A Factured Fairytale Part 3: More Patent Troll Myths

Editor’s Note: This is part 3 of a 5 part series written by Steven J. Moore and with the assistance of Marvin Wachs and Timothy Moore, also of the Kelley Drye & Warren Patent Department. Part 1 was A Fractured Fairy Tale: Separating Fact & Fiction on Patent Trolls, Part 2 was Probing 10 Patent Troll Myths, which is continued below picking up with Myth #3.

Myth 3: Independent inventors and independent inventor companies set up to license their patents have had little impact on the Troll story.

• Truth: Independent inventors have a great impact on the NPE story, with independent inventors and independent inventor companies set up to license their patents filing considerably more suits under the joinder rules of the AIA on the average than non-independent inventor based NPEs.  Their patents also fare significantly worse in both litigation and reexamination proceedings.

Independent Inventors have long distinguished themselves from “Patent Trolls” arguing the term would soon be used by large companies to stop independent inventor activity.  See Chad Vice,  Edison Nation Forums, forum post entitled The Patent Trolls’ Lie and The War on Independent Inventors, June 23, 2013.  Unfortunately, so-called “experts” in the troll story have consistently been including independent inventor activity in the “troll” category for at least over a decade.  In fact as our figures slow, there is no conceivable way of getting anywhere near a majority of troll suits post AIA unless one is counting all independent inventor suits, and suits by their alter ego companies, into the mix.  While some may think this unfair, it is simply a fact.

To our knowledge, this is the first study that looked at the effects of independent inventor, and, in particular independent inventor company (that is, companies that we determined were just the alter ego of the individual inventors themselves) were having on the overall NPE numbers.  That is, we looked behind the NPE to decide whether a company was just an alter ego of an independent inventor.

In our study of post-AIA-cases, we found just over half the so-called NPE suits (when adjudging under the new joinder rules) were brought by inventors, or inventor-based corporate entities, that is companies set up to license the patents of independent inventors (Fig. 6).  This is a huge jump from the 7% which independent inventors and independent inventor companies comprised in our review of 267 cases filed prior to the AIA between 2004 – 2006.  However, when we adjust the numbers post-AIA to reflect for unique independent inventors/independent inventor companies (e.g., of all 10 litigations filed by the same entity on the same patent against 10 defendants is counted as one case, as it would have been pre-AIA), we find that post-AIA data would translate to independent inventor and independent inventor-related companies account for only 11% of all litigation cases being brought under a pre-AIA counting scheme, a significant but not huge jump.  That is, suits by independent inventors and independent inventor companies, while increasing, would not be seen to have increased that much in overall share of the patent suits. See Fig. 6: Chart of Plaintiff Distribution of 428 Post-AIA Cases Based on Whether Entity is  a Producing Company or University, NPE Company that is Not an Inventor Company, or an Independent Inventor or Independent Inventor Related Company.

When looking at the number of cases filed by independent inventor and independent inventor companies post-AIA per unique plaintiff, it was clear that these were much more prodigious than non-independent inventor related NPEs and Producers.  Independent inventor related entities filed on an average of 12 cases per unique plaintiff, versus about 8 cases on the average filed by unique non-independent inventor related NPEs, and only 1.4 cases on average for each unique Producer Plaintiff. See Fig. 7: Average Number of Cases Filed By Identified Entity Status based on 428 Post AIA Cases.

This is important as nearly every piece of legislation against the so-called Trolls seems to allow an exception for independent inventor suits.

One thing that was clear to us comparing the cases filed between 2006 – 2008 and the post-AIA suits, was that there has been significant growth in the number of independent inventors that form corporate entities for purpose of bringing their suits.  The reasons for such activity may simply have to do with independent inventors trying to shield themselves from any personal liability for their bringing a suit that might latter be found to be frivolous and subject to monetary penalties, and in particular for tax reasons.  It is questionable whether legislation that effectively would prevent independent inventors from forming such companies would pass constitutional muster.

[Patent-Search]

Myth 4: Patents of NPEs fare much more poorly in reexamination proceedings brought during litigation than those of Producers.

• Truth: When one includes independent inventors and independent inventors in the mix of NPEs, the patents being asserted by NPEs may be said to fare slightly more poorly in reexamination proceedings than those patents asserted by Producers.  However, if one removes these independent inventor entities from the mix of NPEs, the patents held by non-independent inventor based NPEs were seen to do at least as well, if not better, than the average asserted patent of the Producers which was likewise thrown into reexamination during litigation.

Reexamination has been widely touted for bringing down the bad patents of the patent Trolls.  See Matthew Thayne, Taming the Patent Troll, Utah Business, October 1, 2008.  Much of the rhetoric involving the poor quality of the patents of the NPEs relates to numerous stories of “troll” patents being brought down in reexamination.

As part of our analysis, we looked at the results of all the 109 granted reexaminations involving the patents upon which our 267 pre-AIA patent suits were based.  The 109 reexaminations were directed to 72 distinct suits among the 267 pre-AIA patent suits, that is, one or more reexaminations were filed in 27% of the pre-AIA suit sample.  Eleven of these 72 distinct distinct suits involved inter partes reexamination, with such reexaminations being directed to exactly 11 patents.  The remainder were all ex parte reexaminations.  To determine whether a reexamination was successful for the patentee, we looked to see whether any of the claims that they had asserted in the original litigation, and which had been put into reexamination (or the request for reexamination denied with respect to such claims) had indeed come through unscathed through the reexamination process.

In regard to our sample, of the 109 reexaminations (inter partes and ex parte combined), 31 percent (Fig. 8) were filed against NPEs (including independent inventors and independent inventor companies).  On the other hand, when grouping all reexaminations by unique patent, 22% of all the reexamination grants were directed to patents of NPEs (when including independent inventors and independent inventor companies). See Fig. 8: Percent of Total Reexamination Grants By Entity Status Found in 267 Pre-AIA Litigations Filed Against Each Entity Type.

Removing the relatively few cases which had not yet resolved, our initial figures showed that patents of NPEs asserted in litigation as a whole did fare slightly worse than Producers in overall reexamination proceedings (67% v. 56%).  However, upon more granular analysis, we found if we removed the independent inventors and independent inventor companies from the NPE we tallied a significantly higher (71%) favorable finding for the NPE non-inventor companies as compared to Producers. See Fig. 9: Percent of Favorable Reexamination Results Per Entity Status Based of Challenged Patents in 72 Unique Litigation Cases.

In our sample, of the reexamination patent challenges sought during litigation, 78% of the patents challenged via reexamination were held by producer companies (involving mostly from Producer v. Producer suits), 12% of the patents were held by independent inventors and independent inventor companies, and 10 % related to patents held by non-independent inventor related NPEs (Fig. 10).

In terms of inter partes reexaminations brought during the pendency of the cases, 11 were brought.  Each of the inter partes reexaminations in our sample was brought against a patent owned by a producer.  Only 18 % of the 11 cases (2 cases) were favorably resolved for the producer patent owner, with one case still remaining unresolved.  Thus we could make no comparison between how the patents of producers fared in inter partes USPTO to proceedings versus the patents of NPEs, pre-AIA, in regard to patents asserted in litigation. See Fig. 10: Patent Holder Entity Status For Patents Challenged by Reexamination in 267 Pre-AIA Random Cases.

Myth 5: NPEs carry the largest brunt of the post-AIA Inter Partes Review Requests being filed.

• Truth: Producer companies, particularly small producer companies, are bearing the largest brunt of the new inter partes review requests.

When the AIA was passed to much fanfare, some questioned whether the inter partes reexamination procedures of the act would spell the demise of the patent troll.  See Eric Grondahl, Does The America Invents Act Spell the Demise of the Patent Troll?, The Metropolitan Corporate Counsel, October 21, 2011.  It was envisioned by some that the new procedures would be used by the so-called practicing entities (whom we call Producers) against the NPEs, killing off all the “weak patents” that were fabled to be asserted by the NPEs.

We looked at the distribution of 225 inter partes review petitions filed between September 2012 to May 2013.  As shown in Fig. 11: Types of Challenges by Entity Status for 225 Post-AIA Inter Partes Review Requests, we can see that the vast majority of filings still emanate from producing companies challenging the patents of  other practicing entities, universities and named independent inventors (71%).  Only about one quarter of all inter partes reviews were sought against NPEs when including independent inventor companies.  Interestingly, we noted that significantly fewer petitions are now being filed by non-practicing entities against the patents of practicing entities, compared to the past.  We attribute the same to the large increase in fees which appear to be dissuading not only NPEs from challenging the patents of producers, but also small entity producers from challenging the patents of large entity producers.

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