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. 

Keeping Tabs on “Patent Trolls”: "Trolling Effects"

The Electronic Frontier Foundation recently released its “Trolling Effects” website.  The purpose of the website is to collect information, specifically cease and desist letters [C&D letters] sent by “patent trolls,” and provide a “one-stop shop” for resources concerning “patent trolls” and their impact on the patent system.  Unlike the somewhat similar Chilling Effects Clearinghouse website, which collects C&D letters across the IP disciplines, but particularly copyright C&D letters, “Trolling Effects” is specifically aimed at “patent trolls.” 

The Chilling Effects Clearinghouse website, in addition to its database of C&D letters, provides advice concerning intellectual property law for folks who receive C&D letters and offers a “weather report” on the chilling effect of intellectual property law enforcement on the Internet.  Notably, the Chilling Effects Clearinghouse website has provided a source of C&D letters that allow interested parties to find potential abusive cease and desist letters to “shame” intellectual property owners who may attempt to stop lawful activity through overreaching claims.  The “Trolling Effects” website is designed to help figure out who exactly are the “patent trolls.”  The blog at the website states:

The new site will gather information that's usually kept secret and put it to two important uses:

1. Give those facing troll threats information about the specific threats (including who is really sending them), along with general information about patent law and the system that might help them navigate the legal process and better understand their options.
2. Collect sorely needed data for journalists, academics, and policy makers, helping them better understand the scope of the patent troll problem and allowing them to make a better case for real reform.

In a very short period of time, the website has already collected a number of C&D letters.   Any opinions on how effective the Chilling Effects Clearinghouse website has been?   Will “Trolling Effects” be as or more effective? 

A Need for Trademark Bullies (or at least more trademark enforcement)?

"Patent troll," "copyright troll," and "trademark bully" are labels with generally negative connotations. Most may say that we need less of all of the above, including less enforcement by these "evil doers." However, defining exactly what might fit in one of the above categories can be challenging. In some ways, it is like telling my children that people are not bad, but may engage in bad behavior. For example, Professor Lemley explores the conduct of some universities in a thought provoking article with the provocative title "Are Universities Patent Trolls?".

Interestingly, with so called "trademark bullies," a definition has been very elusive although some may say a trademark bully is an entity with a lot of resources enforcing a trademark against an entity with less resources (usually by a substantial amount) with a trademark theory that is either unsupported by trademark law or is a bit of a stretch. And even more interestingly, when one searches for trademark cease and desist letters posted on the Chilling Effects Clearinghousewebsite, that collects cease and desist letters, a vast majority of the letters are posted by Google--the apparent victim of bullying. Leaving aside the definitional issues involving trademark bullies, there is a space where there appears to be a need for more trademark enforcement--not less. That space involves nonprofits.

A few years ago, the well-known and well respected nonprofit Susan G. Komen For the Cure received some not so positive press about its enforcement of "for the cure" against other nonprofits--specifically smaller nonprofits. It was essentially labeled an evil "trademark bully." But, do we need more of that? A recent study and article by CNN, Tampa Bay Times and the Center For Investigative Reporting, outlines the 50 worst charities in the United States and discusses an apparent tactic of some "bad" charities that choose trademarks similar to respected charities and use telemarketers to secure donations--most of which never reach the intended beneficiaries. The article states:

The nation's worst charities are large and small. Some are one-person outfits operating from run-down apartments. Others claim hundreds of employees and a half-dozen locations around the country. One lists a UPS mail box as its headquarters address.

Several play off the names of well-known organizations, confusing donors.

Among those on the Times/CIR list are Kids Wish Network, Children's Wish Foundation International and Wishing Well Foundation. All of the names sound like the original, Make-A-Wish, which does not hire professional telemarketers.

Make-A-Wish officials say they've spent years fielding complaints from people who were solicited by sound-a-like charities.

"While some of the donations go elsewhere, all the bad public relations that comes with telemarketing seems to come to us," said Make-A-Wish spokesman Paul Allvin.

Donors who answer calls from the 50 worst charities hear professionally honed messages, designed to leverage popular causes and hide one crucial fact: Almost nothing goes to charity.

Why isn't there more trademark enforcement in this space? Is it because of the Komen problem where the nonprofit can look very bad very quickly depending on who they choose to enforce their mark against? Do we need more "bullies" and less shame here? An interesting 2013 article "Trademarks for the Cure: Why Nonprofits Need Their Own Set of Trademark Rules" by Lauren Behr in the 54th volume of the Boston College Law Review explores whether nonprofits need special trademark rules. 

"A Great Story about Patent Trolls or How to Make an Offer You Can't Refuse": It's Not What You Think

Thanks to fellow blogger Mike for bringing to the attention of our readers the article by David Segal, "How a Typical Patent Battle Took an Unexpected Turn", which appeared in the 13 July 13 issue of the New York Times, here. The article recounts the tale of a Chicago entrepreneur, Peter Braxton, whose app, "Jump Rope", which enables users to pay a fee to jump to the head of a queue, fell afoul of a law suit filed by an arguable patent troll, Smart Options. Braxton prevailed in the action (at summary judgment no less), but he was then threatened with an appeal and the filing of another first-instance patent infringement suit. Braxton, facing financial ruin even as he was prevailing at the legal level, ultimately joined forces with the (for some) notorious patent troll Erich Spangenberg and his company, IPNav. The upshot was that patent troll IPNav became a form of venture capitalist, putting in $200,000 in capital, and agreeing to handle Braxton's legal issues with Smart Options, in exchange for a 40% equity stake in company.

For Segal, the black and white hues of the actors seem pretty clear, as he concludes his piece with following observation: "…Peter Braxton's story suggests that there is really only one way to deal with a patent bully: team up with a bigger bully." While this summary makes for a good sound bite as the sardonic dénouement of a morality play, I think it does a bit of a disservice to the more nuanced context in which patent trolls operate. In particular, Segal seems to view the world of patent trolls as a closed lake (with apologizes for the metamorphosis of "trolls") in which defenceless entrepreneurial fish are preyed upon by sharks of various sizes. Under such an approach, the only strategy available for the entrepreneur is "the enemy of my enemy is my friend", under the assumption that the only thing that a patent troll may enjoy more than preying on a defenceless entrepreneur is to best a competing troll for the patent prize.

It seems to me, however, that the better way to understand what took place in the New York Times piece is to view it in terms of shifting marketing dynamics. I spoke several months ago with a veteran of the IP commercialization world in Silicon Valley. She recounted how disheartened she was in encountering twenty-something investors, with or no IP background, who are seeking to create funds of tens of millions of dollars in support of what seems to be straight-up troll-like activity. This is the kind of disconnect between the traditional purpose of patent system to encourage innovation and invention, on the one hand, and the lucrative opportunities to game the litigation system to reap potentially large pay-outs from vulnerable defendants, on the other, that has led to the current furor against not only so-called patent trolls, but the patent system itself.

In the short term (or likely even in John Maynard Keynes famously elusive "long term"), nothing will be done to address the main sources of the inefficiencies in the patent system that have enabled patent trolls to flourish. In particular, I refer to the widespread claims that too many "bad" patents are being granted and later exploited by patent trolls (although the New York Time article does not indicate that the patent at issue was a "lousy" one, but only that Mr. Braxton's business method and system did not infringe). As well, the inefficiencies derive from the crushing cost of funding a defence in a patent litigation action, with virtually no opportunity under U.S. law to receive an award of costs (see my blog post of October 25, 2012 "Patent Litigation Funding: What About the Underfunded Defendant?", here). In such a circumstance, the opportunity to game the patent system to the benefit of the patent troll is clear.

As Arthur Levitt, the former head of the U.S. Securities and Exchange Commission, intimated in a radio interview this week, the opportunity to make millions of dollars on the back of arguably (or palpably) illegal conduct means that illicit behaviour will likely always be part of Wall Street, human nature being what it is. In the case of patent trolls, at least, there is little or no accusation that they are acting in an illegal matter. To the contrary, the story of Mr. Braxton, Smart Options, Mr. Spangenberg and IPNav suggests that at least some of the actors in this world are increasingly behaving like main-stream (at least in a context akin to venture capital) investors. Accordingly an opportunity is identified and an agreement is reached that arguably benefits both parties: the investor and the entrepreneur. True, the latter may be able to dictate the terms, but that is often the case in a garden-variety investment in a start-up. At the end of the day, the deal still has to enable the start-up to achieve its commercial goals for the mutual benefit of the parties.

Seen in this way, Mr. Spangenberg is simply being quicker off the mark in spotting the business opportunity, given his familiarity with the circumstances involved. There is nothing that precludes others for investing in a similar fashion. Not quite David Segal's morality play, but rather a more promising outcome for trying to mitigate the damages caused by the deep-rooted inefficiencies in the patent system.

A Great Story about Patent Trolls or How to Make an Offer You Can't Refuse

The NY Times published a fantastic (and very troubling) piece, How a Typical Patent Battle Took an Unexpected Turn, about a start-up and its fight with a “patent troll” with some great twists.  I experienced a wide range of emotions in reading this article and the story will continue to evolve.  Here is the article.  Who are the winners (if any)?  Who are the losers (if any)?  I hope the "trolls" don't start colluding--protection anyone?  What do you think? 

Federal Trade Commission to Seek Information about “Patent Trolls”

The White House continues to move against the “patent trolls”.  The chairwoman of the Federal Trade Commission (FTC), Edith Ramirez, announced that the FTC would gather information concerning “patent trolls” and their practices.   Back in April, Google, Blackberry, Red Hat and Earthlink (collectively, Google) submitted comments to the FTC and Department of Justice requesting the inquiry.  In the comments, Google provided some potential questions for “trolls”:

How prevalent is outsourcing of patent enforcement by operating companies to PAEs?

What types of arrangement have PAEs and operating companies consummated? 

What motivates these arrangements?

What are the likely competitive harms and benefits of outsourcing?

What are the competitive implications of the secrecy with which many PAEs conduct their operations?

Do the particular terms of outsourcing arrangements indicate that operating companies are employing PAE proxies as competitive weapons?

The comments are well worth a read.  From the reports on the chairwoman’s comments (unfortunately, I could not find a copy of the comments--if you have access to them, please let me know and I'll post them), it appears that the inquiry may be broader than the questions posed by Google, but it appears those questions will be addressed (here, here, here and here).  More information about "patent trolls" and their practices is welcome.  The National Retail Federation, the Food Marketing Institute and the National Restaurant Association announced they are supportive of the FTC’s efforts. 

The White House Moves Against "Patent Trolls"

Today the Obama Administration announced “five executive actions and seven legislative recommendations to protect innovators from frivolous litigation and ensure the highest-quality patents in our system.”  The announcement is here.  The recommendations are below.  The recommendations that seem especially interesting include: expanding challenges to computer enabled patents at the PTO; changing the standard for issuance of injunctions at the International Trade Commission; incentivizing public disclosure of demand letters; increasing efforts to identify the real parties in interest; and making new rules concerning functional claiming in the software context. 

LEGISLATIVE RECOMMENDATIONS

In that spirit, the Administration recommends that Congress pursue at least seven legislative measures that would have immediate effect on some major problems innovators face.  These measures would:

1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.
2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).
3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB).
4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use.  Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.
5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.
6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public.
7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges.

EXECUTIVE ACTIONS

Today the Administration is also announcing a number of steps it is taking to help bring about greater transparency to the patent system and level the playing field for innovators.  Those steps include:

1. Making “Real Party-in-Interest” the New Default.  Patent trolls often set up shell companies to hide their activities and enable their abusive litigation and extraction of settlements.  This tactic prevents those facing litigation from knowing the full extent of the patents that their adversaries hold when negotiating settlements, or even knowing connections between multiple trolls.  Today, the PTO will begin a rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application.
2. Tightening Functional Claiming.  The AIA made important improvements to the examination process and overall patent quality, but stakeholders remain concerned about patents with overly broad claims — particularly in the context of software.  The PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.
3. Empowering Downstream Users.  Patent trolls are increasingly targeting Main Street retailers, consumers and other end-users of products containing patented technology — for instance, for using point-of-sale software or a particular business method.  End-users should not be subject to lawsuits for simply using a product as intended, and need an easier way to know their rights before entering into costly litigation or settlement.  Today, the PTO is announcing new education and outreach materials, including an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll.
4. Expanding Dedicated Outreach and Study.  Challenges to U.S. innovation using tools available in the patent space are particularly dynamic, and require both dedicated attention and meaningful data.  Engagement with stakeholders — including patent holders, research institutions, consumer advocates, public interest groups, and the general public — is also an important part of our work moving forward.  Roundtables and workshops that the PTO, DOJ, and FTC have held in 2012 have offered invaluable input to this process.  Today, we are announcing an expansion of our outreach efforts, including six months of high-profile events across the country to develop new ideas and consensus around updates to patent policies and laws.  We are also announcing an expansion of the PTO Edison Scholars Program, which will bring distinguished academic experts to the PTO to develop — and make available to the public — more robust data and research on the issues bearing on abusive litigation.
5. Strengthen Enforcement Process of Exclusion Orders. Once the U.S. International Trade Commission (ITC) finds a violation of Section 337 and issues an exclusion order barring the importation of infringing goods, Customs and Border Protection (CBP) and the ITC are responsible for determining whether imported articles fall within the scope of the exclusion order. Implementing these orders present unique challenges given these shared responsibilities and the complexity of making this determination, particularly in cases in which a technologically sophisticated product such as a smartphone has been successfully redesigned to not fall within the scope of the exclusion order. To address this concern, the U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that CBP and the ITC use to evaluate the scope of exclusion orders and work to ensure the process and standards utilized during exclusion order enforcement activities are transparent, effective, and efficient.

Marathon Patent Group – The Hot Bet?

Apparently since around mid-November of last year, Marathon Patent Group (MPG) evolved from American Strategic Minerals and discarded its mineral and real estate assets in favor of an IP management and enforcement services business model.  MPG has been very, very active since then and has received quite a bit of (mostly positive) press (here, here, here and here).  MPG detailed some of its activities in an April 25, 2013 report:

·         Acquired CyberFone Systems and its patent portfolio which has generated 32 settlement and license agreements for a total of $15.5 million in revenue

·         Acquired US Patent 5,331,637 from MOSAID Technologies, one of the world's leading intellectual property management companies

·         Entered into a strategic relationship with IP Navigation (IPNav), the leader in full-service patent monetization

·         Completed the acquisition of Sampo IP LLC acquiring its patent portfolio consisting of three patents and one pending patent application

·         Commenced our first licensing campaign on March 20, 2013 by filing a patent infringement lawsuit in the United States District Court for the Eastern District of Texas against Sony Computer Entertainment America LLC, Siemens Energy, Inc., CB Apex Realtors, d/b/a Coldwell Banker Apex Realtors, Blue Cross and Blue Shield Association, Juniper Networks, Inc., Winn Dixie Stores, Inc., and Dell, Inc.

·         Established a new IP Research and Services Center at the University of Arizona Science & Technology Park in Tucson, Arizona . . . .

Since April 25, 2013, MPG has also, through its subsidiaries, filed patent infringement lawsuits against Ambit Energy Holdings LLC, BMC Software Inc., HomeAway Inc., Hoover's Inc. and Ristken Software in the Eastern District of Texas; Thompson Reuters in the District of Delaware; Sprint Nextel Corporation, Juniper Networks, Cisco Systems, Bloomberg L.P., Hitachi Cable America, D-Link Corporation, Avaya, Hewlett-Packard Company, Enterasys Networks, Extreme Networks, TIBCO Software, BT Group, SAVVIS Inc., Zhone Technologies, Huawei Technologies, Allied Telesis, and Adtran in the District of Delaware;  and E*Trade Financial Corporate Services Inc., Liberty Mutual Group Inc., Aetna Inc., Avon Products Inc., Starbucks Corporation, Yum! Brands Inc., Hewlett-Packard Company, and Alcatel-Lucent USA Inc. in the Eastern District of Texas. Like I mentioned before, MPG is getting a lot of press for its activity. 

Co-blogger Neil Wilkof recently raised the question about the interest of boards in questions concerning IP—and he expressly excluded an entity such as MPG.  An entity such as MPG, of course, is primarily concerned with IP and notably, patent expert Professor Craig Nard recently joined MPG's board of directors.  I think that the importance of IP will lead companies to move toward accessing the services of companies like MPG although presently MPG seems mostly (?) involved in the enforcement of its IP.   I also think more companies will seek to draw in more IP experts on their boards—including some professors.  Does anyone have a sense of whether companies are utilizing the valuation, auditing or related services of companies similar to MPG (although MPG may be a different breed according to Forbes)?  The Forbes article indicates that some companies may be doing just that with MPG. 

Patent Trolling doesn't pay, or does it.... in the long term?

An explosive tweet posted by compulsive innovator/investor Chris Dixon made the highlights of hip weblog TechCrunch last week and stirred a heated debate in the IP community. The co-founder of decision-making website Hunch found out in a report published by the University of Texas Management Company (PDF here) listing all of its private investments in venture funds and private equity funds and their results, that Intellectual Ventures – known by many as “IV” and considered by most to be the godfather of all patent trolls – has been severely underperforming notably with a negative internal rate of return (IRR) of 73% of their Invention Development Fund I and a negative IRR of their Invention Investment Fund II of 10%. As TechCrunch pointed out, this negative IRR does not necessary reflect the reality of the situation but it might suggest that the activity of patent trolling is not as lucrative as it appears to be. It also contradicts IV founder Nathan Myhrvold’s claim that his company, whose main goal is to build a large patent portfolio rather than developing new systems, is “turbocharging” the innovation process, especially when the performance of the two IV funds are compared with the ones of more traditional venture funds.

Joff Wild of IAM magazine, which has been posting regularly about IV and now certainly has a good understanding of the company’s business model, moderated the significance of Techcrunch’s claim in a recent blog entry:

"Before you can make any definitive statement on such a thing you have to know how old the funds are and what they are setting out to do. Acquired patents are rarely going to give you a quick return - they are slow boilers. So if you spend a lot of cash upfront on buying up portfolios, you may have to wait a few years before they start to pay dividends. Alternatively, if you are buying up "inventions" that have not yet even been patented - which is also something that IV does - then you have an even longer lead-in until potential monetisation can take place"

His point of view concurs with the answer of IV’s VP Finance Larry Froeber, who highlighted in a reply to Wild’s blog post that the method used by the University of Texas Management Company does not capture the true value of their business, as spending is the driving growth of IV.

I tended to agree with this view till I went through the comments of this blog entry (items posted on the IAM blog always generate a handful of insightful comments) and read what Tom Grew of Yu & Partners had to say:

"Interesting that, in current times as businesses focus more on delivering quarterly results and as a consequence reduce IP spend (and increase divestitures), we are allowed to say: It's ok, IV has a long term business model.
Will investors buy this though? Why should IV be special?
It's been running now for what, 10 years? Wouldn't you expect a ROI in that time - plenty of time to get a patent granted, and many of its investments have been already granted patents in any case. And isn't there a statistic that most patents take about 3-5 years to commercialize? This should be prime time."

In my opinion Tom Grew has a point here. A successful business strategy in the short term is a necessity to survive on capital markets and very few are the companies that managed to stand up after taking a heavy blow upfront. However it does not seem that IV lost the confidence of its investors, so does patent trolling pay and if it does when should investors expect a ROI? I guess we will only find out about it in a few years time.

Troll kalla mik

Mega firm litigation woes: you win a big patent litigation instruction only to find that you cannot act because it may cause a potential conflict with a big corporate the firm is trying to win deal work from. Sound familiar then you may find the latest Bloomberg story (Kolker) on corporate defender turned patent troll interesting, if not inspiring.

"John Desmarais, a former top earner at the 1,500-lawyer firm Kirkland & Ellis, spent more than 15 years representing some of the world’s largest patent owners. Now he’s one of them, and he’s gearing up to slay the kinds of companies he once defended. "

The story once again raises issues over whether trolling is good for IP business. John F. Duffy, a law professor at George Washington University is quoted:

“The good story about nonpracticing entities is that they are developing liquidity in the market for these patent rights. On the negative side, they are given patent rights for goods or services they don’t make and can sue other companies for infringement, he said. "

Illustration by Bob MacNeil

Banish the Trolls Back Home

Certainly the most famous Nordic mythological creature ever to enter the lexicon of IP is the so-called "patent troll." Since Peter Detkin, formerly of Intel, popularly used the term in 2001 to describe parties that sought to extract payment for patents that they have no intention to ever use or practice, the debate about whether the "troll" is a positive or negative factor in the patent world.

My goal in this post is not to revisit generally the argument pro and con, but to consider how the issue was recently addressed by the wide-circulation business weekly, Bloomberg Business Week, in article entitled, "The 'Troll' That Tocks Off Techies", which was published on February 15 under the byline of Rachel King. More specifically, in an effort to bring the pro and con of "patent tolls" within the scope of an apparently self-imposed one-page limit, the article brings snippets and quotes that are apparently intended to give a flavor of the various positions on patent trolls. That said, the article contains several hard-to-understand comments that reflect the mushy boundaries that have been emerged in connection with the patent troll debate.

1. "Critics say trolls try to apply patents that are too broadly defined or that cover ideas that existed before the patent was granted. Many say the entire U.S. patent system needs reform. But for inventors who alone can't take tech companies to court over meaningful innovations, the Acacias [company that acquires patents and then seeks to obtain fees for their use--NJW] of the world play a vital role."

COMMENT: Nothing in this paragraph relates strictly to patent trolls. Regarding the first sentence, the claim is one that a defendant in a patent infringement action will often raise in its defense. One can replace the word "troll" with "plaintiff" without any change of the underlying meaning of the sentence. As for the second sentence, the meaningless of the target reminds me of Joseph Conrad's comment in The Heart of Darkness about the frigate more or less "shooting into a continent."Enough said. As for the third sentence, here as well, there is nothing special about so-called trolls, unless one wants to impose a use requirement for patents. Just because a law suit is filed by a nonpracticing entity does not make the plaintiff a troll.

2. "At the same time, nonpracticing entities help bring transparency to a market in which the price for patents is shrouded in nondisclosure agreements, says James Malackowski, CEO of Ocean Tomo, an intellectual-property consulting firm."

COMMENT: I guess I need some help here. What exactly is the "market" for patents here? Why do "nonpracticing entities" (i..e.,"patent trolls") solve the "transparency" problem resulting from nondisclosure agreements? What indeed is the "transparency" problem? Why should I care that the "transparency" problem is solved?

3. "[A partner at one venture capital firm] says one-third of is firm's portfolio is targeted by patent trolls. 'We're on the very front end of an explosion of frivolous litigation that's going to put a damper on innovation,' he says."

COMMENT: It's a bit hard for me to follow this claim. If this VC went into these investments without being aware of the likelihood of possible third-party patent suits, they have a due diligence problem. If this VC was aware of the risk of possible suit, then one would assume that this risk was priced into the terms of the acquisitions. Further, if the lasuit is "frivolous", the patentee also has to weigh the risk of pursuing a suit against the possibility that it may lose the case.

Nearly a decade after the moniker "patent troll' was coined, the term seems to still elude a commonly agreed meaning. Maybe the time has come to stop using the term and banish the troll back to the frozen Nordic north. In that regard, consider the following suggestion set out recently in Allison, Lemley & Walker,"Extreme Value or Trolls on Top? The Characteristics of the Most-Litigated Patents", University of Pennsylvania Law Review, December 2009.

"... [W]e should not focus so much attention on labeling particular plaintiffs as trolls or not, but instead on making sure that the patent rules provide patentees of all types fair compensation but not opportunities for hold-up."

How the business journalists will react to this sugestion is an open question.

Sun Tzu and the patent trolls

David Wanetick (Managing Director, IncreMental Advantage) has written a little piece for IP Finance which readers may enjoy. He explains:

"Black Operations. Scorched Earth Campaigns. Preemptive Strikes. Fomenting Internal Unrest. Coalition Defenses. Trench Warfare.

These are not terms typically used in discussing patent strategy. However, they are strategies discussed in my article entitled “How Sun Tzu Would Outflank Patent Trolls”. Other articles have postulated that patent trolls are merely an illusion of paranoid patent managers. Some authors have praised patent trolls for providing a market for inventors to monetize their inventions. Other articles have lambasted patent trolls for levying taxes on innovation. This article provides a thorough analysis of how operating companies can respond to demand letters issued by patent trolls".

Patent Trolls: Public Business Enemy No. 1?

One of the most distinctive and well-regarded parts of The Economist magazine is its periodic surveys. For those of you who do not read The Economist, a Survey is an in-depth analysis of 15-20 pages in length on a specific topic. I eagerly look forward to reading them. Given that build-up, and the anticipation that awaits tackling each new Survey that is published, I was extraordinarily disappointed by a paragraph that appeared in the May 30th issue entitled "Business in America.' Under the section entitled "Red Tape and Scissors," in which the Survey discussed some of the difficulties posed for business by "crazy rules, convoluted taxes and rampant lawyers, " the following paragraph appeared:

"" 'Patent trolls' pose another problem. These are firms that buy up patents, not to turn them into products but solely to sue firms that may have infringed them. Since the United States Patent Office grants patents freely and courts enforce them zealously, every inventive company lies in fear of trolls. If one cannot convince a court that a billion-dollar product incorporating hundreds of patents infringes only one of his, he can an injunction to stop it being sold. The victim typically settles. Michale Heller, author of "The Gridlock Economy", argues that vaguely defined property rights stifle innovation and cost lives."

Let me see if I have this right. Within the heart of the most thicket of the most regulatory issues facing American business, e.g., the tax system, products liability, the drug approval process, byzantine financial regulation, lies the patent troll. It is true that patent trolls were apparently viewed as a significant enough issue to warrant a decision several years ago by the U.S. Supreme Court in the eBay case, here. But in that judgment, the Supreme Court significantly cut back on the ability of a so-called patent troll to obtain an injunction.

Contrary to what is asserted in the Survey, a party that sues on a patent that he purchased and of which it does not make any commercial will now have a difficult time if it seeks to obtain an injunction. Moreover, in the post-eBay world, courts are reluctant to grant an injunction if the patent in question covers only a small portion of the overall product. In a word, the account in The Economist does not reflect the current legal position regrading patent trolls, and patent trolls do not constant a systemic threat to the well-being of US business.

Moreover, it is unclear what the reference to the Heller book has to do with patent trolls. mystery. In particular, it is not clear "what vaguely defined" rights are intended in the Survey, and how this relates to patent trolls. There is no evidence that the patents owned by patent trolls are less clearly defined that other patents. Heller's concern is in another direction, namely the threat posed by what he has called "the tragedy of the anticommons", where the transaction costs to reconcile multiple property rights becomes prohibitively expensive. But that, as noted, is a different issue from the claims made against patent trolls. Someone seems to have conflated the two issues, with the result that neither of them is properly dealt with in the Survey.

Find the patent troll

Patent Litigation, the ITC, and Hardship in the Chip Industry

One of the verities of IP law and practice is "Wilkof's Law". For those of you (probably all of you) who have never heard of "Wilkof"s Law", it goes like this. Question: "How do you know when there is economic slowdown?" Answer: "There is an increase in patent litigation."

A clear example of this principle was described recently on Bloomberg.com (23cDecember 23) under the title--"Chipmakers Hire Armies of Lawyers to Boost Revenues Amid Slump." The report described the efforts of chip (of the computer and not the confectionery kind) manufacturers to make increasing use of patent litigators to try and make up for the expected severe downfall in profits for the industry during 2009. The anticipated drop in revenue for 2009 is indeed grim. According to the report, 2008 witnessed a 4.4% decline in sales, and a 16% crater-like decline in sales in forecast for 2009. Never has the industry experienced back-to-back declines in overall annual sales.

The list of current and possible patent litigation activity is broadly based in the industry. Thus it is reported that Qimonda, LSI and Spansion have all brought patent infringement actions before the ITC. Such actions tend to take much less time than a court action, and they may lead to a settlement with payment made into the patentee's coffers. Particularly notable is Spansion, which is reported to have not recorded a profit since going public in 2005. Licensing fees from defendants is one way to remedy this situation, if only in part.

When licensing fails, going forward with the suit is always a possibility. In one such high profile court filing, Spansion has recently sued Samsung for patent infringement in the area of flash memory chips. As well, Qimonda is reported to crossing patent swords with Seagate Technology, and LSI has commenced patent litigation matter with Freescale Semiconductor and Elpida Memory.

The pros and cons of bringing an ITC action with the intention of reaching a licensing arrangement were described by Robert Krupka of Kirkland & Ellis as follows. On the one hand, an ITC proceeding might actually be more expensive than a regular court proceeding (this is due to the procedural requirements of such action), with costs in the area of $5 million or more. On the other hand, for the target, settlement might be the better part of valor, especially since such an arrangement ensures the target's continuing right to sell in the U.S. market. It would seem that there is a bit of the patent-troll mind-set in all of this, although I suspect that none of the plaintiffs to such an action would so characterize themselves.

Your friendly patent trolls in action

In considering this expected flurry of chip-related patent litigation during 2009, we bring you the following comment from from the Bloomberg article. As noted, "Jerry Sanders, the founder of AMD, used to say, "Real Men own fabs", said Craig Berger.... That's kind of changed. Now it's, "Real men have huge armies of lawyers."

Or, stated otherwise, Wilkof's law is alive and well.

"Real men own fabs"--that is so yesterday ...

Patent portfolio strategy revisited

Writing in Innovation Science, Brent Edwards ("Trolls Attack Innovation: Panic in Corporate Parks!"), left, reviews an article in the June 2008 issue of the Harvard Business Review by management professors Joachim Henkel and Markus Reitzig ("Patent Sharks: Legal strategies aren’t enough to deal with these predators of the IP world. You need to rethink your approach to R&D"). Edwards addresses the authors'recommendations which he criticises as being unrealistic in that they idealise the willingness of competing companies to cooperate with each other and to forgo competitiveness in technology development in order to protect themselves against the trolls.

The first of the professors' recommendations is "High-technology firms should move away from building huge patent portfolios for the purpose of cross-licensing with competitors". On this, Edwards comments:

"The authors correctly point out that one reason companies generate patents is to trade them for patents needed from other companies. Such trading is done because the patents behind key components in complex technical products are usually distributed across all of the major companies in an industry—no one company owns all of the patents necessary to produce a product. Because no company can produce a product solely on technology from their own patent portfolio, companies trade their patent licenses for licenses to the other companies’ patents. The cellphone industry is a typical example of this, e.g., Nokia trading patent licenses with Motorola and Samsung. The authors suggest that this strategy of building a strong portfolio and trading licenses is no longer valuable to companies and should be stopped because it doesn’t protect them from trolls. Indeed, it doesn’t—it protects them from their competitors, who are ultimately more threatening than patent trolls. Just because a patent strategy does not affect patent trolls does not mean that it isn’t worth doing. If I were Nokia, however, I would certainly try to convince Motorola to follow this advice to stop building up Motorola’s patent portfolio".

It seems to be by no means clear that one's competitors are ultimately more threatening than patent trolls. By virtue of the fact that they are in the same market -- particularly where that market is technologically complex and patent-rich -- competing players becomes increasingly reliant on one another in terms of standards-setting and cross-licensing, so each has a long-term incentive to cooperate with one another. A troll, however, is an outsider; he is not interested in cooperation or developing any relationship outside that of rentier. The more rent he receives, the better able he is to defend his patents if their validity should be challenged, and the less he does apart from collect his rent and keep it, the more focused he is on his continued role as rentier.