Inter Partes Review and the Covered Business Method Patent Program are the new O.K. Corral and it is High Noon
There is a battle cry against abusive litigants in the patent industry. Among the tactics suggested is a “loser pays” system to try to mirror Europe, where this type of abuse is minimal. The Congressional Research Service presents that 92% of companies who assert but do not make products (over broadly and derisively called “trolls”) lose litigation that reaches judgment on the merits. [i] So far, direct fee shifting has received criticism under US jurisprudence, but the US Supreme Court on Sept. 30, 2013 agreed to hear cases involving the award of attorneys’ fees in patent litigation.[ii] Also, several of the proposed bills in Congress support more aggressive fee awards for bad conduct and enhanced rules. In particular, Rep. Bob Goodlatte’s Innovation Act recently cleared the House Judiciary Committee with a specific focus on cutting down on abusive patent litigation.
The America Invents Act (AIA), the first patent reform in decades, created a new forum to resolve patent disputes that effectively shifts fees. The AIA created the Inter Partes Review (IPR) and the Covered Business Method (CBM) program, which are “mini-trials” before an appeal board of specialized legal and technical expert judges. In these proceedings, the board takes a second look at patents the USPTO has already granted to determine whether they are valid. The judges on the USPTO Patent Trial and Appeal Board (PTAB) have been prolific in decisions clarifying the rules of engagement. The result? Up front costs for patent owners where 85% of the IPR/CBMs involve parallel litigation in court, and 66% of the time, the litigation is stayed pending the PTO proceeding. This can increase the overall cost of litigation for patent owners, while increasing the alternatives for defense strategies – pay up extortion fees or pay the PTO IPR/CBM fixed and potentially higher initial fees. However, the defendant then triggers the same level of fees for the patent owner now taking the defense in IPRs/CBMs.
This paper proposes amending 35 U.S.C. 271 Infringement of Patent with elements drawn from § 2-403 of UCC Article 2, Sale of Goods, and with elements of the Patent Exhaustion Doctrine. This amendment, if enacted, would prevent patent trolls from proceeding against Bona Fide Purchasers for Value with respect to certain specific infringements, in order to strengthen consumer confidence in the marketplace, by ensuring that vendors can deliver the products that they sell, free of threats of patent infringement litigation against such innocent buyers.
Yesterday, the House Judiciary Committee held a hearing on the “Innovation Act,” HR 3309, a bill sponsored by the Chairman of the House Judiciary Committee and co-sponsored by 10 other Members from both sides of the aisle, including the Chairman of the IP Subcommittee.
The hearing focused on the effect the Innovation Act would have on the problem of abusive litigation practices and on the patent system as a whole. Three central themes emerged from the hearing: 1) there is an urgent need to fully fund the PTO; 2) significant skepticism remains about expansion of the Covered Business Method (“CBM”) program; and 3) some of the more technical aspects of the Innovation Act would help rid the patent system of expensive and wasteful lawsuits. Divergence of opinion remained among the Members, however, about whether Congress should address fee shifting at this time or wait for the Supreme Court to hear the two fee shifting cases before it, although the witnesses agreed that legislation on fee shifting would be helpful, and Congress should proceed with legislation on this front.
Note when reading the report below that the “Innovation Act,” HR 3309, is different than the “Innovation Protection Act,” HR 3349. The Innovation Act is the patent litigation reform measure introduced by House Judiciary Committee Goodlatte and others. The Innovation Protection Act is the PTO funding bill introduced by House Judiciary Committee Ranking Member Conyers and others.
Every month I stumble across a number of items that catch my attention, so we have started publishing a monthly News & Notes column that incorporates various items of possible interest, a Pharma & Biotech Update and also a rundown of litigation, deals and licenses. Obviously, these are not intended to be an exhaustive summary, but rather interesting items that might be worth knowing in order to keep your finger on the pulse of the industry.
In their article entitled The Private and Social Costs of Patent Trolls, James Bessen, Jennifer Ford, and Michael Meurer present a study on patent litigation involving Non Practicing Entities (NPEs), which they define as firms that do not produce goods but rather acquire patents in order to license them to others. Bessen et al.’s conclusions are startling. The loss to defendants involved in NPE patent suits during the last four years “exceeds $83 billion per year, over a quarter of U.S. industrial R&D spending per annum;” and NPE patent litigation constitutes a “very large disincentive to innovation.” Bessen et al.’s article was prominently featured on the cover of the Winter 2011-2012 issue of Regulation magazine with a cover illustration of oversized humanoids with visible malign intent, armed with clubs, holding up innocent travelers for payment at a bridge, wherein the cover is titled “Patent Trolls – How NPEs harm innovation.”
In my full article “Questionable science will misguide patent policy,” I expose fundamental flaws in the methods that Bessen et al. apply in their studies and explain why their fantastic cost estimates should be dismissed as extremely biased and unreliable, and why their conclusions should be discarded as misleading for patent policy. An abridged version follows.
Bessen et al.’s stock return event studies on patent litigation
Bessen et al.’s thesis is predicated on “event studies” of lawsuit filings—what happens to an alleged infringer’s stock price around the filing of a patent infringement lawsuit, after taking into account general market trends and random fluctuations of the individual stock. Without providing any proof, these authors argue that during these “events,” stock value declines that are otherwise unaccounted for by estimated market trends (called “Abnormal Return”), reflect “the costs of lost business, management distraction and diversion of productive resources that might result from the lawsuit, possible payments needed to settle the suit, and the reduction in expectations of profits from future opportunities that are forestalled or foreclosed because of the suit.”
Enter Professor Robin Feldman, who has become the preeminent researcher on issues of patent litigation, particularly as it refers to so-called patent monetizers. Professor Feldman has found striking new data on patent trolling and the effects of the America Invents Act, which to me suggests that the AIA has clearly been successful in its intended goal of reducing the number of defendants in a single patent infringement litigation.
Professor Feldman’s new analysis was developed by breaking down the massive data set she collected into a month-by-month analysis of patent infringement lawsuits. The data examines all patent lawsuits over four key years, which represents approximately 15,000 patent infringement lawsuits and 30,000 patents asserted. Not surprisingly to those of us who have closely followed the America Invents Act, but there was an enormous spike in litigation leading up to the implementation of the AIA in September 2011. The following graph tells the story.
I recently received an e-mail from a colleague who is embarking on an interesting research project. This colleague, who would like to remain publicly anonymous for the time being so as to be able to conduct the underlying research privately and without influence. The researcher is seeking to interview a number of different industry participants for a research study on patent assertion entities.
Specifically, the researcher is looking to talk to the following types of people:
Solo inventors or small firms that have sold their invention rights to a patent assertion entity.
Solo inventors or small firms that attempted to sell their invention rights to a manufacturing entity but failed.
Entities that previously were engaged in manufacturing but now primarily license their intellectual property portfolios.
Entities that have licensed technology from a patent assertion entity that previously was a manufacturing entity.
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