NPE Data Does Not Support the Patent Infringer Lobby

Just about one month ago the International Trade Commission prepared a brief document identifying the facts and trends relative to Section 337 investigations. The Silicon Valley elite who would prefer a weaker patent system — those I refer to as the “patent infringer lobby” — would like to strip the ITC of it’s patent jurisdiction and make it easier to import infringing products into the United States. Lead by the ITC Working Group, the patent infringer lobby is forwarding a proposal to accomplish their goal of further weakening the patent system in America, while at the same time grossly exaggerating the problem of non-practicing entities who seek to use the ITC to stop the importation of infringing products.

Frankly, calling what the patent infringer lobby is doing “grossly exaggerating” is being profusely generous. The facts and figures relative to Section 337 investigations put out by the ITC itself demonstrate that the alleged NPE problem simply does not exist. The House Subcommittee on Intellectual Property held a hearing on July 18, 2012. Hopefully Members of Congress will be able to see through the lies and distortions and not put the U.S. patent system in the cross-hairs.

Pursuant to Section 337 of the Tariff Act of 1930 (19 U.S.C. § 1337) the ITC conducts investigations into allegations of unfair practices relating to importation and trade. Section 337 makes the infringement of certain statutory intellectual property rights and other forms of unfair competition to be unlawful practices. Section 337 investigations conducted by the U.S. International Trade Commission most often involve claims regarding intellectual property rights, including allegations of patent infringement and trademark infringement by imported goods.

Section 337 gives the ITC the authority to issue two types of remedy orders: (1) exclusion orders; and (2) cease and desist orders. An award of money damages is not available as a remedy for violation of Section 337, which is why ITC filings are typically associated with district court patent infringement litigation. A United States Federal District Court may issue both injunctive relief and money damages. Because the ITC offers a much faster proceeding it is becoming quite popular for patent owners to see exclusion orders for alleged patent infringement, thereby stopping the alleged ongoing infringement, and simultaneously filing a patent infringement action seeking monetary damages. This gives the plaintiff two bites at the apple, so to speak, and can create leverage for the patent owner if successful at the ITC.

The question is why is the ITC becoming a more popular forum, and is it as the result of NPEs who are attempting to play nefarious games with the system in order to achieve more favorable treatment in the ITC than they would in the Federal District Courts? The data says no, but the patent infringer lobby argues yes. What are you going to believe? The self-serving tale of those who have as their business model infringing innovators, or the facts? I prefer facts and truth myself.

According to the ITC, Section 337 investigations have increased by over 530% between FY 2000 and FY 2011, with new complaint filings in FY 2012 commensurate with filings during FY 2011, or perhaps a little bit higher. So where are all these cases coming from? What has changed?

Anyone who is even casually interested in patents and innovation has to know that over the past few years there have been massive patent battles surrounding the major innovators, copy-cats and manufacturers involved in the smart phone industry. According to the ITC, “Smartphone companies involved in Section 337 investigations during the first half of FY 2012 include: Apple (14), HTC (8), Motorola (4), Samsung (3), RIM (3), Nokia (3), and LG (1).” This has required the ITC to increase staff, and has been a burden on the Commission. But none of those companies are NPEs, are they? It seems the patent infringer lobby is using increases in ITC filings to support their preferred policy position despite the lack of a causal connection.

An issue receiving much attention is whether any NPEs should be permitted to obtain relief at the ITC. As the ITC points out, this is complicated and tricky because “[t]here is no commonly understood definition of an NPE.” Notwithstanding, the ITC has attempted to identify complaints related to “Category 1 NPEs” and “Category 2 NPEs.” The ITC defines a Category 1 NPE to include:

[M]anufacturers whose products do not practice the asserted patents; inventors who may have done R&D or built prototypes, but do not make a product covered by the asserted patents and are therefore relying on licensing to meet the domestic industry requirement; research institutions, such as universities and laboratories, that do not make products covered by the patents, and therefore are relying on licensing to meet the domestic industry requirement; and start-ups that possess IP rights but do not yet manufacture a product that practices the patent.

The ITC defines Category 2 NPEs to include those who do not manufacture products and “whose business model primarily focuses on purchasing and asserting patents.”

If you look at the data compiled by the ITC the suggestion that there is a problem with NPEs filing complaints is completely debunked. Just take a look at the chart below, prepared by the ITC, which shows the overwhelming growth in the number of complaints filed by non-NPE innovators.

If you look at the number of respondents in investigations at the ITC it also becomes clear that it is not the NPEs who are driving companies to have to respond to ITC investigations, it is the non-NPE innovators. See chart below.

So why are those in the patent infringer lobbying saying that there is an NPE problem? They are trying to argue that ever since the Supreme Court issued its decision in eBay NPEs have turned to the ITC in hopes of eluding the 4-prong injunction inquiry. To refresh your recollection, eBay was decided in 2005. Now look at the above two charts. If that were the case then why the low number of investigations since 2005? Why do the number of respondents brought into the ITC by Category 1 and Category 2 NPEs fluctuate up and then down and then up again — all after 2005!

Obviously, the patent infringer lobby is crying wolf. There is no problem with NPEs. All they want is for it to be more economical to infringe the patents of innovators. If that happens it would be terrible.

As Bernard Cassidy explained in his testimony to Congress on this issue on July 18, 2012:

Weakening the ITC’s jurisdiction would benefit foreign economies, foreign competitors, and other foreign manufacturers to the detriment of the U.S. economy. . . Specifically, weakening Section 337 to disadvantage patent holders relative to infringing importers will retard American innovation, weaken the trade position of the United States, and hurt American innovation and manufacturing by protecting infringing products manufactured in other countries.

Let’s hope Congress is listening and can actually be swayed based on factual reality.

Gene Quinn Gene Quinn is a patent attorney and a leading commentator on patent law and innovation policy. Mr. Quinn has twice been named one of the top 50 most influential people [...see more]

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Join the Discussion

5 comments so far.

patent litigation
July 23, 2012 02:55 am
It’s encouraging to see that the ITC has made a distinction between “Category 1 NPEs” (largely independent innovators) and “Category 2 NPEs” (potential abusers of the patent system). I hope that more people start to make this differentiation, rather than referring to all NPEs as “patent trolls.”
http://www.youtube.com/watch?v=LkQELhZeDYQ
Gene Quinn
July 20, 2012 01:08 pm
JD-

I’ll also point out that your focus seems to be on the number of respondents. What about the number of investigations? If you look at that chart (above) it is extraordinarily clear that the driving force behind the ITC caseload is not NPEs at all. I don’t know how you can look at the sharp increases on the blue line and come to any other conclusion.

-Gene
Gene Quinn
July 20, 2012 01:05 pm
JD-

We will have to agree to disagree. If you look at the ITC numbers no such trend is present. The claim that there is an increase owed to NPEs ignores the smart phone wars.

Also, in your own numbers they tick up, then down, then up, then down, then up.

Why would you combine Level 1 and Level 2? Are you saying that innovators who are research and development companies ought not to have access to the ITC?

What is curious is that everyone wants to make this about forum shopping and eBay. eBay came out in 2005, but the alleged increase doesn’t happen immediately, so obviously eBay is irrelevant.

-Gene
ben ford
July 20, 2012 10:11 am
“Patent troll”

Call it what you will…patent hoarder, patent troll, non-practicing entity, shell company, etc. It all means one thing: “we’re using your invention and we’re not going to pay or stop”. This is just dissembling by large infringers and their paid puppets to kill any inventor support system. It is purely about legalizing theft. The fact is, many of the large multinationals whose puppets defame inventors in this way themselves make no products in the US or create any American jobs and it is their continued blatant theft which makes it impossible for the true creators to do so.

It’s about property rights. They should not only be for the rich and powerful. Show me a country with weak or ineffective property rights and I’ll show you a weak economy and high unemployment.

Prior to eBay v Mercexchange, small entities had a viable chance at commercializing their inventions. If the defendant was found guilty, an injunction was most always issued. Then the inventor small entity could enjoy the exclusive use of his invention in commercializing it. Unfortunately, injunctions are often no longer available to small entity inventors because of the Supreme Court decision so we have no fair chance to compete with much larger entities who are now free to use our inventions. Essentially, large infringers now have your gun and all the bullets. Worse yet, inability to commercialize means those same small entities will not be hiring new employees to roll out their products and services. And now some of those same parties who killed injunctions for small entities and thus blocked their chance at commercializing now complain that small entity inventors are not commercializing. They created the problem and now they want to blame small entities for it. What dissembling! If you don’t like this state of affairs (your unemployment is running out), tell your Congress member. Then maybe we can get some sense back in the patent system with injunctions fully enforceable on all infringers by all inventors, large and small.
JD
July 19, 2012 10:29 am
Gene,
Without arguing whether the position that it is good or bad ot prevent NPE’s from using the ITC, I can’t agree with the conclusion that it is “clear that it is not the NPEs who are driving companies to have to respond to ITC investigations”.

If you look at percentages and trends – the data shows a larger contribution to the number of cases filed by NPEs and the number of respondents in these NPE cases.

Specifically, in 2006, there were 0 cases filed by Level 2 (0%), increasing in 2007/8 to 3%, 13% in 08, 7% in 09, 13% in 11 and 17% in 2012 YTD. When combined with Level 1, the total is 20-25% in 2008-2012. This is a significant percentage of our ITC resources. (Again, I am not arguing whether it is good or bad – but it is not an insignificant resource issue).

More signficantly, when you look at the number of respondents, the percentage of level 2 respondents increased tremendously in this period. In 2006, the % of Level 2 respondents was 0, increasing to 30% in 2011/12. The total percentage of Level 1/Level 2 respondents has increased from 2% in 2006 to 40% in 2011 and over 50% in 2012. Without discussing whether this is good or bad – I do not understand how one can conclude from this data that half of the respondents are not reponding to NPE’s (Level 1 and Level 2 ccombined).