The Patent Games Publicly Traded Companies Play

One major problem in the debate about patent litigation abuse is that the debate hasn’t really focused much on litigation abuse. The rhetoric used is all about stopping abuse, but the proposals themselves have little or nothing to do with fixing the problems of the system. Instead, those pushing patent reform have tended to engage in a game of misdirection. For example, what could be wrong with forcing patent trolls who bring specious, extortion-like claims from having to pay the attorney fees of the prevailing defendant? Phrased that way most would likely say “let the evil troll pay!” But if that is the goal then why isn’t the proposed legislation written so that it would apply only to bad actors? Either the drafting is sloppy or the fix is intended to do more than fix the problem of litigation abuse.

Language could be written to make it more easy for district courts to levy attorneys fees against those engaged in a pattern of misconduct without establishing a presumptive fee-shifting law that would require losing parties to pay unless they can demonstrate they acted in good faith at all times, as the Innovation Act does. Further, why is it necessary to allow universities and Venture Capital firms to be pulled into litigation against their will and then have to pay the other sides attorney’s fees for a litigation they didn’t want to pursue in the first place? Is Congress trying to make it even harder for startups to get funding?

The problem with patent reform, particularly the reforms in the Innovation Act and in the PATENT Act, is that the rhetoric doesn’t match the language of the statute. Proposed reforms are not narrowly tailored to deal with abusive litigation. Instead the provisions are written to apply across the board to all patent owners whether or not they are bad actors. All of this in the name of stopping the so-called “explosion of patent litigation” that risks threatening the very survival of the entire system. Too bad it isn’t so. The patent litigation explosion story is just one big lie. When you look at the facts a wholly separate tale emerges.

After an exhaustive review of patent litigation the Government Accountability Office (GAO) concluded in an August 2013 report that there is no patent litigation crisis. The GAO report also found that 80% of the patent lawsuits are brought by operating companies who are suing other operating companies, which debunks the myth that most patent infringement lawsuits are brought by “patent trolls.” Only 20% of patent infringement lawsuits were even brought by non-practicing entities, not all of which qualify as patent trolls. Furthermore, according to data from Lex Machina, in 2014 there were 1,070 fewer patent lawsuits filed than during 2013, and the number of patent cases filed in 2014 was lower than the number of cases filed in 2012 by some 433 cases. Therefore, the stories of run away patent litigation are greatly exaggerated.

When considering the raw numbers of patent litigations filed it is also important to keep in mind that the America Invents Act (AIA), which was enacted in September 2011, introduced new joinder provisions for the express purpose of making it more difficult, if not impossible, for patent owners to sue large numbers of defendants in a single litigation. Prior to the enactment of the AIA dozens or hundreds of defendants were typically sued in a single case brought by a patent troll. This unfairly compromised defendants’ rights to mount an individual defense for a variety of reasons, so Congress wanted to separate out disputes. Although Congress may have naively thought otherwise, no one familiar with the industry suspected that the implementation of joinder provisions in the AIA would mean patent plaintiffs would give up suing, or that patent plaintiffs would sue fewer defendants. It is also worth keeping in mind that the joinder rules were not intended to prevent patent litigation, they were intended to make patent litigation fairer for defendants so that they would not be bundled together in cases where there really was no commonality of facts aside from the patent being asserted. The joinder provisions were designed to guarantee more patent infringement litigation, not less.

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Those who profess there to be rampant problems associated with patent trolls and non-practicing entities suing for patent infringement are simply telling a tale that the factual data doesn’t support. Even despite the AIA requiring more patent infringement lawsuits the data suggests that there is less patent infringement litigation. That doesn’t sound like an explosion of patent litigation at all – because there is no such explosion to be seen.

So how has such a factually baseless narrative been able to dominate the discussion? Unfortunately, this propaganda was promoted by some of the elite Silicon Valley technology companies over the last several years, with Google leading the charge. But Google is a high-tech company. Why would they want to damage the patent system by spreading half-truths and reckless misrepresentations? That is a good question that deserves to be answered, but it needs to be asked first. Google shareholders and Members of the Board of Directors should be asking these and other difficult questions. Why is Google is spending so much money to patent innovations when they are spending tens of millions of dollars lobbying to weaken the patent system? They are spending billions to innovate and millions to make those innovations worthless. Something doesn’t compute. See Google collects patents while lobbying against them.

Sure, there are bad patents, but the problem with bad patents is not nearly what you have heard it to be. During 2014 there were 579,782 utility patent applications filed, with 303,931 utility patents issued. Even if the United States Patent and Trademark Office is correct 99.5% of the time that would mean that 1,520 patents during 2014 were improvidently issued. It is unrealistic to expect perfection in any system, particularly when there are nearly 8,500 patent examiners, who are the front line decision-makers. With that number of individual decision-makers and the volume the USPTO handles in a given year there will be some mistakes.

The fact that mistakes are inevitable doesn’t mean that the system should be or needs to be scrapped. But those who abhor the patent system would have the public believe that the Patent Office issues low quality patents routinely. Every honest observer will tell you that the far larger problem is that the USPTO can’t possibly be expected to provide the high quality demanded given the perpetual state of change the patent system has endured over the past 5 years.

Indeed, the real untold story is that the Patent Office is simply not to blame for low quality patents. According to a Commerce Department Inspector General report, over the last 5 years the Patent Office has had to change examination policy some 19 times in response to changes in the law brought about by judicial decisions. The report explains:

[S]ince FY 2009, USPTO has issued new examination guidance 19 times in response to federal court decisions and Patent Trial and Appeal Board decisions. Thus, the practice of not appropriately recording errors has had an ongoing impact on OPQA reviews and the official quality metric.

When you factor into consideration all the legislative changes that have taken place over that same time frame the scope of the problem facing the Patent Office is staggering. How can any system withstand so many changes over such a short time frame? Even assuming arguendo that there is a quality problem, which I dispute, can anyone blame examiners? How well would you do your job if you had to incorporate 19 separate, distinct and substantive changes to the way you do you operate? My guess is that you would probably think it unfair, not to mention unwise.

The IG report blasted the Office for low quality, but the real story is that with so many substantive changes it is unrealistic to expect perfection or anything that even approximates perfection. The IG report was nothing more than a political hit piece that threw the Patent Office under the bus in order to gin up the issue of low quality patents as the patent reform debate is heating up in Congress. In fact, without intending to do so the IG report makes the case for at least a temporary end to the activism in Congress and in the federal courts.

No one can succeed when the rules of the game are changing so fast, and no system can thrive when it is in a constant state of flux. U.S. patent laws and rules have been constantly shuffled without any real, substantive reform that would lead to a better system. Yet, all these changes are putting $5 trillion dollars in gross domestic product (GDP) and at least 40 million jobs at jeopardy. That is why reasonable voices are practically begging Congress to temper its enthusiasm for reform and to laser focus on the problem of fraudulent and misleading demand letters, which doesn’t need to have any negative impact on legitimate exercise of valid patent rights by innovators.

Sadly, we find ourselves at a place where detractors of the patent system have succeeded beyond their wildest dreams, convincing nearly everyone of problems that don’t exist. So successful has this misinformation campaign been that patents owned by everyone are worth less, if not completely worthless. By taking a shortsighted view of the litigation problems they took direct aim on the patent system, including their own patent portfolios and the essence of their own competitive advantage.

What are these companies going to do when foreign corporations push their way into the U.S. marketplace? How will CEOs explain away the existential threat they face when foreign manufacturers flood the market with goods and services without regard to long since crippled patent portfolios of the former tech elite? The patent portfolios these tech giants own have become so hopelessly compromised and many patents so worthless that all that money spent to build up significant barriers to entry will have been wasted and there will be no way to stop well funded foreign companies who will simply ignore the non-threatening patents the Silicon Valley elite hold.

Management in these Silicon Valley elite tech companies has been spending large sums of shareholder money on R&D. They have spent large sums filing for and obtaining patents on their own homegrown innovations. They have also spent large sums acquiring patents either directly or by acquiring companies with attractive patent portfolios. Yet at the same time they are spending money lobbying for the purpose of devaluing patents.  Can they really be oblivious to the fact that at the same time they are devaluing the patents of others they are also devaluing their own patents? Does spending millions in lobbying fees to undo billions spent on research, development and protection make sense to anyone?

In the patent arena it is not hypocrisy that is fueling the misguided strategies of tech companies. Instead it is the self-interest of tech CEOs who are increasingly only concerned about the short term. This is tragic because corporations are supposed to exist in perpetuity, not just until the current CEO can cash out with his or her golden parachute. Short term thinking of tech CEOs is destroying the patent system and wasting shareholder assets.

There is nothing wrong with public companies speaking out on patent reform, but shouldn’t they have to report the material risk their positions pose to the interest of shareholders?