No one agrees on the definition of a "patent troll". To some, a patent troll is any non-practicing entity, which would include a university. To others (including the non-practicing entities themselves), a patent troll is an entity that collects "bad" patents overlooked by the patent office and (ab)uses them to extort money. In the latter definition, the troll's patents would likely be invalidated or severely narrowed on re-examination.
However, almost everyone agrees that there is a patent troll problem. Patent trolls exist, are taking advantage of the legal system, and are imposing a real cost on innovative companies and end users.
Here are some ways, in my opinion, that the Innovation Act could (probably) (at least partially) alleviate the patent troll problem:
Patent litigation against customers of a product (e.g., lawsuit against the owner of a wifi router) can be stayed if there is simultaneous litigation against the manufacturer. Patent trolls currently have an incentive to target customers because they are more likely to pay a relatively small settlement (or avoid the product, putting additional burden on the manufacturer).
Patent holders must provide more information (list of products that are infringing specific claims of their patents) when filing a lawsuit. This allows defendants to be better prepared and would probably discourage some frivolous lawsuits.
The court can require the losing party in a patent infringement case to pay the legal costs of the other party. This discourages patent trolls from filing frivolous lawsuits which they would likely lose.
Of course, the Innovation Act might not go far enough and the patent troll problem could continue in spite of it. It could also have unintended consequences. For example, fee-shifting could increase the risk and expense of patent lawsuits or discourage smaller patent holders. Overall, however, the bill appears to be positive step forward.
In my last post, I discussed startups applying for and asserting patents. Some startups do but many don't.
The scenario can be inverted: patents can be asserted against startups. Generally, many startups do not need to worry about patent licensing or infringement initially because they are not yet successful. They are not big targets for a lawsuit.
However, startups are vulnerable to "patent trolls". Patent trolls target smaller companies more than larger ones. Smaller companies lose more in time, money, and operational impact relative to their size. Startups do not have the financial and legal resources available to larger companies. They prefer settling, to the uncertainty and expense of the courts, even if a ruling would likely be favorable.
75 percent
said that an NPE had made a demand on their portfolio. For tech-focused
VCs, that number reached 90 percent.
For successful or growing startups, they may be sued by larger competitors as well. The larger competitor may seek an injunction, legitimate or not, in order to push the startup out of business.
Recent reform (fee shifting to curb frivolous lawsuits, improved patent quality, and education on responding to patent demands) could have a positive effect in the future.
The likelihood that a startup will apply for a patent is largely dependent on the startup's industry and investors. Semiconductor and biotech ("hard tech") startups are over three times as likely to apply for patents than "soft tech" startups. In fact, although patents are declining in popularity overall, startups that have applied for patents in the past are applying for more patents. This suggests a desire but a minority of startups to build a patent portfolio.
Software startups are apparently much less likely to apply for patents. Many startup founders and investors are ideologically opposed to software patents. Competitors are less likely to sue for patent infringement in software than in other industries. Intellectual property lawyers advise against applying for patents because it is a poor investment of resources for a startup. Here are a summary of some commonly cited reasons:
Software startups don't have specific ideas that are worth patenting. Their ideas are often a combination of existing ideas.
Applying for a patent is often expensive, when you include time and attorney fees, especially if the patent application is initially rejected. It is also a distraction.
Software patents can be engineered around, unlike pharmaceutical patents.
Patent infringement is hard to detect and expensive to investigate. It isn't clear if the "secret sauce" of competitors infringes.
Competitors may find prior art in order to invalidate or narrow the patent.
Patent litigation is expensive and consumes time which is valuable for a startup. The startup may succeed, fail, or pivot long before the case is settled.
Patent litigation in Silicon Valley can be bad for publicity and reputation.
However, "hard tech" startups in the semiconductor and biotech have good reasons to apply for startups. They have higher upfront research and development costs and a specific, novel idea which is not merely a creative combination of existing ideas put to practice. To them and their investors, a patent portfolio is a valuable asset that may encourage large companies to acquire them.
The most frequent plaintiff in the dataset [is] Apple. Apple has a uniquely aggressive litigation history when compared to the rest of the market leaders and Apple's stance may have effected a more general increase in litigation within the market. First, Apple has filed more lawsuits than other market share leaders. Second, Apple began asserting its design patents related to its smartphone in 2011 and prior to these lawsuits, design patent suits were vary rare in the market. Finally, patent infringement litigation saw a substantial increase after Apple's broad patent litigation was filed in 2011. Apple's aggressive litigation posture may be spurring litigation throughout the market and may be motivating competitors to acquire additional patents in order help them strengthen their defensive position.
Another study agreed that Apple has an aggressive approach. Apple has famously sued Samsung, Motorola, HTC, and other competitors around the world.
According to Mitchell Hall in PC Magazine:
This whole patent war is one that Apple, and Steve Jobs in
particular, started, upending a long-standing "gentleman's agreement"
between U.S. mobile phone companies; all had competing patents but were
generally happy to license them to each other
There is some truth to this. Nokia, once the largest manufacturer, licensed its numerous patents to competitors as part of its day-to-day business. Apple, on the other hand, preferred to keep its technology under closed doors.
In 2010, when Apple filed lawsuits against HTC, then-CEO Steve Jobs stated:
We can sit by and watch competitors steal our patented inventions, or we
can do something about it. We’ve decided to do something about it. We think competition is healthy, but
competitors should create their own original technology, not steal ours.
I can think of two explanations for Apple's aggressive patent litigation.
First, Apple (especially Steve Jobs) wanted to distinguish their product from the competition. They did not want their competition to use their technology, even if they received royalties as Nokia had. They wanted their technology to be exclusive to their branded product. To be honest, I suspect that this was more for ideological or philosophical reasons than for profit.
Second, Apple is losing market share to Android manufacturers. Apple has cash and legal resources on hand. Litigating slows down the competition and gives Apple a competitive edge. After all, Nokia, which had itself been losing market share to Apple, triggered the smartphone wars by suing Apple.
Last August, The US Trade Representative (USTR), delegated authority by the Obama administration, vetoed an ITC ban on the
importation of older iPhones and iPads into the United States market
over a Samsung patent that was deemed standards-essential. This was the first veto of an ITC ruling in decades.
Many people, including The New York Times editorial board, a group of bipartisan Senators, and antitrust lawyers, advocated for the veto. To them, the ITC ruling was anticompetitive and would have set a precedent for owners of standards-essential patents to abuse the system with an overly aggressive ITC ruling. Unlike a case at a district court, decisions can be made relatively quickly at the ITC. The Obama administration recommended that the ITC standard for obtaining an injunction be changed.
But is it protectionism? Florian Mueller called the allegations propaganda because "there's a difference between standard-essential patents (SEPs) such as the patent at issue in Samsung's offensive case and non-SEPs such as the ones underlying the import ban Apple won against Samsung". He also claims that if a protectionist agenda existed, it could have been pursued earlier and with much greater force by having the Department of Justice investigate the standards-essential patents. The European Commission had issued a preliminary antitrust ruling that led to Samsung dropping its requests for sales bans on Apple products claimed to infringe its standards-essential patents.
I don't think it is protectionism. But if South Korea thinks so, then there may be harmful political repercussions regardless of whether protectionism was intended.
A paper titled "An Examination of the Economics of the U.S. Patent System" takes an opposing view against recent ideas on patent reform, such as "anti-troll legislation". These ideas include making lawsuits more difficult for so-called "patent trolls" (forcing lawsuits to be filed individually, for example) and invalidating "abstract" patents.
The paper contests the term "patent troll", which many of us identify as a major problem in the patent system. We see non-practicing entities as parasites. The authors of the paper, on the other hand, see them as "independent inventors, universities, small patent-based businesses, practicing companies and other legitimate patent holders who legally and rightfully enforce their hard-earned patent rights.".
I think there is some merit to this argument. Individuals, small businesses, and universities, can develop ideas into inventions. Although they don't have the ability to manufacture their inventions, surely they should be able to apply for patents and receive royalties from manufacturers. Right?
Now in the interest of full disclosure, I must admit that I have difficulty accepting many of the authors' arguments. For example, they call the "patent troll" problem "fiction created by large corporations who suffer the consequences of infringement and wish to steal inventions without such consequences...and by lobbyists like the Electronic Frontier Foundation...who are paid incredible sums of money to maximize the fabricated 'patent troll' problem." However, I disagree -- patent trolls are a real problem. High-stakes patent lawsuits increase risk, discourage innovation and raise the costs for manufacturing, which get passed down to consumers.
In fact, I support the EFF, a civil liberties group, with a small donation each year, so I have difficulty accepting that characterization. Indeed, the EFF has a patent reform program (for software patents), a patent busting project (to invalidate bogus patents), and has received a half-million dollars in funding for these projects, but I see those as good things that protect software developers and users alike.
It's also worth mentioning that one of the author's is CEO of AmiCOUR IP Group, which submitted an amicus curiae brief that sided with i4i (a non-practicing entity) in i4i v. Microsoft, a 2009 case in the Eastern District of Texas. Although the case was finally appealed to the Supreme Court and Microsoft was unsuccessful at invalidating the patent, many in the tech industry at the time thought that the patent was generic, and the judgment extreme. i4i is not the best example of a patent troll, since it does have a product of its own, but Microsoft did compare it to one.
In the continuing patent reform debate, we are likely to see a strange union of software developers, hardware manufacturers, and civil liberties groups pitted against another strange union of universities, patent owners, patent trolls, and attorneys.
Alice Corp. v. CLS Bank International is an upcoming Supreme Court case involving the patentability of software programs. Specifically, the Court has posed two questions:
What test should the court adopt to determine whether a computer-implemented invention is a patent ineligible "abstract idea"; and when, if ever, does the presence of a computer in a claim lend patent eligibility to an otherwise patent-ineligible idea?
In assessing patent eligibility under 35 U.S.C. § 101 of a computer-implemented invention, should it matter whether the invention is claimed as a method, system, or storage medium; and should such claims at times be considered equivalent for § 101 purposes?
The case has received inconsistent verdicts during appeals. Initially, CLS Bank sought a judgment that Alice's four patents on electronic methods and computer programs for financial-trading systems were invalid. Alice then countersued for infringement of its patents. The district court judge ruled that the patents were abstract and therefore patent-ineligible. Alice appealed and a panel at the Court of Appeals for the Federal Circuit overturned the district court decision. The panel ruled that the patents were valid. CLS petitioned for a rehearing and a new panel at the same court reversed the previous panel's decision. Although seven of the ten judges on the new panel agreed that the patents were invalid, they wrote incompatible opinions. Alice then appealed to the Supreme Court.
The software industry has been observing the case closely. 27 amicus curiae briefs (legal opinion by a third-party to the case) have been filed.
Tim Berners-Lee, inventor of the World Wide Web, argued that the Supreme Court should take the opportunity to abolish software patents. I remember hearing similar sentiments before Bilski v. Kappos (2010), a case involving a business patent on hedging. The Supreme Court, to the disappointment of many, refused to limit or clarify patent eligibility -- "business as usual".
Software patents are a tricky issue. A study from the Government Accountability Office found that a disproportionate share of patent cases concern software patents. James Bessen claimed that this is because software is more likely to have fuzzy boundaries and particularly prone to broad and vague patents. He also claimed that "the patent troll crisis is really a software patent problem".
Software patents as we know them today weren't always legal. In a trio of cases -- Gottschalk v. Benson (1972), Parker v. Flook (1978), Diamond v. Diehr (1981) -- the Supreme Court held that software algorithms weren't patent-eligible. In 1982, Congress created a new court, the Federal Circuit, to hear patent cases. The Federal Circuit reinterpreted the Supreme Court's decisions,
particular Diehr. By 1998, in State Street Bank v. Signature Financial Group, the Federal Circuit had opened the floodgates to software and business method patents.
Until recently -- Bilski v. Kappos (2010) and Mayo v. Prometheus (2012) --- the Supreme Court hasn't interfered with the lower court's new interpretations. By not interfering, the Supreme Court may have implicitly accepted the broadening of patent eligibility and legality of software patents. Bilski and Prometheus could suggest a change in the future.
I would like to limit (if not abolish) software patents, but given the shear number of software patents already granted by the USPTO, and the difficulty of distinguishing a "software" patent from another patent, this would be very difficult. Interest groups both in favor and against software patents would also politicize the issue.
Although Google's desperation for building a patent portfolio is understandable, it's not immediately clear why Google would acquire Motorola for a whopping $12.5 billion. And then sell it for $2.9 billion. And then call this deal a "success".
I think the Motorola transaction has been a success for us. Financially, we bought the asset for $12.5 billion. It had $3 billion in cash; we were able to sell the Home division for $2.5 billion; we ended selling the handset division for $3 billion. There were some other tax assets as well. When you work through the math, you realize we spent between $2.5 billion and $3.5 billion for the patent assets.
For comparison, it cost Rockstar Consortium (includes Apple, Microsoft, Blackberry, Sony, and Ericsson) $4.5 billion to purchase 6,000 smartphone and digital communications-related from Nortel in 2011. The Motorola acquisition doesn't seem so bad after all.
The Nortel patents may have more proven value though. As mentioned in my last post, Google/Motorola hasn't had the greatest of success convincing judges that infringement of its standards-essential patents necessitate great damages or injunctions.
Regardless, selling Motorola to a dedicated hardware company made sense. Google has little experience with hardware or manufacturing. Motorola was already operating at a loss when Google acquired it. Afterwards, the Motorola division lost $1.1 billion in 2012 alone. These losses make the Motorola acquisition even more expensive in the long run.
On the contrary, owning Motorola had the potential to hurt Google's experience with software. Preferential treatment of Motorola would discourage other, more successful Android manufacturers like Samsung, HTC, and LG. In fact, after Google bought Motorola, Samsung and LG started developing their own smartphone operating systems.
From Lenovo's perspective, it is a successful hardware company -- the number 1 PC manufacturer (although that might soon be HP). It is seeking to expand its market, especially if the market moves away from personal computers. Lenovo had just acquired IBM's x86 server division. Given Lenovo's lack of smartphone market share in the US, its success with hardware, and its success at acquiring U.S. companies, it makes sense to expand the business from personal computers to both servers and smartphones.
A few posts ago, I briefly discussed patent stockpiling. Likely in response to patent stockpiling by its competitors, Google bought Motorola Mobility for $12.5 billion.
Google's CEO, Larry Page, wrote
that the acquisition "would enable us to better protect Android from
anti-competitive threats from Microsoft, Apple and other companies." A similar statement was repeated in a press release.
Motorola had 17,000 patents and 7,500 more patents pending.
At the time of the acquisition, Motorola was in litigation against two companies: Microsoft and Apple.
In 2013, a judge ruled that Microsoft would pay under $1.8 million in yearly royalties for Motorola's standards-essential patents on H.264 (video format) and 802.11 (wifi). Standards-essential patents must be licensed to other parties at a so-called "reasonable and non-discriminatory" (RAND) rate. In this case, the judge ruled that Motorola was not acting reasonably. Instead, the appropriate royalty rate for H.264, for example, was 0.55 cents. That's not a lot of money compared to how much Google paid for the patents.
The litigation against Apple has turned sour. Apple has already been issued rulings in its favor. Other cases have dismissed. A judge described Motorola's demands as "crazy".
Google may have thought that patents required for widely-used technologies like wifi or a common video format could be used as a powerful weapon (or powerful defense), but judges don't that's reasonable.
Motorola's strategy of demanding prohibitive royalty rates (only to have
an excuse for seeking injunctions) and bringing out-of-this-world
damages claims over FRAND-pledged SEPs has failed all the way, and the
Federal Circuit ruling on the Posner appeal will be yet another blow to
Google's strategy relating to the patent portfolio that was the primary
reason for paying $12.5 billion for Motorola Mobility. Google is free to
pay crazy prices for patents. But it can't expect companies like Apple
and Microsoft to be crazy enough to accede to its demands, and it's been
unsuccessful so far to find crazy judges to side with it.
However, standard-essential patents still have important uses: they put their owner in a better position to negotiate cross-licensing agreements and can be used against others who don't have standard-essential patents. Google probably wants to encourage its competitors to cross-license.
This is an additional mini-blog post that I thought would be interesting because it might be controversial. Food for thought.
We must keep in mind that despite the magnitude of damages discussed
in court cases, no country has yet to interfere significantly with the
sales of major smartphones. For example, when Samsung won a ban on older
iPhone and iPad models at the International Trade Commission, President
Obama chose to veto the ban.
One prominent blogger, Tero Kuittinen, bitterly wrote
No matter
what patent infringements may have taken place, judges simply cannot
stomach issuing rulings that might actually have a material impact on
major phone vendors. As a result, sales injunctions are typically
limited to minor models (like HTC One mini) and then even those are
stayed by appellate courts.
And once various appeals have been heard and processed, the models in
question are 18 months or older — effectively at the end of their
product runs.
The end result is that the patent system is effectively becoming
welfare for people who have double degrees in engineering and law [emphasis added]. IP
lawyers can charge upwards of $1,000 dollars per hour, but the work they
do will never have any substantial impact on the competitive landscape
in the phone industry.
In 2009, Nokia, once the leading cell phone manufacturer, sued Apple over patent infringement. Apple responded with a countersuit. The two litigants filed a series of simultaneous lawsuits in different jurisdictions and countries over the next two years.
In 2011, Apple settled with a one-time payment and continuing royalties. The terms of these patent licensing agreements are confidential.
Nokia has chosen to hold on to its patent portfolio despite selling its mobile device business to Microsoft for $5 billion. Instead, it granted Microsoft a 10-year patent license for an additional $2.2 billion.
Nokia has now successfully
licensed its patents to Microsoft, Apple, Samsung, and HTC. Microsoft itself
receives patent royalties from about 20 Android manufacturers. With this in mind, Nokia
will likely pursue the other Android manufacturers, despite no longer having a smartphone business of its own.
Thus, Apple's settlement with Nokia is a win-win. Apple has plenty of cash on hand ($160 billion!) to afford the settlement. By settling, both companies will free up resources to litigate against Apple's primary competitors, Android manufacturers.
In the ongoing smartphone patent wars, all sides are stockpiling patents.
Apple, Microsoft, Blackberry, Sony, and Ericsson jointly formed Rockstar Consortium to purchase patents from bankrupt Nortel. In 2009, Nortel, formerly a major telecommunications manufacturer, began liquidating its assets. After selling some cellular technology patents to Ericsson, 6,000 smartphone and digital communications-related patents were sold to the consortium for $4.5 billion in 2011. Google had made a losing bid of $3.14 (π) billion.
A similar consortium, CPTN Holdings, including Microsoft, Apple, and Oracle, had acquired 882 patents as part of the sale of Novell, a software company, to Attachmate. The US Department of Justice expressed antitrust concerns and the deal was changed in order to protect Linux-related software, on royalty-free terms. It's worth noting that Microsoft and Linux developers have had their own patent disputes -- Microsoft has been accused of "feeding patent trolls" by selling their own patents to small companies that in turn use those patents to litigate against Microsoft's competitors.
Google's Chief Legal Officer, David Drummond, wrote on Google's blog that this was "a hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents...our competitors want to impose a 'tax' for these dubious patents that makes Android devices more expensive for consumers. They want to make it harder for manufacturers to sell Android devices. Instead of competing by building new features or devices, they are fighting through litigation." From Drummond's point of view, Microsoft and Apple, two well-known competitors, had colluded together to strangle Google.
However, Google has intensified its own patent portfolio. Only 11 days after losing the Nortel patent auction, Google purchased 1,029 patents from IBM and 1,023 additional patents the following month. Google then acquired Motorola Mobility for $12.5 billion. Google's CEO, Larry Page, wrote that this "would enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies." Motorola had 17,000 patents and 7,500 more patents pending.
Microsoft's patent licensing strategy provide it with two major benefits. First, Microsoft receives a major source of a revenue. But perhaps more importantly, it places a price tag on an otherwise free-of-charge mobile operating system distributed by its competitor. In an interview with the Wall Street Journal, Microsoft's then-CEO, Steve Ballmer, said "It's
not like Android's free. You do have to license patents."
