18 February 2018

Latest Annual US Patent Litigation Data From Lex Machina Provides Insights Into the ‘Troll Narrative’

Data PresentationAlthough there are various accounts of the story – particularly as people’s memories start to fade – there is little doubt that the term ‘patent troll’, as currently employed, has its origins at Intel at around the turn of the 21st century.  As Brenda Sandburg reported at the time (in 2001), Intel’s Peter Detkin defined a ‘patent troll’ as ‘somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced.’  Ironically, Detkin subsequently went on to become a founder of Intellectual Ventures (IV), a company that has made a great deal of money from patents that it is not practicing, has no intention of practicing, and has never practiced.

Sorry – it seems I have that wrong.  According to IV’s profile of co-founder Nathan Myhvold, the company is actually ‘building a market for invention’ to enable inventors to ‘realize the value of their ideas’. It ‘manages one of the largest and fastest growing intellectual property (IP) portfolios in the world, with more than 40,000 assets and more than $6 billion in total committed capital’ and its investors include ‘many of the world’s most innovative companies and renowned academic and research institutions.’  All of which actually sounds kind of like a good thing, and not at all troll-y.  It is also notable that Detkin’s original definition would encompass most universities and research institutes.

So, where does the truth lie?  Somewhere between the two extremes, no doubt, as technology analyst Roger Kay has eloquently explained in an article on Medium this week, Where did the Patent Troll Narrative Come From?  At one end of the spectrum, there are certainly genuinely predatory ‘trolls’ using the patent system to extort payments from companies that lack the resources to fight back.  At the other end, however, are big tech companies, like Intel, Google, Facebook, and Apple, which have adopted a strategy of ‘efficient infringement’ – the practice of using a technology that infringes on someone’s patent, ignoring the patent holder entirely, and when (or if) the patentee decides to sue, tying them up in court by challenging the patent’s validity.  As I have argued in the past, slapping the positive word ‘efficient’ on the front does not alter the reality that this is also an abuse of the system, and of the infringers’ superior economic power.

In other words, it’s complicated.  As Kay notes:

Among combatants in the patent wars, entities are divided along multidimensional lines: practicing vs. non-practicing, dominant vs. upstart, technological vs. financial, inventing vs. acquiring, licensing vs. using internally, R&D-oriented vs. manufacturing-oriented, invention-focused vs. product-focused. While some of these creatures are truly odious, using the word “patent troll” to describe any of them would be to allow Intel and its allies ownership of the narrative. There are no hard and fast rules to separate them into good and bad buckets.

The latest Patent Litigation Year in Review report, from legal analytics company Lex Machina, provides some insights pertinent to the troll narrative, and in particular the impact of changes in US patent law driven, in large part, by lobbying from the ‘efficient infringer’ constituency which, as noted in this IAM Media article, ‘invested large sums in spreading a narrative around the problems posed by “patent trolls” that has been used to justify the need for a re-engineering of the US system to make it less friendly to all rights owners.’

Lex Machina’s analysis shows that since the commencement of the US patent law reforms introduced by the America Invents Act (AIA), rates of patent litigation have been in steady decline in real terms.  Furthermore, while the list of top plaintiffs remains dominated by non-practising entities (NPEs), in 2017 two pharmaceutical companies entered the top ten, with two more filling out the top 15.  And while headlines tend to be captured by a small number of very high awards of damages against big infringers, the reality for most plaintiffs is sobering.  Just 11% of all cases terminated since 2000 reached a final judgment, with around three-quarters settling.  While patentees are victorious slightly more often than defendants (around 60/40), compensatory damages are awarded in less than half of the cases won by plaintiffs, and for those cases in which ‘reasonable royalty’ damages were awarded during the three years up until the end of 2017, the median amount was just US$4.4 million – perhaps barely enough to justify litigation in a jurisdiction where the usual rule is that each party must bear its own costs of the proceedings.

While this might be bad news for the genuine trolls in the system, it is at least as bad – if not worse – for individual inventors, research groups, universities, and other innovators who are better-placed to invent than they are to commercialise their inventions, and therefore rely on licensing to secure a return from their efforts.

Patent Litigation Rate in Decline

The AIA changed the rules for filing patent complaints in the US, limiting the number of defendants that a plaintiff could sue in a single case.  It is therefore not sensible to compare ‘raw’ filing rates from before and after commencement of the relevant provisions on 16 September 2011.  Lex Machina therefore employs a different measure, ‘defendant-case pairs’ – under which each defendant in a single case is counted separately – for case filing rates.

The monthly numbers of defendant-case pairs since 2008 are shown in the chart below.
Litigation Rate
Source: Lex Machina

The ‘spike’ just prior to the commencement of AIA provisions reflects plaintiffs jumping in before the rule changes.  Aside from this, however, it is very clear that the number of cases filed has been in a general decline ever since.  In 2017, a total of 4,060 new patent cases were filed in US Federal District Courts, significantly down from a peak of 6,129 in 2013.

Top Plaintiffs and Defendants

Not surprisingly, the list of top plaintiffs in 2017 is dominated by NPEs (many of which have been accused of being patent trolls).  I say that this is not surprising because, of course, NPEs rely on licensing for income, since they do not make or sell their own products or services based upon the patents they hold.  It is therefore to be expected that they will use all of the tools at their disposal, including litigation, to secure licensees for their technology.  In comparison to 2016, however, when all of the top 10 plaintiffs were NPEs, in 2017 two are operating pharmaceutical companies, with a further two making up the top 15.
Top Plaintiffs
Source: Lex Machina

The picture becomes even more interesting when we look at the corresponding top defendants.  While a number of the usual tech company suspects (i.e. NPE targets), such as Apple, Samsung, Amazon, and Microsoft are present, there is actually a greater number of generic pharmaceutical companies on the list, with Teva Pharmaceuticals at the top.
Top Defendants
Source: Lex Machina

Even for the top tech defendants, the report notes a decline in the number of complaints over recent years.  For example, Apple’s 42 cases, and Samsung’s 37 cases, compare with the top numbers of 37 cases in 2016, 64 cases in 2015, 58 cases in 2014, and 59 cases in 2013 – and in every one of these years, either Apple or Samsung was the top defendant.

While there appears to have been a shift in litigants, it is probably too early to identify this as a trend.  It will be interesting to see what happens over the next couple of years.

Awards of Damages – Rare and (Mostly) Unspectacular

In all cases that have terminated since 2000, only 2% have resulted in awards of compensatory damages.  This is largely because around 75% of cases end in settlement, and around 15% reach a procedural termination (transfer or consolidation).  Of the remaining 11% that reach a judgment on the merits, the plaintiff is successful in a majority of cases (around 6% of the total).  However, damages are awarded in only a third of these.  Damages can be awarded in the form either of lost profits, or a ‘reasonable royalty’.  A calculation of lost profits is, of course, only available to a patentee that is an operating company which has actually lost sales as a result of infringement.  A reasonable royalty calculation is available to any plaintiff, but is the only form of compensation applicable to an NPE.

Over the three-year period from 2015 to 2017, the median amount of reasonable royalty damages awarded was US$4.4 million, while 25% of damages awards were less than US$0.5 million.  Since costs of litigation (i.e. attorney fees and other expenses) are borne by each party under the ‘American rule’, a plaintiff loses money on any case in which an award of damages is not made which exceeds its costs.  These costs can easily run to seven figures in full-blown patent infringement proceedings, so if the primary objective of litigation is to make money (as it would certainly be for most NPEs, and all ‘patent trolls’) or, at the very least, to minimise losses, seeing a case through to final judgment is an extremely risky strategy.  It is therefore not surprising that the vast majority of cases settle long before judgment.

How Much Might Trolls Be Costing the US Economy?

One of the seemingly less complicated things we have been told in the course of the ‘patent wars’ is that patent trolls have been costing the US economy tens of billions of dollars each year.  When Boston University law researchers James Bessen and Michael Meurer published an analysis back in 2012 concluding that the cost in the previous year was US$29 billion, some parts of the media treated it with the breathlessness of the announcement of a Kardashian wedding, rather than the dry academic study it actually was.  However, if Bessen and Meurer’s numbers seemed implausible then (and it was not just me who thought so), then the Lex Machina report casts further doubt on the validity of such huge costs. 

According to the canonical narrative, standard patent troll operating procedure is to sue the target (since filing a complaint in a US Federal Court is relatively cheap), and then seek a quick settlement for a sum that is considerably less that the defendant’s likely costs of litigation.  While settlement terms are almost always confidential, anecdotal reports suggest that sums in the range of five-to-six figures are typical.  My own (limited) experience is consistent with the anecdotes, at the lower end of the scale. 

While such a strategy arguably amounts to a form of extortion, at least the business decision with which the defendant is presented is a simple one that incurs minimal cost, over and above the settlement amount.  Which raises the question: is it remotely plausible, given the Lex Machina numbers, that the economic costs of genuine troll activity in the US run into the tens of billions of dollars?  I think not.  Because even if all of the 75% of new cases in 2017 that can be expected to settle were filed by trolls, and even if the average total cost of each settled case were US$500,000, and even if there were a further four times as many successful demands made by trolls, at the same average cost, that did not result in cases being filed, this still only amounts to a total cost of US$7.5 billion.

These ‘even if’ assumptions are, of course, significant over-estimates.  Indeed, they would necessarily be over-estimates even if we were to count all NPEs as trolls, because it is simple enough to confirm that not all settled cases involve NPEs.  I would be surprised if the real cost of troll activity is even one tenth of the above amount.

Conclusion – Is There a Problem With US Patent Litigation?

Each year of the past five years there have been between about 4,000 and about 6,000 patent suits filed in US Federal District Courts.  About 75% of cases settle, and only around 10% (i.e. 400 to 600) continue to a final judgment on the merits.  This is in the context of a country with around six million firms, and a GDP of nearly US$20 trillion in the fourth quarter of 2017.  In the scheme of things, then, the incidence of patent litigation, and its overall cost to the economy, does not appear terribly significant.

Furthermore, it is reasonable to suppose (contrary to the extreme assumptions in my calculations above) that a majority of the cases filed each year represent genuine disputes over infringement of valid patents, that many of these disputes are between competing operating companies, and that many settlements involve legitimate licensing deals between rights owners and technology implementers.  As such, a significant proportion of the costs involved are transfer costs, and costs that would be incurred in the operation of an ideal patent system, and should not be regarded as dead-weight costs to the economy.

The media tends to focus on trouble-spots, and to ignore the relative peace, tranquillity, and good-order of the vast majority of the surrounding world.  This is not to say that the trouble-spots are not sometimes terrible, or terribly important, but it can be hard to tell without context and perspective.  Taking a step back from the patent ‘war zone’ between the big tech companies and smaller rights-holders, from which the troll narrative has emerged, it is difficult to see any major problem requiring substantial further reform.

Indeed, if there is any problem, it is that the reforms that have already been implemented have moved the benefits of US patent system further from the reach of inventors and smaller innovative companies, reduced certainty in the value of patents, made enforcement of rights more difficult, and delivered advantages to practitioners of ‘efficient infringement’.  There is little evidence, however, of any significant impact on troll activity.


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