Patent Trolls: A Drain on Innovation?

Transcription

1 Patent Trolls: A Drain on Innovation? Presentation to A*STAR Peter H. Kang, Esq. Sidley Austin LLP Palo Alto Office April 20, 2012 AIPLA (IPFEC) Delegation to Singapore

2 PATENT TROLLS: DEFINING TERMS What is a Patent Troll? 2

3 Patent Trolls: Perspectives Peter Detkin, VP, Intel Corp. (then) "We were sued for libel for the use of the term 'patent extortionists' so I came up with 'patent trolls,'" Detkin said. "A patent troll is somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced. - B. Sandburg, Trolling for Dollars, The Recorder (July 30, 2001) Peter Detkin, Co-Founder, Intellectual Ventures (now) NPR s This American Life program quotes Silicon Valley venture capitalist Chris Sacca comparing Intellectual Ventures patent licensing operations to a mafia-style shakedown. In the story, Intellectual Ventures executive Peter Detkin calls that assertion ridiculous and offensive. - T. Bishop, Intellectual Ventures responds to This American Life exposé: We fundamentally disagree, GeekWire (July 24, 2011) 3

4 Patent Trolls: Eye of the Beholder "I have mixed feelings about those organizations. From an ethical standpoint, they're almost like ambulance chasers," said Andy Gibbs, CEO of PatentCafe.com Inc., a Web site that focuses on intellectual property issues. - B. Sandburg, Trolling for Dollars, The Recorder (July 30, 2001) [T]the real issue [is] - that ideas have value and inventors who invest time, money and emotional resources into protecting those ideas with patents have a right to recognize a return on their investments. Intellectual Ventures is challenging the status quo. Our value proposition is simple: we want to provide an efficient way for patent holders to get paid for the inventions they own, and in turn, for technology companies to gain easy access to the invention rights they need or may need as they enter new markets. - T. Bishop, Intellectual Ventures responds to This American Life exposé: We fundamentally disagree, GeekWire (July 24, 2011) 4

5 Patent Trolls vs. Non-Practicing Entities Universities Research Institutes Government Agencies Corporate R&D labs Individual inventors Non-core businesses 5

6 Categories of Non-Practicing Entities Research and Development Entities: use patent license fees to fund technology development; Patent-Assertion Entities: primarily use patents to get and distribute licensing fees, rather than to support the development or transfer of technology; Defensive Patent Trusts: acquire patents so that they will not be used to sue their licensees Startups: acquire patents primarily in order to deter copying and attract financing. As a company s business evolves, it may move from one category to another - Prof. Colleen V. Chien, Santa Clara University Law School: C. Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 Hastings L. J. 297, 328 (2011) 6

7 Evolution from Practicing to Non-Practicing Entity - Prof. Colleen V. Chien, Santa Clara University Law School: C. Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 Hastings L. J. 297, 325 (2011) 7

8 Patent Thickets The patent thickets problem, a form of tragedy of the anticommons, is a phenomenon by which people underuse scarce resources because of overlapping ownership. In the patent thickets, a technology is prone to underuse because of the high costs of licensing resulting from multiple ownership stakes in the same technology. The patent thicket problem is at the forefront in corporate settings, as evidenced by the defensive use of patent portfolios. - J. McDonough, The Myth of the Patent Troll, 56 Emory L. J. 189, 202 (2006) 8

9 Patent Trolls & Patent Thickets [T]he collection of patents and the subsequent need to invent around patents can stifle innovation. This argument has merit. However, this problem implicates the patent thicket problem. - J. McDonough, The Myth of the Patent Troll, 56 Emory L. J. 189, 224 (2006) 9

10 Patent Trolls Exacerbate Patent Thickets Patent dealers are generally immune from the effects of defensive patenting because they do not manufacture products, and therefore there is no basis for a potential countersuit. Consequently, a company s extensive patent portfolio creates no countersuit threat, and the patent dealer does not have to factor in the cost of a countersuit when deciding whether to bring a lawsuit. As a result of this immunity to the use of defensive patent portfolios, the patent thickets problem is more evident when patent dealers are involved in a suit. - J. McDonough, The Myth of the Patent Troll, 56 Emory L. J. 189, 203 (2006) 10

11 Patent Trolls & Patent Quality Bad patents are being issued daily: the issuance of patents for the protection of inventions like the crust-free peanut butter and jelly sandwich, a method of exercising a housecat with a laser pointer, and a method for swinging on a swing illustrate the status quo. - J. McDonough, The Myth of the Patent Troll, 56 Emory L. J. 189, 202 (2006) 11

12 Patent Trolls: Asymmetric Conflicts In the marketplace, the inverse is true the wide diversity of business models means that companies can exploit asymmetries to their advantage. Companies that do not make products target the revenues of those that do. Such patentees are not burdened by the need to manage investor expectations or minimize disruption to the company s core business. Some practicing companies have also taken advantage of asymmetric exposure between themselves and their targets by suing companies that work in areas that they do not, making them invulnerable to countersuit. - C. Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 Hastings L. J. 297, (2011) 12

13 Patent Trolls vs. Practicing Entities We can argue all day about the finer points, but there is one very distinct quality of TiVo's that sets it apart from the trolls. TiVo actually makes and sells things. Rambus and Intellectual Ventures don't. This seemingly irrelevant fact actually makes a world of difference. Rambus can file lawsuits all day long without ever being sued back -- there are no products sales to block, no profits made from infringing on the rights of others. But TiVo is open to all sorts of retaliation because the company makes and sells both hardware and software. So if TiVo launches a lawsuit, it had better be sure about its merits, because a bad attack can backfire with a vengeance. By contrast, Acacia and friends can simply roll the dice, shrug their shoulders at the occasional setback, and keep betting until they hit a big payday. - A. Bylund, Is TiVo a Patent Troll Now?, The Motley Fool (Oct. 14, 2011) 13

14 Patent Trolls: $500B Drain in the U.S. Alone Patent trolls could have cost US businesses as much as $500 billion in stock value over the last 20 years, according to a study from the Boston University School of Law. The study, entitled The Private and Social Costs of Patent Trolls, looked at stock prices between 1990 and 2010 to establish how much corporate value was lost when an organisation was sued for patent infringement. The average loss to a company's stock following a patent suit, says the report, was $122 million. - K. Aziz, Patent trolls cost US economy half a trillion dollars says study, Intellectual Property Magazine (Sept. 21, 2011) 14

15 Patent Trolls & Software The researchers excluded intangibles in their study, such as employee distractions, legal uncertainty and product redesigns. Additionally, only publicly held companies were included in the research, neglecting the cost to smaller private companies who were forced to litigate or went out of business. The authors used a database of 1,630 patent troll lawsuits compiled by Patent Freedom. Software patents accounted for about 62% of the lawsuits. In contrast, only two percent of the lawsuits involved drug or chemical patents and six percent involved mechanical patents. - K. Aziz, Patent trolls cost US economy half a trillion dollars says study, Intellectual Property Magazine (Sept. 21, 2011) 15

16 Patent Trolls: Insufficient Innovation Incentives? Of course, NPE litigation might also produce dynamic gains in social welfare if transfers to independent inventors increase innovation incentives. The investment that NPEs make in acquiring patents is small compared ot the defendants losses: $1.7 billion, or about 2% of the defendants losses. The investment made in patents are also included in the NPE s intangible assets [for 2010]. It is less than $600 million, about 1% of the defendants losses. In any case, we can state that less than 2% of the defendants losses could represent a transfer to independent inventors and quite possibly the true figure is much smaller than 2%. - J. Bessen, et al., The Private and Social Costs of Patent Trolls, Boston University School of Law Working Paper No at p. 19 (Sept. 19, 2011) 16

17 Patent Dealers : Promote the Useful Arts & Sciences? Patent dealers more effectively distribute knowledge throughout the population: First, by increasing patent liquidity and decreasing risk, patent dealers incentivize individual inventors and small entities to invent, making more technology available to the public. Second, [b]y acting as a market intermediary for patents, collecting information regarding patents and their associated industries, and forming relationships with corporations, a patent dealer becomes a focal point for those who create and seek technology. This results in easier and broader access to inventions. Third, patent dealers encourage people to invent around Patents. With knowledge that patents will be enforced by patent dealers, potential infringers are forced to either license technology, or increase research and development to invent around these patents. Regardless of the choice, the end result for the public is broader access to works. - J. McDonough, The Myth of the Patent Troll, 56 Emory L. J. 189, 222 (2006) 17

18 Patent Dealers : Promote the Useful Arts & Sciences? Patent dealers also promote the advancement of innovation for the same Reasons. The presence of patent dealers in the market allows individual inventors and small entities to gain easy access to the patent market. Increased patent liquidity and reduced risk gives inventors more incentive to invent, which results in advancement within that particular industry. - J. McDonough, The Myth of the Patent Troll, 56 Emory L. J. 189, 223 (2006) 18

19 Patent Trolls as Public Companies: Maximizing Shareholder Value? Forgent CEO Dick Snyder insists he s merely providing maximum value to shareholders. This country was built on innovation, and in the Constitution there is a provision in there to protect innovation through patenting, said Snyder, a former executive at Hewlett-Packard Co. and Dell Inc. It s the American way, and we re just doing what we believe is the right thing to gain value from what we own. For Forgent and other companies, the business model is paying off. In the quarter ended Oct. 31, 80 percent of Forgent s revenue came from licensing deals on just one digital image patent it obtained years ago in an acquisition. Elsewhere, Research in Motion Ltd., maker of the popular BlackBerry device, this month settled its longrunning patent dispute with NTP Inc. for $612.5 million. The Supreme Court, meanwhile, is expected to consider a patent dispute between ebay Inc. and patent-holder MercExchange this year. Forgent s biggest earner generating $108.4 million in settlements and licensing fees in the past three years has been U.S. Patent No. 4,698,672, issued in 1987 and obtained years ago in an acquisition. At the heart of the so-called 672 patent is something ubiquitous in the technology world: the JPEG format for digital pictures. - Patent trolling' firms sue their way to profits, MSNBC (Mar. 18, 2006) 19

20 Patent Trolls As Investments James Altucher's friend recently bought back his search-monetization patents from the wreckage of Lycos. And he formed a company with them. And now that company is merging with a public company called Vringo. And Vringo, Altucher says, will use the patents it has just acquired to go into a new business--patent trolling. James Altucher says he has read all the relevant patents and Google's description of how its search monetization works and believes that Vringo will have a strong case against Google. Altucher points out that Google has generated about $67 billion of revenue from search over the past decade, so there's a lot of money to go after. So Altucher has also bought Vringo stock. - H. Blodget, A New Patent-Infringement Lawsuit Could Totally Demolish Google's Stock, Business Insider, March 31, Patent Trolls & Innovation - A*STAR- AIPLA - Peter Kang

21 Patent Dealers: Market Efficiency? [P]atent dealers make the patent market more efficient through buying and licensing patents. Patent dealers create a credible threat of litigation, which encourages exchange, makes patents more liquid, and facilitates market clearing through price equalization. As a result, the patent market becomes more efficient. - J. McDonough, The Myth of the Patent Troll, 56 Emory L. J. 189, 211 (2006) 21

22 Limiting Trolls: No Automatic Injunctions In ebay v. MercExchange, the Supreme Court overruled decades of Federal Circuit precedent which supported virtually automatic permanent injunctions to a patent owner who prevails at trial. ebay Inc v. MercExchange, LLC, 547 U.S. 388 (2006). Prevailing patent owners must show the traditional four-factors to obtain a permanent injunction: Irreparable harm; Inadequate remedy at law; Balance of hardships; and Public interest. 22

23 Automatic Injunctions: The ITC The ITC s recent decision in Cable Connectors (In the Matter of Certain Coaxial Cable Connectors and Components Thereof and Products Containing the Same, Inv. No. 337-TA-650) has not only opened the door for nonpracticing entities, it has defined the path by which such entities can be successful in meeting the threshold requirement of a domestic industry. The ITC ruled a domestic industry can be established by a complainant who documents litigation expenses and proves that they are substantial and related to licensing. Given this newly articulated standard, the bar established for meeting the domestic industry requirement appears remarkably low and there is little doubt that the ITC will become the next rocket docket for nonpracticing entities. - J. Horvack, Patent Trolls' New Forum: The ITC, Law360 (Aug. 23, 2010) 23

24 AIA and Patent Trolls: Non-Joinder (a) JOINDER OF ACCUSED INFRINGERS. -With respect to any civil action arising under any Act of Congress relating to patents parties that are accused infringers may be joined in one action as defendants or counter claim defendants, or have their actions consolidated for trial, or counterclaim defendants only if- (1) any right to relief is asserted against the parties jointly, severally, or in the alternative with respect to or arising out of the same transaction, occurrence or series of transactions or occurrences relating to the making, using, importing into the United States, offering for sale, or selling of the same accused product or process; and (2) questions of fact common to all defendants or counterclaim defendants will arise in the action. (b) ALLEGATIONS INSUFFICIENT FOR JOINDER. For purposes of this subsection, accused infringers may not be joined in one action as defendants or counterclaim defendants, or have their actions consolidated for trial, based solely on allegations that they each have infringed the patent or patents in suit U.S.C. section

25 AIA: Patent Con-Troll The economics of mass patent enforcement have changed. A patent owner will no longer be able to casually sue a multitude of parties with a single filing, participate in proceedings in a single action in a single venue likely convenient only for the plaintiff, and thereby expeditiously pursue a recovery against numerous disparate parties. Actions will have to be filed individually against each accused infringer. The patent owner will have to participate in, contend with and address procedural and substantive aspects of each action. It might be expected that individual actions against individual accused entities will have to be brought in venues more appropriate to the respective accused parties. Otherwise, an action against an individual defendant will be more likely subject to transfer to a more appropriate venue if the defendant seeks transfer, without the baggage of numerous other defendants anchoring an action in an ill-suited forum chosen by the patent owner. - C. Gorenstein, America Invents Act Exercises Con-Troll Over Patent Litigation, IP WatchDog (Sept. 19, 2011) 25

26 AIA: Missed Opportunity? [C]ertain commentators have argued that Congress did not go far enough to stop patent trolling. Suggested measures such as damages limitations tied to the patent's specific contribution over prior technology, mandatory bifurcation of trials on liability and damages, as well as interlocutory appeals of claims construction rulings were not enacted. Also, patent defense litigators have been watching closely as this law, entering into its sixth month of practical application by the courts, to see whether "commonality" will be interpreted as narrowly as they believe the AIA requires. At this early stage, however, it appears that Congress's joinder overhaul, if not a magical fix, is nevertheless a daunting new hurdle for patent trolls. - M. Kelly, Does the America Invents Act Signal an End to 'Patent Trolls'?, The Legal Intelligencer (Mar. 23, 2012) 26

27 AIA & Patent Mills The capacity of trolls to file patents quickly is most observable in the case of socalled patent mills. A patent mill is an entity that simply churns out patents, like Intellectual Ventures or Walker Digital Labs. Intellectual Ventures secures roughly 500 patents every year. Without accusing Intellectual Ventures of being an entity that overreaches, it is easy to imagine that in a race to file, such an entity would be that much quicker and better equipped to file a patent than a start up enterprise. Indeed, one of the concerns about the transition to a firstto-file system is that start up enterprises will be adversely affected since the process of filing a patent costs money and takes time/expertise. - K. Dhadialla, Patent Trolls Under the Patent Reform Act, Berkeley Tech. L.J. Bolt (Oct. 15, 2011), 27

28 Court Rulings Impacting Patent Trolls KSR obviousness Post-Bilski Federal Circuit opinions Fort Properties v. American Master Lease LLC, (Fed. Cir. Mar. 6, 2012) (computer aided process unpatentable) Medimmune DJ actions In re TS Tech; In re Microsoft; In re Acer venue and transfer out of the E.D. Texas 28

29 Patent Trolls: Threat to Civil Liberties? This is because the state, at least in its current iteration, is largely geared toward protecting the powerful against disruptive forces. It s all part and parcel of the same system, whether we re talking about food libel laws, patent-trolling, internet censorship, indefinite detention in the War on Terror, or no-knock SWAT raids, the pepper-spraying of peaceful protesters- the law is increasingly tilted against the individual and against freedom. - E. Kain, SOPA, the NDAA, and Patent-Trolling: Why Americans Need a Civil Liberties Caucus, Forbes (Dec. 10, 2011) 29

30 CONCLUSION - Q&A Patent Trolls: Challenges & Opportunities Questions & Answers 30

31 CONCLUSION On behalf of the partners, attorneys, patent agents, and staff of Sidley Austin LLP, Thank You for your time and attention. Silicon Valley Office 1001 Page Mill Rd. Building 1 Palo Alto, CA USA (650) (Peter Kang direct) (650) (main) (650) (fax) pkang@sidley.com San Francisco Office 555 California Street Suite 2000 San Francisco, CA USA (415) (main) (415) (fax) pkang@sidley.com 31

32 THANK YOU Peter H. Kang, Esq. Sidley Austin LLP

33 THANK YOU! Copyright 2012 Peter H. Kang, Sidley Austin LLP. Notice: The materials presented herein are intended for the educational use and informational purposes of the conference participants only and are not intended to and do not constitute legal advice. Transmission of the information herein is not intended to create, and receipt does not constitute, an attorney-client relationship, and these materials are not intended to nor do they create an attorney-client relationship with Sidley Austin LLP. The materials presented are summaries of particular developments in the law and are not intended to be exhaustive discussions. Because of their summary nature, they should not be relied upon in reaching a conclusion in a particular area. The views expressed herein are current, personal views, and should not be attributed to and do not necessarily represent the views of Sidley Austin LLP or any of the Firm s former, present, or future clients. If you have a particular legal problem, please consult counsel. All rights reserved. pkang@sidley.com 33