Chief Judge Rader’s Recent Comments on Patents and the Federal Circuit Bar Association

The Federal Circuit Bar Association (FCBA) recently released a copy of the remarks of Chief Judge Rader at the recent Eastern District of Texas Bench and Bar Conference.  The FCBA is the bar association for the U.S. Court of Appeals for the Federal Circuit, which hears patent appeals from the district courts in the U.S. along with appeals from the International Trade Commission and the U.S. Patent and Trademark Office.  Chief Judge Rader’s comments address criticisms against the U.S. patent system including the assertion of the tragedy of the anticommons as well as supposed litigation abuses by so-called patent trolls.  Chief Judge Rader notes that empirical evidence doesn’t support the tragedy of the anticommons theory and that the smart phone is a great example of, basically, how the anticommons does not exist.  I believe our fellow blogger Keith Mallinson supports Chief Judge Rader’s view; although I believe, if my memory serves me correctly, that some would argue there is an anticommons like effect in the genetic diagnostics field.  I also wonder about price.  Here are Chief Judge Rader’s comments about the anticommons theory:

As an illustration of the crisis of confidence in the benefits of Patent Law, I wished to just discuss one unsubstantiated charge against the merits of this system of Constitutional dimension.  Academics often charge the Patent system with creating a so-called “tragedy of the anti-commons.”  This academic canard suggests that a “thicket” of patents can actually inhibit innovation; that the administrative burdens of enforcing patents can multiply to frustrate the goal of the Act.  Thus, the law of innovation supposedly works against itself.  In an age of empirical research to verify every legal hypothesis, I would urge you and any policymaker to reject this academic supposition – whether it comes from a high court or any other source – until and unless it is verified by empirical data.   By the way, the only studies on this topic that I have seen could not verify this guess but generally confirmed the opposite – that patents spur innovation. 

May I offer a common sense rebuttal to this academic hypothesis?  [Hold up my smart phone]  This smart phone resides in the technological space most occupied by patents, perhaps in the history of patent law dating back to 1624.  With design patents as part of the equation, this device probably includes easily more than a thousand active patents.  If you count expired patents in this technology back to the advent of the computer age, this device would implicate tens of thousands of patents.  If ever the administrative burdens of a concentration of patents would inhibit innovation, this technology would be the place to observe that encumbrance.  Now you tell me: is this technology experiencing sluggish and encumbered innovation?   I doubt that I could keep track of the pace of innovation in this technology if I devoted my full time to the project.   

No doubt a study would show that the disclosure benefits of patents bring the entire world into the innovation circle that drives smart phone technology forward faster than any of us can fathom.    I am afraid the “tragedy of the anti-commons” has its own tragedy: it simply is academic nonsense.  The patent system does not inhibit invention.

Chief Judge Rader cites his experience working both in the judiciary and in Congress in cautioning the Congress to carefully enact reforms, if any, and to allow the judiciary to correct for any issues from litigation abuse.  Chief Judge Rader first points to the definitional problems concerning the “patent troll”:

Again in simple terms, litigation abuse is a court problem and courts have the best tools to supply the correction. 

Perhaps I could suggest a way that classification fails to address this problem.  Litigation abuse sometimes invites an equally abusive strategy of correction.  This misguided strategy attempts to define some patent-owning entities as the source of the problem.  Regardless of whether you call them NPEs or PAEs or “trolls” or whatever pejorative term suits your fancy, this definition strategy is itself an abuse.   

American law and ethics does not enforce or condition enforcement of basic laws and policy on the characteristics of a party.  American law treats big company and small company, foreign entity and domestic entity, different genders, races, and ethnicities ALIKE.  Our law does not make distinctions based on the characteristics of parties but on their actions proven in a court of law.  The definition of a “troll” will always be over-inclusive or under-inclusive to the detriment of justice.  Instead of finger-pointing and name-calling, the law needs to focus on blameworthy conduct.

Finally, Chief Judge Rader points to three potential avenues of help against so-called trolls.  First, the courts increased use of summary judgment to curb some claims.  Second, the award of attorney fees in exceptional cases—and he notes that the Federal Circuit is “on course” to make it easier for courts to find an exceptional case.  Finally, he points to litigation expense reform and model orders promulgated by the FCBA and the Federal Circuit Advisory Council.  The E-Discovery model order is available here.  The full text of Chief Judge Rader’s remarks are here. 

Since I mentioned the FCBA, I’ll give a “plug” for the FCBA and a panel I am moderating soon.  The FCBA offers a number of other activities, including webinars, conferences and interesting opportunities such as the International Series and the Global Fellows Series.  The FCBA also publishes a newsletter and a law review, The Federal Circuit Bar Journal.  Membership costs are relatively modest and all webinars offered by the organization are free for members.  I am pleased to work with the Diversity Committee of the FCBA and we are offering a webinar, in conjunction with the Law Clerks and Students Committee, concerning intellectual property career planning directed at law students and attorneys with 1-5 years of experience.  The webinar is free for students and members, and will be held this Wednesday (November 6) from noon to 1:30 pm (Pacific Standard Time).  The panelists are: Judge Paul Grewal, Magistrate Judge, U.S. District Court, Northern District of California; Jack Hobaugh, Counsel and Senior Director of Technology, Network Advertising Initiative, Washington D.C.; Paul Korniczky, Partner, Leydig, Voit & Meyer, Chicago, Illinois; Christy LaPierre, Associate, K&L Gates, San Francisco, California; Kim Tran, Associate, Perkins Coie, Palo Alto, California; and A. E. Williams, Retired Patent Examiner, U.S. Patent and Trademark Office. 

What Kind of Damages Does an NPE Deserve?

With all of the media attention that has been given the $1.05 billion dollar verdict in the Apple suit against Samsung, it is a bit surprising that there has been relatively less coverage of the $1.17 billion dollar verdict given on December 26, 2012 in favour of Carnegie-Mellon University (CMU) in its patent infringement action against Marvell Technology Group. The jury verdict, if it stands (and not surprisingly Marvell has sought to overturn it), ranks as one of the largest such awards ever given.

The case is now back in the headlines, following the court filing made by CMU this week, requesting that the court award it up to three times the jury award (so-called treble damages) on the ground that Marvell was a willful infringer of the CMU patents here. Under U.S. law, a court may make an award of three times the amount of damages for infringement in such circumstances. Also, CMU is seeking $321 million in pre-judgment interest. The patents in question were issued in 2001 and 2002 and the case was filed only in 2009. The claim is that Marvell, a major chip maker, has sold without CMU's permission billion of chips that incorporate the patented technology.

The court award and CMU's most recent court filing raise once again several related questions in connection with the current state of patent litigation in the U.S. The first is how to calculate damages when the plaintiff is a non-practising entity (NPE). While few would call CMU a patent troll per se, it being a major university engaged in high level research and teaching, the fact remains that CMU is not primarily in the business of creating technology for purposes of tech transfer and commercialization. True, the school seeks commercial opportunities for such transfer and commercialization, but this is certainly ancillary to its educational function. Moreover, whatever the place of such commercial activities within CMU, they do not include manufacture of products made under the university's patents. And so the question—should a special standard be applied for assessing damages be applied when the plaintiff is an NPE of the CMU type?

Second, what should we make of CMU's request for treble damages? Even for a PE-type of plaintiff, the issue of treble damages raises policy issues. In particular, does an award of treble damages provide any realistic deterrent against "willful infringement"? After all, the award is made from one private party to another. In a sense, the private party plaintiff is awarded a windfall in the name of the public interest in future deterrence of patent infringement. Unless there is some good evidence that deterrence does in fact take place, the argument for treble damages seems flimsy. This is especially so, given the sometimes legal hyper-technical nature of what constitutes willful infringement.

A fortiori, should an award of treble damages to an NPE of the CMU type ever be justified? True, as a private university, CMU can use every dollar that it can in maintaining the university (who can't). Still, do we really want CMU (or indeed any NPE) fully engaged in the same manner as Apple and Samsung over the issue of treble damages?

Patent trolls aren’t all they are cracked up to be

IP Finance is pleased to welcome back Keith Mallinson, whose guest posts on patents, standards and FRAND licensing in the telecom sector have been read with great appreciation.  This piece takes a look at the realities of licensing through the prism of Judge Randall Rader's "trolls and grasshoppers" analysis. Keith ends by calling for patience while existing licensing practices under the current law work things out.

"Patent trolls aren’t all they are cracked up to be 

There is a lot of pending patent litigation in mobile communications with 3G and smartphone technologies. This includes standard-essential and other patents, practicing entities that produce products and non-practising entities (NPEs) who do not. Numerous suits and countersuits in several nations between Apple and Android device producers Samsung and Motorola Mobility are particularly prominent. In addition, for example, NPE IPCom acquired a portfolio of mobile phone technology patents from defunct mobile phone manufacturer Bosch; and has vigorously pursued HTC, Nokia and others for royalties.

Smartphone ecosystem participants are jockeying for position in a new order with a rapidly changing and expanding ecosystem. This indicates an industry in rude health, not malaise. Following lacklustre mobile phone market developments beyond voice and text until the mid 2000s, the smartphone revolution began in earnest with the introduction of Apple’s iPhone in 2007. Previous smartphone market leaders Nokia and RIM have been completely up-ended by the rise and new leadership from Apple and Google’s Android including its many licensees. Meanwhile, this IP-rich industry is flourishing: innovation continues, customer choice is increasing and sales are booming for smartphones and other smart devices such as tablets. Smartphones and tablets are becoming the primary means of Internet connectivity with applications, services and usage levels that were unthinkable just a few years ago.  

Yet there are interventionist moves afoot to prevent allegedly harmful behaviour by patentees, particularly with respect to enforcing their rights in standard-essential patents (SEPs). In addition to interested parties and commentators, European and US competition authorities are also weighing-in publicly on this matter. Knee-jerk reactions by the latter that would overturn long-standing legal rights and remedies would be a grave mistake. The patent system including licensing of (F)RAND-based SEPs has worked extremely well. There is no reason to presume that current levels of smartphone IP litigation are more than a transient phenomenon, or that licensing offers prior to consummated agreements are anything abnormal in the cut-and-thrust of licensing negotiations that typically result in concessions, compromises and cross-licensing. There is no evidence of consumer harm--suspension of sales through injunctions has been minimal--or that outcomes, following the machinations of negotiation, litigation and in some cases commercial court rulings will be unfair, unreasonable or discriminatory. 

Trolls and grasshoppers 

NPEs that are solely in the business of asserting patents, typically acquired from others, are politely referred to as Patent Assertion Entities (PAEs) and disparaging as patent trolls when demands are regarded excessive and unreasonable. However, the latter are somewhat like the fantasy creatures after which they are named: they cause a lot of commotion and scare some folk, but tend not to receive what they demand and ultimately get their comeuppance. The troll in the Billy Goats Gruff tale hid under a bridge to ambush the goats and threaten to “gobble them up” as they tried to cross the stream. However, the troll met his match with the largest of the three goats who threw the troll into the stream out of harm’s way and never to be seen again.

Remarks by Court of Appeals Chief Judge Randall R. Rader in a conference speech last fall provided an astute perspective on extreme behaviours and outcomes in patent cases including trolls and their opposites the “grasshoppers”. 

“Of course, before we can control trolls and grasshoppers, we have to know who they are. And again, OF COURSE, that is the difficulty! Even some Supreme Court justices have referred to the non-practicing entity, the proverbial NPE. We also all understand that the NPE designation sweeps in some unintended “culprits” like universities and research clinics and can also extend to almost every corporation and business because they practice only a fraction of their patent portfolio. For that reason, I have always preferred an alternative definition of a “troll,” namely, any party that attempts to enforce a patent far beyond its actual value or contribution to the prior art.

Every “troll” discussion, however, needs a note of balance. Just as trolls litter the patent system with marginally meritorious lawsuits, so the system also suffers from the IP “grasshopper.” The IP grasshopper is the entity that is quick to steal the “inventor-ant’s” work and research investment because he did no work himself and the winter of competition approaches. We can recognize the grasshopper because he refuses to pay any license fee until his legs and claws are held to the proverbial litigation fire. Once again, a grasshopper is hard to define, but I can venture a description according to the same basic notion that helped us identify the troll: A grasshopper is any entity which refuses to license even the strongest patent at even the most reasonable rates.

Frankly I am not sure who causes more meritless litigation—the troll asserting patents beyond their value or the grasshopper refusing to license until litigation has finally made it impossible to avoid. I am surer, however, that both the troll and the grasshopper tend to blame and feed off of each other. Neither deserves encouragement or tolerance.”

When NPEs attempt to enforce their patents beyond their worth they typically fare poorly with court judgments. For example, in the long-running telecoms patent dispute between Nokia and IPCom, the High Court for England and Wales has recently ruled that IPCom’s European patent (UK), which related to the handover of mobile phones between different base stations (e.g., when the mobile user is on the move), was invalid as originally granted. According to Nokia, and as reported by the IPKat, this “marks the sixtieth patent invalid as granted since IPCom began its aggressive campaign against Nokia and other industry players more than four years ago”. Academic research also indicates that NPEs almost never win their cases in court. A 2010 paper by Allison, Lemley and Walker indicates that whereas product-producing entities win 40% of their cases on the merits, NPEs win only 8% of their cases. Given that out-of-court settlement figures tend not to be disclosed publicly, it is anyone’s guess how large payments are in these cases. 

Even though the above should be reassuring for product companies, the nuisance factor and costs of litigation including discovery and other legal fees can, nevertheless, be quite onerous. Judge Rader expressed a need to bring discipline to the disproportionally high US discovery expenses in patent cases. He went on to state:

“…it is difficult to control the troll or the grasshopper in advance because they cannot really be identified until their abuse is already over—the troll has lost its case of little value or gotten negligible value for a nominally winning case; the grasshopper has finally accepted a reasonable license fee after dragging the court and the patent owner through years of litigation. The troll and the grasshopper only emerge after the case is over..”

He proposes that when the case is over and the court can identify a troll or grasshopper, there should be a full reversal of attorney’s fees and costs. This would, for example, discourage plaintiffs from using discovery (costs) as a tactical weapon. Costs defending meritless claims are generally significantly less outside the US. For example, in the UK the loser typically pays the costs and US-style discovery is not possible in continental Europe. 

Extreme demands by practising and non-practising entity patent owners seeking unreasonably large sums for weak patents and extreme resistance by product-makers who refuse to pay a fair price for the IP they exploit are mostly kept in check by the courts, as indicated by Judge Rader. Large payments can grab press attention, but these are the exception and can result from tactical blunders by defendants who could have settled sooner at lower cost. RIM’s agreement to pay the NTP $612.5 million in a “full and final settlement of all claims” is the most well-known NPE settlement in mobile communications patent litigation. This dispute was not about SEPs. RIM could have avoided paying so much if it had not painted itself into a corner with the imminent prospect of having its email system shut down to the detriment of anxious customers, such as the US Department of Defense with its concerns about maintaining national security. 

Unintended consequences 

Competition authorities should have the patience to let the existing patent laws, established licensing practices with bilateral negotiations and, when necessary, commercial courts, work things out. The smartphone marketplace is in significant flux. No company or companies have anything like market dominance or the large and stable market shares observed elsewhere, such as in PC operating systems or microprocessors. There is no proof of patent “hold-up”; in fact, aggregate SEP royalties have fallen as standardisation has progressed in mobile technologies. Absent proven market failure or consumer harm, the market should be left to establish absolute values in patent licensing, or relative values for SEPs versus other patents. Alternatively, regulators would be drawn to employ simplistic analysis that overlooks the money invested and value derived from IP versus commodity costs in hardware manufacture. They would likely impose arbitrary royalty rate caps and subjective patent evaluations of great inaccuracy. Competition authority intervention could cause distortions that undermine incentives to continue making the large investments in SEPs and other IP while tilting the playing field in favour of one vested interest group or business model to the detriment of others".

Private and Social Costs of Patent Trolls

Patent Troll T-shirts are
available here

Thanks go to Chris Torrero for spotting, via beSpacific, "The Private and Social Costs of Patent Trolls", a research paper by James E. Bessen, Michael J. Meurer and Jennifer Laurissa Ford (September 19, 2011). Boston University School of Law, Law and Economics Research Paper No. 11-45.  According to the abstract:

"In the past, non-practicing entities (NPEs) - firms that license patents without producing goods - have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives".

This 33-page paper can be accessed via SSRN here.

The paper appears well-researched and is quite persuasive -- but this blogger is not economically gifted and he wonders how it appears to other economists.  Also, he wonders why all the debate, and apparently all the numbers-based research, seems to be related to the United States. How does the troll model which is used here fare when measured against, for example, European patent litigation patterns? Can anyone help? This blog is happy to host reviews and comments on this paper.