Patent reformers resort to misrepresentations in WSJ op-ed

By Gene Quinn
February 17, 2015

pinnochio-conceptEarlier today the Wall Street Journal published Stopping the Economy-Sapping Patent Trolls, which is an op-ed written by John Chambers, who is chairman and CEO of Cisco, and Myron Ullman, who is the CEO of J.C. Penney. Whether you agree or disagree with the need for patent reform, everyone should be able to agree that this article includes information that is inaccurate. This is problematic because the high profile nature of the placement of this op-ed will no doubt sway opinions, possibly those who are decision makers in Congress.

Whether the Chambers/Ullman op-ed is intentionally inaccurate and thereby intentionally misleading is open to debate. What is not open to debate, however, is that this op-ed relies upon data that has been thoroughly and completely debunked. So why would the CEO of Cisco and the CEO of J.C. Penney build an argument supporting patent reform on a study that has been proved wrong? That is a very good question. Indeed, legitimate questions can and should be raised about whether these long-time supporters of patent reform are simply trying to use scare tactics and faulty data to mislead Congress into enacting another round of patent reform.

It is troubling that this op-ed relies on secret RPX data that cannot be independently reviewed and verified by anyone. Not only is it troubling because the data is secret, but because the data so significantly differs from publicly available data from other sources. But as problematic as that may be, it is inexcusable for Chambers and Ullman to rely on the study suggesting that patent trolls have cost industry $29 billion. That is simply not true.

Chambers and Ullman write:

A 2012 study by Boston University researchers estimated that companies spent upward of $29 billion a year defending patent lawsuits, and the problem has not let up.

The study referred to by Chambers and Ullman, if you can call it that, is the study published by James Bessen and Michael Meurer. The study continues to be cited by certain media outlets and by proponents of patent reform despite being thoroughly refuted, and despite the fact that Bessen and Meurer have distanced themselves from the study after their definitions, methodology and conclusions became ridiculed and debunked.

As Joff Wild of IAM explained, given the high-profile nature of the claims made by Bessen and Meurer, and given how the alarmist conclusions and estimates have impacted the patent reform debate, they need to be right. Wild explained:

Because Bessen and Meurer do get such wide coverage, it is vital that what they say is subjected to in-depth examination. They make big claims, involving huge numbers; both of which are bound to affect overall debate on, and potentially decision-making around, the patent system. Therefore, they have to be right.

The problem is they are not right, their methodology was flawed, their conclusions inaccurate. Yet those who champion patent reform continue to push this false narrative in the press and through the halls on Capitol Hill. Wild has more recently explained that the Bessen/Meurer figure is “flawed,” and that their claims are clearly far from watertight.

Indeed, in January 2014, David Schwartz (Chicago-Kent College of Law) and Jay Kesan (University of Illinois College of Law) published a paper discrediting the Bessen/Meurer $29 billion estimate in a paper titled Analyzing the Role of Non-Practicing Entities in the Patent System. Schwartz and Kesan explain that given the flawed methodology of the Bessen/Meurer study, their “findings on the issue of NPEs [should] be viewed with some reservations and skepticism.”

For example, Schwartz and Kesan explain that Bessen and Meurer conflate the term “costs” with “transfers,” which allows them to erroneously include sums of money in their estimate that are not considered costs by economists. They write:

The vast majority of the $29 billion figure consists of settlement, licensing, and judgment amounts. For economists, these are not “costs,” as they are classified in Bessen and Meurer’s study, but rather “transfers.” Such transfers to patent holders are the contemplated rewards of the patent system.

The also go on to write:

Turning first to the $29 billion “cost” figure, we disagree with their terminology. By Bessen and Meurer’s own estimate, roughly three-quarters of the direct costs are verdicts, licensing fees, or other settlement amounts. According to standardized economic terminology, these figures are “transfers” contemplated by the patent system, not “costs.” In other words, this is the money paid to a patent owner in exchange for the disclosure and expense required to obtain a patent. The transaction has resulted in money moving from one entity to another in exchange for intellectual property rights, and economists do not consider these costs.

Thus, 75% of what Bessen and Meurer claim are “costs” are payments for the transfer of rights, which is specifically and intentionally the point of the patent system. The patent system is intended to foster innovation and grant exclusive rights to owners, who can then either prevent others or license others for the right to use those exclusive rights. This is the very reward that is intended for innovation, and why people like President Abraham Lincoln explained that the patent system stokes the fire of creative genius.

If innovators cannot reap any reward for their innovations they simply will not innovate. This isn’t rocket science. If you cannot reap the rewards from the investment made you won’t invest; you can’t invest. Without exclusive rights to make innovating worthwhile the free-rider who comes in and copies without repercussions will always have the cost advantage. This is economics 101.

But there are other significant problems with the Bessen/Meurer study that cannot be ignored. For example, Bessen and Meurer estimate the benefits of non-practicing entity (NPE) litigation relying only on an excruciatingly small sample, namely the SEC filings from 10 publicly traded NPEs. The reliance on such a small sample size is hard to reconcile given the fact that they so broadly define NPEs in the first place. If NPEs are so numerous, as they suggest, how could anyone be intellectually satisfied with such a paltry sample size?

Perhaps even more disingenuous than the mischaracterization of “transfers” as “costs” is exactly how Bessen and Meurer define NPEs. To Bessen and Meurer all NPEs are problematic, which is foolish and overstated in and of itself, but still their definition of NPEs is even more enlightening. They define NPEs as:

patent assertion entities, individual inventors, universities, and non-competing entities (operating companies asserting patents well outside the area in which they make products and compete).

Astonishingly, Bessen and Meurer specifically defined non-practicing entities include patent owners who actually manufacture products and who are known by the rest of the world as practicing entities. Aside from the absurdity created by classifying independent inventors and universities as nefarious actors, if a practicing entity that manufactures products invents in a non-core area and has the audacity to license their innovations how can that somehow turn them into an evil non-practicing entity? Based on this definition giant manufacturing companies, such as Boeing and General Electric, qualify as non-practicing entities. To call this absurd doesn’t begin to scratch the surface.

It is equally troubling that Chambers and Ullman relied on a study that doesn’t pass the laugh test when you factor in that more recently Bessen and Meurer have backed away from their own 2012 study. Indeed, Bessen and Meurer have substantially revised the way that they define patent trolls, now to specifically exclude universities, research laboratories, individual inventors and innovative start-ups. This has lead Joff Wild to ask why anyone would ever continue to rely on the original, flawed study when the authors themselves have abandoned their findings by so substantively changing the critical definition upon which the “study” was originally founded. Wild writes:

In fact, not only is there real doubt about the quality of the research that the pair have carried out, but now there are also questions to be asked about their basic credibility as information sources. They surely cannot continue to insist that figures produced based on definitions they no longer hold to should be taken seriously. For those numbers to be justifiable today, even remotely, Bessen and Meurer would have to show that they revisited their previous work…

Based on these facts and everything I have observed, it is my opinion that Bessen and Meurer had an agenda. I don’t know how else you can look at their original “study.” Bessen and Meurer seem to have fixed their original definitions and established a methodology intended to achieve inaccurate and shocking estimates in an effort to support a predetermined narrative. The issue of patent reform is far too important to allow misrepresentations and flawed analysis to inform any decision that may have harm innovators. Innovation is really the only thing driving the U.S. economy, so much is at stake.

It should be self-evident that not all patent owners are patent trolls, and when you acquire rights it is not an economic cost, yet these absurd propositions are at the foundation of the Bessen/Meurer “study” relied upon by Chambers and Ullman. Shame on anyone who uses the thoroughly discredited, agenda driven, biased conclusions of Bessen and Meurer. Shame on Congress if they are swayed by such snake oil and shiny objects. The Bessen/Meurer conclusions, seriously flawed as they are, shouldn’t be used to destroy the patent system and tilt patent laws toward infringers and away from innovators.

The fact that proponents of patent reform rely on misinformation and discredited research speaks volumes about their motives. How can anything they say be trusted?

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 25 Comments comments.

  1. John White February 17, 2015 7:46 pm

    Gene: well done. The WSJ anti patent screed is typical of the access to media of the anti-patent natural rights crowd. Some staffer writes up the piece, it is sent to their pal at the WSJ and, presto, an opinion shaping piece read by those who control patent policy in the US. If only they could be left to steal the ideas and achievement of others in peace. If only. I have spoken at many patent events to get the innovation community to fight back against this sort of thing. It must be done, otherwise we lose the system and its principles to thievery. Keep at it! Thanks.

  2. JNG February 17, 2015 8:09 pm

    Gene, the Bessen/Cisco relationship is quite incestuous. Patrick Anderson put it very well here:

    http://gametimeip.com/2012/07/30/patent-scholars-challenge-bessen-meurers-bogus-29-b-npe-costs-figure/

    What is less well known is that Bessen owns a TON of Cisco stock and has been using it for years to “fund” his “private foundation” known as the “Research on Innovation.” Citizenaudit.org has many of his tax returns, and they document his interest to the share. In 2012 for example alone he sold 1182 shares of Cisco to support his group. Now there’s no indication of where that stock came from, but he clearly benefits directly and personally from Cisco’s financial performance. So his “research” which purports to be academic and objective – but somehow always finds fault with patent owners asking for fair payment from companies like Cisco – see http://www.bu.edu/law/news/BessenMeurer_patenttrolls.shtml – is really a sham. And how apt that one of the main “damage” he harps on in his articles that is allegedly caused to such entities, is – no surprise! a reduction in market capitalization, i.e., a reduction in stock price, which, again, directly relates to his funding. From his paper:

    “Bessen, Ford, and Meurer estimate the total business costs of NPE litigation for public firms using stock market event studies”

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2091210&rec=1&srcabs=2117421&alg=1&pos=1

    Unlike a real lawyer – who have to disclose such interest if he/she were writing a brief for example – he hides behind an academic post where there are apparently no such ethical obligations. The media needs to do more to police these abuses of position.

  3. Randy Landreneau February 17, 2015 11:17 pm

    As obvious as this farce is to us, many in the House are totally unaware of the truth. Others who may be sensing some of it seem to be committed to continuing on the wrong path wearing blinders. The way to stop the idiocy is to get in front of your Representatives this week while they are in their local offices. They are there in your neighborhood right now. Let’s enlighten them.

  4. Night Writer February 18, 2015 9:27 am

    I think the problem is there are no consequences anymore for publishing articles in law journals that are not sound. If the professors were disciplined–perhaps a demotion to assistant professor–we would suddenly see a much higher level of academic work in law journals. We have to remember that law journals are not peer reviewed. Law journals are essentially the vanity press. Let’s not forget that Lemley claims in a law journal article that software has no structure.

  5. Different Perspective February 18, 2015 9:38 am

    Gene – How can use these words in the same sentence: “foster innovation and grant exclusive rights to owners “. What? Seriously? Granting exclusive rights to others is exactly what DOES NOT foster innovation. All these patents like emailing to a mobile device, One Click Patent, Accident Avoidance, etc, are all killing innovation. That is what we are all saying. Nobody should have a patent on technology that prevents accidents in automobiles. Ridiculous.

  6. wow February 18, 2015 9:52 am

    Different,

    Please confirm that you’d like to wipe out the patent system, as that is the logical conclusion that stems from your comment. If so, we can ignore you (as such a facially absurd comment warrants).

    Thanks.

  7. DaveR February 18, 2015 9:54 am

    Well said, Gene. The practical problem facing those who seek a viable, well-grounded patent system is how to get the information in this expose out to those who will be making the legislative decisions. Clearly, the CEOs of Cisco and JCP have their agendas. Those at the WSJ have theirs, yet in fact may be quite under informed regarding this study and patent law in general. In my opinion, whether or not a holder of patent rights is a practicing entity [as Gene defines it] should make no difference; it is the underlying patent rights that should determine the legal and contractual treatment[s] afforded to those patent rights and hence to whomever legally holds those rights.

  8. EG February 18, 2015 10:42 am

    Gene,

    As you correctly note, this WSJ editorial (if you can call it that) is based upon the discredited Bessen and Meurer study reported in “The Direct Costs from NPE Disputes.” As you also correctly note, the methodology in that study has been shown to be highly flawed by others. No more need to be said as to unreliability of this WSJ editorial to prove anything. Unfortunately, those who are ignorant or have agendas to grind don’t seem to care, including many who comment on Patently-O.

  9. Joachim Martillo February 18, 2015 11:05 am

    Cisco appears unwilling to pay for the use of technologies invented by others. I wonder if making it possible for the individual inventor to force Cisco to pay for IP poaching is something that might cause the USPTO embarrassment in the SAWS sense.

  10. Elizabeth February 18, 2015 11:09 am

    I think what all of us patent litigators forget is that this is a problem with the entire legal system. Defending a lawsuit, regardless of how meritorious or not it may be, is outrageously expensive in this country, and can easily bankrupt or cripple any small company or individual. What is the answer to a NPE asserting a non-frivolous, but extraordinarily weak patent claim?

  11. Night Writer February 18, 2015 11:42 am

    >What is the answer to a NPE asserting a non->frivolous, but extraordinarily weak patent claim?

    I don’t think it is we who forget. I think it is the anti-patent crowd that intentionally blame all litigation woes on patents. We should not forget that Google and others are pouring money into Congress to get what they want. Patents are like bridges where there are few that will speak for our infrastructure.

  12. Milena Sukovic February 18, 2015 1:17 pm

    Well written Gene. The current reform bill decreases competition. Instead of focusing on making it more difficult for smaller less funded companies to protect their innovations, the focus should be on figuring out how the patent system can produce better searches. Inventors by applying for patents build a knowledge base that is not taught in any university.

  13. Brian Smith February 18, 2015 2:54 pm

    Did anyone in WSJ see the irony in the article and ask John Chambers to address Arista Patent Lawsuit??

    Cisco sued Arista, citing violations of 14 patents, plus copying of Cisco’s so-called “command line interface,”
    http://bits.blogs.nytimes.com/2014/12/10/aristas-chief-executive-counters-cisco-lawsuit/

    What John wants to say is “if you steal our technology we should be able to Sue you”!
    BUT
    if “we steal YOUR technology then you are a patent troll and getting in the way of our innovation!”

    John is asking US Congress can enact a Law saying any multinational company who have a Billion dollar can Sue! Because they have lobbyist and they can give to the congressional campaign.
    John Chamber is also saying: If you are an ordinary American / small startup / a University Professor with a good idea and you patent it and eventually USPTO grants you a Patent. Then if you have the audacity to tell the Billion dollar multination company that does not pay any taxes in America that you are infringing on this USPTO patent.
    Then US congress should enact a law that helps this Billion dollar multination company can to label your university/small-startup as a Patent Troll in the media! And then get your patent invalidated in PTAB with multiple proceedings in an Article 1 Tribunal court. Because US congress and John Chamber knows that the Jury (ordinary Americans / who they think are too stupid) will not buy your 49 invalidation theories put forth by your So called Expert-Opinion, the expert that John Chambers /Google bought by paying a $500,000 to.

  14. Ken Colton February 18, 2015 4:14 pm

    Gene,
    Is Besson on retainer by or has he been consulted by any of the companies actively lobbying for the latest effort to re-write the patent laws?

    I ask because Besson’s articles and op ed pieces are so skewed it makes me think of the situation a generation ago various law school professors (not Besson) were hired to write law review articles advocating a particular point about jury trials under the Seventh Amendment by parties involved in litigation. It turns out the parties cited the articles they bought and paid for to courts as other authority for their position on jury trials.
    (Is all this worse than the fake article addressed in the Hazel Atlas case from the US Supreme Court?)

    Besson’s article/op ed of the same ilk in the Jan/Feb 2015 issue of Foreign Affairs is no better. The ‘facts’ asserted are not facts at all.

  15. Night Writer February 18, 2015 5:34 pm

    >Besson’s article/op ed of the same ilk in the Jan/Feb 2015 issue of Foreign >Affairs is no better. The ‘facts’ asserted are not facts at all.

    I don’t understand why the universities don’t discipline the professors. From what I’ve seen, professors pretty much get away with anything as long as they haven’t faked data in a scientific field.

  16. Gene Quinn February 18, 2015 7:36 pm

    Ken-

    I really don’t know whether Bessen is being paid or supported by those supporting patent reform. That would explain an awful lot if he is.

    -Gene

  17. Inventor0875 February 19, 2015 12:35 am

    “Loser Pays” will increase litigation expenses:

    Parkinson’s cousin’s law that says: “the litigation effort expands to a significant percentage of the amount available (in dispute)”.

    We are told that to assure winning under “loser pays”, the risk is too high to spare any expense.

    Consequently under “loser pays”: “the litigation effort can now be increased to multiples of the amount in dispute … which we are assured that “someone else” will surely be paying”. 😉

  18. Curious February 19, 2015 11:16 am

    Granting exclusive rights to others is exactly what DOES NOT foster innovation. All these patents like emailing to a mobile device, One Click Patent, Accident Avoidance, etc, are all killing innovation.
    LOL … software patents have been around for decades and your comments imply that we must be living in a technologically-moribound society?

    While innovation will happen without patents, our patent system fosters MORE innovation. Most innovation takes a commitment in time and/or money. Companies rarely spend money on R&D if there is an expectation that once a product/service has been developed it can be easily and quickly copied by a competitor. In today’s world, it has become much more easier, quicker, and cheaper to copy than at any other time in our history.

    The perspective from the other side I would to see is their plan to protect the investments that companies make in R&D if their plan to gut the patent system is successful.

  19. Curious February 19, 2015 11:24 am

    What is the answer to a NPE asserting a non-frivolous, but extraordinarily weak patent claim?
    What do you mean by extraordinary weak? The big three issues involve (i) validity, (ii) infringement, and (iii) damages. If there are validity concerns, put them into ex parte reexamination, which can be done for much, much less than a normal litigation.

    Regardless, if the claims are extraordinary weak, then offer a very small settlement amount. NPE have to pay their lawyers as well, and their lawyers aren’t going to be taking extraordinary weak claims on contingency (would you?). It may be what it takes to make them go away.

  20. Wondering February 20, 2015 10:53 pm

    Curious,

    So if they have, as you say, ‘extraordinary weak claims’ the correct answer is still to pay up? That is the problem many non-lawyers have with the patent system, that even when the likelihood of winning a case is high the proper business decision may still be to pay the NPE off rather than fighting in court.

  21. Lawrence S. Cohen February 23, 2015 8:50 pm

    As a BU Law graduate, I contacted Meurer and was so disappointed in the clear and apparently deliberate fallacies in his book such as the “cost” of patent litigation. It was so obvious that he was pursuing a point of view, not studying to seek a conclusion. What a disapointment. As for “trolls”. In those rare cases of abuse, the courts have had plenty of power to control and punish. But the bigger problem is ever too obvious, a “big” industry push to degrade the patent system at least as to those in the less powerful posture-who can now get representation by substantial organizations. I feel that we are generally helpless in this reform direction because the Congress is really controlled by the money coming in from the reform advocates, and all our complaining will be lost in the wind.

  22. Curious February 23, 2015 10:12 pm

    So if they have, as you say, ‘extraordinary weak claims’ the correct answer is still to pay up? That is the problem many non-lawyers have with the patent system, that even when the likelihood of winning a case is high the proper business decision may still be to pay the NPE off rather than fighting in court.

    A guy walks into your donut shop, buys a dozen donuts, pays cash and leaves. You think that is the end of it. However, a week later you get served with a lawsuit saying that he’s been injured slipping on ice in your parking lots and he wants $1M. You look at the footage of the security camera and you see him (you are 90% positive it is him, but not 100%) walking around the patch of ice, testing it with his feet, looking around for another 5 minutes before laying on the ground — moments before a couple on foot sees him laying there. You send his attorney a copy of the footage.

    His attorney calls back and says he’ll settle for $500. What do you do?

    What we are looking at here is called a “business decision.” You can fight … probably spending $10K-$50K(??) doing so or you can just give him the $500. What would you do?

    BTW — as you are pondering my question, please realize that life isn’t fair and few have ever represented life as such. Is it fair that a bolt of lighting hit a tree that fell onto your business and now your insurance rate is higher because you filed a claim? Sometimes fate deals you a bad hand as a business owner.

    Regardless, if you don’t want to pay, you can choose to wait the other wide out. As I said before, few attorneys are going to sue on a very bad case. If it is on contingency, they have little hope and receiving anything in return, and if somebody does fight they’ll be out even more plus the potential of being sanctioned under Rule 11. You vastly over-estimate the risk tolerance of attorneys — who are frequently the most risk adverse people you’ll ever meet. If the fact of bad facts/law, the other side will most likely back down.

  23. Anon February 24, 2015 1:28 pm

    Hey Curious. Get a better attorney that can dispose of the case for less money. It is your attorney’s job after all. As you have pointed out, most NPEs (at least the ones everyone is so upset about) are on contingency. Therefore, it is not that hard to apply the right pressure and make a contingency case go away. Most NPE cases are not worked up well on the Plaintiff’s side, and most will go away if you make their attorneys work a little. What you want is a world without litigation — good luck with that. In this market and with the enormous amount of price pressure from inside counsel now (if you are outside counsel you know how budgets have gone down), NPE lawsuits are being handled at a fraction of the cost compared to attorney fees prior to 2008. In fact, many are being handled in house with no outside counsel support. There simply is not a problem here and Congress needs to get their head out of their ass. IP owners better start lobbying or patents will be capped at 250 K just like your right arm is.

  24. Derek Kerton February 24, 2015 4:02 pm

    “whether these long-time supporters of patent reform are simply trying to use scare tactics and faulty data to mislead Congress into enacting another round of patent reform.”

    I don’t think that’s the case, but then, they might be copying best practices from your side of the debate, which has overstated the damages of “IP theft” for decades. Counting “lost sales” as a cost, despite no effective proof that those copies would ever have been a sale comes to mind.

    Also, Gene’s article’s biggest logical errors stem from this:

    “75% of what Bessen and Meurer claim are “costs” are payments for the transfer of rights, which is specifically and intentionally the point of the patent system”

    First and foremost, the point of the patent system should be patently clear. You should be ashamed to recast it as anything different, since it is so clearly enshrined in constitutional law: To promote the progress of science and useful arts. That is it. That is the whole point. “Payments for the transfer of rights” is one method which arguably supports this goal. Exclusive rights is another. But a patent lawyer should at least understand the difference between methods and goals.

    Second, the entire argument of Bessen and Meurer seems to suggest that, with patent reform, those transfer payments might not exist. As such, those authors correctly cast those expenses as costs of the current system versus the alternative they envision. What Gene is arguing is a tautology: “given current patent law, these costs are called transfers, therefore they cannot be costs”. OK, Gene, but some of us see them as *costs* of operating with a less-than-optimal patent system.

    Given Gene’s argument against Bessen and Meurer, any law-required transfer of money should not be called a cost, simply because a law says it must happen. Like taxes. Business taxes and registration fees are fully legal under current law, so should businesses not consider them a cost? If it costs you money, it’s a cost.