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The NPE reality is very different to the media myth

Yesterday this blog discussed a paper produced by Tom Ewing and Robin Feldman for the Stanford Technology Law Review entitled "The Giants Among Us". It is, we stated, a serious piece of work looking at the alleged effect that a certain kind of NPE - the so-called mass patent aggregator - is having on the US patent marketplace. The paper is a temprate and important contribution to the debate about NPEs in the US. While people might not agree with the paper's conclusions, they invite a sober response and may open up a debate that has become pretty sterile - with anti-patent rhetoric often replacing informed discussion on one side and accusations of theft from inventors coming from the other direction.

Today, in the spirit of an open exchange of views, we reprint, in edited form, a piece that ran in issue 51 of IAM. This looks at the relationship between NPEs and large operating companies, and explains that it is far more nuanced than is typically portrayed. What's more, it argues, there is a case for saying that the actions of some operating companies may unintentionally be a much bigger threat to R&D and innovation - especailly among start-ups and SMEs - than anything NPEs could ever do. Here it is:

Although non-practising entities are often portrayed as nothing more than parasitical patent trolls, the reality is far more nuanced. And when it comes to behaviour that harms innovation perhaps some operating companies deserve a much greater share of the blame

Once again the activities of non-practising entities (NPEs) are being put under the media spotlight. And as is usually the case when this happens, NPEs, or patent trolls as they are normally referred to in these situations, are not getting a good press.

First there was a programme broadcast on National Public Radio in the US in July. Entitled “When Patents Attack”, its message was established in the opening minutes:

“Today, lots of investors and innovators in Silicon Valley, maybe the majority, would tell you the patent system is doing the exact opposite of what it’s supposed to. It’s not promoting innovation. It’s stifling it. Because patent lawsuits are on the rise. Patent trolls are on the move. Patent lawsuits are so common now that it’s hard to find even one semi-successful startup in Silicon Valley that has not been hit with a suit, which slows innovation, makes it harder for companies to prosper, hurts our global competitiveness (is this getting big enough for you?), costs us all more money when we buy the stuff these companies sell.”

By the times the closing credits were being read out, listeners had been left in no doubt that patent trolls, and Intellectual Ventures in particular, are very bad things. There was little attempt to provide an impartial overview; instead, what was delivered was the standard anti-NPE message: IV is a troll, the US patent system is dysfunctional, innovators are being harmed and the economy is suffering as a result. As an agenda-driven polemic, “When Patents Attack” could not be faulted; as an objective piece of reportage it left much to be desired. But only a handful of listeners would even have known there is another side to the story.

In the same way, very few of the numerous publications and websites that have reported on a study by James Bessen, Jennifer Ford and Michael Meurer, entitled "The Private and Social Costs of Patent Trolls", have questioned its central finding – that NPE lawsuits are associated with an average of US$80 billion per year of lost wealth to defendants. Instead, this figure has been reported as fact by multiple media outlets; among them: Fortune, CNN Money, The Boston Globe, The Washington Post, PC World and any number of blogs. Again, the message that comes across is clear: trolls are bad, operating companies are good; and never the twain shall meet. Except, of course, in the real world it is not like that at all.

Meanwhile in the real world …

Bessen, Ford and Meurer report that a detailed analysis of the stock price movements of publicly-quoted operating companies in the days following patent assertions by NPEs shows that they fall, sometimes quite sharply – hence the US$80 billion of lost wealth annually. “The loss of billions of dollars of wealth associated with these lawsuits harms society. While the lawsuits increase incentives to acquire vague, over-reaching patents, they decrease incentives for real innovation overall,” they conclude.

However, it is not a huge surprise that when the markets learn of potentially bad news they react negatively. Having patents asserted against you is never good as the downsides of losing, especially in the US, can be pretty severe. Against that, though, coming out at the other end of a patent suit is very often viewed by the markets as good news.

Research that was published in the first ever issue of IAM (“When licensing deals create shareholder value") showed that companies listed on the London Stock Exchange saw their stock prices marked upwards when they announced they had concluded licensing agreements (despite the fact that market makers often did not understand what had been agreed). Famously, RIM’s share price soared after it reached a settlement agreement with NTP in the BlackBerry case, even though it involved the company making a settlement payment of US$612.5 million to the NPE. Similar jumps occur regularly when settlements are announced and cases are decided, yet Bessen, Ford and Meurer do not seem to have looked at this.

Neither have they studied how the ownership of patents has helped to create value in the companies targeted by NPEs in the first place. This is important because the conditions that the authors believe allow NPEs to operate – the so-called “fuzziness” of boundaries around the patentability of software in the US, their “unpredictable claim interpretation and unclear scope, lax enablement and obviousness standards”, the “huge number of software patents granted” and the hiding of “claims for many years by filing continuations” – also apply to the many operating companies that seek and own such patents. How much market value would they lose if they were not able to do this?

Furthermore, the authors do not state which “trolls” they have looked at. Instead, readers are informed that they have used “a database of patent lawsuits collected by Patent Freedom (2011)” to “perform 4,114 of these event studies from 1990 through 2010”. A look at PatentFreedom’s list of the NPEs that own the most patents reveals that it includes names such as RoundRock, MOSAID and Acacia. It is a matter of fact that all three of these have close working relationships with operating companies and manage portfolios that have been acquired and/or licensed from them.

RoundRock, for example, bought over 20% of Micron’s entire portfolio in 2009 (the NPE’s owner, John Desmarais, told delegates at the IP Business Congress in June 2011 that he had been approached by Micron to do this) and has been monetising it, very successfully, ever since; while MOSAID has recently purchased Core Wireless Licensing, a Luxembourg-based company established by Nokia to hold 400 patent families relating to wireless technology. For its part Acacia has worked with companies such as Renesas and Access. Over in Europe, which is not covered by the authors or the PatentFreedom database, NPE IPCom has been busily asserting a portfolio of patents it got from Bosch, and Italian NPE Sisvel has acquired a fearsome reputation for the aggressive way in which it enforces portfolios licensed to it by the likes of Philips and France Telecom.

Then there is Intellectual Ventures, often disparagingly described as the ultimate patent troll. Court documents that emerged in May 2011 confirmed what had long been rumoured: among those investing in the firm are a whole host of big operating companies, such as Microsoft, Apple, Amazon, Cisco, eBay, Google, Intel, Nokia, Sony, Verizon and Yahoo.

Tangled relationships

What Bessen, Ford and Meurer do not say is how many of the 4,114 suits they studied involved NPEs asserting rights that had previously been owned by operating companies and/or in which operating companies continue to have a stake. It is a striking omission: if a company has sold patents to an NPE it has made money; if it gets a cut from the results of litigation, it receives an on-going financial benefit; if it is a stakeholder in an NPE, it is helping to drive NPE lawsuits and gets a return if the NPE prevails.

In addition, other NPEs listed by PatentFreedom include WARF, CSIRO, Tessera, InterDigital and Rambus. These are all organisations that do a lot of R&D work and license patents and know-how that underpin products made by companies that employ thousands of people and generate big revenues. It would be very difficult to define them as the “trolls” mentioned in the paper’s title. Yet presumably the actions they take to defend their patent rights and the positions of their licensees are among those suits covered in "The Private and Social Costs of Patent Trolls".

All of which means that this is a much more complex issue than Bessen, Ford and Meurer make it seem. There are many nuances in what NPEs do and there are major overlaps between their operations and the technology companies that the authors portray as victims in their paper. In the on-going debate about the usefulness or not of NPEs/trolls, these often entangled relationships should not be ignored.

The real harm

In fact, far from being victims it is possible that many of the larger high-tech operating companies themselves are part of a wider and more significant problem - growing patent office backlogs and a resultant decline in patent quality.

In September, the OECD issued a report entitled The Science, Technology and Industry Scoreboard 2011. Among its headline findings was that patent quality had declined by 20% between 1999 and 2010. “The rush to protect even minor improvements in products or services is overburdening patent offices. This slows the time to market for true innovations and reduces the potential for breakthrough inventions,” said a press release announcing the report’s publication.

And who is leading the rush that the OECD talks about? The same organisations that are primarily targeted by NPEs. Take a look at PatentFreedom’s list of the operating companies that have been involved in the highest number of NPE suits and you will see that many of them are among the top recipients of USPTO grants each year. And you don’t get hundreds or even thousands of patents annually unless you are also submitting substantial numbers of patent applications.

It does not take a great leap of imagination to see that the more patent applications a patent office is asked to deal with, not only will pendency times be longer, but that also there will be a greater chance that overworked patent examiners will not scrutinise what is in front of them as thoroughly as would otherwise be the case - something that will help to create the fuzzines and lack of clarity that Bessen, Ford and Meurer believe help NPEs to thrive. 

What's more, while delays and poor quality grants may not be too much of a problem for multinational high-tech businesses seeking to build portfolios for defensive purposes, for smaller concerns they are often extremely damaging, often terminally so if it means not being able to secure funding or develop products. In terms of harming innovation and damaging economies that surely is a far greater problem than any that may be caused by NPEs. 

  


Joff Wild
IAM Magazine
31 January 2012

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IP politics, IP litigation, Patents, IP business

Comments

RE: The NPE reality is very different to the media myth

The real parasites are not the NPEs, but the operating companies that use the innovations of others and refuse to pay a reasonable royalty and have to be sued. A solution would be baseball arbitration prior to trial. The winner in arbitration gets their legal fees, and costs, if they prevail at trial. You can also build in floors and ceilings, but the key is that the presiding Judge knows the results of the arbitration in order to enable a potential negotiated settlement.

"The Giants Among Us" is another ad hominem attack on innovation and its protection. The serves man nonsense in the article is a complete rejection of the Section II, Article 8 mandate for their statist greater good. Views in opposition can only be found in blogs such as these because it is only the big check writers that can enable such mind numbing repetitive articles and the crony capitalist nonsense like the AIA.

It would be refreshing to see an article from this same alleluia chorus that the copyright protection afforded software was a complete fraud perpetrated upon Congress because software is functional and not protectable within the ambit of copyright.

Francis Rushford, Rushford Law Group on 31 Jan 2012 @ 16:22

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