“[T]his Article studies all awards granted for findings of patent infringement in U.S. district courts between 1995 and 2011, and, with targeted analyses, focuses on cases involving patent assertion entities (“PAEs”). This Article specifically investigates certain principal assumptions about patent assertion which have been raised in the debate and further tests some of the leading policy proposals that are currently being considered. In so doing, this Article seeks to inform the “patent troll” debate and helps answer some of the key questions driving it.” (957-58)
There is tremendous interest in a certain type of patent litigant — the often-called non-practicing entity (“NPE”), patent assertion entity (“PAE”), patent monetization entity (“PME”), or simply patent troll. These NPEs are the subject of a recent GAO report, a possible FTC investigation, pending legislation before Congress, and even comments from the President of the United States. All of this commentary and activity centers on whether NPE participation in patent litigation, and the patent system in general, is detrimental or beneficial to society. But the fundamental barrier to understanding the current debate is the lack of granular and transparent data on NPE litigation behavior.
Accordingly, we personally hand-coded all patent holder litigants from calendar years 2010 and 2012, and we are releasing this data to the public. In our coding, we drill down and finely classify the nature of the litigants beyond the simple NPE or non-NPE definitions. Releasing this data to the public that unpacks the definition of NPE can provide better illumination to policy makers, researchers, and others interested in the patent litigation system.
The data reveals a much lower percentage of litigation brought by patent holding companies than other studies, finding no explosion in NPE litigation between 2010 and 2012. Instead, we find that most differences between the years — an increase in the number of patent holding companies and individual inventor suits — is likely explained by a change in the joinder rules adopted in 2011 as part of the America Invents Act.
Graham Stuart H.H., Merges Robert P., Samuelson Pam, and Sichelman Ted, High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey, 24 Berkeley Tech. L. J. 1255 (2009)
We offer description and analysis of the 2008 Berkeley Patent Survey, summarizing the responses of 1,332 U.S.-based technology startups in the biotechnology, medical device, IT hardware, software, and Internet sectors. We discover that holding patents is more widespread among technology startups than has been previously reported, but that the patterns and drivers of holding patents are industry and context specific. Surprisingly, startup executives report in general that patents are providing relatively weak incentives for core activities in the innovation process. Our analysis uncovers that the drivers of startup patenting are often associated with capturing competitive advantage, and the associated goals of preventing technology copying, securing financing, and enhancing reputation – although again these and other motives depend on firm and industry factors. We also find substantial differences in the roles played by patents for startups in the biotechnology and medical device sectors – where patents are more commonly used and considered important – as compared to those operating in the software and Internet fields – where they are less useful. Interestingly, venture-backed IT hardware startups tend to resemble those in health-related fields in terms of their use of and motives for patenting. We generally find a wide disparity between the patenting behavior of venture-backed technology startups and those that are not funded with venture capital. We also discover that, when choosing not to patent major innovations, startups often cite to cost considerations, although again the motives to forgo patenting differ according to firm and industry characteristics. The respondents to our survey also generally report that checking the patent literature and licensing patents from others is reasonably common, although there too results differ according to the context. Other findings are discussed.
This paper presents the first study in the royalty rates earned by NPE licensors. Based on the royalty data from two major vendors, ktMine and RoyaltySources, the study examines the royalty rates in license agreements with NPE licensors, and compares them with the rates reported in other comparable licenses. The econometric analysis fails to reject the hypothesis that the royalty rates obtained by NPEs are not different than the rates charged by practicing company licensors. The conclusion remains robustly true with or without controlling the effects of upfront payments, exclusivity, and industries. The finding, coupled with other major ones from the relevant empirical studies in NPEs and patents, raised four interesting issues, which are summarized by this paper as NPE success rate puzzle, NPE valuation puzzle, value metrics relevance puzzle, and value consistency puzzle. Six topics for further research are proposed during the discussion about the puzzles.
Risch, Michael, A Generation of Patent Litigation: Outcomes and Patent Quality, San Diego Law Review (Forthcoming 2015)
Unsurprisingly, the data shows that the studied NPE patents were found invalid and noninfringed about twice as often as the comparable nonNPEs. But there is more to the story. First, summary judgment challenges were denied at about the same rate. Second, most cases never tested the patent at all: the invalidations were bunched into 3% of the cases. Third, about 17% of the NPE cases involved a patent that was later invalidated, as compared to 3% for the nonNPEs. This left 75% of NPE cases with patents that were never tested and did not involve a patent invalidated at any time (as compared to 90% of nonNPE cases). Thus, one’s view of the data will depend on views about motivations in asserting patents that wind up invalid later and the merits of settlements. The paper presents data about settlements, consent judgments, defaults, and the like, but ultimately takes no position on the quality of untested patents.
Other major findings include:
- NPE cases are shorter duration than non-NPE cases, even though they are transferred and consolidated more often. Even with transferred cases, NPE cases are shorter.
- A patent’s likelihood of being invalidated has almost nothing to do with objectively observable patent metrics – including reexamination data. Instead, the odds of invalidation are driven by those cases that are more likely to have a challenge, like the number of defendants or number of patents in the case. Once variables that indicate challenges are considered, a party’s status as NPE added no explanatory power.
- One patent metric was statistically significant in predicting invalidation: backward citations, or the number of prior patents that a patent refers to. But the sign was surprising: the more citations in the patent, the more likely it was found invalid. This may mean that backward citations are another selection variable – patents citing many other patents may be more likely to be highly controversial and thus challenged. This finding implies, however, that ‘gold plating’ patents may not be as beneficial as first thought.Sag, Matthew, IP Litigation in United States District Courts: 1994 to 2014 (Feb. 26, 2015), Iowa Law Review (Forthcoming)Abstract:
This article undertakes a broad-based empirical review of Intellectual Property (IP) litigation in United States federal district courts from 1994 to 2014. Unlike the prior literature, this study analyzes federal copyright, patent and trademark litigation trends as a unified whole. It undertakes a systematic analysis of more than 190,000 individual case filings and examines the subject matter, geographical and temporal variation within federal IP litigation over the last two decades.This article makes a number of significant contributions to our understanding of IP litigation. It analyzes time trends in copyright, patent and trademark litigation filings at the national level, but it does much more than simply count the number of cases; it explores the meaning behind those numbers and shows how in some cases the observable headline data can be positively misleading. Exploring the changes in the distribution of IP litigation over time and their regional distribution leads to a number of significant insights, these are summarized below. Just as importantly, one of the key contributions of this article is that it frames the context for more fine-grained empirical studies in the future. Many of the results and conclusions herein demonstrate the dangers of basing empirical conclusions on narrow slices of data from selected regions or selected time periods.Some of the key findings of this study are as follows:First, the rise of Internet file-sharing has transformed copyright litigation in the United States. More specifically, to the extent that the rate of copyright litigation has increased over the last two decades, that increase appears to be entirely attributable to lawsuits against anonymous Internet file sharers. These lawsuits largely took place in two distinct phases: the first phase largely consisted of lawsuits seeking to discourage illegal downloading; the second phase largely consists lawsuits seeking to monetize online infringement.Second, in relation to patent litigation, the apparent patent litigation explosion between 2010 and 2012 is something of a mirage; however there has been a sustained patent litigation inflation over the last two decades the extent of which has not been fully recognized until now. The reason why this steady inflation was mistaken for a sudden explosion was that the true extent of patent litigation was disguised by permissive joinder.Third, in relation to the geography of IP litigation, it appears that filings in copyright, patent and trademark litigation are generally highly correlated. The major exceptions to that correlation are driven by short term idiosyncratic events in copyright and trademark litigation — these are discussed in detail — and by the dumbfounding willingness of the Eastern district Texas to engage in forum selling to attract patent litigation. The popularity of the Eastern District of Texas as a forum for patent litigation is a well-known phenomenon. However, the data and analysis presented in this study provides a new way of looking at the astonishing ascendancy of this district and the problem of forum shopping in patent law more generally.
In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far-reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-standard and misguided definitions of economic terms of art such as “ex ante” and “hold-up,” while urging new inefficient rules for calculating damages for patent infringement. Stripped of the technicalities, the FTC Proposal would so reduce the costs of infringement by downstream users that the rate of infringement would unduly increase, as potential infringers find it in their interest to abandon the voluntary market in favor of a more attractive system of judicial pricing. As the number of nonmarket transactions increases, the courts will play an ever larger role in deciding the terms on which the patents of one party may be used by another party. The adverse effects of this new trend will do more than reduce the incentives for innovation; it will upset the current set of well-functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. Such a trend would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote.
In this paper, we examine how these consequences play out in the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC’s proposed definitions of “reasonable royalties” and “incremental damages” become the rules for calculating damages in patent infringement cases, the stage will be set to allow the FTC and private actors to attack, after the fact, all standard pricing methods through some combination of antitrust litigation or direct regulation on the ground that such time-honored royalty arrangements involve the use of monopoly power by patent licensors. In consequence, the FTC’s Proposal, if adopted, could well encourage potential licensees to adopt the very holdout strategies the FTC purports to address and that well-organized SSOs routinely counteract today. Simply put, the FTC’s proposal for regulating IP by limiting the freedom of SSOs to set their own terms would replace private coordination with government hold-up. The FTC should instead abandon its preliminary recommendations and support the current set of licensing tools that have fueled effective innovation and dissemination in the IP marketplace. FTC forbearance from its unwise Proposal will improve bargaining incentives, reduce administrative costs, and remove unnecessary elements of legal uncertainty in the IP system, thereby allowing effective marketplace transactions to advance consumer welfare.
Firm structure and the degree of vertical integration lie at the core of a key intellectual property concern currently under debate: “patent trolls.” While court opinions and competition agency decisions have focused on “non-practicing” patent holders as synonymous with trolls and hold up problems, this view of upstream specialists is far too narrow. In fact, patents in the hands of nonpracticing entities can increase competition, increase innovation, lower downstream prices, and enhance consumer choice. We explain why and when and argue for more business-model-neutral policy when it comes to patent licensing. Clearly, patents are a complex subject that cannot be portrayed as either all good or all bad; tradeoffs will always be involved. Likewise, patents in the hands of nonpracticing entities cannot be viewed as either all good or all bad. Without a better understanding of the many complicated effects of patents in high technology markets, we run the very real risk of misguided policy decisions. In light of that risk, we argue that more attention needs to be devoted to finding meaningful ways of identifying harmful behaviors, rather than on categorical labels based on firm structure or business model.
The most significant changes to the patent and innovation system in the past two centuries have been, or are in the process of being, implemented in the United States today. Critics of patent grants and intellectual property institutions propose alternatives such as unprecedented constraints on the rights of patent owners, and many advocate the award of technological prizes as superior alternatives. Such proposals are motivated by claims that the patent system is in crisis, with new developments that require departures from traditional approaches to property rights and technology policy. The historical record sheds light on the nature and validity of these controversies. In particular, data on patents granted, litigation rates over the past two centuries, and the role of non-practicing entities, indicate that these features of the current market in intellectual property are hardly anomalous. Indeed, they have been inherently associated with disruptive technologies that transformed the United States into the world leader in industrial and economic growth. By contrast, extensive empirical analyses of prize systems in Europe and the United States explain why early enthusiasm about such administered nonmarket-oriented awards had waned by the end of the nineteenth century.
Lunney, Glynn, On the Continuing Misuse of Event Studies: The Example of Bessen and Meurer. 16 Journal of Intellectual Property Law 35 (2008)
“While I am generally sympathetic to Bessen and Meurer’s analysis and their recommended reforms, I am deeply troubled by their use of a stock market event study to establish the true cost of patent litigation.” (36)
“[W]hat empirical testing has repeatedly shown is that the change in market capitalization associated with certain kinds of bad news, such as the filing of a lawsuit, exceeds, often by an order of magnitude, any reasonable estimate of the capitalized loss in the firm’s expected future earnings associated with the bad news.” (37)
“Unfortunately, because Bessen and Meurer rely on the event study to establish the costs of patent litigation, without it they have no means for establishing the social or private costs of patent litigation. The increase in patent lawsuit filings alone or the differences in probability that a patent will become the basis for a lawsuit ‘lack clear economic significance.’” (54)
Osenga, Kristen, Formerly Manufacturing Entities – Piercing the “Patent Troll” Rhetoric, 47 Connecticut Law Review 435 (2014)
Reilly, Greg, Linking Patent Reform and Civil Litigation Reform, 47 Loy. U. Chi. L.J. (2015, Forthcoming)
Treating patent litigation as exceptional has a siloing effect. Patent reform debates ignore parallel debates over general civil litigation reform that raise the same arguments about disproportionately expensive and burdensome discovery and propose their own set of reforms. This Article links patent reform to civil litigation reform, arguing that patent discovery is not exceptional in its costs, supposed effects, or causes. Instead, patent discovery is representative of a subset of discovery-intensive civil cases. The main problem with discovery in patent cases is not abusive tactics of ‘patent trolls’ or inherent technical complexity but rather complex and open-ended remedial doctrines. Doctrinal complexity is not unique to patent litigation.
Pinpointing the source of patent discovery problems also suggests a solution – delaying costly and burdensome remedial discovery until after liability is established. This solution need not be limited to patent cases. Greater use of staged litigation – litigating and resolving some potentially case-dispositive issues before any discovery or other litigation occurs on more discovery-intensive issues – is a potentially valuable tool for reforming general civil litigation. Notably, staged litigation preserves the plaintiff’s access to information and right to a jury trial, overcoming objections to other efforts to reduce civil litigation costs, like Twombly/Iqbal plausibility pleading.
Risch, Michael, Licensing Acquired Patents, 21 George Mason Law Review 979 (2014)
“This Essay, presented at the ‘New Business Models and New Opportunities’ panel of the ‘Commercial Function of Patents in Today’s Innovation Economy’ conference, makes two claims. First, it argues that broad-based patent acquisition for the purposes of licensing is a somewhat new business model, despite some historical counterexamples. If anything, the counterexamples shed light on today’s marketplace. Second, it describes ways that acquired patent licensing might aid commercialization, despite concerns about the business model’s negative impact on social benefits.” (979-80)
“Part I begins by describing the four phases of potential licensing and technology transfer. Part II then explains where licensing acquired patents fits into the system, now and historically. Finally, Part III argues that acquired patent licensing may provide some commercialization benefits, even for patents that are likely to lose in court. If so, the current state of affairs may be a transitional period in which licensing acquired patents enables improved future technology transfer.” (981)
Currently, there is an important debate about the role of non-practicing entities in patent litigation. People are asking: what are the costs and benefits associated with NPE litigation? Are they too high, too low, or just right? This paper makes two contributions to the discussion. First, we review a recent study, “The Direct Costs of NPE Disputes,” by James Bessen and Michael J. Meurer. The study presents new data on the litigation costs and settlement expenses incurred by a subset of defendants in NPE cases. Some of their findings are provocative, but we find their methodology to be deficient in several respects, which limits the usefulness of the data and thus the implications that can be drawn from them. We also offer suggestions for future research on NPEs, including data collection and analysis. Second, we argue that the study asks the wrong question. The debate should be reframed to focus on the merits of the lawsuits, including patent system changes focusing on reducing transaction costs (e.g., lawyers’ fees) in patent litigation, instead of focusing solely on whether the patent holder is a non-practicing entity.
Sichelman, Ted, Are Patent Trolls ‘Opportunistic’?, San Diego Legal Studies Working Paper No. 14-175 (2014)
The paper develops a comprehensive framework demonstrating how patents provide the foundation of the market for inventions. Patents support the establishment of the market in several key ways. First, patents provide a system of intellectual property (IP) rights that increases transaction efficiencies and stimulates competition by offering exclusion, transferability, disclosure, certification, standardization, and divisibility. Second, patents provide efficient incentives for invention, innovation, and investment in complementary assets so that the market for inventions is a market for innovative control. Third, patents as intangible real assets promote the financing of invention and innovation. The market foundation role of patents refutes the economically incorrect “rewards” view of patents. The discussion considers how economic benefits of the market for inventions should guide IP policy and antitrust policy.
Competition and intellectual property (IP) protections are complements in stimulating innovation. When IP is appropriable, a market for inventions forms and competitive pressures increase incentives to innovate. Competition among producers, the demand side of the market for inventions, and competition among inventors, the supply side of the market for inventions, create incentives to innovate. When IP is not fully appropriable, markets for inventions are limited and competitive pressures can decrease incentives to innovate. Firms vertically integrate R&D and production and share technology to appropriate the returns to IP. This implies that antitrust policy and IP protections are complements.
Industries with technological standards can be highly competitive and innovative. The modern approach to Innovation Economics understands that technology standards, the competitive conduct of firms, and the economic performance of innovative industries are endogenous and jointly determined. Market competition and standards organizations endogenously determine technology standards, which are consistent with innovative efficiency. This contrasts with traditional Innovation Economics, which can be summarized as a “Standards-Conduct-Performance” paradigm. The traditional view, which is reminiscent of the traditional Industrial Organization “Structure-Conduct-Performance” paradigm, incorrectly assumes that technology standards are exogenous and cause imperfectly competitive conduct and inefficient economic performance. Instead, studies of innovation should apply game-theoretic models that account for strategic interaction and empirical tools that control for the interplay among technology standards, competitive conduct, and economic performance.