Category: Software Patent

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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 One of the authors has been circulating this unpublished study to congressional staffers to make the case that NPEs have a large negative effect on US innovation.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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Intellectual Property Unites Creators and Innovators

This is the first in a series of posts summarizing CPIP’s 2014 Fall Conference, “Common Ground: How Intellectual Property Unites Creators and Innovators.” The Conference was held at George Mason University School of Law on October 9-10, 2014. Videos of the conference panels and remarks, as well as panel summaries, will be available soon.

Introduction by Professors Adam Mossoff and Mark Schultz

Common Ground: How Intellectual Property Unites Creators and Innovators

The creative industries and innovation industries have much in common, but too often this is overlooked. Both industries engage in brilliant intellectual work to bring new products and services into the world, both take great risks to commercialize this work, and both depend on intellectual property – copyrights (for the creative industries) and patents (for the innovation industries). Unfortunately, most accounts of these two industries emphasize their differences and frequently portray them in conflict.

This conference will explore the common ground shared by these two dynamic industries, focusing on the similar values secured by their patents and copyrights and thus their common policy goals and commercial developments.

It should be unsurprising that these two industries share much in common. The work of inventors and artists is much the same. We see hints of this in their respective aspirations. Engineers, for example, often talk of seeking “elegant” or “beautiful” solutions to the technological problems they face. Artists also strive to innovate technically in how they create their works, as demonstrated with much panache in the recent documentary, Tim’s Vermeer. Many creators apply their prodigious talents to both art and invention.

One may think of a Steve Jobs today as exemplifying this truth, but history is replete with examples. Leonardo da Vinci also comes to mind, the quintessential Renaissance Man. In the 19th century, Samuel Morse invented the telegraph, but he was also a successful artist and in fact he developed the telegraph while working as a well-known Professor of Art at New York University.

In modern America, Walt Disney has defined much of our culture not just with his artistic creations, but also with his innovative technological creations in movies, theme parks and products. More recently, filmmakers George Lucas and James Cameron have cast large shadows in popular culture, but their contributions to filmmaking technology may prove even more enduring and pervasive.

These and many other examples are unsurprising when one considers that art and technology both result from the same source: productive intellectual labor.

As the work of artists and inventors is at heart the same, so is the moral and economic case for securing property rights to them. Artists and inventors deserve to own the fruits of their productive labors. In protecting these labors, intellectual property rights secure to them their liberty and their careers. These rights thus fuel the vast economic activity that drives the innovation economy – bringing to market the products and services that ensure full and flourishing lives for them and for the rest of us as well.

Too often, though, the creative and innovation industries are portrayed as being at odds. One popular narrative today – in both scholarly and popular accounts – is that technology disrupts the creative industries, forcing copyright owners to adapt. This is a myopic account of their relationship that ultimately creates a false picture. In truth, creativity and innovation – secured by copyrights and patents – constantly spur each other to greater heights.

The true story of creativity and innovation is more properly viewed as a virtuous circle.

Recording and broadcast technology, for instance, gave musicians and other performers their first worldwide audiences, whose demand for ever-more entertainment and information spurred further improvement and expansion of technology. The invention of the electric guitar, spurred by a series of patented improvements, enabled blues and rock ‘n’ roll, which in turn pushed further developments in music and recording technology.

The Internet certainly created much disruption, but it also has been a fountainhead of creativity. To take just one example, streaming of original, creative content enables television viewers to enjoy storytelling as never before, bringing about what some are now calling a Second Golden Age of Television.

Our technological devices, such as smartphones and iPads, would not be so well loved and so ubiquitous without the games, music, and video content they deliver to hundreds of millions of people the world over.

The common ground and shared aspirations of creators and innovators is clear, but rarely appreciated in the din of today’s policy debates.

Thus, our Annual Conference this year considers afresh the common goals, challenges and needs of the creative and innovation industries. Many distinguished speakers with extensive knowledge and experience in both fields will address how intellectual property rights represent the bedrock of this common ground. We hope that you will enjoy what promises to be enlightening discussion.

**Panel summaries coming soon**

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High Tech Industry Innovation Intellectual Property Theory Internet Inventors Patent Law Patent Theory Patentability Requirements Software Patent Supreme Court Uncategorized

Alice Gets the Most Important Question Right

By far the most important takeaway from today’s Supreme Court decision in Alice Corp. v. CLS Bank  is the Court’s acknowledgment that “many computer-implemented claims are formally addressed to patent-eligible subject matter.”  Despite failing to alleviate the profound confusion caused by its recent §101 analysis in cases like Bilski, Myriad, Mayo, and plenty of earlier cases going all the way back to Benson, the Court once and for all put to rest the absurd notion that computer-implemented inventions are not patentable under §101.

To its credit, the Alice Court issued its opinion without once using the term “software patent,” or even the term “software.”  Many people don’t realize that this is not a term of art in patent law.  There is no category of “software patents” at the PTO, although they do have classifications for every type of invention.  The term is also not an official category in any statutes or court decisions.  Instead, “software patent” is merely a pejorative, rhetorical term used by patent-skeptics in the patent policy debate.  One hears endless arguments about “all those crappy software patents,” or how we need to “fix the software patent problem,” as if there is something deeply wrong with providing patent protection for inventions implemented through software.  But from an inventive or technological standpoint, the notion of creating a separate category of “software patents” doesn’t even make sense. Any process that is implemented through software could also be implemented through hardware (as pointed out succinctly in the IEEE’s amicus brief in Alice), and the efficiencies and design decisions that guide the choice between hardware and software are essentially irrelevant to the core patentability requirements under the Patent Act.

Of course, the Alice Court’s decision still leaves inventors (not to mention patent examiners, lawyers, and judges) with shockingly little guidance for determining whether a claim is “directed to a patent-ineligible concept,” such as an “abstract idea,” and if so, whether it “contains an ‘inventive’ concept sufficient to ‘transform’ the claimed abstract idea into  a patent-eligible application.”  Citing Mayo, the Court again acknowledges that, when broken down into their basic elements, all inventions rely upon abstract ideas, natural phenomena, or laws of nature.  If that’s the case, we might ask why the Court added any of these exceptions into its §101 analysis in the first place.  After all, the Court’s “inventive concept” test for saving claims that are directed at abstract ideas really just looks like a hybrid novelty/non-obviousness determination.

Despite the remaining doctrinal confusion about how to apply the Court’s various pronouncements about which inventions are “abstract ideas” or “laws of nature” and which are not, the Court deserves credit for getting the most important question right.  At long last, it laid to rest the ridiculous argument that software isn’t patentable.  Are claims to computer-implemented inventions patent-eligible subject matter?  Of course they are.  Inventors in the high-tech industry can at least breathe a sigh of relief.  The Court has expressly recognized that the countless incredible technological inventions that form the bedrock of our innovation economy deserve patent protection.

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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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An Insightful Analysis of “Fair and Reasonable” in the Determination of FRAND Terms

By Steven Tjoe

In his forthcoming George Mason University Law Review article entitled “The Meaning of ‘Fair and Reasonable’ in the Context of Third-Party Determination of FRAND Terms,” Professor Damien Geradin explores the delicate balance of interests protected by the current system of arm’s length negotiations in the standard-setting process, and the detrimental effect disrupting this balance would have on standards-related technologies and our innovation economy.

Fair, reasonable, and non-discriminatory (“FRAND”) commitments are the subject of frequent criticism in both legal and economic literature.  Many policymakers, practitioners, and academics have argued that the inherent ambiguity in establishing “fair and reasonable” terms creates inefficiencies and perverse incentives for standard-essential patent (“SEP”) holders to exercise ex post opportunism.  Based on this belief, some now argue that the standard-setting organization (“SSO”) contracting process is broken and requires additional legal and regulatory mechanisms to afford standard implementers greater protection.

Professor Geradin’s article brings some much-needed balance to this debate.  By highlighting the economic principles and the carefully negotiated terms underlying current SSO contracting processes, Geradin exposes the pitfalls of many of the reforms suggested.  Geradin’s analysis elucidates the SSO contracting process itself through dissection of the intensive discussions and negotiations giving rise to the prominent ETSI Intellectual Property Rights (“IPR”) policy, a policy that played a fundamental standardization role in the wireless communication field.  The ETSI IPR policy shows that its members understood the notions of “fairness and reasonable” to define a fair balance between the interests of SEP holders and standard implementers – securing the availability of the standards while simultaneously ensuring that SEP holders are “adequately and fairly rewarded for the use of their [intellectual property rights].”

Professor Geradin addresses two potential forms of ex post opportunism – “hold-up” and “royalty stacking” – and observes that though both could occur in theory, there is little evidence to suggest that they occur in real-world patent licensing.  Regarding the hold-up conjecture, Geradin observes that the relative absence of hold-up is consistent with the economics of contracting: parties who repeatedly deal with each other will limit opportunism to protect their reputation.  Similarly, royalty stacking is a rare occurrence in high-technology, where cross-licensing is common and greatly diminishes the risk of royalty-stacking.  Given the absence of empirical evidence demonstrating opportunistic behavior by SEP holders, Geradin cautions against implementing reforms that systematically weaken the bargaining power of SEP holders, as proposed reforms may themselves trigger reciprocal opportunistic behavior – such as “reverse hold-up” – by standard implementers.

In the context of FRAND licensing, Geradin observes that for rewards to be adequate and fair, they must not only compensate SEP holders for their risky R&D investments (including investments in prior failed projects), they must also give SEP holders sufficient incentive to keep investing in the development of standardized technologies.  The negative consequences of systematically offering below-FRAND terms to SEP holders are two-fold.  First, as Geradin eloquently observes, “[i]t is a basic law of finance that capital flows where the best opportunities arise,” and developers of technologies in standardized sectors unduly constrained by low returns may seek opportunities outside the standardized sectors.  Second, without adequate returns, major technological contributors may decide to no longer participate in SSOs in order to avoid being bound by FRAND commitments.  As a result, standards would likely fail to incorporate the best technology available.

Accordingly, Geradin is skeptical of many of the policy measures suggested to provide additional protections to potential licensees and consumers of standardized technologies.  One such measure is the “ex ante incremental value method,” where the rate that would have resulted from ex ante competition between the technology in question and alternative technological solutions serves as a benchmark to whether a royalty is fair and reasonable.  As Geradin observes:

While the pricing of SEPs at incremental value may facilitate the dissemination of the standard in the short-term, the licensing fee resulting from the incremental value of the SEP holder’s technology would certainly not be enough to properly compensate the investment costs and risks [a] company incurred in developing its superior technology, as well as to incentivize it to make investment in new technologies.

With respect to this method, Geradin concludes that the “ex ante incremental rule is thus not so much an instrument to prevent the theoretical risks of hold-up, but a tool to lower royalty rates to the benefit of standard implementers.”  As such, the ex ante incremental value rule could potentially have a devastating impact on innovation incentives and standards.

Geradin next explores the multi-factor test contained in Georgia-Pacific Corp. v. United States Plywood Corp. (“Georgia-Pacific”).  In Georgia-Pacific, a federal district court established a framework by which fifteen factors offering a variety of benchmarks are used to compute reasonable royalty damages by contemplating a “hypothetical negotiation” between a “willing licensor” and “willing licensee” at the time the infringement began.  Geradin observes:

A key strength of the Georgia-Pacific framework is that it is sufficiently flexible to establish a balance between the dual objective of SSO’s IPR policies … which are both to ensure standard dissemination and adequate remuneration of the SEP holder.  In other words, unlike abstract mathematical methods, which … can be easily tipped in favor of the prospective licensee (or the prospective licensor), the multi-factor test at the core of the Georgia-Pacific framework reduces the risk of bias if it is properly carried out.

As such, the Georgia-Pacific framework can better reflect the reality of contract negotiations, where the parties look to a variety of factors, and not some magic formula, to come to mutually acceptable licensing terms.

In the context of FRAND litigation, however, Geradin cautions against potential pitfalls of applying the Georgia-Pacific framework.  At the outset, Geradin notes that licensing agreements are often “highly relationship-specific and thus agreements will be hard to compare.”  Geradin discusses the practice of comparing the rate offered ex post standardization by SEP holders with the rate offered for the same patents ex ante standardization.  Though many are inclined to treat the ex ante rate as a “safe harbor” against any claim of opportunism, Geradin finds that there is little reason why licensors should be prohibited from charging higher rates ex post than ex ante.  Not only may ex post contracts be more efficient in the way they incorporate a clearer understanding of the technology and the market, but also forcing SEP holders to charge similar ex ante and ex post rates deprives SEP holders of giving preferential terms to early adopters of their technology.

Professor Geradin then explores whether patent pools offer a useful benchmark to determine FRAND license terms.  Due to the difficulties of forming pools and the different business models of the relevant patent holders, many standardized sectors simply do not have sizeable patent pools covering their standards.  Even where sizeable patent pools exist, Geradin observes that the pools often will not serve as the right benchmark for FRAND rate determination.  In many standardized sectors, such as in wireless communications, patent pools tend to be used by SEP holders to avoid transactions costs, rather than to obtain FRAND compensation.  Moreover, many patent pools base their method of remuneration on the number of a firm’s patents compared to the size of the pool rather than the relative strength of the patents themselves.  Where numerical proportionality serves as the metric of FRAND compensation, such as in the recent In re Innovatio IP Ventures LLC case, SEP holders have the incentive to inflate the number of patents they contribute to the pool.  Thus, using patent pools as a benchmark runs the risk of setting rates that are well below FRAND.

The potential welfare-reducing consequences of limiting the flexibility of the SSO negotiation process has been well documented in recent legal and economic literature.  As Professor Geradin observes, solutions to perceived FRAND inadequacies that aim to weaken the bargaining position of SEP holders often overreach, in effect triggering the “wholesale devaluation of patents.”  Instead, FRAND determinations should consider the “dynamic nature of standardization” and should be determined by balancing the need to (1) make standards available and, (2) fairly compensate SEP holders.  This delicate balance of interests is necessary to protect the future of standardization.