Do non-practicing entities behave like patent trolls?

Stop Bad Patents!
A campaign by The Internet Association

A new study by Lauren Cohen, Umit G. Gurun and Scott Duke Kominers, entitled 'Patent Trolls: Evidence from Targeted Firms', found that non-practicing entities (NPEs) generally behave opportunistically, resembling the typical behavior of patent trolls. After a careful evaluation of the companies targeted by NPEs in litigation, the circumstances that surround NPE litigation, and the impact of litigation on the targeted companies' innovative activity, the researchers concluded that non-practicing entities target companies on the basis of ex ante expected profitability, preferring 'suits with high probability of payoff against firms with deep pockets'.

The researchers first described 'a parsimonious model of an innovative economy in which NPEs endogenously arise as patent trolls', due to the combination of a number of factors (heterogeneity in innovation quality across the agents, commercialization costs, imperfections in the legal system of IP enforcement). In such model, an agent that seeks to maximize profits acts on the basis of a comparison between the expected profitability of litigation, on one side, and of commercialization, on the other. Low-type innovators, therefore, commonly choose to litigate; as their expected profits from litigation depend upon the likelihood of obtaining compensation from the alleged infringer, and the extent of such compensation, the model predicts that 'targeted firms should be those cash-rich enough to fund payoffs and those most likely to settle or lose the case for any reason (even if they have less cash)'. The model implicitly discloses the risk that some meaningful inventions may not be brought to the market, where the expected profitability of litigation is higher than that of commercialization, or, conversely, where the probability of being sued acts as a deterrent.

To validate its theoretical model, the study primarily examined data on NPE behavior from PatentFreedom (and firm-related data from several other databases). The researchers found that non-practicing entities, as expected, commonly target companies with high levels of cash balances, or which had a recent positive cash shock (steep increase in cash holdings, compared to the previous fiscal year). A one standard-deviation increase in these indicators correlates, respectively, with an 11% and a 2% increase in the likelihood of being sued by an NPE. Considering that the unconditional probability of being sued by NPEs is 2.18%, such findings indicate a five-fold increase of the risk of NPE litigation in the case of higher cash levels, and a two-fold increase in the case of positive cash shocks. Non-practicing entities also target conglomerate firms regardless of the source of the cash levels (e.g. even where the cash revenues are not derived from business segments related to the infringing patents): the study found that 'profitability in unrelated businesses is almost as predictive of NPE infringement lawsuits as is profitability in the segment related to the allegedly infringing patent'.

As predicted by the theoretical model, NPEs prefer targeting companies against which they have a higher ex ante likelihood of winning (or, conversely, that have a higher ex ante propensity to settling). Thus, litigation blossoms if the targeted company is already engaged in a number of other litigation events unrelated to intellectual property (a one standard-deviation increase corresponds to a 1.67% increase in the likelihood of NPE litigation), but is deterred by the presence of a large legal team (0.5% decrease). The validated model combines the potential proceeds with the probability of success to determine the expected profitability of NPE litigation. Thus, expected profitability positively correlates with high cash levels, small legal teams, and preexisting litigation events.

Evaluating the impact of NPE litigation, the researchers found that the companies that lost against non-practicing entities in court experienced a subsequent significant reduction in R&D expenditure and inventive activity (in terms of post-litigation patenting activity and citations to their marginal post-litigation patents), concluding that 'it really is the NPE litigation that causes this decrease in innovation' in the United States. The small amount of the damages awarded in NPE litigation that flows back to end-inventors (estimated at 5%) does not affect this conclusion, as it constitutes an insufficient incentive for innovators to carry out inventive activity under the threat of NPE litigation.

The scholars validated these findings by comparing them to results obtained from a poll of practicing entities, and concluded that they 'are not just reflections of general characteristics of IP litigation'. The study, however, could not take into consideration informal patent assertions by NPEs (usually in the form of demand letters), due to the lack of reliable data on the phenomenon. While the researchers note that 'it is widely believed that informal patent assertions has been in decline recently, and is projected to decline further', a comparison between informal and formal (in court) assertions (as well as between successful and unsuccessful formal assertions - although undeniably subject to the uncertain attribution of settlements to either category) would help further distinguish between the different patterns of behavior that emerge even within the supposedly homogeneous group of non-practicing entities.

Intellectual Property Enterprise Court: Practice and Procedure -- now you can follow the Fox

Hot off the press is Intellectual Property Enterprise Court: Practice and Procedure by Angela Fox, a partner in the London-based IP firm of Jenkins in which she practises as a solicitor advocate and trade mark attorney.

According to the publishers:

Intellectual Property Enterprise Court: Practice and Procedure provides a reference for all litigators and practitioners seeking to make the best use of the court’s unique streamlined procedures for the cost-effective resolution of intellectual property disputes involving UK or Community IP rights.

* The only title available that focuses on the Intellectual Property Enterprise Court [true, and this is a bit of an innovation, seeing as there wasn't exactly a glut of books on the market on this court's predecessor, the Patents County Court (PCC)]

* Discusses essential topics including pre-action matters, starting proceedings, case management, applications, evidence, experiments and disclosure, trial, appeals, costs and small claims [I should hope so too!]

* Covers the jurisdiction of the Intellectual Property Enterprise Court, the types of proceedings it undertakes and representation before the court, offering practical guidance on navigating the system effectively [welcome, given the uncertainty about navigating the PCC --  and navigating between the PCC and its senior forum the Patents Court, under the old regime]

* Looks at the specialist rules of procedure introduced in 2010 and since that have broadened the Court’s appeal as a forum for resolving IP disputes in a streamlined and cost-effective way

* Also considers other dispute resolution mechanisms relevant to claims that may be brought before the IPEC, including domain names and company names, as well as ADR Includes example statements of case for a range of IP subject matter

* Draws on a range of sources to present a complete picture, including extracts from relevant source materials, court guides and the Civil Procedure Rules

Since my copy of the book has only just arrived, I've not had a chance to feast on it yet, but I look forward to doing so. The law is stated to be current to April 2014 and the book opens with some kind words from Mr Justice Birss and Judge Hacon -- the two members of the judiciary who between them have shaped the IPEC and made it what it is today, a thoroughly modern, effective and relatively affordable forum for resolving small IP disputes, as well as for resolving bigger disputes in a smaller way.

Bibliographic data: hardback, xlv + 545 pages. ISBN: 9780414028685. Price £165 or £175, depending on whether the book has been published or not when you order it.  Book's web page here.

A view of US trends: the 2014 PwC Patent Litigation Study

PwC's 2014 Patent Litigation Study has now been published online. You can read it in full here. The study's main thrust is summarised in its subtitle: "As case volume leaps, damages continue general decline".  The study, which is limited to US litigation, is only 30 pages long, and isn't too challenging to read.

The report is not a snapshot of contemporary conditions but rather a reflection of trends, since it analyses a database of 1,985 US District Court cases handed down since 1995 and recorded as having reached final decisions at summary judgment and trial, as recorded in two Westlaw databases -- US District Court Cases and Combined Jury Verdicts and Settlements -- as well as in corresponding Public Access to Court Electronic Records (PACER) system records. It thus bridges the coming into force of the America Invents Act, a series of major rulings from the US Supreme Court and the emergence of the non-practising entity (NPE) as both a business model and a force in patent litigation (NPEs have a 25% success rate in US patent litigation as against 35% for businesses that work their own patents, though this figure obviously doesn't take account of the "successes" achieved by NPEs in securing cash settlements without the need to go to court).

Thanks are due to Chris Torrero for providing the link.

Public investment in higher education research: the Australian government wants patents, not publications!

A few days ago, the Australian Minister of Industry, Hon. Ian Macfarlane, suggested (here) that public investment in higher education research should be linked to the number of patents granted to each University. The Minister said: ‘[w]e might think about realigning block grants to commercial outcomes, and awarding them to universities not on the basis of how many papers they’ve had published, but actually on how many patents they’ve had registered’. He declared that a similar change ‘is not rocket science’, and would simply align Australia’s approach to that of several other countries.

An interesting piece by Kim Carr (shadow minister for higher education, research, innovation and industry), published on the Guardian on 8 August, observed that ‘[s]cience research grants awarded on the basis of patents is patently wrong’. Carr noted that the objective of research is not commercialization, but the pursuit of new knowledge, free of any predetermined instrumentalism. Such curiosity-driven process, he added, does not align well with patent law: ‘excellent research doesn’t necessarily end in a patent, and where it does, genuinely useful patents can take years – often decades – to be realised’. The article also mentioned other issues, including those related to cost, attribution, and opportunity (e.g. companies in fast-evolving technological sectors may choose to rely on other industrial and commercial strategies to gain a temporary competitive advantage, in the brief period of time between invention and technological obsolescence). Carr concluded that, if the Australian government is interested in fostering the national economy and creating jobs, it should focus on ‘providing incentives for researchers and their partners who are trying to commercialise inventions’, expanding the R&D Tax Incentive scheme, and creating an environment where research and commercialization can easily interact.

Aside from the arguments analysed by Carr, the proposal of the Australian Minister raises several other tangential issues. First of all, it is readily apparent that criteria linked to the number of patents granted would not apply across the whole field of academic research, thus causing potential disparities in the allocation of public financing in different research sectors. Even restricting the applicability of the patenting criteria to scientific research susceptible of commercialization (and I suspect that it would be difficult to agree on an appropriate definition and limitation, considering how the density of patentable innovation changes, sometimes even dramatically, in different scientific areas), the grant of a patent would not attest to the overall significance and scientific quality of the underlying research (nor would allow its evaluation from a cost/benefit perspective). As the assessment of novelty and inventiveness for patents has a mere lower threshold, which excludes the tailoring of the reward to different levels of such constitutive elements, scientific research would be subject to the same system, and to its well-known traps. Thus, rather than incentivizing high quality research, the Australian proposal could potentially deter similar efforts, promoting low quality research, which would achieve the best prospect of attracting public spending with the lowest initial investment. The alternative would again force the government, upon implementation of the new system, to look into methods of creating a hierarchy of the commercializable research outcomes, perpetuating the issue that it intended to resolve.

Another significant issue concerns the temporal mechanics of the system. Paradoxically, in light of the considerable amount of time that elapses between the filing of a patent application and the granting of a patent, the proposed change would provide a time-delayed reward that could prevent any researcher whose work has not yet produced commercializable results (e.g. young scholars, theoretical scientists, etc.) from having access to the financial means necessary to carry out the kind of research that Macfarlane wishes to encourage. In other words, the allocation of financial resources would not be tailored to the research potential of a researcher, nor to the results of its most recent work. Long-term research projects would be similarly penalized, as would be collective research efforts, or ambitious research projects whose outcome may generate just a few patents, albeit of greater significance.

A third range of questions is raised by the unique structure and fabric of the scientific research carried out by publicly funded bodies, which cannot be reduced to a mono-dimensional, commercially or industrially-driven venture. While a private company necessarily evaluates its research objectives in terms of potential returns in a short to medium term (with the exception of larger companies which may risk significant investments in a long term perspective), one of the essential roles of Universities and other bodies financed by public spending is to engage in an all around research that first ventures into unexplored territories, pursuing theoretical hypothesis or abstract ideas, and later spreads into a number of more selective, concrete ramifications that finally lead to the attainment of practical, commercializable results. It is generally only the terminal path of this multidimensional research that leads to the filing of patent applications, as the prior steps do not usually provide researchers with all the elements needed to fulfill the statutory requirements for patenting. Discouraging the pursuit of long-term, exploratory, visionary research would probably reduce the need for public spending, but would also greatly contribute to the decline of scientific research and innovation. The trade off may not be worth it.

There are several other aspects that would deserve a more in-depth discussion (e.g. peer-review or patent examination, linking public investments to the number of patent applications filed, the role of patent lawyers in the process, the effects of rejection, etc.) - you are welcome to join the debate and share your point of view, ideas or comments!

Denmark tidies up its Brussels commitment following patent court referendum vote

Under the Agreement between the European Union and the Kingdom of Denmark on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters of 13 August, Denmark has told the European Commission that it is to implement Regulation 542/2014 amending Regulation 1215/2012 as regards the rules to be applied with respect to the Unified Patent Court and the Benelux Court of Justice (the "Brussels I Update Regulation").

Denmark originally opted out of the EU's Brussels I regime for recognition and enforcement of judgments but, following Denmark's recent referendum vote in favour of ratifying the Unified Patent Court Agreement, implementation of the Brussels I Update has become necessary.

Fancy bit of case management training: here's a course to pursue doggedly ...

The Chartered Institute of Patent Attorneys (CIPA) has informed PatLit that it is going to be repeating its residential course on making use of your rights in the Intellectual Property Enterprise Court (IPEC), England and Wales.  As CIPA explains:

Some patent attorney litigators
have a real "can"-do attitude

The course centres on a patent infringement & validity case study from pleadings, via the case management conference [this is the bit which this blogger gets very excited about, since case management is the best way of bringing cases on quickly and in a highly focused manner -- but only if handled properly] and culminating in a mock trial.  All participants will get hands on experience in the necessary skills to litigate in the IPEC with feedback from experts in the field (including PALs [patent attorney litigators, that is], solicitors and patent barristers).  Our tutors will also cover the practice and procedure necessary to handle such litigation. Judge Hacon has agreed to give a guest speech. The course consists of two parts: a preliminary day at CIPA on 2 September 2014 followed by a residential three days at Missenden Abbey [this sounds a bit like a religious retreat ...] from Thursday 18 to Saturday 20 September 2014.  The course is expensive intensive but so is litigation. It is aimed at those both with and without previous experience and provides an invaluable opportunity to acquire or sharpen one’s skills.

 Further details are available from the CIPA website here.

The cost of the course is £1,300 + VAT for CIPA members, inclusive of accommodation at Missenden Abbey, together with meals. If you're interested you'd better be quick: bookings close on Tuesday 19 August. To save a place just email CPD@cipa.org.uk

What business thinks about Europe's patent regime -- and how you can help

Dr Luke McDonagh (Lecturer in Law, Cardiff University) has been doing some valuable research into attitudes which patent owners are starting to develop with regard to the European Union's forthcoming Unified Patent Court (UPC) and Unitary Patent (UP) systems. However, his topic of investigation is by no means exhausted -- and you can help him.  Luke explains as follows:

Exploring Perspectives 

Readers of this weblog may be aware that on 10 July the UK Intellectual Property Office published a report, researched and authored by me,  entitled 'Exploring Perspectives of the Unified Patent Court and Unitary Patent Within the Business and Legal Communities'. The report is accessible here and there's an audio recording of the launch event, kindly hosted by CIPA (the Chartered Institute of Patent Attorneys), here.

The report discusses the views of 28 interviewees -- consisting of representatives from patentee companies, solicitors and patent attorneys -- concerning a range of issues concerning the new UPC/UP system, including the procedural and cost rules for the new court, and the all-important fees issues for the UP.

One particularly interesting issue that came up in the conversations I had with interviewees concerns the all important opt-in/opt-out question. It was noted that while businesses are concerned about the risks of opting-in their entire portfolios -- with the possibility of revocation across all UPC member states a clear worry in their minds -- virtually all businesses are considering opting-in at least some patents in order to test the new system and to avail themselves of centralised enforcement. In this respect, some patentees are considering opting-out their most valuable patents (to avoid the central revocation possibility), while others are focused on identifying and opting-in their 'strongest' patents (to take advantage of centralised enforcement). Few, however, seem willing at this stage to opt-in everything. For this reason, it is likely that for the early part of the UPC's life there will be a two-tier patent system, with cases involving UPs and opted-in European patents (EPs) heard at the UPC, and cases involving opted-out EPs heard in the national courts in line with the current fragmented system. The following question, therefore, arises: how will patents be perceived within this two-tier system? 

From the interview data I collected, it's clear that a small number of interviewees fear that an opted-out patent will be perceived as weak, and thus open to attack by competitors via the national route. By contrast, will an opted-in patent be automatically perceived as being strong i.e. of high quality, and thus less vulnerable?

It is not possible at this stage to answer these questions; yet, the fact that these concerns exist aptly illustrates that the coming into force of the UPC is likely to have (unintended) consequences that are difficult for businesses to predict -- or plan for -- at this stage. If any readers of this weblog have any insights to add on this issue, feel free to post comments to this blog, or alternatively to email me at mcdonaghl@cf.ac.uk.

Do please help Luke if you can!

Mined Regions - T 2231/09

When EP practitioners speak about inescapable traps, they usually refer to situations where the patentee in an opposition is faced with the problem that features added in the examination procedure extend beyond the subject-matter of the documents as originally filed (Art 123(2) EPC) but cannot be removed without extending the scope of protection (Art 123(3) EPC).

Very few people speak about a far more frequent sort of inescapable trap: the clarity-disclosure trap (sometimes appearing as enablement-disclosure trap as well). This unpleasant trap is set when somebody objects that an expression in a claim is unclear and the trap snaps if the pitiful applicant has no disclosure in the documents as originally filed which could serve as a clarifying limitation.

The decision T 2231/09 is an example of such a trap. The application relates to an image processing algorithm wherein a certain parameter is derived from a subset of pixels in a region (whereas the prior art used all the pixels in the region). Four years of search and examination at the EPO did not reveal any problems with the word "region". The application was then refused on the grounds that the subject-matter of the claims lacked novelty or did not involve an inventive step over the prior art.

The patentee appealed the decision, waited further four years and was then summoned to oral proceedings before the Technical Board of Appeal. The board raised objections on the clarity of the expressions "region" and "subset of pixels" for the first time in the annex to the summons. As a clarifying definition of these expression was missing in the documents as filed, all the attempts of the patentee to overcome this clarity problem were doomed to fail.

Apparently, the claim was considered sufficiently clear in the US, in JP and in China, where the patent was granted.

I cannot help to feel uncomfortable about this course of procedure and about the fact that a potentially valuable intellectual property right was completely lost as a consequence of a minute (if any) imprecision of the draftsman many years ago. The discretionary decision of the Board of Appeals whether or not the ordinary language expression "region" is clear is final and cannot be reversed by a higher instance It is therefore clearly problematic if it is introduced ex officio in the ex parte appeal procedure.

The full text of the decision can be accessed here

Basic Litigation course: room for patent attorneys too

Back in May of this year the IPKat weblog included this piece on the availability of Basic Litigation courses for newly qualified patent attorneys, writes Chris Ryan (IP Consultant to the Nottingham Law School at Nottingham Trent University). Chris continues:

"I and others posted some comments at the time; I mentioned the equivalent course run by the Nottingham Law School at Nottingham Trent University for Trade Mark Attorneys.  The Law School now finds that there are places free on a trade mark attorney’s Basic Litigation course in September, which it is able to offer to patent attorneys.  The course has been accredited by IPReg and would run from Monday 15 September until Friday 19 September 2014.    Anyone wishing to take advantage of this opportunity  (or two courses dedicated to patent attorney students and scheduled to take place in January and June next year) should follow this link".

This blogger, though acutely conscious of the difference between patent attorneys and trade mark attorneys -- and between patent litigation and trade mark litigation -- is comforted by the fact that the two species of IP practitioner can share the same Basic Litigation course in cheerful peace and harmony ...

Dealing with mumbo-jumbo

"Inventor says HDB infringed patent for clothes-drying rack" is the title of an article in Singapore's Today Online, here, which tells the story so far with regard to a patent infringement action brought by Mr Yiap Hang Boon, a 54-year-old inventor, against the Housing and Development Board (HDB) for infringing his patent for a clothes-drying rack. The HDB denies infringement and is seeking to revoke the patent, which was granted ten years ago.

This extract from the Today Online feature caught this blogger's eye:

Mr Yiap, who is not represented by a lawyer, appeared to have difficulty conveying his points yesterday.

Justice Chan Seng Onn interjected during his opening statement, saying he could not understand the latter’s “mumbo jumbo”. The judge also sought visuals for a clearer idea of the alleged infringements.

The invention itself, illustrated above, is of quite a low-tech nature. It is regrettable that the patentee should find it difficult to convey his points, and that the judge should have difficulties understanding it. With a specialist intellectual property court and firm pre-trial case management, these difficulties can be reduced, if not actually eliminated. As it is, the judge -- with degrees in Engineering and Industrial Engineering -- is at least in theory better equipped to hear low-tech infringement cases of this nature than are many others.

One new patent, one new court, one event -- and two venues

Managing Intellectual Property magazine, which this blogger founded back in the 1990s and for which he still has a soft spot, is running a conference, titled the "European Patent Reform Forum", in two European venues this autumn. On 9 September the Forum comes to Munich, Germany, and on 11 September it shifts to Paris, France. The significance of both venues, as well as a few words about the programme, can be found on my earlier Katpost here, together with details of registration discounts for readers of that weblog.

Apart from a session on the new unitary patent, the programme focuses almost entirely on patent litigation and dispute resolution issues. The sessions that address these topics are as follows:

The Unified Patent Court explained in detail 

• How to best navigate the new divisions and structures
• A practical guide to making best use of the courts and mitigating costs
• Understanding procedures: From starting proceedings through to trial
• Strategising in advance 

Split Proceedings and the UPC

• Transitional Period: Proceedings in National Court and in UPC
• Complaints by Licensees, Counterclaims for Revocation against Proprietor
• Bifurcation: Debunking the myths - Evaluating the possible pros and cons
• Appeals against Bifurcation under the 16th draft of the Rules of Procedure
• What should be learnt from current German practice?
• How judges will handle bifurcation 

The European Court of Justice and the Unified Patent Court 

• How the Spanish challenge affected plans for the new system
• When will/ won’t the ECJ be able to review issues of law pertaining to patents? 

Swiss focus 

• The new Swiss patent court – how does it work?
• The Swiss patent court and the UPC
• Challenges and opportunities for companies doing business in Switzerland 

Alternative IP strategies parallel to the UPC 

• Avoiding the down-sides of court litigation before the UPC: Alternative dispute resolution
and arbitration proceedings
• Best practices and strategies to utilize third party observations and opposition proceedings
before the EPO
• Interdependency and future interplay between existing legal mechanisms and the UPCsystem 

Litigation planning and forum shopping in the European Unified Patent Court

• Game over? Litigation planning and strategy under the new UPC
• Risks and opportunities of forum shopping in Europe 

Inter-industry debate - International litigation considerations

• How different countries regard the UPC
• The future of national legislation
• The unanswered questions about the UPC

This blogger is unable to attend, though he'd very much like to do so -- and while some of his friends are on the programmes (the cast of speakers is a little different, reflecting the fact that the host cities are in different countries, they are not in a position to do any real-time speed-blogging. Accordingly, if any of our readers are likely to be there and would like to write up a note on one or more of the sessions, for publication on this weblog, can they please email me at jjip@btinternet.com and let me know.