For the half-year to 31 December 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Rebecca Gulbul, Lucas Michels and Marie-Andrée Weiss.

Regular round-ups of the previous week's blogposts are kindly compiled by Alberto Bellan.

Friday, 4 July 2014

Have U.S. courts made patents less valuable?

Sometimes what grabs this Kat’s attention, at least for blogging purposes, is a Table that accompanies a longer article. That is the case with Terry Ludlow’s article, “Signs of the times: trends in technology IP licensing”, that appeared in the July-August issue of Intellectual Asset Magazine. The entire article is recommended to Kat readers, but this Kat wishes to focus on Table 2 of the article, captioned “Some key decisions and legislation driving patent value down in the US since eBay”. Set out below in essential part are the contents of Table 2 with respect to the cases considered (two items of legislation are not included):
1. eBay (2006)-“Reduced (virtually eliminated) probability of getting an injunction if you win a patent litigation.” Effect—“Lowers penalty for infringing patents and thus reduces patent values.”

2. Sandisk (from Medimunne 2007)—“Lowered the bar significant on the grounds for filing a declaratory judgment.” Effect—“Makes it more difficult to license patents”.

3. KSR v. Teleflex (2007)—“Lowered the bar for obviousness.” Effect—“Makes it easier to invalidate patents.”

4. Seagate (2007)—“Raised the bar for wilful infringement.” Effect—“Reduces prospects of treble damages.”

5. Quanta Computer v. LG (2008)—“Patent exhaustion for downstream products.” Effect—“Limits options for licensing.”

6. Cornell U v. Hewlett Packard (2009)—“Virtual elimination of entire market value (EMV) basis for damages.” Effect—“Reduces royalty base to the value of a sub-contractor.”

7. Uniloc v. Microsoft (2011)—“Elimination of 25% rule as an admissible rule of thumb to determine damages.” Effect—“Requires comparable license agreements to determine royalty rate.”

8. Laser Dynamics v. Quanta Computer (2012)—“Damages based on smallest saleable patent practicing unit.” Effect—“Damages values drop with shrinking royalty base.”

9. Motorola v. Apple (2012)—“Sufficiency of damages expert opinions.” Effect-“The risks and uncertainty of damages law for patent cases.”

10. Motorola v. Microsoft (2013)—“Standards-essential patents (SEPs).” Effect—“Value of SEP’s drops.”

11. Samsung v Apple (2013)—“ITC case looking at SEPs.” Effect—“A presidential veto was used for the first time since 1987 to deny an exclusion order based on the “anti-competitive” use of SEPs.”

12. Alice Corp v. CLS (2014)—“Software patent eligibility” [decision since rendered by the U.S. Supreme Court ruling against the clamed patentable subject matter]. Effect—“Could reduce (or even eliminate) the value of many software related patents.”
What are we to make of Ludlow’s summary? The most notable point is the organizing principle by which these cases are aggregated, namely that all of them have the alleged effect of “driving down patent value.” At the outset, this Kat wonders whether a parallel table could be fashioned setting out some key decisions and legislation that have actually driven up patent value in the US since eBay. Either trends have been so one-sided in driving down patent values for this period that no such parallel table can be provided, or Ludlow has simply chosen to focus on only part of the picture. Either way, what seems to underlie the Table is the view that patents are in the aggregate worth less (or the rate of increase in the value of patents has declined).

Whether this is true or not depends upon how one understands what is meant by patent value. Ludlow’s focus seems clear: it is on patent strategy, especially with respect to winning settlements and better leveraging patents to generate further value from them. Seen from this perspective, there may be merit in his position—if one is interested in using patents as a litigation sword to extract large court awards, in some ways it is more difficult than a decade ago to do so in the US (though far from impossible), whether or not the plaintiff is an NPE. Making the possibility of an oversized court award less likely might diminish the value of a given plaintiff’s particular patent, but it might be a net positive for the patent system as part of the larger innovation ecosystem. It is also the case that it might now be “more difficult” to obtain patent protection for certain subject-matters. However, the presumed improvement in the quality of patents might actually have the effect of making granted patents under the current regime “more valuable” for their owners. Moreover, people seek patent protection for a variety of reasons and depending upon one’s reason for patenting, the legal results set out in the Table may simply be irrelevant.( Indeed, for another view of what is meant by patent value, consider the book by Larry M. Goldstein, True Patent Value, here.)

The focus of patent value from solely a US perspective also warrants comment. What would a parallel table based on the European, Japanese or Chinese experience for the comparable period look like? From the point of view of the applicable case law in these jurisdictions, one wonders whether this a better or worse time from the point of view of patent litigation and monetizing patents as an asset. Or perhaps the focus on litigation awards and monetizing patents assets is a distinctively American phenomenon. If so, the question of what would constitute patent value for jurisdictions other than the US might look very different. More generally, it shows the difficulty of discussing patent value as a notion distinct and separate from the circumstances in specific jurisdictions.

9 comments:

Mark Summerfield said...

Broadly speaking, Ludlow is probably right that judicial decisions and law reform over the past decade have reduced the power wielded by patent-holders in the US, and this probably has reduced the value of US patents.

Rather than question whether he has been selective in his choice of cases, I would advocate closer scrutiny of his underlying assumption, i.e. that this is a bad thing, and that the power of patent -holders (and the corresponding value of patents) was appropriate in the first place.

Despite all these checks on patent-power, the US remains the world's leading jurisdiction for patent trolls, primarily because a US patent remains a potent weapon, and the risks of litigation are disproportionately borne by the alleged infringer. As we know, recent further reform efforts to assess this imbalance failed.

The main case I would see as having the opposite effect would by i4i v Microsoft, in which the Supreme Court upheld the "clear and convincing evidence" standard for establishing invalidity of a US patent.

Anonymous said...

Mark,

You hint at something, but I am not sure if you have taken a stand: strong patents, are they good or bad?

I see you fold into the equation a bit of the "Troll" hype. Some would say that given who coined the term (and why they coined the term), coupled with the report of last summer (not the Executive report, by the report based on data from Lemley's company), coupled further with the effects of the AIA in artificially inflating litigation numbers, coupled still further with taking a big picture view of rate of litigation (as viewed against the total number of patents possible for which litigation is possible - and the result of this view that far less than 0.5% of patents are actually being litigated), that this "Litigation Boogeyman" is much like the tail of the flea that rests on the tail of the dog is wagging the dog.

And this is not even addressing the fact that litigation itself is the way the system is set up to enforce patent rights when parties cannot agree on their own (removing the "litigation is per se bad" mindset).

The big picture view seems quite a bit different with these other points kept in mind, doesn't it?

Anonymous said...

@Mark -- if you read the full article, you will note that Ludlow does not identify this as a bad thing, merely as a relevant point that investors piling into companies with patent-driven valuations should be aware of.

As he notes (p. 32, col. 2) "the U.S. patent system is still the strongest and most supportive of patent rights" -- although he draws attention that the new European system appears to be going to give rise to continent-wide injunctions combined with German-style bifurcated hearings, leading him to write that "Fears that this will attract Patent Assertion Entities are well founded; but if U.S. experience is a guide, operating companies will be by far the biggest users of the new system once it is up and running."

@Anon 16:15 -- the point surely is that the value of patents ought to be in reasonable calibration with the value of research and development they represent (including the cost of risks taken and false leads explored in that development and research process).

If the value of patents is too low, then society may not sufficiently incentivise risky investments.

But if patents are used to extract royalties, or to inhibit competition and follow-on innovation, to a degree which is out-of-proportion to the worth of the developmental contribution which they represent, then that is not a good outcome either.

With the rise of the PAE litigation has become more important (and less likely to be resolved by cross-licensing), so it has perhaps become more important to review whether contribution and reward achieved through litigation are in appropriate balance, in a way that was perhaps not so critical before.

An interesting thesis that Ludlow develops in the full article is that the entire business has become much more litigation-focused. He asserts that not just PAEs but also operating companies are now much more ready to litigate; even companies trying just to license their patents must increasingly show that they are able, prepared and ready to litigate those patents, just to be taken seriously -- and also have now to counter-litigation, attempts to invalidate keys portions of their portfolios if they dare to try to assert and license.

Ludlow's background is in electronics and chip-making, which may lead him to a particular perspective and perceptions, but it's an interesting conclusion that he draws from this: that patent assertion and licensing has become a game for the big players, with the resources to be able to prepare for (and if necessary run) multiple large scale litigations both offensive and defensive as a matter of course, and patent portfolios deep enough to be able to take substantial validity hits and still remain credible.

Players looking to leverage smaller portfolios, he suggests, will increasingly tend to have to sell them, or lend them to PAE "privateers" to exert the patents strategically, rather than asserting the patents themselves.


Anonymous said...

There are no pro-patent rights decisions since ebay. The larger so-called ecosystem of innovation does not profit from weak property rights for inventions. Who profits from these decisions and legislation like the AIA are Crony Capitalists.

Anonymous said...

To the post of "the point surely is that the value of patents ought to be in reasonable calibration with the value of research and development they represent (including the cost of risks taken and false leads explored in that development and research process)." that is an interesting - but legally unfounded - principle. It is similar to the "but-for-ONLY" fallacy often bandied about in the States.

US patent law does not EVEN require commercialization, so the aspect of reward (return) on investment is dead in the water.

The attachment of the subjective "good" is a subtle - but real - problem (a logical fallacy, if you will). Innovation (true innovation) simply does not care about what we consider "good" and tomorrow's breakthroughs can come from today's "not-so-good."

Further the "rise of PAE" and the absence of cross-licensing is a feature - NOT a bug. The large corporations were becoming too content with the nuclear Armageddon strategy and bloating the patent offices for a shear number effect.

Anonymous said...

To Anonymous at 23:56:00 BST:

through all the words "true innovation", "not-so-good", "good", "legally unfounded", it is almost impossible to grasp your point.

with respect to: "the point surely is that the value of patents ought to be in reasonable calibration with the value of research and development they represent (including the cost of risks taken and false leads explored in that development and research process)."

why not? very well might be. one might connect the patent value to the closest alternative. and the last one to the research value of the initial patent.

where do you see a fallacy?

Anonymous said...

@Anon 23:56 -- As my following two paragraphs might have indicated, my comment about "reasonable calibration" was thinking primarily from an economic point of view, rather than necessarily a legal one.

But looking at the legal decisions cited in the original post, they do seem to share a common thread, of trying to make damages more closely track the actual unfair benefit that infringers have obtained from patents (plus a quantum for wilfulness/deterrence), and that does seem to me to be economically appropriate.

With respect to PAEs, I agree with an aside in a 2006 paper by Sag and Rohde: the core issue is not their business structure in itself, but whether they have been "in a position to negotiate licensing fees that are grossly out of alignment with their contribution to the alleged infringer's product or service".

The rise of the PAEs I think brought into sharp focus some aspects of the patent system that were out of calibration, that were perhaps more dormant before. In that regard, the changes cited appear to be steps in the right direction, but to get better calibration there is probably further along the road that should be gone -- for example, there are still too many patents being issued which frankly shouldn't be, or where the value of the teaching in the patent is frankly minimal ("Photography against a white background", anyone?); more rewards of costs against plaintiffs when the defendant plainly does not infringe or the patent is invalid, to reduce licensing blackmail by the threat of litigation costs; more control of venue cherry-picking; etc, etc.

You write that the rise PAEs have limited the "bloating of the patent offices for a shear number effect". If only this were true. In fact Ludlow argues that it is now ''more'' important to have a wider and deeper portfolio than ever before, to remain credible even in the face of some invalidations.

Anonymous said...

Anonymous at 10:57,

You raise some interesting points (but still indicate some serious unchecked bias, of which I hope to comment more on later today), but for now, please note that you are appearing to conflate remedies and rights.

Remedies do not define the right. This is one of the sources of the logical fallacy of "but-for-ONLY." Yes, economics do factor into (and factor heavily into) the fashioning of remedies. If you focus too much on damages, you miss the bigger picture of the right itself. You seem to want to calibrate not to the right, but to the remedy. Please take note of this and contemplate why this leads you in the wrong direction.

Anonymous at 01:19,

If you do not understand the terms of innovation that are terms of art in the patent world, may I suggest that you do some independent reading on innovation, as a blog comment section will not likely suffice to bring you up to speed. The history of innovation reveals that the common man's perception that innovation is a linear process, and that tomorrow's innovation only comes from today's best ideas simply is not true. It is a convenient fallacy that ignores the actual fits and starts (and stops) and dead ends, and iterations and blind happenstance and the wonderful non-linear aspects of innovation. Properly aligned reward systems seek to capture ALL of the innovation directions, not just the ones that in hindsight appear to paint a false picture of orderly progression.

This is why here in the U.S., the legal term "promote the progress" has a more nuanced legal understanding (see writings by Judge Rich).

Perhaps an analogy will be helpful: innovation (rather the reward system set up to promote innovation) is not like paving a highway. The reward system is more like paving a parking lot. Since true innovation (understand that to mean actual historical innovation) is not linear, does not happen in one straight path, the reward system is not geared to paving a single path. Instead, the reward system seeks to pave in all directions, so that whichever direction tomorrow's innovation takes us, that direction is paved.

The analogy also captures a nuanced reaction against reward systems. While paved roads can be viewed as an acceptable "intrusion" on nature (for their utilitarian purpose of conveniently bringing us from point A to point B), parking lots appear rather ugly and destructive of nature. They appear disorderly, because any old path from point A to point B is opened up. But that apparent bug is actually the aimed for feature of reward systems.

May I also recommend an older television show called "Connections." It is the capture of the disparate notions and promoting (in the sense of advertising promotions) of the variety of possible links - quite divorced from the common perception of linear "this idea is better than that idea" thinking. If you cannot break free of the mindset that the nature of innovation does not follow the "only build on the best ideas," you will misunderstand a fundamental nature of the innovation reward systems. You will want to only build roads, when it is the parking lots that truly advance and "promote the progress."

Anonymous said...

@Anon of 14:33:

Ehmmm... sheesh...

The anon of 10:57 simply made the observation that the decisions being cited share the common thread of making damages more closely track the actual unfair benefit that infringers have obtained from patents. (I'm not sure KSR and Alice share this thread, but certainly the others seem to do.)

Now you are lecturing that "remedies do not define the right" bla bla bla "wrong direction". That's just not very sensical. The blog post is about various recent legal decisions, the question whether those decisions have had the effect of making patents less valuable, and the associated naturally arising question of whether that would be a good thing or a bad thing for society as a whole. Most commenters here seem to grasp this.

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