3. The Good, the Bad, and the Ugly, January, 2014: Patent Quality and Patent Litigation

Introduction: very little comment on the GAO report

The Government Accountability Office (“GAO”), which is the investigative arm of the U.S. Congress, was charged by section 34 of the America Invents Acts with studying patent litigation in the United States and producing a report related to Non-Practicing Entities (“NPEs”) and Patent Assertion Entities (“PAEs”)[1]. The study and subsequent report were to review, among other topics, the volume of patent litigation, costs of such litigation for various parties, and the impacts of such litigation on the economy and commerce of the United States. This is a fairly tall order for such a complicated topic, even for the GAO, but the study was conducted and a 56-page report published on August 22, 2013.[2]

Given the great importance of this topic to patents, innovation, commerce, and the economy generally, one would have expected to see very heavy commentary on this GAO report. In fact, there are a few blog entries, most of which merely notify the public of the report and summarize some of the key provisions, but these are few in number, and there is almost no in-depth analysis of the report. Why this unexpected gap in commentary? Is the GAO report really so lacking in insight or importance?

What the GAO said: the good, the bad, and the ugly

The GAO presented many statistics and graphs, and summarized many findings, but one of the key discussions focuses specifically on the reasons for large increases in the numbers of patent infringement suits being filed in recent years. The GAO interviewed 44 people knowledgeable about patent litigation, and coined these experts “stakeholders”.[3] According the GAO, at pp.28-36 of the GAO Report, this very diverse group of experts noted three reasons for the great increases in numbers of patent cases over the past few years:

“(1) unclear and overly broad patents,”
“(2) the potential for disproportionately large damage awards,” and
“(3) the increasing recognition that patents are a valuable asset.”

Let’s call these reasons (1) the bad (unclear patents), (2) the ugly (large damage awards), and (3) the good (recognition of value), but let’s deal with them in the order of (3), (1), and (2).

The Good – Increased Understanding of Legal Rights

(3) “Several stakeholders…said that the recognition that patents are a more valuable asset than once assumed may have contributed to recent issuance trends and patent infringement lawsuits”, p.34. In the past, patents were used only “to protect inventions”, but today, technology companies in particular see patents as valuable and important to corporate strategy, p.34.

We can only call this consciousness “good”, and if the trend causes a continuing increase in patent applications and lawsuits, that’s “good”, too. People who formerly did not know of their legal rights, are now aware of their legal rights, and they should enforce them. People are now aware that technology efforts, R&D, and entrepreneurship, can be rewarded in new ways, and they should realize these rewards. To the extent that this is the reason for increasing numbers of lawsuits, one might conclude that there is nothing at all wrong in the increasing numbers of patent lawsuits.

The Bad – Deficient Patents

(1) That conclusion would be wrong, however. The fact is that some of these patents are bad, and if they are bad, then the applications that generate the patents, and the lawsuits based on bad patents, are also bad. By “bad patents”, the intention is patents that are low-quality. What deficiencies in drafting cause patents to be “bad”? The GAO correctly noted two deficiencies:

– First Deficiency in Drafting: “unclear patents”: There are very many reasons why patents are “unclear”, and in fact, clarity or unclarity of patents, including problems such as shifting terminology, missing definitions, contradictions between different parts of a patent, etc., are the main topic of my recent book[4], but merely to list some of these problems is to make obvious why they cause patents to be “bad”.

– Second Deficiency in Drafting: “overly broad patents”: This is actually two deficiencies rolled into one.

“Overly broad” certainly includes “unclear patents” where the unclarity leaves the patent claims broader than they should be, and to that extent this problem overlaps the first problem. Software claims in which critical functions are presented (and accepted by the PTO) as black boxes rather than in detail, is one such problem.[5]

Alternatively, “overly broad” may also mean, “overlapping prior art, which should have prevented the claims from issuing in the first instance”. This definition of “overly broad” is true for software patents, but also for hardware patents and all other kinds of patents – claims must have enough specificity so that the patent examiner knows what is claimed, and the examiner must have sufficient time, resources, and assistance, to find the most relevant prior art.

To the extent that plaintiffs are suing on patents with unclear and overly broad claims, or rather specifically because the plaintiffs are suing to enforce these kinds of claims, the phenomenon of increasing numbers of patent lawsuits is bad.[6]

The Ugly – High Damage Awards

The problem noted by the GAO appears not to be “damage awards”, nor even “large damage awards”, but rather “disproportionately large damage awards” that apparently encourage lawsuits that should not be brought. I call this “the Ugly”, which is short for “the ugly truth”, and that is:

Money drives the patent system, as it does many other areas of law and business.

I agree, and I imagine that the vast majority of business people would agree, that “disproportionate” damages should not be awarded. The GAO properly noted the death of the automatic 25% damages rule, and the higher bar for plaintiffs to obtain enhanced damages. But even with these changes, and with other changes to come, there are still going to be high damage awards, patent holders of all kinds will still be motivated to sue to obtain damages, and at the end of the day, it truly is the possibility of money that drives not only patents, but in fact the entire R&D effort in the private effort. The “ugly truth” is that making money is a key motivator in Western society, and has been one of the key factors in Western success. No one supports “abuse” or “disproportion”, but money will remain a motivator.

CONCLUSION:

This short report is actually an excellent summary of a philosophy for the patent system. The patent system should support:
(1) Recognition of legal rights – “the good”,
(2) Reducing the problem of poor quality patents – reducing “the bad”, and
(3) Maintaining a profit motive (but not abusive or disproportionate) – “the ugly”.

Notes:

[1] Whether or not there is really a different between “Non-Practicing Entity” and “Patent Assertion Entity” is not entirely clear. Professor Colleen Chien defines the PAE as “a company that asserts patents on existing products as a business model”, and classifies the PAE as only one type of at least seven kinds of NPEs (the others being Defensive Aggregators, Corporate Monetizers, Universities, Inventor Monetizers, and Special Purpose Patent Monetizers). “Patent Assertion Entities”, presentation by Professor Chien to the DOJ and FTC on December 10, 2012, available at www.justice.gov/atr/public/workshops/pae/presentations/290073.pdf, at pp.4-5. In a later presentation, entitled “Patent Assertion and Startup Innovation”, Open Technology Institute, September, 2013, available at http://www.newamerica.net/sites/newamerica.net/files/policydocs/Patent%20Assertion%20and%20Startup%20Innovation_updated.pdf, Professor Chien says, at p.3, “entities that assert patents as a business, referred to in this report interchangeably as patent assertion entities (PAEs) and non-practicing entities (NPEs)².” Footnote 2 is explained at p.35: “We defined non-practicing entity (NPE) in our survey as ‘an entity that asserts patents as a business, not including universities or startups.’” So is the PAE one of only seven types of NPE? Or perhaps NPE and PAE are equivalent terms, but both of these terms exclude universities and startups? In either case, the GAO in its report is clearly referring to private companies asserting patents, and probably does exclude universities and startups with products or services. [Note: Web sites last viewed on last viewed on December 24, 2013.]

[2] The GAO’s report, entitled “INTELLECTUAL PROPERTY: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality”, Report GAO-13-465, August 22, 2013, available at http://www.gao.gov/assets/660/657103.pdf (last viewed December 24, 2013).

[3] According to “Appendix I: Objectives, Scope, and Methodology”, GAO Report at pp.48-49, these 44 stakeholders included 10 from operating companies and industry groups, 8 from “patent monetization entities” and research firms, 14 legal commentators, economists, and consultants, 2 representatives of large research universities, 2 patent brokers, 4 venture capitalists, and 4 small inventors at either software startups or an inventor advocacy group. The identities of the stakeholders are not reported, so no opinion can be formed on their quality or possible biases, but one must applaud the GAO for acquiring expert comment from a very wide variety of sources.

[4] The book is TRUE PATENT VALUE: Defining Quality in Patents and Patent Portfolios, (True Value Press, July 5, 2013). The core of this book is 20 cases studies, with more than 50 patents, in which I say, “this claim is good”, or “this definition is bad”, or “the patent would have been much stronger had it been written in this way…..”

[5] TRUE PATENT VALUE presents multiple examples in which software claims generated verdicts of millions to hundreds of millions for dollars for the patent holders, including one case where the software claims won while the hardware claims lost. I do not subscribe to the view that says all software patents are inherently suspicious, and I certainly do not agree that all software inventions should be non-patentable, but it is true that some software patents are not good because of unclarity and failure to set limits.

[6] Lack of clarity and overly broad claims are discussed at pp.28-32 of the GAO Report. Issues of patent quality, be it high-quality or low-quality, will be a major focus for future entries in this blog, both as to individual patents and as to portfolios of patents.

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