On Friday, April 12, 2013, I was at American University Washington College of Law for a program titled Patent Subject Matter Eligibility Today: Software, Genomics, and Business Methods. I participated on a panel titled CLS Bank en band: Are Software Methods Patentable? What I want to write about today, however, is not our panel presentation, but rather the Keynote presentation by Suzanne Michel (no relation to Chief Judge Michel), a former deputy director of the FTC who is Senior Patent Counsel at Google, Inc., working in Google’s policy office in Washington, DC.

It is no great surprise probably, but I disagreed with practically everything she said, although I did enjoy her presentation. I love to debate the issues, and she is extremely knowledgeable and well briefed on what is happening in the trenches. Those of us who disagree with the proffered narrative that the patent system is broken can’t ignore competent advocates like Michel. She is not a patent-hater and her message is sharp, crisp and clear, although I do think it is misleading. The patent system is not broken, and for reasons I can only guess the best and brightest leaders in much of the big-tech industry are pursuing paths not calculated to succeed; at least if the goal is to stem the rise of patent litigation and innovate for the future.

With this in mind, what follows is a summary of Michel’s presentation, which if not titled was certainly themed — Fixing Problems of the Patent System to Improve Innovation. I also provide my thoughts and comments in the format of comments from the peanut gallery, or perhaps as a patent law equivalent to Mystery Science Theater 3000.  In order to differentiate my thoughts/comments from Michel’s presentation, my comments are italicized, colored, indented and tagged with the IPWatchdog logo.

I am in New York City this week taping the new patent bar review course, which is a part of our effort to bring the course current with the latest changes in the law and rules that will begin to be tested starting April 2, 2013. After a long day of lecturing and preparing materials and writing questions, I had dinner and found myself sipping a drink at Randolph’s, which is the bar attached to the Warwick Hotel, where I stay when in New York City. Unwinding from the day I decided to catch up on news – for me that means reading Politico or The Hill typically. I learned that Rand Paul engaged in a filibuster over drone strikes and Jeb Bush is on a book tour and folks are speculating about whether he will run for President in 2016. But I also learned that the self-appointed anti-patent billionaire idiot – Mark Cuban – was at it again. I quietly asked for the check and excused myself from an otherwise enjoyable evening of relaxation. Mark Cuban is an idiot!

Mark Cuban, the flamboyant owner of the Dallas Mavericks, has said some truly ridiculous things about patents. Recently, he complained to Tech Crunch about patent lawyers that “make too much money,” which is something that only a truly out of touch billionaire could rationalize. Really? A capitalist billionaire complaining about anyone making too much money ought to be a bridge too far for anyone. But Cuban doesn’t stop there, he talks about “dumbass patents,” and how patents on things that others later figure out ought to be invalidated. As if hindsight doesn’t make everything obvious in retrospect. Seriously, if he really holds these thoughts it has to be a complete accident that he managed to become a billionaire.

But this time it wasn’t that Mark Cuban made this idiotic and completely indefensible statement about the patent system that got me started. Nevertheless, he is still to blame. You see, Julie Samuels is the “Mark Cuban Chair to Eliminate Stupid Patents” at the Electronic Frontier Foundation. What a title! The Mark Cuban Chair to Eliminate Stupid Patents? And folks are actually supposed to take this seriously?

Chief Judge Randall Rader of the United States Court of Appeals for the Federal Circuit kicked off the public programming at the annual meeting of the Association of University Technology Managers (AUTM) in San Antonio, Texas, last night. He participated in a question and answer session in front of a packed theater at the Henry B. Gonzalez Convention Center in downtown San Antonio, Texas, just a block away from the famed River Walk and only several blocks from the Alamo.

The event was billed as a fireside chat with Chief Judge Rader, sans fire. Nevertheless, those familiar with the fireside chat genre get the feel for the evening. It started out a bit biographical before it turned to an in depth discussion of the patent system and heavy issues of the day. The conversation was lead by Sean Flanigan, who is President-Elect of AUTM. Questions were also taken from the audience, which I would estimate at well over 500.

Chief Judge Rader is known for his frank discussions, and he is not afraid to defend the patent system. He did not disappoint with his candor. Very early on in response to a question from Flanigan, the Chief Judge said matter-of-factly: “Yes, I do think there is a litigation abuse problem.” Game on! Chief Judge Rader would go on to discuss the blackmail-like shake-downs that are plaguing the industry and giving the patent system an unjustified bad name.

2013 is going to be an exciting year for patent law and the policies which govern it. From implementation of sections of the Leahy-Smith America Invents Act to anticipated decisions from the Supreme Court, we can expect changes to the patent system that will affect the high tech and biotechnology industries, start up companies and established businesses of all sizes. Just some of the developments we can expect to see include a determination of whether genes are patentable, proposed legislation addressing the litigation strategies of non practicing entities, and harmonization of the US with much of the world through the implementation of the first-to-file patent application system and the introduction of an international design patent application process.

The Patentability of Human Genes

Isolated genes and DNA sequences are claimed in numerous patents and patent applications and are extremely important to the biotechnology industry. Myriad Genetics was granted patents for BRCA1 and BRCA2, two genes linked to breast and ovarian cancer, and is the sole provider in the US of tests for cancers involving the BRCA genes.

For several years I was the lead attorney at a Taiwan company that manufactures technology and consumer electronic products, from light-emitting diodes to liquid-crystal displays.  Every month we received a new demand for patent licensing or indemnification and it was my job to dispose of them at no cost, without licensing, litigation, or outside counsel.  Usually it was possible, but occasionally we found ourselves mired in full-blown litigation.

It’s no secret patent litigation costs are immense.  According to the American Intellectual Property Law Association, the cost of an average patent lawsuit, where $1 million to $25 million is at risk, is $1.6 million through the end of discovery and $2.8 million through final disposition.  Adding insult to injury, more than 60% of all patent suits are filed by non-practicing entities (NPEs) that manufacture no products and rely on litigation as a key part of their business model.

However, whether one represents a plaintiff or defendant, manufacturer or NPE, there are actions one can take to help manage the costs.  Below are some general guidelines.

On December 20, 2012, I interviewed Paul Ryan. Not Congressman Paul Ryan, but rather the Paul Ryan that is the CEO of Acacia Research Corporation. See part 1 of my interview with Paul Ryan.

What you think of Ryan and Acacia is almost entirely dependent upon the side of the aisle on which you sit; namely whether you are an innovator or a practicing entity. Even more specifically, those who are innovators but don’t have a voice loud enough to be heard by practicing entities are likely to believe that Ryan and Acacia are the answer to their prayers. Those practicing companies that simply want to make a product and sell it without regard to the underlying patents that might be in place are likely to believe Ryan and Acacia are the poster children for everything wrong with the patent system.

My own opinion is this: independent inventors and small businesses that innovate get trampled. They are ignored by larger entities. Acacia Research is a publicly traded company and opens it books to the full extent required by the Securities and Exchange Commission. There is no mystery about their business model, and there is no doubt that when they partner with a patent owner that patent owner will have a voice that will be heard loud and clear by all those who might be infringing.

But you can decide for yourself. Without further ado, here is the culmination of the interview with Paul Ryan.

Paul Ryan is a more common name than you might think. In the world of politics when one speaks of “Paul Ryan” they are talking about the Republican Congressman from Wisconsin who was Mitt Romney’s running-mate and would-have-been Vice President. But in the intellectual property world, particularly the patent litigation world, the name “Paul Ryan” refers to the CEO of Acacia Research Corporation. It is the later Paul Ryan that went on the record with me to discuss Acacia, patent enforcement, how large companies who are infringers disregard innovative independent inventors and much more.

This two-part interview took place on December 20, 2012. With the holidays looming and various articles already in the pipeline for the end of the year and start of 2013 publication slid a bit.

Sometimes when I’m doing an interview I have a good feeling about it and know it will turn out very good in print. This was one of those times. I enjoyed my conversation with Ryan and think you will find it quite informative and interesting as well. Without further ado, here is my interview with Paul Ryan.

Non-practicing entities (NPEs) are once again thrust into the Section 337 spotlight by way of the “domestic industry” requirement.  Back in 2007, InterDigital LLC filed a complaint at the United States International Trade Commission (“the Commission”), with the intention of blocking Nokia’s import of mobile devices into the United States.  InterDigital alleged that Nokia’s mobile devices infringed its U.S. patents relating to power control and high-speed data transmission in 3G wireless technologies.   The Commission sided with Nokia and found no infringement.  However, Nokia’s favorable decision turned sour when it was reversed by the Court of Appeals for the Federal Circuit (“the Federal Circuit”).  Nokia responded by petitioning the Federal Circuit for an en banc rehearing of the case.  In its petition, Nokia focused specifically on the question of whether InterDigital’s patent licensing activities satisfied the “domestic industry” requirement.  Recently the Federal Circuit, sitting en banc, denied Nokia’s petition for rehearing.  The Federal Circuit decision is nevertheless interesting for its treatment of Section 337’s “domestic industry” requirement as it is applied to NPEs.

Under 19 U.S.C. §1337(a)(2), relief at the Commission is predicated on the existence or establishment of an industry in the United States “relating to the articles protected by the patent.”  This is commonly known as the “domestic industry” requirement.  In turn, section 1337(a)(3) provides that an industry is considered to exist if there is in the United States, “with respect to the articles protected by the patent,” significant investment in plant or equipment, significant employment of labor or capital, or “substantial investment in [the patent’s] exploitation, including engineering, research and development, or licensing” (emphasis added).

Eastman Kodak Company, the once mighty technology juggernaut that has fallen on hard times and found itself fighting to get out of bankruptcy, has completed a series of agreements that successfully monetizes its digital imaging patents. Under the agreements, Kodak will receive approximately $525 million, a portion of which will be paid by 12 intellectual property licensees organized by Intellectual Ventures and RPX Corporation, with each licensee receiving rights with respect to the digital imaging patent portfolio and certain other Kodak patents. Another portion will be paid by Intellectual Ventures, which is acquiring the digital imaging patent portfolio subject to these new licenses, as well as previously existing licenses.

Giant patent aggregators like Intellectual Ventures and RPX being involved will certainly make people stand up and notice, and perhaps also make them wish that they have entered the bidding.

The proposed transaction, which achieves one of Kodak’s key restructuring objectives, follows other recent major accomplishments that include an agreement for interim and exit financing for the company’s emergence from its Chapter 11 restructuring, and resolution of U.S. retiree non-pension benefits liabilities. Kodak’s monetization of IP assets further builds on its momentum toward a successful emergence in the first half of 2013.

A multinational corporate client, who was concerned about potentially defending non-practicing entity (NPE) patent suits, recently asked me about its options for joining a U.S.-based defensive patent pool.  Upon doing the research, I was surprised to learn that there are only really three options: Allied Security Trust, RPX Corporation, and Intellectual Ventures!

First, some background.

NPEs, as most of us know, are entities that own one or more patent portfolios, attempt to license them through targeted letter-writing campaigns and then file patent infringement suits against those letter recipients who refuse to enter into non-exclusive licenses.  In some cases, due the U.S. Court of Appeals for the Federal Circuit’s 2007 ruling in Sandisk Corporation v. STMicroelectronics Inc., NPEs often file law suits first and then attempt to negotiate a license with the accused infringer/defendant.

Between the legacy issue of bad patents, patent auctions and the many who purchase patents, what has started to happen is that the patent system rewards those who have the finances and ability to game the system. But the problem is extraordinarily complex. What is clear, however, is that the enforcement of bad patents is a problem within the patent and innovation industry.

But at the same time it would really be GREAT if the media and anti-patent community would get a clue and understand that the problem with bad patents is largely a legacy issue. Those that say that the United States Patent and Trademark Office continues to hand out dubious patents like candy are flat wrong. The bad patents that we witness being used in unsavory shake-downs have not been granted over the last few years, but rather were granted many years ago, under a different patent regime and when there was little findable prior art for patent examiners to use.

Those that pretend that bad patents issue today by the dozen and for a dime are living in a fantasy world that does not approximate reality. Yet the misinformation continues, undaunted by reality. So if reality doesn’t support the mountains of misinformation about the patent system and how it operates today, what is going on?

The Federal Trade Commission (FTC) and Department of Justice (DOJ) announced today that they will hold a joint public workshop on December 10, 2012, to explore the impact of patent assertion entity (PAE) activities on innovation and competition and the implications for antitrust enforcement and policy.

This workshop will examine the economic and legal implications of PAE activity, as distinct from prototypical “non-practicing entity” (NPE) activity, such as developing and transferring technology.  By contrast, PAE activities often include purchasing patents from existing owners and seeking to maximize revenues by licensing the intellectual property to (or litigating against) manufacturers who are already using the patented technology.

Supporters of the PAE business model say that it facilitates the transfer of patent rights, rewards inventors and funds ongoing research and development efforts.  Critics describe adverse effects on competition and innovation, including increased costs and a lack of technology transfer, ultimately taxing consumers and industry.

Any discussion of flaws in the United States patent system inevitably turns to the system’s modern villain: non-practicing entities. They are known more colorfully as patent trolls, although the business model of non-practicing entities has appeared in copyright markets as well as well as in patent markets.

In the America Invents Act, Congress directed the nonpartisan Government Accountability Office (GAO) to conduct a study “on the consequences of patent infringement lawsuits brought by non-practicing entities.” At the GAO’s request, we provided data on non?practicing entities for five years (2007-2011) using a database from Lex Machina, formerly the Stanford IP Clearinghouse.  The GAO requested only the coded data without analysis, and we provided this with the understanding that we would publish our own analysis of the data at a later time.

Our current article, which is in draft form and available at SSRN and the final study will be available from the Duke Law & Technology Review. We note that although the cases were compiled at the GAO’s request, all conclusions are our alone and not those of the GAO.

Shortly after the Nortel transaction and Google’s acquisition of Motorola Mobility in the summer of 2011, some industry observers quickly warned us that patent market was a bubble (here, here and here). The debate over the patent bubble has been going on since then (examples can be seen here, here and here). Some were saying that the patent bubble has already burst (here and here), some saying it’s about to, while still others keeping hailing the booming patent market.

To be sure, all of the concerns over the patent bubble are legitimate, and as always, rational debate is beneficial to the healthy development of patent market. There is no doubt that most of the opinions expressed were based on the observers’ experience and the information available to them at the time. Unfortunately, unlike in the well-established financial markets where transaction information and price data are mostly available for research and analysis, the prices and deal terms in patent transactions are usually kept secret by the parties. Except for meeting certain regulatory requirements (such as SEC filing in the US) for publicly-traded companies, there is usually not much additional motivation for the parties to release the prices and deal terms in patent transactions.

The lack of disclosure leads to the scarcity of data, and what comes with the scarcity are the incompleteness and obscurity, all of which lead to misinterpretation of the data and information. More importantly, misinterpretation, in turn, can lead to mispricing and market inefficiency when the misinterpreted data is applied to value patents for transaction. For example, after the Nortel transaction and Google’s acquisition of Motorola Mobility, some observers noticed that both deals were concluded on a $750K per patent basis. Therefore, as the story goes, market price per patent was about $750K per patent.

A report assembled by the USPTO and the economics and statistics administration (ESA) states that intellectual property intensive industries account for 27.1 million jobs (18.8% of all employment). These same IP intensive industries, which are better defined in the report, also account for $5.06 trillion or 34.8% of the U.S. GDP. See also IP Contributes $5 Trillion and 40 Million Jobs to US Economy. Therefore, it is clear to see the importance of intellectual property within the economy of the United States.

“The first step in winning the future is encouraging American innovation,” said President Barack Obama explains almost two years ago in his State of the Union Address delivered to Congress in January 2011. Innovation is the process through which new ideas are generated and ultimately put into the marketplace.  Innovation is one of the main forces behind the growth of the U.S. economy — it spurs national competitiveness.

Innovation and how to foster next generation technologies is a topic of very active discussion within businesses across the country. But how can America continue to be one of the most innovative countries in the world?  The rapid adoption of IP management and licensing platforms built around social collaboration seems to lead us to one answer – open innovation. Indeed, with today’s technology allowing for the seamless transfer of information – R&D departments have little to no choice but to begin to embrace the open innovation model and use it to their advantage. Understanding your intellectual assets and being able to capitalize on them in order to generate more revenue must be an important part of managing IP and fostering innovation.