Chemical Company Joins the LOT Network Against Trolls

Covestro, a chemical company which uses digital technologies to build better products, has joined the LOT Network.  As previously discussed, the LOT Network was started to thwart patent trolls.  Essentially, each member agrees to provide a license to the other members of the network if their patent is transferred to a patent troll.  Covestro’s press release states:

“With the convergence of the chemical industry and digital technologies, our sector has increased exposure to PAE litigation,” said Gilbert Voortmans, Vice President, Head of Intellectual Property Rights at Covestro. “Innovation is core to our business, and we feel it’s important to take a stance against anything that could interfere with the fair use of intellectual property.”

Interestingly, this is the first chemical company to join the LOT Network, according to the press release.  We’ll have to see whether other companies in industries generally thought not to be subject to troll suits will join the network, particularly as digital technologies influence almost all industries.  Moreover, I count around 170 members listed on the LOT Network website, including companies ranging from Alibaba to Crate and Barrel to Wells Fargo to Uber to Target to Honda. I wonder if universities should create something like the LOT Network to protect themselves from future suits by university based patents.  

"Opportunistic" Google and Intertrust Launch "Patent Shield": Protection for Startups

Google and Intertrust have announced the creation of Patent Shield, which is designed to protect startups.  Essentially, the exchange is access to a patent portfolio for an equity stake in the startup.  It seems to put startups in the position of a much more resourced company with a portfolio of patents and presumably freedom to operate.  This appears to be another attempt to get ahead of something like the patent troll problem; however, it seems to be aimed at patent demands from entities that are practicing not absolute non-practicing entities because the portfolio is supposed to provide leverage against the entity asserting infringement initially.  Interestingly, this appears to be a great way for Google and Intertrust to find licensing partners for their patented technology without looking like a “bad guy” by operating through patent demand letters—let them come to us.  Very clever.  It also gives Intertrust the opportunity to offer its IP services to startups, and maybe a chance for additional investment/acquisition opportunities through notice about great new startups that have attracted the attention of established players in the market. Very, very clever. For more details, please see here. 

U.S. Federal Trade Commission Releases Report on Patent Assertion Entities

On October 6, 2016, the Federal Trade Commission [FTC] released a 269 page report titled, "Patent Assertion Entity Activity: An FTC Study" [Study].  The Study reviews PAE activity from 2009 to 2014.  The press release from the study excerpts some highlights: 

The report found two types of PAEs that use distinctly different business models. One type, referred to in the report as Portfolio PAEs, were strongly capitalized and purchased patents outright. They negotiated broad licenses, covering large patent portfolios, frequently worth more than $1 million. The second, more common, type, referred to in the report as Litigation PAEs, frequently relied on revenue sharing agreements to acquire patents. They overwhelmingly filed infringement lawsuits before securing licenses, which covered a small number of patents and were generally less valuable. 

The report found that, among the PAEs in the study, Litigation PAEs accounted for 96 percent of all patent infringement lawsuits, but generated only about 20 percent of all reported PAE revenues. The report also found that 93 percent of the patent licensing agreements held by Litigation PAEs resulted from litigation, while for Portfolio PAEs that figure was 29 percent. 

The study found that the royalties typically yielded by Litigation PAE licenses were less than the lower bounds of early stage litigation costs. This data is consistent with nuisance litigation, in which defendant companies decide to settle based on the cost of litigation rather than the likelihood of their infringement.

Interestingly, the report relies on the AIPLA economic survey on patent litigation costs to conclude that the majority of Litigation PAE litigation is nuisance litigation.  That merits additional scrutiny, I think.  The Study also includes reforms to address nuisance infringement litigation: 

  

“The FTC recognizes that infringement litigation plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws. Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior,” the report states. With this balance in mind, the FTC proposes reforms to: 

• Address the imbalances between the cost of litigation discovery for PAE plaintiffs and defendants;

• provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits;

• streamline multiple cases brought against defendants on the same theories of infringement; and

• provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.

Notably, the Study also reviewed " types of patents held by PAEs, and found that 88 percent were in the information and communications technology sectors; more than 75 percent of those patents were software-related patents." Interestingly, some Study PAEs frequently targeted a small number of firms in the "Computer and Electronic Manufacturing" sectors.  Further, the Study "also looked at whether PAEs were able to make money by mass-mailing so-called “demand letters”; however, the FTC observed an “absence of large demand letter campaigns for low-revenue licenses among the Study PAEs.”  This results in the Study stating that reforms concerning demand letters "on its own" would make little difference. 

Notably, the Study includes an review of the wireless chipset sector in particular: 

[T]he report also looked at the wireless chipset sector, examining how reported PAE assertion behavior compared to certain manufacturers and non-practicing entities (NPEs) (who primarily seek to develop and transfer technology ). For this study, the FTC obtained non-public data from eight manufacturers and five NPEs, for the same timeframe using its 6(b) authority. 

The wireless case study found that Litigation PAEs and manufacturers behaved differently. Within the study, Litigation PAEs brought far more infringement lawsuits involving wireless patents—nearly two-and-a-half times as many as manufacturers, NPEs, and Portfolio PAEs combined. Litigation PAE licenses involved simple lump-sum payments with few restrictions, if any, whereas the reported manufacturer licenses frequently included field-of-use restrictions, cross-licenses, and complicated payment terms.

Importantly, the Study does not draw conclusions concerning the merits of PAE activity in monetizing inventions for inventors and innovators: 

Study PAEs had diverse and heterogeneous data-keeping practices. As a result, the FTC does not report how much revenue PAEs shared with others, including independent inventors, or the costs of assertion activity. The FTC sought to evaluate the role of PAE activity in promoting patent monetization for inventors and innovation as part of its study. Towards that end, the FTC requested that Responding PAEs provide detailed data describing how they shared licensing revenue with outside parties and their costs of patent assertion. Responding PAEs used different methods to maintain information describing their revenue sharing and costs, however, which prevented any meaningful comparison of the degree of revenue sharing by PAEs or their assertion costs. For example, some Responding PAEs viewed payments to outside counsel as a cost of patent assertion, but others viewed such payments as revenue sharing (counsel often received a fixed proportion of licensing royalties). Moreover, the majority of Responding PAEs did not maintain information on assertion costs, and only a few Responding PAEs provided such data at either the Affiliate level or assertion campaign level. For these reasons, we did not analyze either the proportion of licensing revenue that they shared with outside parties, or the costs of patent assertion. Due to this limited data, this report does not address the efficiency of PAE business models. [emphasis added].

And, what impact will Alice have?  The Study notes that "it did not collect enough information regarding patent assertion after the Alice decision" to "directly measure" Alice's impact, but: 

In addition, because more than 75% of the patents in the FTC’s sample likely include software-related claims, and because the FTC estimates that Study PAEs held more than 75% of all U.S. patents held by PAEs at the end of 2013, any change in PAE behavior with respect to software patents that results from Alice will likely have a significant impact on both the overall volume of PAE assertion and the types of technologies that PAEs assert.

Study PAEs generated about $4 billion in licensing revenue.  And, the Study noted, "Fewer Than 1% of Study Patents Were Identified as Encumbered by a FRAND Commitment to a SSO."  [Hat tip to Professor Dennis Crouch's Patently Obvious Blog.]

Google’s Patent Purchase Program: What Did We Learn?

Recently, this blog discussed Google’s Patent Purchase Program (Program), here.  The Program was designed to help Google get in front of the patent troll problem by purchasing patents that could be acquired by patent trolls and subsequently used to “hold up” practicing entities.  Tam Harbert has published an article in the IEEE Spectrum titled, “Google Tries to Keep Patents Out of the Hands of Trolls.”  The article reports on the results of the Program.  Notably, the article states: “Internet Giant Buys 28% of the Patents Offered During Its Patent Purchase Experiment.”  The median price for a patent was $150,000.  The lowest price Google paid was $3,000 and the highest price was $250,000.  Interestingly, the highest submission offer was $3.5 billion and 47 percent of the submission offers were below $100,000.  The article notes that even though the Program was only available for three weeks “a few thousand” patents were submitted for consideration.  Around 28% of a few thousand patents is a significant number of patents.  It is unclear how many patents were purchased.  The article also notes that the value of the patents in this field are likely significantly less because of the U.S. Supreme Court’s decision in Alice.

As the article hints, a lesson from the experiment may be that we (of course) need a real marketplace for patents (with “less friction”).  Even with the short notice for the program as well as a narrow time frame to submit, there were many willing participants.  Moreover, a substantial number of the submissions were from individual inventors—about 25%.  Interestingly, this may indicate that individual inventors do not have many opportunities to monetize their patents and valuable patents may be “languishing” on the shelf, so to speak.  And worse yet, technology covered by those patents may not be commercialized.  This brings me to a second point.  What does Google plan to do with this patented technology?  The article also hints that Google acquired patents relevant to its business.  Will it actually utilize the technology covered by the patents?  Is it already using technology covered by the patents?  I suppose it could just sit on the technology and not use it.  Will it assert the patents against other operating companies? 

Notably, Google continues to accept submissions to consider patents—although not under the terms of the Program.  Will Google reopen the Program?

Google also has taught us that there are a lot of potentially valuable patents out there that could be successfully asserted against operating companies.  Good to know?  It doesn't seem like Google is widely publishing the results of the Program.  

An Energetic, Engaging and Balanced Symposium on Patent, Copyright and Trademark Trolls PART III

The next panel is entitled, “The Practitioner’s Perspective:The Effect of Patent Non-Practicing Entities on Industry.”  The panelists include Lee Cheng, Chief Legal Officer, SVP-Corporate Development and Corporate Secretary, Newegg Inc.; Robert D. Fish, Founding Partner, Fish & Tsang LLP; Ian D. McClure, Director, Intellectual Property Exchange International, Inc.; Congressman Dana Rohrabacher, U.S. Representative for California’s 48^th Congressional District; and Nathan Shafroth, Partner, Covington & Burling LLP.  The moderator is John B. Sganga, Jr., partner at Knobbe, Martens, Olson & Bear.  The following is a partial description of the excellent panel discussion. 

The moderator, Mr. Sganga, posed several questions for the panelists.  The first question is “has the trend of NPE suits peaked?”  Mr. Shafroth noted that recent Supreme Court cases have “raised the barrier to entry” for new patent suits.  He is surprised that the rate of decline is not greater.  He thinks that one of the main reasons for decline includes: the Supreme Court’s Alice decision and the district courts' and the Federal Circuit’s interpretation of that decision.  He believes that some companies are more selective in patent enforcement.  Mr. Cheng noted that Newegg is not being sued anymore since Alice.  He also noted that “it is the low, low, low hanging fruit that is eliminated.”  He believes we still have problems with “imbalance” in the patent system.  He notes it is less than $10,000 to get a patent, but the cost to eliminate it is huge—perhaps around $300,000.  Mr. McClure notes that there are many patents with “nominal” value, but there is some “rearranging of business models” by nonpracticing entities.  Those entities are attempting to acquire better quality patent portfolios—“aggregation is the game.”  Mr. Shafroth noted there are other reasons for why there is a decline in patent suits.  One includes damages decisions, particularly by Chief Judge Rader, which limit damages for patents covering a part of a component product, such as smart phones.   Mr. Sganga noted that small companies and inventors may be hurt by these new developments.  Mr. Fish notes that we need to distinguish between enforcement and extortion, and Vermont’s legislation moves toward that goal through focusing on “bad faith.”  He believes “having the ability to sue through an NPE is critical” for some inventors and small companies with good patents that cover very good technology.  They do not have the resources to enforce their patents.  For business development, we need nonpracticing entities.  Congressman Rohrabacher noted the purpose of the patent system, but notes that “major multinational corporations are trying to change the discussion” away from the fact that a “property right has been stolen.”  He expressed a lot of concern for small corporations and “crony capitalism.”  Mr. Cheng stated that there are many “myths” surrounding the patent debate, including “that the patent act [helps] the little guy.”  He noted that patent rights are “property rights,” “but that not all property rights are created equally.”  Mr. Fish noted that some of the problem concerns “allocation of risk” and that there is litigation insurance.  These are just costs of doing business.  Mr. McClure noted that 96% of companies are relatively small.  He further noted that ascertaining the value of patents is difficult and expensive.  He thinks that NPEs helpfully create information concerning patents and that more information about patents is helpful.  He thinks that crowdsourcing of prior art is a good idea.  Congressman Rohrabacher states a patent represents “hard work” and is against taking away the chance of “treble of damages.”  Mr. Fish noted that “things have gotten out of hand,” but many developments are moving toward restoring balance, such as Alice and a focus on patent eligibility early and some districts requiring very early claim construction.  Mr. Cheng believes we should examine “abusive behavior” as opposed to status.   No one on the panel thinks that enforcement of quality patents is a problem.  

The full discussion is available via webcast here. 

Who are the “Good” “Trolls”? Or, How to Monetize Well?

This blog, in the past, has discussed the merits of so-called “patent trolls” or patent assertion entities (PAEs), here, here and here.  For sure, some PAEs or "trolls" provide a helpful service for firms, universities and some inventors without the wherewithal to enforce their patents.  And, defining exactly what is a “troll” may be a difficult task.  But, are all PAEs and “trolls” the same?  Are there good PAEs and “trolls”, and bad PAEs and “trolls”?  How do you tell the difference?  Joe Beyers and Wayne P. Sobon (both of Inventergy) recently published an article on Corporate Counsel titled, “Do’s and Don’ts of Corporate Patent Monetization.”  The article helpfully explains why patent owners should beware the bad “trolls” or PAEs and should partner with the good “trolls” or PAEs.  Why should they be concerned?  The authors wisely state that protection of the brand is paramount.  Association with a “bad” PAE or “troll” could reflect negatively upon the patent owner.  The authors provide a list of criteria for choosing a “licensing partner”.  Here are the “Don’ts”:

1. DON’T choose a licensor with a reputation for acquiring poor-quality patents and quickly suing.

2. DON’T select a licensor with a history of settling claims for a lot less than the cost of litigation (i.e., “nuisance fees”).

3. DON’T work with a licensor that sends widespread demand letters to multiple companies with little or no evidence that its patents are being infringed.

4. DON’T use a licensor that’s been the subject of any state actions or consent decrees, or has been forced to pay an opposing party’s attorneys’ fees.

5. DON’T partner with a licensor that operates behind hidden shell companies or otherwise has a reputation for abusive patent assertion behavior.

Here are the Do’s:

1. DO select a licensor that has made a public commitment to transparency and ethical business practices—and then speak with its licensees to confirm that this commitment is genuine in deed as well as word.

2. DO work with a licensor that seeks licenses only from appropriate companies (rather than startups or small retail businesses), and that comes to negotiations with substantive claim charts and other evidence of use.

3. DO choose a licensor that selects, owns and manages high-quality patent assets developed by global operating companies with reputations for innovation, like you.

4. DO use a licensor that takes active steps and commits material resources to ensure the quality of its patents, and vets them prior to licensing.

5. DO ensure that members of the licensor’s executive team have product or service company experience, and understand the needs and concerns of companies like yours regarding patent value creation.

This brings me to my next question.  Well readers, who are the “good” “PAEs” or “trolls”?  Please name them.  

I suppose maybe there are no “trolls”--just naughty behavior. 

Chief Judge Rader’s Recent Comments on Patents and the Federal Circuit Bar Association

The Federal Circuit Bar Association (FCBA) recently released a copy of the remarks of Chief Judge Rader at the recent Eastern District of Texas Bench and Bar Conference.  The FCBA is the bar association for the U.S. Court of Appeals for the Federal Circuit, which hears patent appeals from the district courts in the U.S. along with appeals from the International Trade Commission and the U.S. Patent and Trademark Office.  Chief Judge Rader’s comments address criticisms against the U.S. patent system including the assertion of the tragedy of the anticommons as well as supposed litigation abuses by so-called patent trolls.  Chief Judge Rader notes that empirical evidence doesn’t support the tragedy of the anticommons theory and that the smart phone is a great example of, basically, how the anticommons does not exist.  I believe our fellow blogger Keith Mallinson supports Chief Judge Rader’s view; although I believe, if my memory serves me correctly, that some would argue there is an anticommons like effect in the genetic diagnostics field.  I also wonder about price.  Here are Chief Judge Rader’s comments about the anticommons theory:

As an illustration of the crisis of confidence in the benefits of Patent Law, I wished to just discuss one unsubstantiated charge against the merits of this system of Constitutional dimension.  Academics often charge the Patent system with creating a so-called “tragedy of the anti-commons.”  This academic canard suggests that a “thicket” of patents can actually inhibit innovation; that the administrative burdens of enforcing patents can multiply to frustrate the goal of the Act.  Thus, the law of innovation supposedly works against itself.  In an age of empirical research to verify every legal hypothesis, I would urge you and any policymaker to reject this academic supposition – whether it comes from a high court or any other source – until and unless it is verified by empirical data.   By the way, the only studies on this topic that I have seen could not verify this guess but generally confirmed the opposite – that patents spur innovation. 

May I offer a common sense rebuttal to this academic hypothesis?  [Hold up my smart phone]  This smart phone resides in the technological space most occupied by patents, perhaps in the history of patent law dating back to 1624.  With design patents as part of the equation, this device probably includes easily more than a thousand active patents.  If you count expired patents in this technology back to the advent of the computer age, this device would implicate tens of thousands of patents.  If ever the administrative burdens of a concentration of patents would inhibit innovation, this technology would be the place to observe that encumbrance.  Now you tell me: is this technology experiencing sluggish and encumbered innovation?   I doubt that I could keep track of the pace of innovation in this technology if I devoted my full time to the project.   

No doubt a study would show that the disclosure benefits of patents bring the entire world into the innovation circle that drives smart phone technology forward faster than any of us can fathom.    I am afraid the “tragedy of the anti-commons” has its own tragedy: it simply is academic nonsense.  The patent system does not inhibit invention.

Chief Judge Rader cites his experience working both in the judiciary and in Congress in cautioning the Congress to carefully enact reforms, if any, and to allow the judiciary to correct for any issues from litigation abuse.  Chief Judge Rader first points to the definitional problems concerning the “patent troll”:

Again in simple terms, litigation abuse is a court problem and courts have the best tools to supply the correction. 

Perhaps I could suggest a way that classification fails to address this problem.  Litigation abuse sometimes invites an equally abusive strategy of correction.  This misguided strategy attempts to define some patent-owning entities as the source of the problem.  Regardless of whether you call them NPEs or PAEs or “trolls” or whatever pejorative term suits your fancy, this definition strategy is itself an abuse.   

American law and ethics does not enforce or condition enforcement of basic laws and policy on the characteristics of a party.  American law treats big company and small company, foreign entity and domestic entity, different genders, races, and ethnicities ALIKE.  Our law does not make distinctions based on the characteristics of parties but on their actions proven in a court of law.  The definition of a “troll” will always be over-inclusive or under-inclusive to the detriment of justice.  Instead of finger-pointing and name-calling, the law needs to focus on blameworthy conduct.

Finally, Chief Judge Rader points to three potential avenues of help against so-called trolls.  First, the courts increased use of summary judgment to curb some claims.  Second, the award of attorney fees in exceptional cases—and he notes that the Federal Circuit is “on course” to make it easier for courts to find an exceptional case.  Finally, he points to litigation expense reform and model orders promulgated by the FCBA and the Federal Circuit Advisory Council.  The E-Discovery model order is available here.  The full text of Chief Judge Rader’s remarks are here. 

Since I mentioned the FCBA, I’ll give a “plug” for the FCBA and a panel I am moderating soon.  The FCBA offers a number of other activities, including webinars, conferences and interesting opportunities such as the International Series and the Global Fellows Series.  The FCBA also publishes a newsletter and a law review, The Federal Circuit Bar Journal.  Membership costs are relatively modest and all webinars offered by the organization are free for members.  I am pleased to work with the Diversity Committee of the FCBA and we are offering a webinar, in conjunction with the Law Clerks and Students Committee, concerning intellectual property career planning directed at law students and attorneys with 1-5 years of experience.  The webinar is free for students and members, and will be held this Wednesday (November 6) from noon to 1:30 pm (Pacific Standard Time).  The panelists are: Judge Paul Grewal, Magistrate Judge, U.S. District Court, Northern District of California; Jack Hobaugh, Counsel and Senior Director of Technology, Network Advertising Initiative, Washington D.C.; Paul Korniczky, Partner, Leydig, Voit & Meyer, Chicago, Illinois; Christy LaPierre, Associate, K&L Gates, San Francisco, California; Kim Tran, Associate, Perkins Coie, Palo Alto, California; and A. E. Williams, Retired Patent Examiner, U.S. Patent and Trademark Office. 

Federal Trade Commission to Seek Information about “Patent Trolls”

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

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

What types of arrangement have PAEs and operating companies consummated? 

What motivates these arrangements?

What are the likely competitive harms and benefits of outsourcing?

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

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

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