Patent troll supporters are ramping up efforts – a response

Many Patent Progress readers have likely noticed the groundswell of interest directed at addressing the patent troll problem plaguing high-tech innovators.  In January, the U.S. Patent and Trademark Office (USPTO) held a roundtable to discuss the impact of obfuscatory patent ownership tactics, such as trolls’ use of shell companies. Last month, the Patent Progress panel discussion explored “how patent trolls are harming innovation” on Capitol Hill.  Companies, advocacy groups and two Members of Congress spoke to a standing-room-only crowd about the need to address the economic harms caused by abusive patent litigation spearheaded by trolls.  And just last week, the House Judiciary Committee held a hearing on the impacts that abusive patent litigation has on innovation and jobs, and potential solutions for addressing those harms.

These examples are but the tip of the iceberg of the attention that the patent troll problem has received in recent weeks and months.  However, this attention has led to a counter-attack.  Patent assertion entity (PAE) representatives and parties interested in maintaining the status quo have begun to push back against this broad-based pro-reform momentum by challenging whether the patent troll problem even exists.

A blog post from George Mason University’s Adam Mossoff represents the most recent attempt to challenge the notion patent trolls are a serious threat to our innovation economy.  Prof. Mossoff challenges the well-regarded and widely cited study by Boston University academics James Bessen and Michael Meurer, which seeks to quantify the impacts brought to bear on the economy by non-practicing entities, or trolls.

Later today, Prof. Mossoff will appear at a panel event at George Washington University on software patents.  In the past, Mossoff has cited the railroad and sewing machine patent disputes of the 19th century as evidence that there’s nothing new with recent patent litigation in the smartphone space.  His argument is those seeking meaningful reforms to address patent troll abuses are misguided because there’s nothing new here.

But there is something new.  The alarming rise in patent troll litigation, which now accounts for 61% of all patent litigation compared with just 19% of patent litigation in 2006, demands legislative action.  The stories of patent troll extortion are real. Unknowing office workers have been targeted by trolls for scanning a document to a coworker.  The costs are real too. Businesses reached $29 billion in costs in 2011 alone.  These risks are ignored at our own peril.

The following notes arguments from Prof. Mossoff’s recent blog post and attempted to set the record straight.

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1. Mossoff:  “First, and most absurdly, this definition [of non-practicing entity or NPE used by Bessen & Meurer], by necessity, includes every university in the world that sues someone for infringing one of its patents, as universities don’t manufacture goods.”

Response:  The U.S. Federal Trade Commission (FTC) adopted NPE as “a neutral term” to describe assertion entities in its seminal 2003 report, “To Promote Innovation.” Independent academic work has shown that the number of other entities that critics are worried about (e.g., universities, companies that design and transfer technology) are a very small part of the sample and would not materially change the numbers.  One need not quibble over minor differences in the numbers when the size of problem is indisputably very large.  The important point is that the rise in litigation demonstrates that the troll business model is exploiting flaws in the patent system, which should be addressed directly.

Bessen & Meurer used the definition of NPE used by RPX to collect data, which achieves similar conclusions to those of Patent Freedom, another well-regarded entity monitoring and analyzing the rise of patent troll activity.  The RPX and Patent Freedom databases find a nearly identical number of NPE suits: in 2012 Patent Freedom counts 2923 suits; RPX counts 2921.  More to Mossoff’s point, Santa Clara Law patent expert Prof. Colleen Chien drills down into these numbers and points out  the RPX data shows a whopping 94% of assertions from PAEs are based on corporate patents with only one percent of assertions coming from university patents.  The small number of universities and technology transfer companies in the overall cohort of PAEs has been confirmed by additional studies:

  • PriceWaterhouseCooper’s 2012 Patent Litigation Study found that universities are only 5% of NPE plaintiffs.

  • In an earlier study on the impacts of patent trolls on startups, Colleen Chien independently analyzed the RPX database of NPE assertions from 2005-2012 to identify patent assertion entities and exclude technology transfer companies and universities from her study, and found that this only reduced the sample size by four percent.

  • Prof. Robin Feldman of UC Hastings used a narrow definition to identify suits by “patent monetizers” from 2007-2011 in her study for GAO.  On average, she found only one percent fewer suits than the RPX data.  (Comparison of Feldman and RPX data by Chien at slide 33 here.)  Feldman finds that university suits are a trivial percentage, only 0.2%, of the sample.

In any case, lawsuits are only the tip of the iceberg of patent troll activity: it is estimated that for every lawsuit, there are 50 demand letters.

2. Mossoff:  “The $29 billion cost study also assumes that all litigation transaction costs are deadweight losses, which would mean that the entire U.S. court system is a deadweight loss according to the terms of this study.  Every lawsuit, whether a contract, tort, property, regulatory or constitutional dispute is, according to the assumption of the $29 billion cost study, a deadweight loss.  The entire U.S. court system is an inefficient cost imposed on everyone who uses it.”

Response:  NPEs have long claimed that they exist primarily to help small, resource-constrained inventors rightfully recoup their investments in R&D and patenting.  This claim is not supported by data analyzing return to inventors from PAE activity and is inconsistent with what small inventors and developers of new technology actually experience.

At the FTC’s December workshop on patent assertion entity (PAE) activities, RPX clearly explained what the data shows: original inventors see little benefit from PAE activities.  In one case, as much as 90 percent of the PAE’s revenues stayed with lawyers and investors who feed trolls, with only a small portion going to the person or entity responsible for that invention.  A more recent PatentlyO post from Bessen & Meurer shows only a paltry 26 percent of PAE licensing revenues flow back to the original inventor.

This data shows the PAE business model generates huge transactions costs with little residual benefit for the real innovators.

3. Mossoff:  “In addition to the methodological problems, there are also serious concerns about the trustworthiness and quality of the actual data used to reach the $29 billion claim in the study.  All studies rely on data, and in this case, the $29 billion study used data from a secret survey done by RPX of its customers.  For those who don’t know, RPX’s business model is to defend companies against these so-called “patent trolls.”  So, a company whose business model is predicated on hyping the threat of “patent trolls” does a secret survey of its paying customers, and it is now known that RPX informed its customers in the survey that their answers would be used to lobby for changes in the patent laws.”

Response:  Bessen, Meurer, Chien and Feldman are well-respected academics who are studying an undeniable trend and problem in the patent system.  The RPX data is confidential because trolls force NDA agreements on settlements and the data had to be collected pursuant to these restrictions.  Trolls can hardly complain about transparency when the opacity of the data is their own handiwork.

4. Mossoff:  “As every reputable economist or statistician will tell you, such conditions encourage exaggeration and bias in a data sample by motivating participation among those who support changes to the patent law.  Such a problem even has a formal name in economic studies: self-selection bias.”

Response:  The $29 billion number is based on hard data on direct costs spent by companies in direct payouts to trolls and the outside legal costs to fight trolls.  It underestimates the true cost because it does not take into account in-house costs for companies, including the distraction of engineers and executives to deal with the demands and lawsuits and the fruits of money that would have been in an R&D budget that ended up in a legal budget.  Using a different technique, Bessen & Meurer have estimated this cost to be $80 billion per year in recent years, and a half-trillion dollars in economic costs from 1990-2010.

The $29 billion number is also conservative because it cannot fully account for the cost of dealing with demand letters, which are harder to track. As former Apple counsel Chip Lutton noted in sworn testimony to Congress, Apple receives 25 demand letters for every case that gets litigated. Just talk to counsels at any major tech or retail company and one will quickly learn Apple is not alone. There are real costs in dealing with these demand letters.  As trolls continue to embrace a business model based on nuisance demands driven by the high cost of litigation, this problem will only get worse.

From a purely technical standpoint, the extrapolation methodology (calculating total cost based on companies that reported data) is sound and widely used.  It took into account different types of PAEs and defendants to avoid the bias that Kesan and Schwartz point out (see pp. 7-8 of “The Direct Costs of NPE Disputes”).  The sample size was large enough and varied enough to be statistically significant and reliable.

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In conclusion, when our leading technology companies, innovative start-ups and developers, Members of Congress, thousands of podcasters targeted by patent trolls, judges, local grocery stores and retailers all agree that there is a patent troll problem, it’s too late to bury one’s head in the sand and pretend that a problem doesn’t exist.