Archives For patent assertion entity

It’s not quite so simple to spur innovation. Just ask the EU as it resorts to levying punitive retroactive taxes on productive American companies in order to ostensibly level the playing field (among other things) for struggling European startups. Thus it’s truly confusing when groups go on a wholesale offensive against patent rights — one of the cornerstones of American law that has contributed a great deal toward our unparalleled success as an innovative economy.

Take EFF, for instance. The advocacy organization has recently been peddling sample state legislation it calls the “Reclaim Invention Act,” which it claims is targeted at reining in so-called “patent trolls.” Leaving aside potential ulterior motives (like making it impossible to get software patents at all), I am left wondering what EFF actually hopes to achieve.

“Troll” is a scary sounding word, but what exactly is wrapped up in EFF’s definition? According to EFF’s proposed legislation, a “patent assertion entity” (the polite term for “patent troll”) is any entity that primarily derives its income through the licensing of patents – as opposed to actually producing the invention for public consumption. But this is just wrong. As Zorina Khan has noted, the basic premise upon which patent law was constructed in the U.S. was never predicated upon whether an invention would actually be produced:

The primary concern was access to the new information, and the ability of other inventors to benefit from the discovery either through licensing, inventing around the idea, or at expiration of the patent grant. The emphasis was certainly not on the production of goods; in fact, anyone who had previously commercialized an invention lost the right of exclusion vested in patents. The decision about how or whether the patent should be exploited remained completely within the discretion of the patentee, in the same way that the owner of physical property is allowed to determine its use or nonuse.

Patents are property. As with other forms of property, patent holders are free to transfer them to whomever they wish, and are free to license them as they see fit. The mere act of exercising property rights simply cannot be the basis for punitive treatment by the state. And, like it or not, licensing inventions or selling the property rights to an invention is very often how inventors are compensated for their work. Whether one likes the Patent Act in particular or not is irrelevant; as long as we have patents, these are fundamental economic and legal facts.

Further, the view implicit in EFF’s legislative proposal completely ignores the fact that the people or companies that may excel at inventing things (the province of scientists, for example) may not be so skilled at commercializing things (the province of entrepreneurs). Moreover, inventions can be enormously expensive to commercialize. In such cases, it could very well be the most economically efficient result to allow some third party with the requisite expertise or the means to build it, to purchase and manage the rights to the patent, and to allow them to arrange for production of the invention through licensing agreements. Intermediaries are nothing new in society, and, despite popular epithets about “middlemen,” they actually provide a necessary function with respect to mobilizing capital and enabling production.

Granted, some companies will exhibit actual “troll” behavior, but the question is not whether some actors are bad, but whether the whole system overall optimizes innovation and otherwise contributes to greater social welfare. Licensing patents in itself is a benign practice, so long as the companies that manage the patents are not abusive. And, of course, among the entities that engage in patent licensing, one would assume that universities would be the most unobjectionable of all parties.

Thus, it’s extremely disappointing that EFF would choose to single out universities as aiders and abettors of “trolls” — and in so doing recommend punitive treatment. And what EFF recommends is shockingly draconian. It doesn’t suggest that there should be heightened review in IPR proceedings, or that there should be fee shifting or other case-by-case sanctions doled out for unwise partnership decisions. No, according to the model legislation, universities would be outright cut off from government financial aid or other state funding, and any technology transfers would be void, unless they:

determine whether a patent is the most effective way to bring a new invention to a broad user base before filing for a patent that covers that invention[;] … prioritize technology transfer that develops its inventions and scales their potential user base[;] … endeavor to nurture startups that will create new jobs, products, and services[;] … endeavor to assign and license patents only to entities that require such licenses for active commercialization efforts or further research and development[;] … foster agreements and relationships that include the sharing of know-how and practical experience to maximize the value of the assignment or license of the corresponding patents; and … prioritize the public interest in all patent transactions.

Never mind the fact that recent cases like Alice Corp., Octane Fitness, and Highmark — as well as the new inter partes review process — seem to be putting effective downward pressure on frivolous suits (as well as, potentially, non-frivolous suits, for that matter); apparently EFF thinks that putting the screws to universities is what’s needed to finally overcome the (disputed) problems of excessive patent litigation.

Perhaps reflecting that even EFF itself knows that its model legislation is more of a publicity stunt than a serious proposal, most of what it recommends is either so ill-defined as to be useless (e.g., “prioritize public interest in all patent transactions?” What does that even mean?) or is completely mixed up.

For instance, the entire point of a university technology transfer office is that educational institutions and university researchers are not themselves in a position to adequately commercialize inventions. Questions of how large a user base a given invention can reach, or how best to scale products, grow markets, or create jobs are best left to entrepreneurs and business people. The very reason a technology transfer office would license or sell its patents to a third party is to discover these efficiencies.

And if a university engages in a transfer that, upon closer scrutiny, runs afoul of this rather fuzzy bit of legislation, any such transfers will be deemed void. Which means that universities will either have to expend enormous resources to find willing partners, or will spend millions on lawsuits and contract restitution damages. Enacting these feel-good  mandates into state law is at best useless, and most likely a tool for crusading plaintiff’s attorneys to use to harass universities.

Universities: Don’t you dare commercialize that invention!

As I noted above, it’s really surprising that groups like EFF are going after universities, as their educational mission and general devotion to improving social welfare should make them the darlings of social justice crusaders. However, as public institutions with budgets and tax statuses dependent on political will, universities are both unable to route around organizational challenges (like losing student aid or preferred tax status) and are probably unwilling to engage in wholesale PR defensive warfare for fear of offending a necessary political constituency. Thus, universities are very juicy targets — particularly when they engage in “dirty” commercial activities of any sort, no matter how attenuated.

And lest you think that universities wouldn’t actually be harassed (other than in the abstract by the likes of EFF) over patents, it turns out that it’s happening even now, even without EFF’s proposed law.

For the last five years Princeton University has been locked in a lawsuit with some residents of Princeton, New Jersey who have embarked upon a transparently self-interested play to divert university funds to their own pockets. Their weapon of choice? A challenge to Princeton’s tax-exempt status based on the fact that the school licenses and sells its patented inventions.

The plaintiffs’ core argument in Fields v. Princeton is that the University should be  a taxpaying entity because it occasionally generates patent licensing revenues from a small fraction of the research that its faculty conducts in University buildings.

The Princeton case is problematic for a variety of reasons, one of which deserves special attention because it runs squarely up against a laudable federal law that is intended to promote research, development, and patent commercialization.

In the early 1980s Congress passed the Bayh-Dole Act, which made it possible for universities to retain ownership over discoveries made in campus labs. The aim of the law was to encourage essential basic research that had historically been underdeveloped. Previously, the rights to any such federally-funded discoveries automatically became the property of the federal government, which, not surprisingly, put a damper on universities’ incentives to innovate.

When universities collaborate with industry — a major aim of Bayh-Dole — innovation is encouraged, breakthroughs occur, and society as a whole is better off. About a quarter of the top drugs approved since 1981 came from university research, as did many life-changing products we now take for granted, like Google, web browsers, email, cochlear implants and major components of cell phones. Since the passage of the Act, a boom in commercialized patents has yielded billions of dollars of economic activity.

Under the Act innovators are also rewarded: Qualifying institutions like Princeton are required to share royalties with the researchers who make these crucial discoveries. The University has no choice in the matter; to refuse to share the revenues would constitute a violation of the terms of federal research funding. But the Fields suit ignores this reality an,d in much the same way as EFF’s proposed legislation, will force a stark choice upon Princeton University: engage with industry, increase social utility and face lawsuits, or keep your head down and your inventions to yourself.

A Hobson’s Choice

Thus, things like the Fields suit and EFF’s proposed legislation are worse than costly distractions for universities; they are major disincentives to the commercialization of university inventions. This may not be the intended consequence of these actions, but it is an entirely predictable one.

Faced with legislation that punishes them for being insufficiently entrepreneurial and suits that attack them for bothering to commercialize at all, universities will have to make a hobson’s choice: commercialize the small fraction of research that might yield licensing revenues and potentially face massive legal liability, or simply decide to forego commercialization (and much basic research) altogether.

The risk here, obviously, is that research institutions will choose the latter in order to guard against the significant organizational costs that could result from a change in their tax status or a thicket of lawsuits that emerge from voided technology transfers (let alone the risk of losing student aid money).

But this is not what we want as a society. We want the optimal level of invention, innovation, and commercialization. What anti-patent extremists and short-sighted state governments may obtain for us instead, however, is a status quo much like Europe where the legal and regulatory systems perpetually keep innovation on a low simmer.

[Below is an excellent essay by Devlin Hartline that was first posted at the Center for the Protection of Intellectual Property blog last week, and I’m sharing it here.]

ACKNOWLEDGING THE LIMITATIONS OF THE FTC’S “PAE” STUDY

By Devlin Hartline

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 Advocacyemphasized 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.

 

Below is the text of my oral testimony to the Senate Commerce, Science and Transportation Committee, the Consumer Protection, Product Safety, and Insurance Subcommittee, at its November 7, 2013 hearing on “Demand Letters and Consumer Protection: Examining Deceptive Practices by Patent Assertion Entities.” Information on the hearing is here, including an archived webcast of the hearing. My much longer and more indepth written testimony is here.

Please note that I am incorrectly identified on the hearing website as speaking on behalf of the Center for the Protection of Intellectual Property (CPIP). In fact, I was invited to testify soley in my personal capacity as a Professor of Law at George Mason University School of Law, given my academic research into the history of the patent system and the role of licensing and commercialization in the distribution of patented innovation. I spoke for neither George Mason University nor CPIP, and thus I am solely responsible for the content of my research and remarks.

Chairman McCaskill, Ranking Member Heller, and Members of the Subcommittee:

Thank you for this opportunity to speak with you today.

There certainly are bad actors, deceptive demand letters, and frivolous litigation in the patent system. The important question, though, is whether there is a systemic problem requiring further systemic revisions to the patent system. There is no answer to this question, and this is the case for three reasons.

Harm to Innovation

First, the calls to rush to enact systemic revisions to the patent system are being made without established evidence there is in fact systemic harm to innovation, let alone any harm to the consumers that Section 5 authorizes the FTC to protect. As the Government Accountability Office found in its August 2013 report on patent litigation, the frequently-cited studies claiming harms are actually “nonrandom and nongeneralizable,” which means they are unscientific and unreliable.

These anecdotal reports and unreliable studies do not prove there is a systemic problem requiring a systemic revision to patent licensing practices.

Of even greater concern is that the many changes to the patent system Congress is considering, incl. extending the FTC’s authority over demand letters, would impose serious costs on real innovators and thus do actual harm to America’s innovation economy and job growth.

From Charles Goodyear and Thomas Edison in the nineteenth century to IBM and Microsoft today, patent licensing has been essential in bringing patented innovation to the marketplace, creating economic growth and a flourishing society.  But expanding FTC authority to regulate requests for licensing royalties under vague evidentiary and legal standards only weakens patents and create costly uncertainty.

This will hamper America’s innovation economy—causing reduced economic growth, lost jobs, and reduced standards of living for everyone, incl. the consumers the FTC is charged to protect.

Existing Tools

Second, the Patent and Trademark Office (PTO) and courts have long had the legal tools to weed out bad patents and punish bad actors, and these tools were massively expanded just two years ago with the enactment of the America Invents Act.

This is important because the real concern with demand letters is that the underlying patents are invalid.

No one denies that owners of valid patents have the right to license their property or to sue infringers, or that patent owners can even make patent licensing their sole business model, as did Charles Goodyear and Elias Howe in the mid-nineteenth century.

There are too many of these tools to discuss in my brief remarks, but to name just a few: recipients of demand letters can sue patent owners in courts through declaratory judgment actions and invalidate bad patents. And the PTO now has four separate programs dedicated solely to weeding out bad patents.

For those who lack the knowledge or resources to access these legal tools, there are now numerous legal clinics, law firms and policy organizations that actively offer assistance.

Again, further systemic changes to the patent system are unwarranted because there are existing legal tools with established legal standards to address the bad actors and their bad patents.

If Congress enacts a law this year, then it should secure full funding for the PTO. Weakening patents and creating more uncertainties in the licensing process is not the solution.

Rhetoric

Lastly, Congress is being driven to revise the patent system on the basis of rhetoric and anecdote instead of objective evidence and reasoned explanations. While there are bad actors in the patent system, terms like PAE or patent troll constantly shift in meaning. These terms have been used to cover anyone who licenses patents, including universities, startups, companies that engage in R&D, and many others.

Classic American innovators in the nineteenth century like Thomas Edison, Charles Goodyear, and Elias Howe would be called PAEs or patent trolls today. In fact, they and other patent owners made royalty demands against thousands of end users.

Congress should exercise restraint when it is being asked to enact systemic legislative or regulatory changes on the basis of pejorative labels that would lead us to condemn or discriminate against classic innovators like Edison who have contributed immensely to America’s innovation economy.

Conclusion

In conclusion, the benefits or costs of patent licensing to the innovation economy is an important empirical and policy question, but systemic changes to the patent system should not be based on rhetoric, anecdotes, invalid studies, and incorrect claims about the historical and economic significance of patent licensing

As former PTO Director David Kappos stated last week in his testimony before the House Judiciary Committee: “we are reworking the greatest innovation engine the world has ever known, almost instantly after it has just been significantly overhauled. If there were ever a case where caution is called for, this is it.”

Thank you.

The Center for the Protection of Intellectual Property is hosting a teleforum panel on end-user lawsuits in patent law on Thursday, August 29, at Noon (EST). Here’s the announcement with the program information:

End-User Lawsuits in Patent Litigation: A Bug or a Feature of Patent Law?
A Teleforum Panel
(Free and Open to the Public)

Thursday, August 29, 2013
Noon – 1pm (EST)

In the patent policy debates today, one issue that has proven a flash point of controversy is patent infringement lawsuits against consumers and retailers, such as coffee shops, JC Penney, and others.  These are now called “end-user lawsuits,” and various bills in Congress, including the Goodlatte Discussion Draft released last May, would mandate a “stay” of such lawsuits in favor of suing upstream manufacturers.  The federal judiciary currently vests stay decisions within the discretionary authority of trial judges, who have long controlled and directed complex litigation in their courtrooms.  While anecdotes of cease-and-desist letters against “mom-and-pop stores” abound in public commentary, there has been no discussion of the systemic effects of the proposed mandatory stay provisions.  Are end-user lawsuits a recent phenomenon or are they a longstanding feature of the patent system?  Why has approval of a motion to stay litigation rested within the discretionary authority of a trial judge?  Are there are any unintended consequences of adopting a mandatory stay rule for end-user lawsuits?  This teleforum panel brings together scholars and representatives from the innovation industries to discuss the history, function and policy implications of end-user lawsuits within patent litigation.

This is a live, in-person panel presentation in which the panelists and audience members participate via a conference bridge.  It is free and open to the public (audience members simply call the 800 number below).  Audience members will be able to ask questions of the panelists in an interactive Q&A format.  The teleforum panel also will be recorded and posted as a podcast.

PANELISTS:

Christopher Beauchamp, Assistant Professor of Law, Brooklyn Law School
David Berten, Founder and Partner, Global IP Law Group
John Scott, Vice President of Litigation, Qualcomm Inc.

Moderator: Adam Mossoff, Professor of Law and Co-Director of Academic Programs of the Center for the Protection of Intellectual Property, George Mason University School of Law

PROGRAM INFORMATION:

Thursday, August 29, 2013
Noon – 1pm (Eastern Standard Time)

CONFERENCE BRIDGE INFORMATION:

Telephone Number: (800) 832-0736
Access Code: 1346613

 

[Cross posted at The Center for the Protection of Intellectual Property]

In a prior blog posting, I reported how reports of a so-called “patent litigation explosion” today are just wrong.  As I detailed in another blog posting, the percentage of patent lawsuits today are not only consistent with historical patent litigation rates in the nineteenth century, there is actually less litigation today than during some decades in the early nineteenth century. Between 1840 and 1849, for instance, patent litigation rates were 3.6% — more than twice the patent litigation rate today.

(As an aside, we have to hold constant for issued patents in computing litigation percentage rates because more patents are issued now per year than twice the total population of New York City (NYC) in 1820 — 253,315 patents issued in 2012 compared to 123,706 residents in NYC in 1820.  Yet before someone says that this just means we have too many patents today, as Judge Posner blithely asserts without any empirical evidence, one must also recognize that the NYC population in 2013 is 8.3 million, which is far beyond merely double its 1820 population — NYC’s population has grown by a factor of 67!  A simple comparison to population growth, especially taking into account the explosive growth in the innovation industries in the past several decades, could as easily justify the claim that we haven’t got enough patents issuing today.)

Unfortunately, the mythical claims about a “patent litigation explosion” have shifted in recent months (perhaps because the original assertion was untenable).  Now the assertion is that there has been an “explosion” in lawsuits brought by patent licensing companies.  I’ll note for the record here that patent licensing companies are often referred to today by the undefined and nonobjective rhetorical epithet of “patent troll.”  In a recent study of patent licensing companies that exposes many of the unsound and unproven claims about these much-maligned companies – such as that patents owned by these companies are of lower quality than those owned by manufacturing entities – Stephen Moore first explained that the “troll” slur is used today by academics, commentators and the public alike “without a universally accepted definition.” So, let’s dispense with nonobjective rhetoric and simply identify these companies factually by their business models: patent licensing.

As with all discriminatory slurs, it’s unsurprising that this new claim about an alleged “explosion” in so-called “patent troll” lawsuits is unproven rubbish.  Similar to the myth about patent litigation generally, this is just another example of overwrought and empirically unsound rhetoric being used to push a policy agenda in Congress and regulatory agencies. (Six bills have been on the Hill so far this year, and FTC Chairwoman Edith Ramirez has announced that the FTC intends to begin a formal § 6(b) investigation of patent licensing companies).

How do we know that patent licensing companies are not the sole driver of any increases in patent litigation?  Contrary to the much-hyped claim today that patent licensing companies are the primary cause of most patent lawsuits in district courts in 2012, other serious and more careful reviews of the litigation data have shown that the primary culprit is not patent licensing companies, but rather the America Invents Act of 2011(“AIA”). The AIA created numerous new administrative proceedings for invalidating patents at the Patent & Trademark Office, which created additional incentives to file lawsuits in certain contexts.  Moreover, the AIA expressly prohibited joinder of multiple defendants in single lawsuits.  Both of these significant changes to the patent system has produced the entirely logical and expected result of more lawsuits being filed after the AIA’s statutory provisions went into effect in 2011 and 2012. In basic statistics terms, the effect of these statutory provisions in any study of patent litigation rates that does not take them into account is referred to as a “confounding variable.”

Even more important, when the data used in one of the most-referenced studies asserting a patent litigation explosion by patent licensing companies was tested by a highly respected scholar who specializes in statistical and empirical analyses of the patent system, he reported that he found no statistically significant results. (See Dave Schwartz’s testimony at the DOJ-FTC Workshop (Dec. 10, 2012), starting at approximately 1:58 at this video. Transcript available here.)  At least the scholars of this disputed study made their data available for confirmation, according to basic scientific norms. Other prominently cited studies on patent licensing companies have relied on secret data from companies like RPX, Patent Freedom, and other firms who have a very large dog in the litigation and policy fight, and thus this data has all of the trappings of being unreliable and biased (see here and here)

The important role that the AIA is playing in increasing patent lawsuits by patent licensing companies is ironic if only because the people misreporting the patent litigation data are the same people who were big proponents of the AIA (some of them even attended the AIA’s signing ceremony with President Obama in September 2011).  Among non-patent scholars, this is called trying to have your cake and eat it, too.  Usually such efforts fail, especially when children always try to get away with this logical fallacy.  It shows the depths to which the patent policy debates have sunk that the press, Congress, the President and many others don’t seem to care about this one bit and instead are pushing ahead and repeating – and even drafting legislation based upon – bad “statistics” with serious methodological problems and compiled from secret, unreliable data.

With Congress rushing headlong to enact legislation that discriminates against patent licensing companies, it’s time to step back and start asking serious questions before the legal system that makes possible the innovation industries is changed and we discover too late that it’s for the worse.  It’s time to set aside rhetoric and made-up “statistics” based on secret data and to ask whether there really is a systemic problem.  It’s also time to start asking serious questions about why these myths were created in the first place, what does the raw data actually say, who is providing the data and funding these “troll” studies, and who is pushing this rhetoric into the public policy debates to the point that it has become a deafening roar that makes impossible all reasonable and sensible discussion.

[NOTE: minor grammatical and style changes were made after the initial posting]

 

The Federalist Society has started a new program, The Executive Branch Review, which focuses on the myriad fields in which the Executive Branch acts outside of the constitutional and legal limits imposed on it, either by Executive Orders or by the plethora of semi-independent administrative agencies’ regulatory actions.

I recently posted on the Federal Trade Commission’s (FTC) ongoing investigations into the patent licensing business model and the actions (“consent decrees”) taken by the FTC against Bosch and Google.  These “consent decrees” constrain Bosch’s and Google’s rights in enforce patents they have committed to standard setting organizations (these patents are called “standard essential patents”). Here’s a brief taste:

One of the most prominent participants at the FTC-DOJ workshop back in December, former DOJ antitrust official and UC-Berkeley economics professor Carl Shapiro, explained in his opening speech that there was still insufficient data on patent licensing companies and their effects on the market.  This is true; for instance, a prominent study cited by Google et al. in support of their request to the FTC to investigate patent licensing companies has been described as being fundamentally flawed on both substantive and methodological grounds. Even more important, Professor Shapiro expressed skepticism at the workshop that, even if there was properly acquired, valid data, the FTC lacked the legal authority to sanction patent licensing firms for being allegedly anti-competitive.

Commentators have long noted that courts and agencies have a lousy historical track record when it comes to assessing the merits of new innovation, whether in new products or new business models. They maintain that the FTC should not continue such mistakes by letting its decision-making today be driven by rhetoric or by the widespread animus against certain commercial firms. Restraint and fact-gathering, institutional virtues reflected in a government animated by the rule of law and respect for individual rights, are key to preventing regulatory overreach and harm to future innovation.

Go read the whole thing, and, while you’re at it, check out Commissioner Joshua Wright’s similar comments on the FTC’s investigations of patent licensing companies, which the FTC calls “patent assertion entities.”

Over at the blog for the Center for the Protection for Intellectual Property, Wayne Sobon, the Vice President and General Counsel of Inventergy, has posted an important essay that criticizes the slew of congressional bills that have been proposed in Congress in recent months. 

In A Line in the Sand on the Calls for New Patent Legislation, Mr. Sobon responds to the heavy-handed rhetoric and emotionalism that dominates the debate today over patent licensing and litigation. He calls for a return to the real first principles of the patent system in discussions about patent licensing, as well as for more measured thinking and analysis about the costs of uncertainty created by never-ending systemic changes from legislation produced by heavy lobbying by interested parties.  Here’s a small taste:

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.” 

Read the whole thing here. Mr. Sobon’s essay reflects similar concerns expressed by Commissioner Joshua Wright this past April on the Federal Trade Commission’s investigation of what the FTC identifies as “patent assertion entities.”

Earlier this month, Representatives Peter DeFazio and Jason Chaffetz picked up the gauntlet from President Obama’s comments on February 14 at a Google-sponsored Internet Q&A on Google+ that “our efforts at patent reform only went about halfway to where we need to go” and that he would like “to see if we can build some additional consensus on smarter patent laws.” So, Reps. DeFazio and Chaffetz introduced on March 1 the Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act, which creates a “losing plaintiff patent-owner pays” litigation system for a single type of patent owner—patent licensing companies that purchase and license patents in the marketplace (and who sue infringers when infringers refuse their requests to license). To Google, to Representative DeFazio, and to others, these patent licensing companies are “patent trolls” who are destroyers of all things good—and the SHIELD Act will save us all from these dastardly “trolls” (is a troll anything but dastardly?).

As I and other scholars have pointed out, the “patent troll” moniker is really just a rhetorical epithet that lacks even an agreed-upon definition.  The term is used loosely enough that it sometimes covers and sometimes excludes universities, Thomas Edison, Elias Howe (the inventor of the lockstitch in 1843), Charles Goodyear (the inventor of vulcanized rubber in 1839), and even companies like IBM.  How can we be expected to have a reasonable discussion about patent policy when our basic terms of public discourse shift in meaning from blog to blog, article to article, speaker to speaker?  The same is true of the new term, “Patent Assertion Entities,” which sounds more neutral, but has the same problem in that it also lacks any objective definition or usage.

Setting aside this basic problem of terminology for the moment, the SHIELD Act is anything but a “smarter patent law” (to quote President Obama). Some patent scholars, like Michael Risch, have begun to point out some of the serious problems with the SHIELD Act, such as its selectively discriminatory treatment of certain types of patent-owners.  Moreover, as Professor Risch ably identifies, this legislation was so cleverly drafted to cover only a limited set of a specific type of patent-owner that it ended up being too clever. Unlike the previous version introduced last year, the 2013 SHIELD Act does not even apply to the flavor-of-the-day outrage over patent licensing companies—the owner of the podcast patent. (Although you wouldn’t know this if you read the supporters of the SHIELD Act like the EFF who falsely claim that this law will stop patent-owners like the podcast patent-owning company.)

There are many things wrong with the SHIELD Act, but one thing that I want to highlight here is that it based on a falsehood: the oft-repeated claim that two Boston University researchers have proven in a study that “patent troll suits cost American technology companies over $29 billion in 2011 alone.”  This is what Rep. DeFazio said when he introduced the SHIELD Act on March 1. This claim was repeated yesterday by House Members during a hearing on “Abusive Patent Litigation.” The claim that patent licensing companies cost American tech companies $29 billion in a single year (2011) has become gospel since this study, The Direct Costs from NPE Disputes, was released last summer on the Internet. (Another name of patent licensing companies is “Non Practicing Entity” or “NPE.”)  A Google search of “patent troll 29 billion” produces 191,000 hits. A Google search of “NPE 29 billion” produces 605,000 hits. Such is the making of conventional wisdom.

The problem with conventional wisdom is that it is usually incorrect, and the study that produced the claim of “$29 billion imposed by patent trolls” is no different. The $29 billion cost study is deeply and fundamentally flawed, as explained by two noted professors, David Schwartz and Jay Kesan, who are also highly regarded for their empirical and economic work in patent law.  In their essay, Analyzing the Role of Non-Practicing Entities in the Patent System, also released late last summer, they detailed at great length serious methodological and substantive flaws in The Direct Costs from NPE Disputes. Unfortunately, the Schwartz and Kesan essay has gone virtually unnoticed in the patent policy debates, while the $29 billion cost claim has through repetition become truth.

In the hope that at least a few more people might discover the Schwartz and Kesan essay, I will briefly summarize some of their concerns about the study that produced the $29 billion cost figure.  This is not merely an academic exercise.  Since Rep. DeFazio explicitly relied on the $29 billion cost claim to justify the SHIELD Act, and he and others keep repeating it, it’s important to know if it is true, because it’s being used to drive proposed legislation in the real world.  If patent legislation is supposed to secure innovation, then it behooves us to know if this legislation is based on actual facts. Yet, as Schwartz and Kesan explain in their essay, the $29 billion cost claim is based on a study that is fundamentally flawed in both substance and methodology.

In terms of its methodological flaws, the study supporting the $29 billion cost claim employs an incredibly broad definition of “patent troll” that covers almost every person, corporation or university that sues someone for infringing a patent that it is not currently being used to manufacture a product at that moment.  While the meaning of the “patent troll” epithet shifts depending on the commentator, reporter, blogger, or scholar who is using it, one would be extremely hard pressed to find anyone embracing this expansive usage in patent scholarship or similar commentary today.

There are several reasons why the extremely broad definition of “NPE” or “patent troll” in the study is unusual even compared to uses of this term in other commentary or studies. First, and most absurdly, this definition, by necessity, includes every university in the world that sues someone for infringing one of its patents, as universities don’t manufacture goods.  Second, it includes every individual and start-up company who plans to manufacture a patented invention, but is forced to sue an infringer-competitor who thwarted these business plans by its infringing sales in the marketplace.  Third, it includes commercial firms throughout the wide-ranging innovation industries—from high tech to biotech to traditional manufacturing—that have at least one patent among a portfolio of thousands that is not being used at the moment to manufacture a product because it may be “well outside the area in which they make products” and yet they sue infringers of this patent (the quoted language is from the study). So, according to this study, every manufacturer becomes an “NPE” or “patent troll” if it strays too far from what somebody subjectively defines as its rightful “area” of manufacturing. What company is not branded an “NPE” or “patent troll” under this definition, or will necessarily become one in the future given inevitable changes in one’s business plans or commercial activities? This is particularly true for every person or company whose only current opportunity to reap the benefit of their patented invention is to license the technology or to litigate against the infringers who refuse license offers.

So, when almost every possible patent-owning person, university, or corporation is defined as a “NPE” or “patent troll,” why are we surprised that a study that employs this virtually boundless definition concludes that they create $29 billion in litigation costs per year?  The only thing surprising is that the number isn’t even higher!

There are many other methodological flaws in the $29 billion cost study, such as its explicit assumption that patent litigation costs are “too high” without providing any comparative baseline for this conclusion.  What are the costs in other areas of litigation, such as standard commercial litigation, tort claims, or disputes over complex regulations?  We are not told.  What are the historical costs of patent litigation?  We are not told.  On what basis then can we conclude that $29 billion is “too high” or even “too low”?  We’re supposed to be impressed by a number that exists in a vacuum and that lacks any empirical context by which to evaluate it.

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.  Really?  That’s an assumption that reduces itself to absurdity—it’s a self-imposed reductio ad absurdum!

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.

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.  But one doesn’t need to be an economist or statistician to be able to see the problems in relying on the RPX data to conclude that NPEs cost $29 billion per year. As the classic adage goes, “Something is rotten in the state of Denmark.”

Even worse, as I noted above, the RPX survey was confidential.  RPX has continued to invoke “client confidences” in refusing to disclose its actual customer survey or the resulting data, which means that the data underlying the $29 billion claim is completely unknown and unverifiable for anyone who reads the study.  Don’t worry, the researchers have told us in a footnote in the study, they looked at the data and confirmed it is good.  Again, it doesn’t take economic or statistical training to know that something is not right here. Another classic cliché comes to mind at this point: “it’s not the crime, it’s the cover-up.”

In fact, keeping data secret in a published study violates well-established and longstanding norms in all scientific research that data should always be made available for testing and verification by third parties.  No peer-reviewed medical or scientific journal would publish a study based on a secret data set in which the researchers have told us that we should simply trust them that the data is accurate.  Its use of secret data probably explains why the $29 billion study has not yet appeared in a peer-reviewed journal, and, if economics has any claim to being an actual science, this study never will.  If a study does not meet basic scientific standards for verifying data, then why are Reps. DeFazio and Chaffetz relying on it to propose national legislation that directly impacts the patent system and future innovation?  If heads-in-the-clouds academics would know to reject such a study as based on unverifiable, likely biased claptrap, then why are our elected officials embracing it to create real-world legal rules?

And, to continue our running theme of classic clichés, there’s the rub. The more one looks at the actual legal requirements of the SHIELD Act, the more, in the words of Professor Risch, one is left “scratching one’s head” in bewilderment.  The more one looks at the supporting studies and arguments in favor of the SHIELD Act, the more one is left, in the words of Professor Risch, “scratching one’s head.”  The more and more one thinks about the SHIELD Act, the more one realizes what it is—legislation that has been crafted at the behest of the politically powerful (such as an Internet company who can get the President to do a special appearance on its own social media website) to have the government eliminate a smaller, publicly reviled, and less politically-connected group.

In short, people may have legitimate complaints about the ways in which the court system in the U.S. generally has problems.  Commentators and Congresspersons could even consider revising the general legal rules governing patent ligtiation for all plaintiffs and defendants to make the ligitation system work better or more efficiently (by some established metric).   Professor Risch has done exactly this in a recent Wired op-ed.  But it’s time to call a spade a spade: the SHIELD Act is a classic example of rent-seeking, discriminatory legislation.