Innovation Policy Post

This week President Obama addressed job creation and spending in his State of the Union address. Although he did not directly address the broken patent system, his speech did support a few of the issues we have raised in terms of patent litigation stifling innovation and job creation.

With that in mind, here’s some purely hypothetical uses for $5.5 million dollars:

• hire 79 experienced software engineers at high-paying salaries
• hire Indianapolis Colts Pro Bowl Receiver Reggie Wayne to play for your football team

• defend yourself in the average patent infringement litigation

According to the Metropolitan Corporate Counsel, the average cost of a patent lawsuit has risen 10% just in the past two years.

The sooner we fix the broken patent system, the sooner we can put those 79 software engineers back to work and stimulate the economy. We support President Obama’s pledge to stimulate job creation and we believe that innovation will be a key component. Yet, until Congress addresses the broken patent system, many small businesses, including many in the high-tech industry, do not have the legal clarity they need to compete globally.

During last night’s State of the Union address, President Obama spoke of the need to maintain the nation’s competitive position in the world and to encourage innovation. While we wholeheartedly agree with the President’s focus on competition and innovation, unfortunately our outdated patent laws inhibit the innovation they’re supposed to promote – especially in the tech sector.

The patent system dates back to the founding of our country, and contemplated simpler inventions that lacked the hundreds of interoperable components found in the Blackberries and smart phones that some members of Congress Twittered from during the speech. The last comprehensive revision of U.S. patent law took place in 1952 – light years away from where we are today on technology issues.

The current patent system has come under increasing pressure as the technological revolution transforms our way of life and business. It is past time for the patent system to catch up with the 21st Century high-tech economy. Obama’s campaign material noted that, “a system that produces timely, high-quality patents is essential for global competitiveness in the 21st century. By improving predictability and clarity in our patent system, we will help foster an environment that encourages innovation.” So we trust the administration sees patent reform as an innovation issue even though it didn’t make it into the address.

The speech was more general in its focus on jobs without giving too many specifics on creating those jobs. We hope as members of Congress respond to both his call to pass policies that will produce jobs and to find ways to work together, that patent reform will emerge as an issue that has bipartisan support and can deliver the economic boost the nation needs. If Congress can bring patent reform legislation to a vote this year, it will help rebalance, strengthen and enhance the patent system and enable cutting-edge innovation to continue to drive the U.S. knowledge-based economy.

Another recent article, cleverly titled, Of Trolls, Davids, Goliaths, and Kings: Narratives and Evidence in the Litigation of High-Tech Patents, seeks to quantify the most popular “type” of patent disputes. Authored by Santa Clara University School of Law Professor Colleen Chien, the article studies case filings from January 2000 to March 2008. Chien investigated the prevalence of a number of common patent litigation scenarios including (but not limited to) suits: a) between two large corporations; b) between an individual inventor and a company; and c) by patent trolls.

After sorting through approximately 2,300 cases, Chien found that 17 percent of all cases involved patent trolls. Expecting a higher percentage in light of the tremendous controversy surrounding patent trolls, Chien realized that these results failed to account for a typical patent troll tactic. Often, patent trolls will sue a number of distinct defendants in a single suit, and it is not uncommon for patent trolls to adopt a shotgun approach, accusing more than a dozen unrelated parties of infringement in a single case. Accounting for each defendant as a “separate” case, Chien found that the percentage of suits involving patent trolls rose to 26 percent. The results of her study also indicated that patent trolls filed 40 percent of all suits involving financial patents.

Furthermore, Chien noted the statistics indicated that lawsuits involving patent trolls were the fastest to be resolved, with the average suit lasting only 9.1 months. By comparison, suits involving two large corporations, or suits involving an individual inventor against a company averaged more than 14 months before resolution. As the author notes, these results support the notion that patent trolls are looking for quick settlements and royalty payments as soon as possible, and are not as interested in the ultimate merits of the case.

While Chien does shed light into the extent of patent troll activity, the results are far from perfect. For instance, the results of the study were limited to only investigating computer hardware, computer software, and financial invention patents. Granted, these categories are three of the most common in terms of litigated patents, but Chien’s study would provide a much more complete view on the effect of patent trolls in litigation, had her results accounted for other areas as well. Still, Chien notes that her study is deliberately conservative in her results, particularly with regards to counting patent trolls. A party was classified as a patent troll only where there was some sort of independent labeling (i.e. in a court document, news report, blog posting etc) to corroborate it, and did not count those individuals suing in their own name, but perhaps on behalf of a patent troll.

Additionally, Chien noted where there was no information about a party available publicly, that party was identified as a “private company”, when in fact they could have been a patent troll in reality. Consequently, the true extent of the patent troll influence is likely to rise, though it is unclear at this point just how far the reach extends. Undoubtedly, we should expect an increase from the 17 and 26 percent of all suits, and 40 percent of financial patent suits as noted prior, once a more thorough investigation is completed.

New scholarship from prominent law professors confirms that patent trolls have become a tremendous influence on the legal system, and that their efforts have been targeted at a number of distinct industries and technologies.

While empirical studies are inherently subject to the interpretation of the researcher and open to the possibility of conflicting vantage points, this research may provide readers with a foundation for future discussion and research.

In Extreme Value or Trolls on Top? The Characteristics of the Most-Litigated Patents, noted law professors John Allison, Mark Lemley and Joshua Walker seek to provide real data in response to anecdotes as to the extent of patent troll activity. The article, published in the most recent edition of the University of Pennsylvania Law Review, focused on the patents subject to the most number of litigated patent cases between 2000 and 2007. The authors report that these patents are frequently in the software and telecommunications fields, as compared to other technological areas. More significant, the authors note these patents are “disproportionately owned by non-practicing entities (i.e., ‘trolls’).”

The authors go on to report the “most-litigated patents are overwhelmingly likely to be software patents,” finding that software patents account for nearly 75 percent of those cases involving patents subject to multiple litigation. It is no surprise to find that the related computer industry bears the brunt of the majority of such lawsuits with 72 percent.” By comparison, the authors found that using a sample size of patents, which were litigated only once, the computer industry accounted for only 34 percent of all cases. Similar incongruencies were seen in the telecommunications field as well.

In addition, the authors noted that many of the most litigated patents were owned by non-practicing entities, at a rate of more than 80 percent! The authors delineated between inventor-owned companies who do not produce the patented product, and pure patent trolls, who acquire and enforce patents. Of this 80 percent, approximately 74 percent of these cases fall into the former category, with pure patent trolls accounting for the remaining 6 percent.

While the article is an interesting read, it may only provide a glimmer into the realities of the situation. The article focuses solely on those patents which have been subject to the most number of patent litigation cases. It does not truly take into account (besides the random sample size of single litigated patents) those patents which patent trolls have asserted in a single case against a wide swath of defendants.

Additionally, in light of the thousands of patents that are issued yearly, the authors do not account for a situation where patent trolls acquire a collection of patents and sue on each patent separately. The prospect of a patent troll suing on eight separate patents is no less a drain on our patent system in comparison to a situation where the troll sues on the same patent eight times. However, the authors do provide anecdotal arguments that the patent troll business plan is exploiting a single strong patent multiple times against as many defendants available to extract the highest revenue possible. Nonetheless, the professors do correctly note the importance of non-practicing entities in the modern patent system is a crucial aspect of the system that needs to be further investigated and addressed.

Scott Brown’s recent Senate victory sent shockwaves well beyond the Commonwealth of Massachusetts. It ended the Democrats’ filibuster proof majority, and makes broad efforts at reform a challenge.

As we’ve noted repeatedly, President Obama has provided a welcome commitment to reforming the patent system. If Democrats are no longer able to push proposals through the Senate, how will this affect patent reform? IP Watchdog’s Gene Quinn recently chimed in with his opinion. In particular, he said this will likely make Congress focus on issues where there is broad consensus like more funding for the Patent Office and skip those that are controversial such as the broader reform bill.

Do you agree that the odds of patent reform in 2010 have diminished with Brown’s ascension to the Senate? If healthcare becomes a no-go, could the Democrats turn to patent reform as an issue where they can garner bi-partisan support? Our two cents: the latter is likely true. Although previous patent reform efforts haven’t crossed the finish line, there has been bi-partisan, bicameral support for significant reform.

We simply cannot place patent reform on the back burner. The need for patent reform is unquestionable. We must rebalance, strengthen and enhance the current patent system to drive cutting-edge innovation that in turn drives our knowledge-based economy. At a time when our economy continues to struggle, partisan battles should not stand in the way of changes that will spur economic growth, investment, job creation, technological progress and innovation.

At a time when America is trying to regain its economic footing, we need to ensure that new innovation is taking place at a rapid place that can help pull the country out of tough times. However, it’s hard to move forward on that front when there’s a major backlog of patent applications at the USPTO, slowing down the process through which major and important new innovations can be granted patents.  It looks like President Obama is finally realizing just how important patent reform is.

Kim Hart of The Hill reported late yesterday afternoon that President Barack Obama revealed his opinion on the antiquated U.S. patent system at the Forum on Modernizing Government:

“’Believe it or not, in our patent office -- now, this is embarrassing -- this is an institution responsible for protecting and promoting innovation -- our patent office receives more than 80 percent of patent applications electronically, then manually prints them out, scans them, and enters them into an outdated case management system,’ Obama said…”

“This is one of the reasons why the average processing time for a patent is roughly three years,” Obama added.

Now if our own President is embarrassed by our patent system, perhaps it is time for a change. Patent reform should address up-to-date technology that can handle the number of patent applications that are filed each month and should be able deal with the backlog of applications.

Congress needs to act this year to pass patent reform legislation that will bring USPTO technology into the 21st Century and up to speed with the latest, cutting edge technology. Only then, can innovation prosper and help to improve our economy.

For more information on the U.S. patent system and the USPTO, visit www.uspto.gov.

The Big Question: Why are so many patent cases brought to Marshall?

There are three probable explanations for why cases are taken to Marshall so often: plaintiff-friendly juries, the “rocket docket” and numerous plaintiff- hungry lawyers. Today we’ll just focus on the first reason: how and why plaintiff-friendly juries in the Eastern District of Texas create an ideal situation for non-practicing entities.

Plaintiff-friendly juries

In a September 2006 New York Times article, Julie Creswell wrote that patent holders in the Eastern District of Texas docket win “78 percent of the time, compared with an average of 59 percent nationwide, according to LegalMetric, a company that tracks patent litigation.”  In a 2006 article in the Kansas City Daily Record and republished by Lawyer’s Weekly Dick Dahl reported that of the eight cases that were ultimately decided by a jury in the Eastern District, the jury sided with the plaintiff all eight times!

In addition, juries have a history of awarding huge verdicts to winners.  The odds lead many corporate defendants to attempt to settle before having to set foot in Marshall. 

“In April, for instance, a Marshall jury returned a $73 million verdict against EchoStar Communications for infringing the patents of TiVo,” Crewell reports later in that same 2006 New York Times article.  A short time later, this award was trumped by a $133 million dollar verdict in favor of Z4 Technologies in its case against Microsoft and Autodesk, according to Dahl’s article. From 1995 to 2007 the median damage award by Eastern District of Texas juries was approximately $19.7 million dollars, among the highest in the nation, according to an Omega Communications article last year.

Creswll wrote that:

“The success rate for patent holders in Marshall is a great incentive for defendants to settle matters quickly and privately. Since 1991, the Federal District Court in Marshall has held less than half the number of full patent trials as courts in Los Angeles, New York, Chicago and San Francisco.”

Additionally, Dahl wrote that the plaintiff-friendly nature of the juries may also be attributed to the fact that Texas jurors often hold property rights in high regard. Dahl quotes Attorney James P. Bradley as saying that:

“When a patent holder argues that someone is infringing on its property, it's a message that resonates with Marshall Jurors.”

Stay tuned for an upcoming post on the Eastern District of Texas’ “Rocket Docket”.

One of the problems that could be addressed by patent reform legislation is venue shopping. In a series of posts we’ll look at a popular litigation destination and why lawyers are taking up residence – or at least office space – there.

Eastern District of Texas: Non-Practicing Entity Haven?

Marshall, Texas, a town of about 25,000 residents and the self-proclaimed Pottery Capital of the World, has another feature you aren’t likely to read about in a Chamber of Commerce brochure. As many of our readers know, Marshall has long been criticized as a patent troll haven – a place where plaintiffs in patent cases often walk away with huge awards in record time.

(As of writing, it is even noted on the town’s Wikipedia page) ...

A January 7 article posted on the Intellectual Asset Management website alerted readers to a shortage of patent attorneys authorized to prosecute patents before the European Patent Office (EPO).  The EPO is an organization that provides streamlined search and examination functions on behalf of the patent offices of the individual member countries.  For example, an applicant seeking patent protection in England, Spain and Germany, may file a single application with the EPO, which will then grant patent protection on behalf of those designated countries.

According to the article, the entire European Union currently has only 9250 licensed patent attorneys authorized to prosecute patents before the EPO.   With a total population of 500 million people, this works out to one patent attorney for every 54,000 people.  By comparison, there are currently over 39,000 people in the United States who may prosecute patents before the U.S. Patent and Trademark Office (9722 patent agents and 29482 patent attorneys).  Taking the U.S. population of just over 307 million into consideration, that’s a ratio of just about one patent professional for every 7,800 people.

Perhaps the short fall in the number of patent attorneys in Europe is not a pressing issue due to a lower number of patents to file at the EPO.  In other words, one potential reason for having nearly one-third less patent attorneys is that the demand for patent applications is simply not as high.  In investigating this hypothesis, we looked at the total number of patent applications filed in the USPTO compared to the EPO.  See Figure Y.  We focused solely on utility patents, choosing not to account for design patents (which are not actively examined by the EPO), and plant patents (which stands on tenuous legal grounds in Europe)...

For over 200 years, the U.S. has been a home to innovation. We are still celebrated for innovation, but today innovation is more diverse, often more complex, and increasingly collaborative. In addition to product and process innovation, we benefit from new forms of marketing and other business and social activities.

The policy tools we have for encouraging innovation have also grown in scope and complexity. The Constitution authorized patents and copyright “to promote the progress of science and the useful arts.” In the 19th Century, states invested heavily in agricultural research. After World War II, the federal government began making large investments in basic science, as well as in technology for defense. Post-Sputnik, we worked to improve education in math and science. We grant tax credits for “research and experimentation.” We have set-asides for small business, because small businesses are considered more innovative than large businesses.

For innovation to happen, ideas are not enough, there must be real impact. Realizing innovation may require research, practical invention, product development, integration, design, marketing, and/or organizational change.

The federal government seldom invests directly in innovation, except where it supports a recognized federal purpose such as defense. State governments (as well as other countries) have been more adventuresome, sometimes putting money into incubators, technology parks, research consortia, investment funds, regional clusters, research institutions, and region-specific technologies. Yet the federal government plays a critical role in setting the right conditions for innovation. It supports a vast amount of scientific research and data collection. The federal government sets the ground rules for intellectual property, environmental protection, corporate reporting, financial markets, trade, consumer protection, and health and safety standards – all of which shape innovation and competition.

While PACER is a vital research tool for anyone interested in patent infringement cases, it isn’t exactly the most efficient website we’ve encountered. We’ve all had to sift through hundreds of cases at one point or another to find what we’re looking for.

Two Stanford researchers have produced a new system that may have the potential change the way we explore and analyze the patent system. As they announced on Tuesday, Mark Lemley and Joshua Walker have created an online research tool called Lex Machina, which contains 25,000 patent infringement cases as well as 100,000 IP and antitrust cases.

The last two sentences of their press release really caught our eye: “The average patent case costs $5 million in legal fees on each side to litigate. A patent lawsuit can prevent a company from bringing a new product to market, or otherwise stall the kind of innovation that the IP system was meant to spur.”

If Lemley and Walker plan to use Lex Machina to help foster a renewed sense of innovation, the sky just may be the limit. Innovators are currently spinning their tires in the mud, held back by an outdated patent system that permits a merry-go-round of frivolous legal action.

David Worthington over at Technologizer wrote today, he got a sneak peak at the new system, and the results are telling. In the post, Lemley tells Worthington that his research using the new online site has found that 30 percent of all IT suits are initiated by patent trolls.

Information is power. A database like Lex Machina can be an important tool in fighting the battle against patent trolls. Kudos to Lemley and Walker for the time, effort and the idea -- and also for sharing such a great site.

Welcome to the Innovation Policy Post, CCIA's forum for news and debate about intellectual property issues.

We will use this blog to share our thoughts, and get yours, on patent and copyright law. We'll also highlight abuses of those laws that range from ridiculous to damaging and illustrate the need for patent reform and 21st-century copyright laws. As you can see from the navigation bar, we intend to gradually add other innovation issues to the discussion, like competition policy and telecom issues. 
Innovation is essential to America's ability to compete in the global economy, and government policies need to reflect an awareness of how the world has changed. CCIA has been an important voice in those discussions for years, and the Innovation Policy Post will help us both add to the debate in a new format and give other people a voice.

Our goal is to create a civil but robust dialogue on innovation and obstacles to it. We'll leave the legal mumbo-jumbo to the legal blogs, though we'll undoubtedly be linking to their work periodically because their insights are valuable.  We look forward to the discussion.

(CCIA members wholeheartedly believe the Internet adds great value to policy debates. At the same time, we are aware of its limitations. We want to protect the anonymity of people who desire it, but we don't want anonymity to be used as a shield for bad behavior.  With that in mind, you can join the Innovation Policy Post community by registering anonymously, but you will have to provide your actual name and a real e-mail address behind the scenes.)