Patent Trolls—Posner

The term “patent trolls” is a colloquialism that denotes what the trolls themselves prefer to call “patent-assertion entities.” A patent troll buys patents (sometimes thousands) with the aim not of making the patented product or process or licensing it to others to make but of finding companies or individual inventors that the troll can claim with more or less plausibility are infringing one or more of his inventory of patents. The troll demands a license fee from every such allegedly infringing company or inventor. If the target of the demand refuses, the troll may drop the matter or may sue the refuser for patent infringement, hoping that if the threat is plausible this will induce a favorable settlement. If the target refuses to settle, the troll, to maintain the credibility of its threats, may litigate the suit to judgment. The troll does not practice the patent; but, in its own terminology, “asserts” it. 

Two recent articles in the New York Times (July 14, Sunday Business section, p. 1; July 17, Business Day section, p. B1) report the crescendo of criticism that the trolls are attracting, as the magnitude and consequences and visibility of their activities grow. Last year 61 percent of the patent suits filed were filed by trolls. Trolldom is becoming increasingly profitable—one of the articles is about a troll who earns $25 million a year from trolling—and is therefore growing. There is little if anything that will stop their growth except saturation of the market (which will put a ceiling on troll activity, but at a very high level) or action by Congress. 

It is extremely difficult to discern any possible social benefit from trolls, and extremely easy to discern substantial social costs. The purpose of patent protection is to encourage innovation by giving the creative inventor temporary insulation from competition, to enable him to recover his upfront costs. In the the case of phamaceutical drugs, the testing on animal and human subjects for safety and efficacy, testing required for approval of a pharmaceutical drug for sale, may cost hundreds of millions of dollars incurred a decade or more before the drug is approved, goes on sale, and thus begins to earn money for the manufacturer. Yet the cost of making the drug once it is approved may be modest. As a result, the inventor could not hope to recover its upfront costs if competitors were allowed to duplicate and sell the drug as soon as it appeared on the market; and to forbid them it needs a patent. Actually few markets have the characteristics of the pharmaceutical drug market. It seems to be the lone poster child for the patent system. There is a widespread belief among economists, scientists, and business people that the patent system is vastly overextended—patents granted too casually, patent terms too long, patent litigation too expensive and unreliable. 

The patent system has serious problems; the troll problem is among the serious problems and happens to be the one easiest to solve (were it for the usual political obstacles—like class action lawyers, patent trolls have deep pockets that they can draw from to influence Congress). All that would be required is a rule that barred enforcement of a patent that was not reduced to practice within a specified time after the patent was granted, with extensions allowed for inventions that required an unusual amount of post-patent development to reduce to practice. There is no reason to allow the enforcement of a patent that was obtained by its current owner for the sole purpose of shaking down alleged infringers. Remember that the purpose of patent protection is to encourage invention by enabling the inventor to recover his upfront costs of invention, which he might not be able to do if anyone could copy the invention and, not having incurred any upfront costs, undersell the patentee. There are no upfront costs if the patented invention is never produced, but serves merely as an excuse for a threat to sue. 

It’s not just that patent trolls don’t do anything that encourages innovation; they impair innovation. Trolldom requires inventors to invest more resources in searching the files of the patent office before
applying for a patent (and for safety’s sake again after they begin making the patented product or process), to avoid being hit by a license demand from a troll. This makes trade secrecy a more attractive alternative to patent protection than it would otherwise be. And trade secrecy not only is often a costly or even infeasible alternative to a patent; it also conceals information that a patent is required to disclose. The patent must disclose enough information to enable a person with the relevant technical skills to duplicate the patented invention. Not that he is permitted to duplicate it without the patentee’s permission. But the disclosure fosters innovation by adding to the stock of technical information. It enables “inventing around,” the lawful practice of using information in a patent to create a substitute for the patented invention that is different enough not to be deemed infringing. 

The problem of patent trolls is a function in part of the promiscuity with which the patent office has issued patents in recent years, and the encouragement that such issuance has received from the U.S. Court of Appeals for the Federal Circuit, the federal appellate court that has exclusive appellate jurisdiction over patent cases. The court has long played a promotional role in the patent system, having been created at a time (the early 1980s) when there were fears that the United States was being overtaken on the technological front by Japan. Those fears of course proved groundless. But the idea that American inventors needed more encouragement and therefore that the standard of patentability should be relaxed persisted. The result today is a vast number of patents in force—some 2 million—providing a rich source of inputs for the patent troll industry. 

President Obama criticized patent trolls last month and promised action to curb them. Such action is overdue.

Comments

[DWAnderson1]

To the extent there is a problem, the proposed rules seem ill-suited to curbing it and easily evaded. They are easily evaded, because a troll could easily practice the patent in some token manner. They seem ill-suited, because it is not clear why you shouldn't be able to separate the rolls of patent enforcement from invention. If someone creates an invention why not allow them to make it public in exchange for the right to demanding licensing fees from those who do make use of it?

To the extent there is a problem (and I am certainly prepared to believe there is) it seems likely that the standards for granting patents are too loose. Why not focus reform efforts there?

[Mike80]

Congress must certainly stop patent trolls. But there are even bigger problems with patents. Patent examiners are overwhelmed, prosecution goes on forever, and allowance is capricious. The whole process is far too expensive. The only solution is to eliminate patent examination. Inventors would file their inventions and elaborate their claims as a matter of record. If they ever needed to assert the claims, the PTO, a private hearing system, or a court of law would adjudicate expert testimony presented by the litigants. In addition to eliminating the granting of ridiculous patents by overworked examiners, this system would solve the patent troll problem because patents could not be used as blunt instruments to extract settlements. Patent holders would expect that the assertions they make in their patent filings would be properly examined with respect to the specific circumstances. Getting by at the PTO would no longer give the lucky patent holder a weapon to intimidate.

[Thusbloggedanderson.wordpress.com]

And then there are copyright trolls, like the Faulkner estate, which just lost on a 12(b)(6) in its claim that Sony Pictures owed it for a single (famous) line of a Faulkner novel quoted in a Woody Allen movie:

"Of course, in all life + 50 jurisdictions, Faulkner’s works just entered the public domain, so plenty of people around the world can read the whole novel at will. But in America, the past is never dead—it’s not even public domain."

[Ted Sichelman]

Judge Posner contends that "It is extremely difficult to discern any possible social benefit from trolls, and extremely easy to discern substantial social costs." Actually, it is "extremely easy" to discern social benefits and costs from "trolls" (hereinafter, NPEs). The question is whether the costs outweigh the benefits, and Posner presents no evidence other than anecdote and flawed speculation that NPEs are a net cost. Moreover, the only legitimate problems Posner cites with NPEs are systemic problems of the patent system, endemic to non-practicing and practicing entities alike.

As Becker notes, the benefit of NPEs is that they provide an intermediary function to more efficiently channel payment back to inventors so that they can more easily recoup their (risk-adjusted) costs of invention. By aggregating numerous patents, NPEs lower the costs of litigating against and licensing third-party infringers. This benefit is simple to identify and palpable.

Posner's assertion that "There are no upfront costs if the patented invention is never produced, but serves merely as an excuse for a threat to sue" is clearly wrong. The upfront costs of a patented invention are R & D costs and the related costs of filing for a patent. Because, ex ante, it is impossible to determine which inventions will and won't be commercialized, a rule that barred suit on inventions not commercialized by their inventors would diminish the incentive to engage in costly R & D and patent filing.

Nor is the potential counterargument that NPEs never commercialize their inventions a way out of this dilemma. They may not, but the inventors who sell them to NPEs often plan to commercialize their inventions, or license them out to third parties who will. In this sense, NPEs serve an important "hedging" function, acting as a sort of insurance company in the event the inventor cannot commercialize or license its invention because of other factors--such as barriers to entry imposed by incumbents (often via cross-licensing agreements, control of distribution networks, and the like), effective collusion by incumbents in refusing to license the invention, difficulty in raising further financing, and so forth. By eliminating this hedging function, the value of patents is diminished.

To this, Posner would rejoin that it is beneficial to diminish the value of such patents. He argues that the problem of "patent troll is a function in part of the promiscuity with which the patent office has issued patents in recent years, and the encouragement that such issuance has received from the U.S. Court of Appeals for the Federal Circuit." Relatedly, Posner claims that "There is a widespread belief among economists, scientists, and business people that the patent system is vastly overextended—patents granted too casually, patent terms too long, patent litigation too expensive and unreliable."

Yet these concerns are ones that are systemic, and infect all types of patent owners, from NPEs to commercializing startups to large incumbents. As such, Posner's screed against trolls is highly problematic to the extent it identifies a type of business model as the major problem--with concomitant solutions against the business model (e.g., preclude all suits by NPEs)--when the solutions should focus on these core problems (e.g., improving the USPTO, the Federal Circuit, reducing litigation costs, and so forth).

Ultimately, Posner's claim that "It’s not just that patent trolls don’t do anything that encourages innovation; they impair innovation," is dubious as a theoretical proposition and has little to no empirical support. (The several studies by Bessen & Meurer are seriously flawed--see, e.g., critiques by Lunney and Kesan & Schwartz.) Making such a statement is not only unjustified, but also a detractor to the types of patent law reforms on which we should be focusing our efforts--namely, ones addressing systemic problems that affect all manner of patent owners.

[Mike Wilmot]

Well said to the last poster.

It's difficult to know where to being with this blog entry. The suggestion that only entities or person who practice the patent are entitled to a patent (or such property right somehow disappears after a given length of time) would completely stunt innovation and relegate the users of the patent system to only the wealthy and well-heeled. Under Judge Posner's paradigm, universities and other research institutes would not have access to the patent system. Other small and individual inventors would lack access as well.

Moreover, such a system would destroy the value for the IP asset class. It is a property right and, as such, should be freely assignable and saleable to others who should be able to enjoy its use and, if need be, enforce the rights.

Further, the focus on patent trolls as the problem with the system is a significant departure from reality. Who are the investors in Intellectual Ventures? Who formed Rockstar BIDCO? Who are the entities assigning patents to the large patent holding companies in exchange for a backend? The answer to all three questions is corporate America. I would add that supposed "practicing entities" routinely file patent infringement cases related to patents that have not, and will not, ever commercialize.

It is obvious that there is an attempt to paint all NPE's with a broad brush under the premise that this type of entity stunts innovation, brings meritless cases, and generally abuses the patent and litigation system. Such an argument is unfounded. Like other practice areas, each case needs (and is required to be) dealt with on a case-by-case basis as to its merits. This attempt to destroy an assert class and prejudge a category of plaintiffs by the sheer nature of its business is an abomination in my view.

Finally, I am generally unaware of any "class action" lawyers that are actually, actively practicing patent litigation. To be sure, I am certain some exist, but they are on the edges. As anyone that practices in this space knows, law firms that represent patent plaintiffs on a contingency fee, including NPE's, run the gamut from large, international (supposed defense-oriented) law firms to solo's. Again, the attempt to create a narrative about the how and why NPE's exists should be based on facts.

[Erik B Flom]

The drug example is actually more complicated than that because of regulatory exclusivity. While the company holding the approved brand cannot sue under regulatory exclusivity, it is an effective barrier to entry. After all, selling medicinal drugs without FDA approval would have consequences. The current controversy over the length of regulatory exclusivity for biologic drugs shows that regulatory exclusivity is a viable way to protect initial investment, though not necessarily ongoing investment.

Practicing entities do not necessarily practice a particular patent that they have. Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908) involved a patent for a paper bag that the patent holder did not make. The notion of cost-recovery is unclear because of line-drawing problems. Should the pioneer count all of his investment in better paper bags, or only those that directly resulted in the marketed product? In terms of a factor to raise the target recovery amount the risk of failing on a capital investment ought to be considered as well. If 10 start-ups with competing patented products start, and one ends up with the market, is the target investment recovery that of the one player or the market including the failed would-be participants?

[Erich]

Do either of you have data to support the key points in this blog post? Will you pardon those of us who are less than overwhelmed by your post in that it appears to be based on anecdote at best.

Some is laughable--do you really believe the "trolls" spend more to lobby Congress and the Executive branch than Google? How about the numerous "coalitions" they also fund? If you Google "patent reform lobbying" is this perhaps a hint that this statement in your blog is just ridiculous?

Some is curious--do you really believe reduction to practice is the fix it for all? It will certainly come as news to the famous research labs (SRI, Bell, Park and others), universities, large corporations that spend a fortune on R&D and patent outside their core business, and small inventors that they deliver "no value" and you are advocating changing a fundamental property right with no data to support your fix.

This is not a philosophy or economics class where you can espouse and it will have no impact. You massively overly generalize about the "widespread belief" held by economists, scientist and business. What is true is that some in Big Tech have done a great job getting the popular press to latch on to buzz words (who does not hate trolls? law suits? extortion? abusive tactics?) that are not reflective of behavior of the large spectrum of patent owners.

I had hope gentlemen of your stature would advance past the anecdote and generalization. It is disappointing.

[Richard Falk]

People come up with ideas all the time, but do not put them into practice. There is a big difference between trying to patent the concept or idea of a light bulb where one passes electricity to heat an element vs. patenting the specific material that is used, the method of attachment for the filament, and the inert gases used in the bulb, all of which took years of costly experimentation with thousands of filament materials to discover to produce a practical light bulb (Edison's coiled carbon filament using bamboo) and its later improvements by others (using tungsten and inert gasses).

Patents should exist to encourage innovation that requires investment rather than simply creative thinking. The distinction is in Thomas Edison's quote: "Genius is one percent inspiration, ninety-nine percent perspiration." There is history about this issue such as the George Seldon patent for Henry Ford. That case required an automobile to be built according to the patent and the resulting car was a failure and the patent overturned:

http://inventors.about.com/library/weekly/aacarsseldona.htm

That case was used to justify forcing the Wright Brothers to license their patents (and related ones from Curtiss) at reasonable rates:

http://ipbiz.blogspot.com/2006/07/patent-thickets-and-wright-brothers.html

So while the points in this Posner blog post are valid with regard to the purpose of patents in encouraging innovation that incurs up-front costs, it is incorrect to assume that only the pharmaceutical industry has such significant costs. One may reasonably argue that many (though not all) software and business method patents do not incur such costs. The USPTO was right in being very restrictive in issuing software patents and that the CCPA was wrong in reversing those rulings which later on the subsequent CAFC made much worse in State Street Bank v. Signature Financial Group. Then came Bilski v. Kappos approving business methods. What has been lost in the patent system is the concept of invention.

The Constitution clearly states Authors with their Writings (i.e.copyright) and Inventors with their Discoveries (i.e. patents). Section 101 of title 35 USC also clearly states "whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent…" Implicit is some degree of effort required. Otherwise we'd be referring to "ideas" not "inventions".

There are really two distinct broad classes of problems with a lot of current patent litigation. There is the issue of weak patents where I would include the issue of whether or not they are put into practice, but there is also the issue of weak cases. That's an entire topic not related to this blog, but critically important to examine since patent abuse is done by multiple actors, not just PAEs -- corporations not acting in good faith in licensing inventor's inventions or in suing competitors with weak cases are also a problem. At the intersection of these issues are attorneys, but courts do not generally look at more than one case at a time so the cumulative repetitive harm that is done is not measured nor punished, but I digress...

[Anthony Youngman]

"All that would be required is a rule that barred enforcement of a patent that was not reduced to practice within a specified time after the patent was granted"

Actually, it would be better if the EXISTING rule that "a patent must describe the reduction to practice" were enforced!

A patent isn't a valid patent if it doesn't teach a POSITA. If the applicant has never done it, then how is he to teach someone else to do it? To be valid, the applicant needs to have reduced the invention to practice BEFORE APPLYING for the patent.

(I know I know - lots of patents have been granted before reduction to practice - but that is the big problem with the American patent system - most patents are wrongfully granted.)

[Pointsnfigures]

My perception of you as a judge is a strict constructionist when it comes to Constitutional law. (I might be incorrect, and please accept my apologies if I am wrong). My question is this:

As a judge, would you be activist from the bench to discourage patent troll activity?

[Neilehat]

Such are the "Joys" and "Benefits" of a fundamentally unregulated Market Economy. "Patent Trolls" have discovered a new "Business" oppurtunity within the various "loopholes" of Intellectual Property Law. Be it Patent, Copyright, or Trademark. On the philosophical basis of Patent Law, it was once understood that patent was required to protect the inventors valuable intellectual efforts and "property" from theft and fraudulent use by granting said patents to allow unimpeded Production of said invention (and creating public benefit). But this was back in the days when Business and the Economy were productive Enterprises. Since then we have moved from this style of Economy to a more manipulative form of Economy. Whereby, it is far easier to manipulate the business environment by a form of legalized fraud and extortion to create "profits" than it is to utilize production to create profit. Do "Corporate Raiders" come too mind? This applies throughout the entire Intellectual Property realm. "Patent Trolls" are just one of the problems.

Yep, we've got a Legal structure problem right here in the Twenty-first Century, which probably will become one of the "celebrity" issues of our times...

[Thomas Cotter]

I have posted some thoughts on Judge Posner's comments on my blog, at http://comparativepatentremedies.blogspot.com/2013/07/posner-and-becker-on-patent-trolls.html.

[Aye Run]

"There was one district judge who died recently who was 104 years old," Posner said. "It's very unlikely he was firing on all eight cylinders at that age."

: )

[0ldFox]

In re: "'There was one district judge who died recently who was 104 years old,' Posner said. 'It's very unlikely he was firing on all eight cylinders at that age.'"

That sounds somewhat xenophobic to me. If it was a Japanese-, Korean-, Italian-, British-, or even German-American judge, four cylinders might have been the optimal number.

[Paul Morinville]

If the intention is to kill independent inventors and small patent-based business, legislation currently in Congress will accomplish that.

http://beforeitsnews.com/libertarian/2013/12/legislation-to-kill-the-us-patent-system-2543158.html