The Heartland Institute today is releasing my policy brief on patent abuse, one of the few areas where there is bipartisan consensus on the problem. As I write in the paper, patent assertion entities (PAEs), known pejoratively as “patent trolls,” exist to exploit weaknesses in the U.S. patent system. Their business model is built on the fact it is often cheaper for defendants to settle a patent infringement claim than to endure a lengthy court process, risking an unfavorable ruling and incurring significant legal fees. PAEs do not stockpile patents or assert the patents they control for legitimate purposes, such as defending their investment in research or development. The patent itself is usually the primary asset PAEs control with any real revenue-earning potential.
The patent abuse industry takes an enormous toll on U.S. consumers:
- In 2013, almost 6,500 patent lawsuits were filed in the United States. Suits filed by PAEs accounted for 67 percent of them, up from 28 percent five years ago, according to a 2014 patent litigation study by PricewaterhouseCoopers. The median damages award in 2013 was $4.3 million, the report also found.
- In 2008, the American Intellectual Property Law Association put the median cost of defending a patent claim at $600,000 in cases where less than $1 million was at risk. The median cost in major patent cases was $5 million.
- Frivolous patent litigation costs U.S. businesses $29 billion a year in direct costs and $80 billion in indirect costs.
Because software and technology patents can be arcane and often difficult for juries to determine differentiation, a trial is often a coin toss for defendant. Moreso if the plaintiffs bring the case in one of several federal districts notorious for finding infringement, such as East Texas. The decision to settle, even if the patent claim is questionable or even outright frivolous, is often a question of economics. The defendant agrees to pay the demanded license fee rather than risk heftier legal costs of a trial and the possibility of losing all rights to the product.
Enterprises should be using the marketplace, not the courtroom, to evaluate investment and return opportunities. Patent reform can help by changing the cost-benefit ratios of litigation so frivolous patents are deterred but plaintiffs with legitimate cases are still able to bring a case.
Specific recommendations for reform include:
- Federal legislation should empower the United States Patent and Trademark Office (USPTO) to better address the changing nature of patents, particularly regarding software. USPTO needs to better understand methodologies and mechanisms in the way software is written. It also needs clearer rules on what end-functions – shopping carts, location mapping, web indexing, and cross referencing, for example – can be deemed proprietary and subject to license.
- Courts are important in patent enforcement, but a lack of suitable guidelines from USPTO leaves juries and courts too much leeway in interpreting patent law. The U.S. Supreme Court has provided some guidance for lower courts in calling on plaintiffs to be specific as to their infringement claims. Congress and state legislative bodies should follow the Court’s lead and craft legislation that demands higher and more specific standards for the establishment of infringement.
- Congress should confirm President Obama’s nomination of Michele K. Lee as director of USPTO. The agency has a poor reputation when it comes to evaluating software patents and other high-technology innovation. Placing Lee, currently USPTO acting director and a former Google executive, in charge of the agency will address this perception and help implement a real shift in USPTO’s approach to contemporary patent issues.
- The White House, through the U.S. Commerce Department and U.S. Trade Representative’s Office, should use the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership negotiations to address the growing problem of state-sponsored patent trolling. If governments persist in using frivolous patent suits to block U.S. entry into their domestic markets, the United States should turn to treaty organizations such as the World Trade Organization for enforcement and redress.
- Regulatory bodies such as the Federal Communications Commission that set standards necessary for the interoperability of devices should avoid heavy reliance on patented technology. These decisions result in a government-mandated monopoly that leads to overpricing of licenses, as seen with the ATSC television standard.
The complete paper, Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions, can be found here on the Heartland Institute web site.