Our Political Patent System: Is Patent Justice for Sale?

The unfortunate reality is the United States is no longer the most favorable jurisdiction for innovators. There has been a full assault on patent rights that started at least as early as 2005 when the U.S. Supreme Court issued its decision in eBay v. MercExchange. Encouraged by this success in the courts, which largely ushered in an era of compulsory licensing, the forces that wanted to weaken the patent system to suit their own agenda put their foot on the accelerator. Ever since we have seen proposed legislative change after proposed legislative change, as well as a never ending stream of cases at the Supreme Court and Federal Circuit that continue to weaken patent rights. Innovators are under attack from ever expanding judicial exceptions that render more and more subject matter patent ineligible, and from an ever expanding view of what it means to be obvious. This coupled with fresh new ways to challenge issued patents and concern about a patent litigation explosion that doesn’t exist is leading to extraordinary mischief in the Courts, on Capitol Hill and in the White House.

“The Supreme Court is making national economic policy in Section 101 cases, despite lacking economic expertise, factual information or statutory authority, based on its own decades-to-century-old dicta and unfounded assumptions that seem merely to mirror editorials in certain media that equally lack factual basis,” former Federal Circuit Chief Judge Paul Michel says. “Meanwhile, Congress threatens to micro-manage patent infringement proceedings, abrogating the Federal Rules of Civil Procedure that controlled all civil cases since 1938, interfering with the independence of this co-equal Branch of government, undermining the Separation of Powers and severely restricting the necessary discretion of Federal judges.”

These and other issues will be the focus of a free webinar I am hosting on Thursday, November 13, 2014. The webinar, sponsored by Innography, will take place from 12pm to 1pm Eastern. Joining me will be Judge Michel and Richard Baker, a senior IP licensing executive who is on the Board of LES and is one of the top 300 IP strategists according to IAM Magazine. Judge Michel will provide commentary both about what we are seeing in the Courts and inside the beltway with respect to legislative initiatives ostensibly aimed at “solving” problems. Baker will discuss the implications on the patent brokerage and licensing business of so many patent claims being invalidated as a result of SCOTUS decisions, and will specifically address how things have changed over the past several years.

The root of the problem in my opinion is an overly politicized patent system, where the Supreme Court is constantly concerned about a patent troll that isn’t in the room and isn’t a party to the cases they decide. Increasingly the Supreme Court Justices seem to want to be Super Legislators, and I’m afraid at least some on the Federal Circuit seem more interested in making the law rather than interpreting the law, particularly with respect to obviousness. The U.S. patent system has reached a breaking point thanks to a Congress who doesn’t understand patents and won’t take the plight of the innovator into consideration, a Supreme Court that can’t ever hope to understand patents or technology because they just don’t handle enough cases, and a Federal Circuit that seems enamored with de novo review and doing the job of the District Court instead of their job as an appellate court.

Richard Baker, a senior IP licensing executive who is on the Board of LES, doesn’t disagree that we have a political patent system, but he has a different take. “This first question that we have to ask is whether the US Patent system is for sale to the highest bidder,” Baker told me. “For many years, patent litigation has been called ‘the Game of Kings’  because of the incredible costs associated with litigation… a small patent owner finds it nearly impossible to receive compensation for their efforts to invent and develop a new idea when a large company ignores requests for royalties.”

Another particularly important point that must be raised is the reality that we will be seeing additional patent reform efforts once the next Congressional session begins in January 2015. This is troubling because according to Baker, “the sharpest turn for patent valuation came with the passing of the AIA, because we now have a society that is anti-inventor and anti-patent.” The “reforms” that we will so see will likewise be bad because they will almost certainly not take into account the needs of small businesses, start-ups and other entrepreneurial innovators. With Republicans in control of both Houses of Congress we can expect that something very similar to the Innovation Act that passed in the House with strong bi-partisan support will again pass the House and quickly advance to the Senate, almost certainly passing quickly through the Senate Judiciary Committee. Few things passed the House of Representatives with 325 votes over the last several years, thus, if the Republicans want to show that they can move legislation in a bi-partisan way, which by all accounts they want to prove to the American people that they can, patent reform may become an early “victory” for Republicans.

The rush for more patent reform “ignores many reforms recently instituted by the Judiciary itself on pleadings and discovery and by the trial courts on eligibility and fee-shifting, as well as the dramatic impacts of the AIA Review proceedings,” Judge Michel explained. “Not to mention recent landmark decisions such as Alice, Octane, Highmark and Nautilus.  If that were not enough, the White House proposes to assist all defendants in patent cases to the detriment of all plaintiffs without regard to the circumstances of the individual case and which party, if any, is misbehaving.  Consequently, the traditional independence, professionalism and expertise of the PTO is threatened by political considerations and policy views that seem based more on special interest lobbying and exaggerated PR spin about ‘trolls’ than on facts like those revealed in the GAO Report.”

So who is pushing this reform? It is widely known that Google is the main proponent of so-called “patent reform,” and they have many former executives stationed throughout the Obama Administration, including at the United States Patent and Trademark Office. In the past I have called Google position on patents  downright schizophrenic. But what if their position on patents isn’t nearly as scattered as it seems?

Google was founded upon the page rank patent, which was filed even before the founders acquired the domain name Google.com. Google is also a top 10 acquirer of patents in the U.S. Patently-O recently reported that Google is also the largest user of pay-to-advance acceleration, also known as Track One or prioritized examination, which guarantees the patent application a final resolution within 12 months of filing, usually much quicker. Could the Google position in the courts and throughout the halls of Capitol Hill not be an anti-patent position, but rather an attempt to make patents so expensive and so easily challenged that only a large company like Google could ever play the patent to innovation game? Just last week at the IP Dealmakers Forum in New York, Priceline.com founder Jay Walker astutely recognized that as a result of the lack of a strong innovation ecosystem “[w]e have figured out how to exclude nearly everybody from the game of innovating, and we are going to pay a heavy price if we don’t fix it.”

“Google is filing many of their patent applications under the accelerated program, paying an extra $4000 per application… [T]his is the same Google that spends millions each year lobbying Congress to tailor the patent laws to their benefit,” Baker explains. “Many of the largest technology companies successfully lobbied Congress and the White House to pass the AIA, and then continued to propose legislation to make the system more beneficial to them… An IPR costs $300K-700K to defend.  The initial reaction of most small companies and individual inventors will be to abandon their patents out of necessity. Only large companies can avoid this issue with a mutually assured portfolio destruction strategy of retaliatory IPR filings against anyone who challenges their patents.”

Maybe the Google position on patents isn’t schizophrenic, or even nuanced. Maybe it is all about making sure that start-ups and innovators, even kids in a dorm room working toward the next algorithm that will supplant Google, can’t get the patent rights they need to gain funding and build a competitive corporation. Whatever the rationale, Google has not only changed the patent laws for others, but they have changed the patent laws for themselves. While they might not be worried, they should be. I’ve also started to hear from some folks in Silicon Valley that for the first time in recent memory people are not talking about worry over patent trolls, but rather they are worrying about the Chinese. It seems that the crazy valuation of Alibaba, who has made a business out of manufacturing (including manufacturing knock-offs), has opened the eyes of at least some in Silicon Valley. Without strong patents what will a company do? “[A]t the end of the day if you do not own the exclusive rights to the problems you are solving you are going to get copied at an astronomical rate,” told the audience in New York last Thursday.

Sadly, facts, figures and truth seem to play a minor role (if any role at all) in consideration of these issues. If facts actually mattered we wouldn’t be talking about a non-existent explosion of patent troll litigation. We would recognize that to the extent that there has been an increase in patent litigation that is to be expected thanks to the AIA. Upon being signed into law on September 16, 2011, it became more difficult if not completely impossible to sue dozens, or hundreds of defendants in a single patent infringement lawsuit. Forcing smaller lawsuits where there is a commonality between defendants seems reasonable to me, but what is not reasonable is complaining about the inevitable increase in the number of patent lawsuits that would be initiated. Did Congress really think people were going to stop suing? If they did they were ridiculously foolish. If they didn’t consider the reality that more lawsuits would be filed (which seems most likely) it is further proof that Congress has no ability to predict the reaction to the actions it takes. To a sane person that would counsel cautious action, not moving forward with the foot on the accelerator for more changes to the patent system.

If we were concerned with facts we would also seriously review the exhaustive review of patent litigation conducted by the independent Government Accountability Office, which concluded that there was no patent litigation crisis. The same GAO report also found that 80% of the patent lawsuits filed are brought by operating companies suing other operating companies. Thus, 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 does not support. But even more recently Lex Machina has come forward with some eye opening statistics as well. A recent report from Lex Machina concludes: “Plaintiffs filed 329 new federal patent cases in September 2014, a 40% decrease from the 549 cases filed in September 2013.” The number of lawsuits also dropped approximately 30% in October 2014 compared with October 2013. So who is fooling who?

There is no patent litigation problem, although this is not to say that there isn’t a problem with nefarious actors taking advantage of small businesses. They do so by abusing the litigation process, threatening litigation where no liability resides, lying in demand letters and asking for paltry, extortion-like sums of $500 or $1,000 to settle a patent infringement matter. Of course, nothing in the Innovation Act would have addressed this very real problem relating to false and misleading demand letters. Furthermore, do we need legislation to handle that if the FTC already has the authority to regulate bad behavior like they did against MPHJ?

“Has the country descended to the point where facts and figures no longer matter, only politics and PR,” Judge Michel asked. “What about the need for future growth and for adequate incentives to invest in R&D and Commercialization, which boosted the nation to the top spot on the planet?” Unfortunately, I think the only thing that matters is politics and PR. But that is what you get when you have an overly politicized patent system.

In any event, I hope you can join us for what promises to be an exceptionally interesting discussion on The Ramifications of a Political Patent System. In addition to everything above we will take your questions, and will also seek to answer the valuation question everyone seems so concerned about — what are your patents really worth today?