Myths of the Patent Wars: An “Explosion Of Patent Litigation” Greater Than Any in History?

What if (Almost) Everything You Thought You Knew About America’s “Broken” Patent System Was Wrong?

What follows is the first installment in the four-part “Myths of the Patent Wars” series.

Four months ago, the House of Representatives passed the “Innovation Act” (H.R. 3309), which would impose sweeping changes to U.S. patent law and the judicial system. Now, as the Senate prepares to act on its own patent reform measure, the “Patent Transparency and Improvements Act” (S-1720), it’s more important than ever that we try to separate fact from the various fictions driving this unprecedented rush to alter a patent system that for 224 years has been vital to U.S. competitiveness and economic growth.

It is a glaring fact that patent trolls extort businesses and harm the patent system, and that measures to curb their extortionist behavior are needed. The lawsuits they file (or threaten to file) against small businesses are designed to extort nuisance settlements that are less than the cost of litigation and are called “strike suits” in legal parlance.

Strike suits are actually nothing new in American courts. Similar suits are filed every year by “ambulance chasers” in the personal injury field as well as by abusive litigants in the product liability and shareholder rights arenas. In fact, personal injury and product liability suits outnumber patent suits by roughly 10 to 1 in any given year.

Patent troll suits, however, generate far more public outrage that those in other arenas of law. This is likely due to the (accurate) perception that these trolls are corrupting a vital and venerated American social compact to promote innovation and progress by granting to inventors the exclusive right to profit from their inventions for a limited time.

To address these problems, the legislatures and attorneys general of nearly a dozen states have filed suits against trolls under existing state consumer protection laws or passed new laws against the deceptive practices used by trolls to extort nuisance settlements from businesses. The federal government has also undertaken a series of White House and USPTO initiatives to curb patent litigation abuse and strengthen the patent system. These encourage the greater use of crowdsourced prior art and promote better training for examiners.

But in view of many experts, including retired Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit, the effort to curb bad actors in the legislative arena is being “hijacked” by a small handful of very powerful global technology companies intent on forcing much broader changes in the patent system to make it better serve their business interests.

Under the banner of “patent reform,” argue Judge Michel and others, these giant firms have spent tens of millions of dollars on lobbyists and media relations to promulgate a series of dramatic but false claims about America’s supposedly-“broken” patent system — claims that are now almost universally accepted as true by the media, Congress, and the public at large.

These deceptive claims are meant to justify and buttress a legislative agenda aimed at immunizing this small coterie of technology giants from the costs of their patent infringing behavior, says Michel. The patent “reformers” especially want to limit claims brought by “non-practicing entities” (NPEs) who neither make nor sell products that can be counter-sued or held hostage to the “mutual assured destruction” threat of retaliatory suits from product companies. Although the lack of a counter-suable product gives NPEs an asymmetric patent warfare advantage in court, global product companies like Google and Cisco have decided to use some hugely-asymmetrical assets of their own — most especially their financial, media, and lobbying clout — to limit or perhaps even deprive these NPEs of equal access to the courts.

In short, says Judge Michel, this handful of global tech giants are engaged in the process of “regulatory capture” — the term of art used in economics to describe the means by which groups with a high-stakes interest in the outcome of policy or regulatory decisions gain the policy outcomes they prefer.

What are the misleading claims that underlie Big Tech’s legislative agenda?

1. An “explosion of patent litigation” greater than any in history is imposing an unwarranted burden on industry and diverting resources better spent on innovation.
2. “Non-practicing entities”(NPEs) who make or sell no products are a new breed of parasitic patent litigants that hinder economic growth and contribute nothing to society.
3. These NPEs have “stampeded” the International Trade Commission (ITC) with spurious infringement claims, “holding up” products that consumers want and need in order to extort settlements from deep-pocketed tech importers like Apple and Google.
4. Undeserving patent holders are winning “excessive damages” from gullible juries for the infringement of even the most minor patents.
5. Software patents are stifling innovation in the industry, and should not be allowed because software innovation is far more incremental and iterative than in other industries.

What is most fascinating about all five claims is how clearly the facts contradict them. Much of the evidence for their falsity lies in one of the richest depositories of economic and legal history in America — the records of the U.S. Patent Office. Meticulously catalogued ever since the establishment of the U.S. patent system in April of 1790, patent records provide remarkable insight into U.S. technology development and the direct role of the patent system in helping to build the most successful economy in the history of the world.

Let’s examine the claims versus the facts, starting with Claim #1:

A PATENT LITIGATION EXPLOSION?

Claim #1: There’s an “explosion of patent suits” greater than any time in history.

The Facts: No responsible observer would deny that the courts have seen an increase in patent infringement suits in recent years, just as they have seen a rise in personal injury claims and product liability suits. But that said, the evidence shows that the rate of patent litigation today is actually significantly below historical norms.

According to USCourts.gov figures, the number of patent infringement suits filed in the U.S. increased 59 percent between 2001 and 2011 — from 2,520 cases in 2001 to 4,015 cases in 2011. Meanwhile, the number of patents granted in that same period increased by only 35 percent, which supports the view that patent litigation has been on the upswing over the last decade as the role and value of intellectual property has increased in the Knowledge Economy.

Statistics from USCourts.gov show an even sharper rise in the number of patent suits filed in 2012, to 5,189 cases. But analysts attribute most of this increase to the anti-joinder provisions of the Patent Act of 2011, which curtailed the practice of naming multiple defendants in a single infringement suit. According to Carla Rydholm of the patent analytics firm Lex Machina, “Plaintiffs must [now] meet more stringent requirements to file a case against multiple defendants. So instead of Plaintiff X filing one case naming 20 defendants, Plaintiff X might file 20 lawsuits (one per defendant) each with unique civil action numbers.”

When looked at over the longer term, however, it turns out that 96 percent of all the increase in patent infringement suits since 1991 can be explained by a corresponding increase in patents granted, reports the PriceWaterhouseCooper’s 2013 Patent Litigation Study.

Could the increase in patents granted itself be a sign that the patent system is increasingly being gamed by speculators wishing to cash in on the new “patent gold rush?” This appears to not be the case, since the average number of patents issued per billion dollars of GDP has remained at or below the same level since 1963 — 13 patents per billion dollars of GDP.

Interestingly, although the number of suits filed has increased in rough correlation to the numbers of patents issued, the number that actually go to trial has remained constant over the last 30 years. Over 90 percent of the suits filed each year are abandoned or settled, and of those that remain, most are adjudicated on summary judgment, usually with a ruling of non-infringement.

The nation is thus left with, at most, a little over 100 patent infringement trials per year — exactly the same number that went to trial 10, 20, and even 30 years ago back in 1983.

To be sure, there can be significant costs to business even in litigating and settling patent suits that never go to trial. But there is no evidence that the relative cost of patent litigation today is higher than it was historically, and in any case it remains far less burdensome to firms than other customary legal costs in business, most especially the huge cost of regulatory compliance.

In sum, the evidence does not suggest that patent litigation is “out of control” today. “The level of patent litigation in the U.S. is actually pretty modest for a nation with 2.5 million active patents and hundreds of thousands of businesses competing against each other,” insists Michel.

History supports Michel on this point. The estimated 124-plus smartphone patent suits filed between 2009-2012 are less than one-quarter the number of patent suits filed during the first “Telephone Wars” of Alexander Graham Bell’s time. Back then, the American Bell Telephone Company and its successor, AT&T, litigated an astonishing 587 patent cases alone.

Even more surprising, given the common belief in a patent litigation “explosion” today, patent and legal records from the golden age of the U.S. Industrial Revolution in the mid-19^th century show that the patent litigation rate at that time — defined as the number of patent suits filed in a decade divided by the number of patents issued in that decade — reached 3.6 percent.

In contrast, USCourts.gov figures show the patent litigation rate during the decade 2001 to 2011 was less than half that — only 1.52 percent. From 2002 to 2012, reflecting the increased suits but also the increased (276,788) patents issued last year, the litigation rate was 1.57 percent.

Over the entire period 1790 to 1860, the patent litigation rate averaged 1.65 percent.

Bottom line: today’s smartphone patent wars are simply par for the course when it comes to the ways in which disruptive new industries are developed. Historians note that nearly every major industrial breakthrough of the last 150 years — from the development of the sewing machine, telephone, automobile, radio, aircraft, medical stent, and even disposable diaper industries to the birth of the semiconductor and Internet e-commerce industries — witnessed exactly the same surge in patenting and patent litigation that we see in today’s smartphone field.

And just as with smartphones today, the most competitive technology arenas have always been the most litigious. In Edison’s time, the inventors of electrical discoveries were four times more likely than other inventors to be involved in patent litigation, and they accounted for an incredible 41 percent of all patent suits filed during that period. Smartphone patent suits, on the other hand, account for only about one percent of all patent suits filed between 2009 and 2012.

Although patent litigation may be costly and unpleasant, historically it has served the vital economic function of settling the validity and disputed ownership of patent rights so these can be commercialized into new products, new services, and new medical treatments.

Coming tomorrow: Are NPEs really a new breed of parasitic patent holder?

CLICK TO CONTINUE READING: Up next we will address whether NPEs are really a new breed of parasitic patent holder.