instead render the much of the act toothless.

7. Finally, the original inventor can always sue. This leaves me scratching my head on both ends of the spectrum. On the large company end, I cannot comprehend why fee shifting is a bad thing if BigCo enforces patents, but a good thing if BigCo creates BigCoIPSubsidiary to enforce its patents. Are these two worlds really that different? Perhaps it is to those BigCo supporters of the bill that enforce their own patents. I should add that I’m told, but have not verified, that the tax code rewards companies that spin out their patents. The law gives with one hand and takes away with the other. Perhaps a better solution would be to get rid of the tax benefits, but I won’t hold my breath.

On the small side, I see the SHIELD Act as changing the way NPEs enforce patents. Original inventors aren’t covered, so perhaps the original inventor should be a nominal plaintiff and just get funded by the NPE. That’s a great incentive at a time when people are clamoring for more transparency in the system.

One more point: Individuals are a primary source of NPE patents. Small businesses have always held their own as patent plaintiffs in the system and continue to do so. But the number of patents represented by individual inventors is double with NPE participation. It’s easy to see why: it costs a lot to enforce a patent, or even to license it, and NPEs have skill and finances that individuals lack.

And so when we discuss the SHIELD Act, we should be crystal clear about what we are talking about: a system that favors big companies over individuals. I’m not making a value statement; there may be good reasons why we want fewer patents by individuals enforced. For example, individuals invent a lot of software, and a lot of software patents are really bad. But are individual software patents worse than everyone else’s? I’ve read thousands of software patents, and my belief is that big companies can write crappy patents just like everyone else. My point is that we should be truthful about what is at stake, what the impacts will be, and whether those are the results we want. Then, given that truth, we should look at some evidence to decide what to do.

Update A comment below notes that the podcasting patent might indeed fall under SHIELD because it was assigned by a family trust of one of the inventors instead of the inventor. This highlights another problem with the bill that I hadn’t even thought about. I noted issues with purchases of companies above.

But if we also say that a wholly owned and controlled intermediary cannot assign the patent on behalf of the original inventor, then SHIELD has the potential to throw a wrench into the works of corporate financing and restructuring. Every day of the week, companies reform through mergers or financing, often creating “NewCo” shell companies that will serve as intermediate owners of assets or will take on new names post financing. I have known lawyers who have such companies already formed so they can use them on a moments notice.

If we say that the intermediary trust excludes the next assignee from being the “original inventor,” then many restructured startup, merged, and financed companies may be in for a rude surprise when the attempt to enforce their patent portfolios. Now, if you dislike patents generally, this realization would lead to rejoicing. I doubt that’s how this act was intended, though.