RPX Blog
Patent Problems Might be Obvious; Solutions Less So
May 10, 2012
Patents aren’t just for inventors and IP counsel, anymore. Patents are hot. Thanks to billion dollar deals like the Nortel auction, Google/Motorola Mobility and Microsoft/AOL/Facebook, as well as a flurry of high-profile infringement fights between big names in high tech, patents have been in the news a lot lately. After decades of obscurity, patents have captured the attention and imagination of the general public, and it’s rare to scan an Op/Ed page or visit the blogosphere without seeing a new point of view.
Holly Finn, for instance, who writes the general-interest Marvels column for the Wall Street Journal, weighed in on patents recently (A Patently Obvious Problem), and while we think she has definitely identified many of the fundamental problems in the current patent system, we can’t agree with most of her prescribed solutions.
Finn writes, “The problem is that the system allows too many inessential patents, which leads to even more inessential litigation.” No argument. There are too many patents issued, too vaguely worded and with too much overlap with prior art. Finn (echoing many other observers) is right that the USPTO needs to look at overhauling its processes.
But even if the system for approving patents were to become more rigorous overnight, we still need to deal with the millions of patents that are already in circulation. Here we think Finn’s suggestions are wide of the mark.
She believes, for instance, that the law should “insist that filers of patents be provably active and productive in an industry.” This would contravene the underlying logic of our patent system: that inventors should be able to invent for invention’s sake. Some of our greatest innovators – including commercially active entrepreneurs like Thomas Edison – licensed their patents. Should the system prevent someone from selling and profiting from their intellectual property alone? Of course not.
Finn makes no secret of her disdain for NPEs, who she feels are exploiting inventors (“Actual inventors in Silicon Valley are incensed, their faith in fair play as bruised as their bottom lines”). We can’t completely share her opinion because we feel the system is as much to blame as the participants. After all, patents do have value, and inventors/owners of patents deserve to receive that value. NPEs are undeniably spurring that transfer of value.
That said, using litigation to do so is wasteful, and using legal means to establish valuation creates deep distortions in price. In fact, many operating companies settle with NPEs simply to avoid legal costs with no regard to the underlying value of the patent. These kinds of “nuisance suits” can be eliminated as more and more companies adopt market-based mechanisms like the defensive acquisition service RPX provides for its large network of member companies.
Finn does correctly point out that the average infringement case now takes 18 months to conclude and costs more than $1 million. What she doesn’t say is that 98% of cases settle. We believe it is simply more logical to make that settlement – transfer to the owner of the patent the appropriate value for the asset – at the outset rather than after wasting many months and many hundreds of thousands of dollars on legal proceedings. This, of course, is the central logic of pursuing a defensive acquisition strategy. At RPX, we pay fair value to the owner of a patent through a transparent, multi-party, open-market process. By removing the need to determine value through litigation, we eliminate uncertainty for the seller and dramatically reduce cost and risk for any potential targets of litigation.
Finn also makes an important point that settlements are confidential, so companies have no information to make decisions about whether and how much to pay. In Finn’s mind this is strictly the fault of NPEs, but we aren’t so sure. Defense counsel have their own reasons for not wanting settlement data to be public. The resulting lack of transparency has been a huge obstacle to rational decision-making for any company in an NPE suit. We do agree with Finn that participants should seek to “… rid settlements of nondisclosure agreements – or at least encourage the sued not to sign them.”
The final sentence of Finn’s column is a call to action, exhorting a visionary high-tech CEO to champion the cause of fixing the patent market’s systemic problems. Of course, RPX is already doing this. We have brought more participants into the market and helped spur far greater price transparency. And through ongoing defensive patent acquisition on behalf of our 116 clients, we are helping operating companies avoid or limit NPE litigation, while dramatically reducing their overall patent legal costs. If tech CEOs decide to take Finn’s advice, they will find there is a ready-made way to champion the cause of a more rational patent market: join RPX.
Tags: Defensive Patent Acquisition, Market-based Solution, NPE Litigation, USPTO
Mavs Owner Should Focus on (Patent) Defense
April 30, 2012
Mark Cuban knows business and basketball (his defending NBA champion Dallas Mavericks earned a playoff spot despite a season marred by injuries and Lamar Odom). It turns out he also knows patents – though not as much as maybe he should.
In a recent blog post The Greatest Business Risk You Don’t Know About – Your Business Will Be Sued Over Patents, Cuban sounds the alarm over NPE patent litigation and says the threat is widespread: “No matter what business you are in, you are susceptible to a patent infringement lawsuit….EVERY company in America is at risk of having 2, 3, 5, 100 patent lawsuits coming your way.”
Cuban faults the USPTO for issuing too many vague and unnecessary patents. He also says the gravest danger from NPEs is faced by small- and medium-size companies that are only now starting to be sued in greater numbers and with increasing frequency.
While maybe slightly alarmist, Cuban has clearly grasped the enormity and wastefulness of NPE litigation. He knows the trend for operating companies is very troubling. He is apparently unaware, however, that a rational business-based solution exists – RPX’s defensive acquisition model.
Cuban’s prescription for affected companies is legislative: “contact your local Senator”. But we suspect he knows that this is really no solution at all. Legislative – and for that matter judicial -- solutions can only go so far, especially in such a well-established market. Regulation would most likely just distort an already irrational ecosystem even further. Given his free-market track record, Cuban would probably rather see the threat of NPE litigation eliminated through the widespread adoption of a transparent market that can price, transact, and insure against risk without the high transaction costs of litigation.
This certainly seems to be his mindset. In an earlier blog post titled My Suggestion on Patent Law, Cuban makes a compelling case that the persistent uncertainty caused by the fear of patent litigation makes it difficult for managers to plan for and invest in the future of their companies. This, he believes, has been holding back job creation because “It’s impossible to quantify just how much and how often you will be sued and what the costs associated with those lawsuit(s) will be.” Uncertainty about litigation, in other words, is almost as harmful as the litigation itself.
We agree, and in the past we have often cited Warren Buffet’s quip that “risk comes from not knowing what you are doing.” In a rational market, unencumbered by unnecessary legal threats and costs, participants know what they are doing. That is why RPX has spent the last four years bringing transparency to the patent market so that our 110+ clients can quantify and predict the frequency and cost of patent risk. And as more and more of these companies have engaged directly in the process of making this market rational, we have been able to build a broad enough and deep enough database of market information to begin insuring against those risks, too.
Protecting against patent risk is never going to be free, but if the thousands of companies that face it participated in a scalable solution to mitigate the risk by buying patents (many of which are – as Cuban points out – frivolous) the cost of insurance over time will be quite manageable. And unlike the legislative solution he advocates, such risk-mitigation costs would be entirely predictable and within their control.
Given his obvious understanding of the systemic dangers of NPE litigation, it is perplexing – and a bit dismaying – when Cuban ends his most recent patent post by disclosing his personal response to the NPE problem is … invest in an NPE. “What can you do as a small business person to protect yourself ? Honestly, nothing beyond complaining to your Congressperson. The only option I have found is to buy into companies that aggressively sue over IP. It is a hedge against patent law. Put another way, if you can’t beat ‘em, join ‘em. Sucks, but there aren’t any other options that I can see.”
Clearly, Cuban just needs to look a little harder. RPX has proven that a broad enough coalition of companies can effectively reduce the threat of NPE litigation and we are regularly buying and clearing dangerous patents before they become high-cost/high-risk problems for the more than 110 companies in our network. The RPX model is based on a strong, persistent, shared defense. A proven entrepreneur – and NBA insider – like Mark Cuban has to appreciate the logic and power of that approach. We’d be happy to explain it to him. Maybe after the playoffs.
Tags: NPE Inefficiency, NPE Litigation, USPTO, Warren Buffett
NPEs Increasingly Opt for ITC Action
March 19, 2012
The International Trade Commission has become a popular venue for patent confrontations between NPEs and operating companies. After years of relatively consistent activity, NPE-driven investigations in the ITC jumped fourfold, from 4 to 16, between 2010 and 2011 (NPE suits filed in district court, by comparison, rose 84% year to year). In a parallel trend, the total number of respondents in NPE patent actions has also exploded in the ITC, with the number of respondents to NPE complaints rising from 22 companies in 2010 to 235 through the end of 2011.
The ITC, of course, is a quasi-judicial executive agency that has the power to administer unfair trade remedies pursuant to 19 U.S.C. §1337 (“Section 337”) to prevent infringing products and processes from harming domestic industry. It is not an Article III court (i.e., Federal District Court) – so matters are tried before an Administrative Law Judge and there is no jury. The ITC cannot award monetary damages or attorney’s fees, but can, through Customs, enforce general exclusion orders that stop offending products at the US border, and/or issue cease-and-desist orders. This power has made the Commission an attractive setting for NPEs seeking leverage in their disputes with operating companies.
Today, NPEs represent an increasing percentage of total ITC actions. Fully 25% of ITC Investigations in 2011 were filed by an NPE and 51% of respondents hauled into the ITC were in response to an NPE complaint.
The Commission threw the doors of the ITC wide open to NPEs in In re: Coaxial Cable Connectors, Inv. 337-TA-650 in 2010, holding that the domestic industry requirement is met when licensing is a Complainants’ sole economic activity. Since this ruling, the percentage of complainants in the ITC relying on licensing activity to meet the domestic industry requirement has risen from 13% in 2008 to 32% in 2011.
NPEs increasingly turn to the ITC to leverage a severely compressed cost window to increase settlement pressure. The average time to trial in district court is 36 months. The average ITC Investigation gets to trial before an Administrative Law Judge in just 10 months, meaning respondents’ legal costs per month are three times what they would be in district court. Further, informal surveys of RPX clients indicate the total legal costs in the ITC are roughly double what they are in district court. Tack on the inevitability of parallel filings in district court, the threat of inconsistent judgments and the intercession of the Federal Circuit to resolve discrepancies between the rulings of the two bodies, and the total bill for ITC respondents is drastically higher than an action confined to just district court.
But the pain of ITC adjudication doesn’t stop at higher costs. In the wake of the Supreme Court’s 2006 ruling in eBay v. MercExchange, NPEs turned to the ITC to revive the threat of injunction-like relief through general exclusion orders and cease-and-desist orders, which stop an entire product at the border for what might be a single alleged infringing process in a complex device like a cell phone or automobile. Notably, nearly half of ITC Investigations go to trial, and once before the Administrative Law Judge, respondents fare poorly: 55% of trials result in exclusion or cease-and-desist orders, or both.
The lesson here is that NPEs are a market phenomenon and the market always adapts. Given a new avenue to increase pressure to settle, NPEs began migrating to the ITC. The America Invents Act’s limitation on joining parties in the same suit will likely result in a similar adaptation by NPEs to meet the challenges of a changing patent environment.
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