Analyzing the role of non-practicing entities in the patent system

Cornell Law Review

Volumn 99, Issue 2, 2014, Pages 425-456

  Schwartz, David L ^a   Kesan, Jay P ^b  

^a CHICAGO KENT COLLEGE OF LAW   (United States)

^b UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84890100195     PISSN: 00108847     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (69)

1. Colleen V. Chien, Of Trolls, Davids, Golliaths, and Kings: Narratives and Evidence in the Litigation of High-Tech Patents, 87 N.C. L. REV. 1571, 1603 (2009) (noting that over 80% of patent lawsuits filed between 2000 and 2008 involving "high tech" patents were filed by practicing entities).
2. See Michael Risch, Patent Troll Myths, 42 SETON HALL L. REV. 457, 458 (2012).
3. Colleen Chien, Assistant Professor, Santa Clara Univ., Presentation to the DOJ/ FTC Hearing on Patent Assertion Entities: Patent Assertion Entities, at slide 23 (Dec. 10, 2012), available at http://papers.ssrn.com/sol3/papers.cfm? abstract-id=2187314 (reporting that 61% of patent lawsuits filed from January 1 to December 1, 2012, were filed by patent assertion entities).
4. But see Christopher Anthony Cotropia, Jay P. Kesan & David L. Schwartz, Patent Assertion Entities (PAEs) Under the Microscope: An Empirical Investigation of Patent Holders as Litigants 16 fig.1 (Ill. Pub. Law Research Paper No. 14-17, 2013), available at http://ssrn.com/abstract=2346381 (reporting lower numbers of suits brought by PAEs, with the results varying based upon the definition of PAE used).
5. James Bessen, Jennifer Ford & Michael J. Meurer, The Private and Social Costs of Patent Trolls, REGULATION, Winter 2011-12, at 26, 26, available at http://www.cato.org/ sites/cato.org/files/serials/files/regulation/2012/5/ v34n4-1.pdf.
6. David L. Schwartz & Jay P. Kesan, Analyzing the Role of NPEs in the Patent System, PATENTLY-O (Aug. 21, 2012), http://www.patentlyo.com/patent/2012/ 08/analyzing-therole- of-npes-in-the-patent-system.html.
7. See, e.g., Lee A. Rosengard, Learning from Law Firms: Using Co-Mediation to Train New Mediators, DISP. RESOL. J., May/July 2004, at 16, 16, 18 (noting that the medical-malpractice industry has distinct plaintiff and defense bars).
8. Large manufacturing, computer and IT, and financial-services companies sought damages reform in patent litigation purportedly due to the increase in costs caused by patent assertions. On the other hand, small and mid-size technology companies argue that damages reform would (1) limit trial courts' flexibility to craft appropriate remedies, (2) make infringement cheaper, and (3) encourage litigation rather than payment of licensing fees. See David W. Opderbeck, Patent Damages Reform and the Shape of Patent Law, 89 B.U. L. REV. 127, 135-37 (2009).
9. See Ian Rainey, The War over Information Technology Patents: How Microsoft v. I4i Is Reforming the Mobile Entertainment Industry, 11 U. DENV. SPORTS & ENT. L.J. 137, 154 (2011) ("As opposed to the pharmaceutical companies, information technology companies have recently become increasingly concerned with infringement claims initiated by non-practicing entities or patent trolls.").
10. James Bessen & Michael J. Meurer, The Direct Costs from NPE Disputes, 99 CORNELL L. REV. 387, 389 (2014).
11. See John M. Golden, Commentary, "Patent Trolls" and Patent Remedies, 85 TEX. L. REV. 2111, 2112 (2007).
12. See Jiaqing "Jack" Lu, The Economics and Controversies of Non-practicing Entities (NPEs): How NPEs and Defensive Patent Aggregators Will Change the License Market, LES NOUVELLES, Mar. 2012, at 55, 61, available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1935 524 (discussing how entrepreneurs, universities, and research institutions who do not have competency in marketing and licensing can alleviate the risks associated with patents by selling their patents to NPEs, thereby freeing them to exploit "their comparative advantages in innovating").
13. See Ashish Arora, Patents, Licensing, and Market Structure in the Chemical Industry, 26 RES. POL'Y 391, 395-97 (1997).
14. See David L. Schwartz, The Rise of Contingent Fee Representation in Patent Litigation, 64 ALA. L. REV. 335, 358 (2012) (explaining the "substantial due diligence" that lawyers state that they perform before they agree to represent a client on a contingent-fee basis).
15. Patrick Anderson, Do NPE's "Cost" Us $29 B? Intellectual Ventures Co-Founder Peter Detkin Sets the Record Straight, GAMETIME IP (June 28, 2012), http://gametimeip.com/2012/ 06/28/do-npes-cost-us-29-b-intellectual- ventures-co-founder-peter-detkin-sets-the-recordstraight/.
16. See, e.g., Mark A. Lemley, Are Universities Patent Trolls?, 18 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 611, 612 (2008) (arguing that universities should not be deemed trolls);
17. This is an age-old complaint by individual inventors who are NPEs. In the early 1850s, for instance, Elias Howe's repeated requests for I.M. Singer & Co. to pay a license fee for its (unauthorized) use of Howe's patented lockstitch were rejected, resulting in Howe (an NPE) suing Singer for infringement. See Adam Mossoff, The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s, 53 ARIZ. L. REV. 165, 183-85 (2011).
18. A number of people have discussed the peculiar problems that various types of non-practicing entities or small firms might face in appropriating value from their inventions. See, e.g., John M. Golden, Principles for Patent Remedies, 88 TEX. L. REV. 505, 545 (2010) ("For small firms or independent inventors,... patent rights might be the only effective means to obtain a return on investments in research and development.").
19. See Andrei Hagiu & David B. Yoffie, The New Patent Intermediaries: Platforms, Defensive Aggregators, and Super-Aggregators, 27 J. ECON. PERSP. 45, 53 (2013) (discussing how NPEs can cause economic harm by acting as intermediaries).
20. See Tom Ewing, Introducing the Patent Privateers, 45 INTELL. ASSET MGMT., Jan./Feb. 2011, at 31, 32-33.
21. See, e.g., Susan Decker, Business Costs Quadruple on Patent-Owner Claims: BGOV Barometer, BLOOMBERG (June 26, 2012, 12:00 AM), http://www.bloomberg.com/ news/2012-06- 26/business-costs-quadruple-on-patent-owner-claims-bgov-barometer. html;
22. David Goldman, Patent Trolls Cost Inventors Half a Trillion Dollars, CNN MONEY (Sept. 21, 2011, 5:19 AM), http://money.cnn.com/2011/09/21/technology/ patent-troll-cost/index.htm;
23. Dara Kerr, Patent Trolls Curb Innovation and Cost the U.S. $29B in 2011, CNET (June 26, 2012, 5:41 PM), http://news.cnet.com/8301-1023-3-57461110- 93/patent-trolls-curb-inno vation-and-cost-the-u.s-$29b-in-2011/;
24. 'Patent trolls' Cost Other US Bodies $29bn Last Year, Says Study, BBC NEWS (June 29, 2012, 4:36 PM), http://www.bbc.co.uk/news/technology- 18598559;
25. Rebecca J. Rosen, Study: Patent Trolls Cost Companies $29 Billion Last Year, ATLANTIC (June 29, 2012, 7:37 AM), http://www.theatlantic.com/ technology/archive/2012/06/study-patent-trolls-cost-companies-29-billion-last- year/259070/.
26. A few blogs have criticized the study. See A $29 Billion US Troll-Tax or Just Another Statistical Smokescreen?, PATENTOLOGY BLOG (June 29, 2012), http://blog.patentology.com.au/2012/06/29-billion-us-troll-tax-orjust- another.html;
27. In addition, IAM Magazine's blog subtly im- plies that the large amount of press that the study generated is due to the push of several major corporations, presumably ones that favor the policy changes recommended in the study. Joff Wild, The PR Genius of Messrs Bessen and Meurer, INTELL. ASSET MGMT. BLOG (June 28, 2012), http://www.iam-magazine.com/blog/Detail.aspx?g=e780ve3b8- 715d-484f- 9318-d04d81e0e9d8.
28. See John R. Allison et al., Patent Quality and Settlement Among Repeat Patent Litigants, 99 GEO. L.J. 677, 709 (2011) (asserting that in the context of software and NPE patents, settlements are confidential);
29. Jay P. Kesan & Gwendolyn G. Ball, How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes, 84 WASH. U. L. REV. 237, 259 (2006) (noting that "approximately 80% of patent cases settle").
30. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 8-9 (8th ed. 2011).
31. See Catherine White, Taking on the Trolls, INTELL. PROP. MAG., Oct. 2012, at 98, 98, available at http://www.rpxcorp.com/siteFiles/News/ ABAFDBBC110C77BC90FE5F0BEFD EEDE9.pdf (noting that "RPX states it offers defensive patent aggregation").
32. See Nexsen Pruet & Dan Leonardi, Avoiding Confrontations with Licensing Firms, LEXOLOGY (July 18, 2011), http://www.lexology.com/library/ detail.aspx?g=03dbc3de-fb58-4c b9-ba39-6b0d1affa8d5.
33. In the original draft of Bessen and Meurer's study, they attempted to benchmark to two outside studies. See James Bessen & Michael J. Meurer, The Direct Costs from NPE Disputes 13-15 (June 28, 2012) (unpublished manuscrupt) [hereinafter Bessen & Meurer, Draft], available at http://www.bu.edu/law/ faculty/scholarship/workingpapers/documents/ BessenJ-MeurerM062512rev062812.pdf. In the final version, they benchmarked to three outside studies.
34. For example, in DNT, LLC v. Sprint Nextel Corp., Civil Action 3:09-cv-00021 (E.D. Va.), more than half of the first 75 docket entries in the case were for inexpensive filings such as appearances and motion for admission pro hac vice. The docket entries near the close of the case were substantive (and likely expensive) briefing on key issues in patent litigation.
35. See QUINN EMANUEL TRIAL LAWYERS, QUINN EMANUEL URQUHART & SULLIVAN, LLP, BEST PRACTICES FOR DEFENDING AGAINST PATENT TROLLS (2011), available at http://www.jdsupra.com/documents/60ca1e29-8ea5-4db6-ae4b-b5a562b38fc0.pdf (noting that NPEs tend to prefer courts with historically speedy trial times due to the value of speed to NPEs). RPX also may have assembled its own data on current cases, especially for those involving NPEs. We suggest that such data be made available.
36. But the 2013 AIPLA cost survey provides evidence that contradicts Bessen and Meurer's claim. See AM. INTELLECTUAL PROP. LAW ASS'N, REPORT OF THE ECONOMIC SURVEY 2013 (2013). For the first time in 2013, the AIPLA cost survey separates the cost of defending NPE cases from the costs of all patent litigation. Not surprisingly (to us), the average cost of defending NPE cases is substantially less than the average cost of litigating a patent case. Thus, on balance, the 2011 AIPLA study costs should be higher than Bessen and Meurer's data. The fact that they are in line further supports the view that Bessen and Meurer's data is biased too high.
37. Prying Open the "Black Box" of NPE Costs, RPX BLOG (June 26, 2012), http://www.rpxcorp.com/index.cfm?pageID=169&itemID=24.
38. Others studying patent litigation have disaggregated universities, among other types of NPEs. See John R. Allison et al., Extreme Value or Trolls on Top? The Characteristics of the Most-Litigated Patents, 158 U. PA. L. REV. 1, 24 & n.43 (2009)
39. Raymond P. Niro, Why Bash Individual Inventor-Owned or Controlled Companies?, IPWATCHDOG (June 30, 2013, 10:24 AM), http://www.ipwatchdog.com/ 2013/06/30/whybash- individual-inventor-owned-or-controlled-companies/id=42613/.
40. See InterDigital Commc'ns Corp., Annual Report (Form 10-K) at 13 (Apr. 1, 1996) (showing that InterDigital employed 96 employees in Research and Development and only 2 employees in Patent Licensing);
41. Rambus Inc., Annual Report (Form 10-K) at 5 (Dec. 15, 1997) (showing that Rambus employed 99 employees in R&D and 27 in Marketing);
42. Tessera Techs. Inc., Annual Report (Form 10-K) at 13 (Mar. 8, 2004) (showing that Tessera employed 53 engineers in R&D and only 16 employees in Sales & Marketing).
43. See, e.g., InterDigital Commc'ns Corp., Amended Annual Report (Form 10-K/A) at 11 (Jan. 28, 2004) (describing InterDigital's patent-licensing activities in the 2000s).
44. See, e.g., Rambus Inc., Annual Report (Form 10-K) at 27 (Dec. 12, 1998) (showing multiple years of financial data in which Rambus expended more on R&D than it earned in licensing).
45. See Rambus Inc., Annual Report (Form 10-K) at 46 (Feb. 21, 2006) (showing that Rambus earned more in licensing fees than it expended in R&D);
46. Tessera Techns., Inc., Annual Report (Form 10-K) at 31 (Mar. 16, 2006) (same for Tessera).
47. See, e.g., Jerry Crimmins, Intellectual Property Attorneys Quarrel with 'Patent Troll' Study, CHI. DAILY L. BULL. (July 9, 2012) (explaining that some groups believe that financial assistance makes the patent-troll study biased while others do not).
48. Transparency means fully disclosing the precise methods used in a study. Reliability refers to whether the measurements can be reproduced if generated by others. Validity refers to how accurate the measurements are. See Lee Epstein & Gary King, The Rules of Inference, 69 U. CHI. L. REV. 1, 83, 85, 87 (2002).
49. See generally ROBERT M. LAWLESS, JENNIFER K. ROBBENNOLT & THOMAS S. ULEN, EMPIRICAL METHODS IN LAW 26 (2010) ("[S]teps... taken in your research must be transparent and obvious enough so that another researcher can duplicate what you have done....").
50. See Lee Epstein & Charles E. Clarke, Jr., Academic Integrity and Legal Scholarship in the Wake of Exxon Shipping, Footnote 17, 21 STAN. L. & POL'Y REV. 33, 43 (2010) (noting that it is appropriate to treat funded research with skepticism and that validity, reliability, and transparency are the keys to accessing such scholarship).
51. RPX, NPE Cost Study: Invitation to Participate, at 10 (Jan. 2012) (on file with authors).
52. Reliability is typically reported by using measures such as Cohen's Kappa. See Mark A. Hall & Ronald F. Wright, Systematic Content Analysis of Judicial Opinions, 96 CALIF. L. REV. 63, 113-14 (2008) (stating that the best practice for relaying reliability information is to report a coefficient such as Cohen's Kappa).
53. See Glynn S. Lunney, Jr., On the Continuing Misuse of Event Studies: The Example of Bessen and Meurer, 16 J. INTELL. PROP. L. 35, 37, 49-56 (2008) (arguing that academics cannot trust Bessen and Meurer's argument that the patent system has discouraged innovation).
54. For a thoughtful blog post on the limits of event studies, see Lisa Larrimore Ouellette, Patent Costs & Benefits, WRITTEN DESCRIPTION (July 2, 2013), http://writtendescription.blogspot.com/2013/07/costs-benefits.html (arguing that when reading event studies, readers should keep in mind exactly what authors are estimating and stating that it may be valuable to have a more thorough discussion about authors' results on the merits).
55. For an interesting paper that finds that correlations between patent-holder trialcourt victories and stock increases, see Alan C. Marco & Saurabh Vishnubhakat, Certain Patents, 16 YALE J.L. & TECH. (forthcoming 2013), available at http://papers.ssrn.com/ sol3/papers.cfm?abstract-id=2324538.
56. Ron D. Katznelson, Questionable Science Will Misguide Patent Policy, (Oct. 27, 2013) (unpublished manuscript), available at http://j.mp/Junk-Science.
57. Mark A. Lemley, Essay, Rational Ignorance at the Patent Office, 95 NW. U. L. REV. 1495, 1495 (2001) (discussing how the Patent Office has come under fire for not thoroughly examining patents).
58. Press Release, Acacia Research Corp., Acacia Research Reports First Quarter Financial Results (Apr. 20, 2011), http://www.acaciaresearch.com/pr/ 042011.pdf.
59. See BRIAN T. YEH, CONG. RESEARCH SERV., R42668, AN OVERVIEW OF THE "PATENT TROLLS" DEBATE, summary (2012), available at http://assets.opencrs.com/rpts/R42668- 20120820.pdf.
60. See BRIAN T. YEH, CONG. RESEARCH SERV., R42668, AN OVERVIEW OF THE "PATENT TROLLS" DEBATE, summary, 2 (2013), available at http://www.fas.org/sgp/crs/misc/R426 68.pdf.
61. See EXEC. OFFICE OF THE PRESIDENT, PATENT ASSERTION AND U.S. INNOVATION 9-10 & n.5 (2013), available at http://www.whitehouse.gov/sites/default/ files/docs/patent-re port.pdf.
62. emphasizing the use of "patents of dubious merit" as well as the study by Ranganath Sudarshan, Nuisance-Value Patent Suits: An Economic Model and Proposal, 25 SANTA CLARA COMPUTER & HIGH TECH. L.J. 159 (2008), analyzing the offer of settlements that are much lower than litigation costs (internal quotation marks omitted)).
63. Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011)
64. codified in scattered sections of 35 U.S.C.
65. See Robert P. Greenspoon, Is the United States Finally Ready for a Patent Small Claims Court?, 10 MINN. J.L. SCI. & TECH. 549, 551 (2009).
66. Request for Comments on a Patent Small Claims Proceeding in the United States, 77 Fed. Reg. 74,830 (Dec. 18, 2012).
67. Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013, H.R. 845, 113th Cong. (2013).
68. citing Larry E. Ribstein, The Death of Big Law, 2010 WIS. L. REV. 749, 801-02 (2010);
69. see also STEVEN GARBER, RAND INST. FOR CIVIL JUSTICE, ALTERNATIVE LITIGATION FINANCING IN THE United States: ISSUES, KNOWNS, AND UNKNOWNS 37 (2010), available at http://www.rand.org/content/dam/rand/pubs/occasional- papers/2010/RAND-OP306.pdf ("[Alternative litigation financing] can be a fairly close substitute for selling the patent to an NPE.").