Tag: patent assertion entity

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FTC Patent Law Uncategorized

FTC’s PAE Study Makes Unsupported Recommendations

Washington, D.C. at nightThe FTC released its long-awaited study of so-called patent assertion entities, or PAEs, today. As many predicted, the FTC makes several broad recommendations for substantive and procedural reforms. The problem with this, however, is that the study was not designed to reveal the sort of data that could support such policy recommendations.

The FTC itself even admitted this. When seeking approval from the Office of Management and Budget (OMB) to go ahead with the study, the FTC explained that its findings “will not be generalizable to the universe of all PAE activity.” In another submission to the OMB, the FTC acknowledged 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.” Now that the study is out, we see that the FTC has neglected to recognize the very limitations it once acknowledged to exist.

The simple fact is that the PAE study is just the first step down the long road to understanding the complicated world of PAEs. While the study’s results reveal some information about a handful of firms, they don’t—because they can’t—tell us how PAE activity affects competition and innovation in general. The sample size is too small, and the questions are too open-ended, to have any predictive power.

It’s clear that many had already jumped the gun, claiming both that we need this study to understand PAEs but that we know enough about PAEs to condemn them. They were going to use this study to argue for broad reforms no matter what it said. And now that the study is out, itself suggesting many fundamental changes, the anti-patent crowd has more fuel for the anti-inventor bonfire. That the study does not support its conclusions matters a great deal, and it’s disappointing that the FTC would use an exploratory study designed to simply suggest hypotheses to claim that those hypotheses have now been fully tested.

To better understand the limitations of the FTC’s study, here are some recommended readings:

Papers

  1. Anne Layne-Farrar, What Can the FTC’s §6(B) PAE Study Teach Us? A Practical Review of the Study’s Methodology
  2. Kristen Osenga, Sticks and Stones: How the FTC’s Name-Calling Misses the Complexity of Licensing-Based Business Models
  3. Fritz Scheuren, Statistics and the Paperwork Reduction Act: An FTC Case Study

Essays

  1. Devlin Hartline, Acknowledging the Limitations of the FTC’s PAE Study
  2. Devlin Hartline, How Rhetorical Epithets Have Led the FTC Astray in its Study of Patent Licensing Firms
  3. Anne Layne-Farrar, What Can the FTC’s PAE Study Teach Us?
  4. Kristen Osenga, Why the FTC Study on PAEs is Destined to Produce Incomplete and Inaccurate Results
  5. Fritz Scheuren, What Can We Learn From the FTC’s Patent Assertion Entity Study?
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.

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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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Uncategorized

Patent Licensing and Secondary Markets in the Nineteenth Century

The following post comes from CPIP Programs and Research Associate Terrica Carrington, a rising 3L at George Mason University School of Law, and Devlin Hartline, Assistant Director at CPIP. They review a paper from CPIP’s 2014 Fall Conference, Common Ground: How Intellectual Property Unites Creators and Innovators, that was recently published in the George Mason Law Review.

By Terrica Carrington & Devlin Hartline

In his paper, Patent Licensing and Secondary Markets in the Nineteenth Century, CPIP Senior Scholar Adam Mossoff gives important historical context to the ongoing debate over patent licensing firms. He explains that some of the biggest misconceptions about such firms are that the patent licensing business model and the secondary market for patents are relatively new phenomena. On the contrary, Mossoff shows that “famous nineteenth-century American inventors,” such as Charles Goodyear, Elias Howe, and Thomas Edison, “wholeheartedly embraced patent licensing to commercialize their inventions.” Moreover, he demonstrates that there was “a vibrant secondary market” where patents were bought and sold with regularity.

Like many inventors, Mossoff explains, it was curiosity—rather than market success—that drove Charles Goodyear to create. Despite having invented the process for vulcanized rubber, Goodyear “never manufactured or sold rubber products.” While he enjoyed finding new uses for the material, commercialization was not his niche. Instead, Goodyear “transferred his rights in his patented innovation to other individuals and firms” so that they could capitalize on his inventions. “As the archetypal obsessive inventor,” notes Mossoff, “Goodyear was not interested in manufacturing or selling his patented innovations.” In fact, his assignees and licensees “filed hundreds of lawsuits in the nineteenth century,” demonstrating that “patent licensing companies are nothing new in America’s innovation economy.”

Mossoff next looks at Elias Howe, best known for his invention of the sewing machine lockstitch in 1843, who “licensed his patented innovation for most of his life.” Howe was also famous for “suing commercial firms and individuals for patent infringement” and then entering into royalty agreements with them. It was Howe’s troubles with “noncompliant infringers” that “precipitated the first ‘patent war’ in the American patent system—called, at the time, the Sewing Machine War.” Howe engaged in “practices that are alleged to be relatively novel today,” such as “third-party litigation financing,” and he even joined “the first patent pool formed in American history,” known as “the Sewing Machine Combination of 1856.”

Finally, Mossoff discusses Thomas Edison, whom many consider to be “an early exemplar of the patent licensing business model.” Edison sold and licensed his patents, especially early on, so that he could fund his research and development. However, Edison is a “mixed historical example” since “he manufactured and sold some of his patented innovation to consumers, such as the electric light bulb and the phonograph.” Moreover, despite his “path-breaking inventions,” the marketplace was often dominated by his competitors. Mossoff notes that Edison was a better inventor than businessman: “At the end of the day, Edison should have stuck to the patent licensing business model that brought him his justly earned fame as a young innovator at Menlo Park.”

While some might call these inventors anomalies, Mossoff reveals that they were in good company with others who utilized the patent licensing business model to serve “one of the key policy functions of the patent system by commercializing patented innovation in the United States.” These include “William Woodworth (planing machine), Thomas Blanchard (lathe), and Obed Hussey and Cyrus McCormick (mechanical reaper)” and many others who “sold or licensed their patent rights in addition to engaging in manufacturing and other commercial activities.” This licensing business model continues to be used today by innovative firms such as Bell Labs, IBM, Apple, and Nokia.

Mossoff next rebuts the “oft-repeated claim” made by many law professors that “large-scale selling and licensing of patents in a secondary market is a recent phenomenon.” This claim is as “profoundly mistaken as the related assertion that the patent licensing business model is novel.” Mossoff notes that during the Sewing Machine War of the Antebellum Era, “the various patents obtained by different inventors on different components of the sewing machine were purchased or exchanged between a variety of individuals and firms.” As early as the 1840s, individuals acquired patents in the secondary market and used them to sue infringers.

In fact, Mossoff points out that it was not uncommon to see newspaper ads offering patents for sale in the nineteenth century:

The classified ads in Scientific American provide a window into this vibrant and widespread secondary market. In an 1869 issue of Scientific American, among ads touting the value to purchasers of “Woodbury’s Patent Planing and Matching and Moulding Machines” and ads declaring “AGENTS WANTED—To sell H.V. Van Etten’s Patent Device for Catching and Holding Domestic Animals,” one finds ads offering patents and rights in patents for sale:

Such ads were ubiquitous in the nineteenth century, says Mossoff, and they “belie any assertions about the absence of such historical secondary markets by commentators today.” Similarly, Mossoff points to research showing the “fundamental and significant role” performed by intermediaries known as “patent agents,” the “predecessors of today’s patent aggregators.” These patent agents invested in a wide range of products and industries—a remarkable feat given the “constraints of primitive, nineteenth-century corporate law and the limited financial capabilities of market actors at that time.”

In his brief yet insightful account of the history of patent licensing firms, Mossoff refutes the modern misconception that “the patent licensing business model and secondary markets in patents are novel practices today.” It’s important to set the record straight, especially as many in modern patent policy debates rely on erroneous historical accounts to make negative inferences. The evidence from the nineteenth century isn’t that surprising since it reflects “the basic economic principle of the division of labor that Adam Smith famously recognized as essential to a successful free market and flourishing economy.” Casting “aspersions on this basic economic principle,” Mossoff concludes, “strikes at the very core of what it means to secure property rights in innovation through the patent system.”

Categories
Commercialization History of Intellectual Property Innovation Patent Law Patent Licensing Patent Litigation Uncategorized

Guest Post by Wayne Sobon: A Line in the Sand on the Calls for New Patent Legislation

On June 9-11, the IP Business Congress sponsored by Intellectual Asset Magazine (IAM) hosted a debate on the resolution: “This house believes that the America Invents Act should be a legislative line in the sand and that no more reform of the US patent system is needed.” The debate was moderated by Denise DeFranco, a partner with the Finnegan law firm.  Arguing on behalf of the resolution were David Schwartz, Associate Professor of Law at Chicago-Kent College of Law, and Wayne Sobon, Vice President and General Counsel of Inventergy, Inc.  Arguing against the resolution were Michael Meurer, Professor of Law at Boston University School of Law and Dan Lang, Vice President, Intellectual Property, Cisco.  

With Mr. Sobon’s permission, we are publishing here a slightly modified version of his opening statement at the IP Business Congress debate. Mr. Sobon spoke for himself and not on behalf of his employer or any other institutions.

A Line in the Sand on the Calls for New Patent Legislation

Wayne Sobon
Vice President & General Counsel, Inventergy

With the June 4, 2013 announcement by the Obama Administration of a new set of legislative priorities to change our patent laws yet again, bolstered by a chorus of academics and interested corporations, there are now four separate bills in Congress (with more coming) proposing a wide range of changes to the patent system. Fresh from the seven-year battle that concluded with the America Invents Act of 2011, we once more face a highly emotionally-driven campaign to alter the rules of the field, replete with name-calling (“trolls”).

But just as with our personal conflicts, the best way forward usually comes once we let emotions cool and we dispassionately take a longer view.

We just spent the better part of a decade — following significant research, public hearings, the reports of the National Academies of Science and the FTC, and the testimony of a wide variety of NGOs, corporations, and private inventors and citizens — debating and then approving the most significant changes to our patent system since the 1952 Act.  The America Invents Act of 2011was argued in forums like this and on the floor of our Congress as the needed corrective for poor-quality patents, claimed by so-called “trolls” to hold up and oppress innovative companies.

Various companies such as Cisco testified before Congress that the sweeping collection of provisions that make up the AIA were necessary to achieve these policy goals.  When it was enacted, it was heralded as “the most significant reform of the U.S. patent system since 1836.” Yet the ink is barely dry, and the voluminous regulations implementing the AIA have barely been set in motion, when the same group of academics and industry players are once again demanding sweeping new changes to the patent laws.

The United States intellectual property system is a precious resource.  Indeed, the Founding Fathers saw a unified, national regime of patent laws as so crucial to our democracy that they enshrined it as one of the key powers of Congress.  Unanimously and without debate, they passed Article 1, Section 8, Clause 8 of our Constitution.  One of the first acts of the first Congress was to pass the Patent Law of 1790.  That law has only been significantly amended five times in the last 220 some years.  Five times.  1793‎, 1836, 1870, 1952 and 2011.

One genius of our patent system has been an implicit recognition that since its underlying subject matter, innovation, remains by definition in constant flux, the scaffolding of our system and the ability of all stakeholders to make reasonably consistent, prudent and socially efficient choices, should remain as stable as possible.  But now these latest moves, demanding yet further significant changes to our patent laws, threaten that stability.  And it is in fact systemic instability, from whatever source, that allows the very parasitic behaviors we have termed “troll”-like, to flourish.

It is silly and blindly ahistoric to lump anyone who seeks to license or enforce a patent right, but who does not themselves make a corresponding product, as a “troll.”  Many arguments about Non-Practicing Entities (NPE), Patent Assertion Entities (PAE), Patent Licensing Assertion Entities (PLAE) — the various formal names and acronyms for the more commonly known epithet, “patent troll” — include an implicit and often explicit emotional condemnation of any patent holder who either did not invent or does not manufacture the patented products.  The President’s statements unfortunately are replete with such derision of people or firms who “don’t actually produce anything themselves.”

Yet, from the very outset, our American patent system distinguished itself from its English predecessor, by establishing the unfettered sale in the marketplace of patent rights, precisely because patents are private property rights (see here, here, and here).  In England, patent monopolies were still mostly creatures of the Crown — personal privileges. See B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (Cambridge University Press, 2005), pp. 36-38.  The United States patent system, based upon objective criteria for inventiveness and established in freely-alienable property rights, was as significant a revolution in the commercial sphere as the federalist structure was in the political.  Id., pp. 49-51, 60-62. And it’s hard to argue against the unprecedented success of the American economy based on the patented innovation protected by these laws.

And indeed, it might come as a surprise, that many of the inventor giants we hold in such high regard today in fact never manufactured the products covered by their patents.  Elias Howe did not make sewing machines.  Rather, having invented the hugely important lock-stitch technology, but being poor himself, he assembled financing, using then novel securitization of patents, and then licensed his patent to others (and famously, fought the equivalent of our smart phone wars, against Singer). Charles Goodyear never manufactured any rubber; he licensed his vulcanization process to others.  Thomas Edison also received third-party financing to operate his famous invention factory in Menlo Park, and he licensed his patented inventions to other companies for manufacture and sale in the marketplace, such as his invention of the first electric pen.  And when the unscrupulous refused to pay licenses, each of these inventors of course moved to enforce.

Rather than focus on practicing vs. non-practicing, as manufacturing and licensing are both equal rights in practicing a property right, let’s focus instead on parasitic behaviors. Let’s respect the genius of our Founders, and make few if any changes to the structure of our system.  And let’s focus on specific, targeted interventions that can actually cut off the systemic rot upon which parasitic behavior thrives.

Here are two important areas that could benefit from targeted interventions: (1) the high costs of litigation for all participants, and (2) the rampant and extended uncertainty of patent disputes.  Both of these interventions rest soundly in the discretion of our Federal Courts.  We already have the tools to bring down discovery costs (I’d argue we need less discovery than what we spend so much time, money, energy and emotion on to yield valid, fair results).  And as noted by now-former Chief Judge Randall Rader in his many public comments, judges already have the legal and procedural tools to cull sham lawsuits from the courts.  It just requires exercising judgment, as they ably can and do.  That’s why they’re called judges.

We do not need yet more statutory changes, changes that will engender more uncertainty and another decade of resulting litigation, to achieve the particular policy goals here.  We simply need our judges and our existing system to do the job they already have.