A Decade Of US Patent Reform Must Be Undone – IPWatchdog.co…


John Thorne of the High-Tech Inventors Alliance (HTIA) recently argued  in an OpEd appearing in Law 360 that a decade of patent reform must not be undone. To put this OpEd into perspective, you must first look at who Thorne represents.  The HTIA is a lobbying arm of Google, Amazon, Intel, Cisco, Dell, and others who are affectionately known as the infringer lobby because rather than licensing or buying patent rights from innovators they knowingly and intentionally infringe. Their actions are considered rational business decisions because it is cheaper and more efficient to infringe than pay, hence the term efficient infringement to describe their actions. So, it is hardly surprising that the infringer lobby that has so successfully profited from a scheme of efficient infringement enabled in large part by patent reform wouldn’t want to see those gains on the backs of inventors come to an end.

The companies that make up the HTIA – the infringer lobby – are the very companies that benefit from weak patent protection because it allows them to freely take the property of others, a phenomena that economists refer to as the free-rider problem. But this free-riding goes beyond just being unfair, it strikes at the very heart of the patent system and fundamentally prevents the threat of creative destruction posed by an innovator with better technology.  The effect is to perpetuate these monopolistic multinationals and to consolidate power into the hands of the megalomaniacs who run them.

How ironic is it that the infringer lobby – the very people trying to weaken the patent system and who ignore the patent rights of others through a free riding scheme of efficient infringement – are the ones who are seeing their monopoly power consolidated. We hear all the time that patents create monopolies, which has a nice ring to it, but isn’t true. What good is a patent that a large multinational corporation will just ignore and infringe? That certainly doesn’t create a monopoly. But oddly, by ignoring the property of true innovators the infringer lobby has grown in size, power, strength and influence. See Tech Super Giants Maintain Standard Oil Sized Monopolies.

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Naturally, Thorne preaches that patent trolls actually exist and are killing huge multinational corporations.  After all, his benefactors are the primary novelists of the fairy tale having spent millions of dollars spreading its fiction.  But stop and think about that for even half a second in an objective way and the claims don’t stand up to any level of scrutiny. In 2017, Apple had nearly $50 billion in net income, Microsoft has over $20 billion in net income, Facebook over $15 billion, Goggle approximately $13 billion. If patent trolls are attempting to kill the tech elite of Silicon Valley we all ought to be able to agree they are doing a very poor job. Profits are soaring for the tech elite. See here, here, here, here and here. The age of patent retrenchment has coincided with a tremendous boon for Silicon Valley.

Thorne also argues that tech inventions are somehow different than other types of inventions because the lifetime of tech is much shorter, so the life of a tech product expires long before the patent expires.  But this makes no sense because most tech innovations become embedded into tech products permanently.  The original invention is enhanced in some way with further inventions that are built on top of the original invention in the next generations of the product. This sinks the original invention solidly into the tech product preserving its use forever.  A real-world analogy is pouring a foundation. Even if you gut the house and rebuild you will build on the frame and foundation in place. The same is true in the tech sector. Thorne implicitly acknowledges this tech truism by highlighting a patent issued to Steve Wozniak in 1979 for a “microprocessor for use with a video display”, which is still used today almost 40 years after it was invented.

Thorne argues correctly that the pace of high tech patenting has increased.  It certainly has.  And that is obviously a result of the explosive pace of high tech innovation. Just think of all we have now that we did not have as kids.  In our youth the latest, cool “invention” was a party line telephone. Some no doubt remember the first “mobile” phones that were really anything but mobile, but at least they weren’t tethered to your home.  Now we have the Internet, Wi-Fi, smartphones, GPS, satellite radio, internet television, robotic manufacturing, robots doing surgery, drones, self-driving cars, digital cameras, enterprise software systems, automated banking, and so much more. We also have new economies start because of technology. For example, Uber couldn’t have existed with 3G technology, but is possible with 4G.

Of course, the pace of tech patenting has increased.  Virtually every product on the market today is related in some way to tech.  If it is not a tech product itself, it is an enhancement to a tech product in some way or fashion.  Where it is neither, the product is engineered, manufactured, distributed, and sold via tech products.  Tech permeates everything from your smartphone to the buttons on the shirt you are wearing. Technology is everywhere.

But despite the explosion of innovation, Thorne argues that too many patents are issued and as a result patent litigation grew by six-fold from 2000 to 2013.  Not only does Thorne fail to map that growth in patenting to the explosion of tech innovation, but he completely omits the effects of the America Invents Act (AIA) where patent suits against multiple infringers must now be filed as separate suits which has been shown to account for all the numerical increase during the timeframe he selected.  Indeed, the increase in patent litigation was a purposeful design by Congress.

Larger numbers of patent infringement lawsuits were an intentional choice, and it was demanded by the likes of the infringer lobby that Thorne represents. They were tired of getting sued as one of one hundred or one of two hundred defendants, so they convinced Congress and the Courts to make it harder and harder to sue large numbers of defendants in the same case. So, of course there was going to be more patent litigation. This argument is not only a misrepresentation, it is intentionally deceitful. Thorne knows better.

Given the logarithmic growth in patenting in America it makes more sense to compare the rate of litigation in relation to number of patents in force. That is the only true apples to apples comparison, but one Thorne and the infringe lobby do not want to do that because if they do it becomes apparent there is no increase in patent litigation despite changes to the law requiring more lawsuits for patent owners to get the same justice.

 

Thorne argues that that the litigation rate goes up because with more patents, there are more opportunities for litigation.  He says there are too many patents issued and many of them should not have been issued. Perhaps he is correct. In an ideal world if patent examiners could spend 4 months researching and examining each patent application more narrow claims would issue, or in some cases patents might not issue at all. But that is an unrealistic system, and one that even his clients in the HTIA wouldn’t support. The unspoken truth is not every patent is commercially viable.  Indeed, the vast majority of patents are not commercially viable and are never commercialized. Industry estimates generally range between 96% to 98% of patents will wind up not being commercially viable or valuable. It doesn’t make sense to do a no stone left unturnedsearch and have the system come to a screeching halt when 2% to 4% of patents will be viable and commercially valuable.

What Thorne knows, but won’d say, is that commercially irrelevant patents are not the subject of litigation.  There is no constant of commercially viable patents in relation to issued patents either, so there is no direct relationship between an increase in patenting and the fictional increase in litigation that Thorne asserts.

Litigation rates have remained relatively constant for about 150 years.  But before that litigation rates were higher.  If you buy Thorne’s thesis that more patenting means more litigation and you also wish to replicate America’s innovation explosion during that early period more than 150 years ago that lifted us from an agrarian backwater nation to the world’s most innovative economy in just a few decades, then you must conclude that today not enough patents are being issued because our litigation rate is too low and we should issue more to correct it.

Thorne also argues that high tech products are an aggregation of many inventions and that patenting these inventions slows innovation because enjoining any minor invention within an aggregated product will enjoin the entire product.

Can we stop with claims that patents inhibit innovation please? There are tens of thousands, if not hundreds of thousands, of patents that relate to smartphones. Exactly what innovation in the smartphone industry has been inhibited by patents? Even Apple’s gigantic and well drafted patent portfolio turned out to be inadequate in order to keep Samsung from copying the revolutionary design of the iPhone.

Innovators file patents for economic gain.  There is no other reason.  Getting an injunction provides no economic gain.  In fact, it is an economic loss to the inventor because patent lawsuits cost millions of dollars.  during the sewing machine wars of the antebellum period, everyone sued everyone and locked up the market.  But because everyone was trying to make money, the industry solved the dilemma through the creation of the sewing machine combine which aggregated the patents in one entity and licensed all the patents to the manufacturers.  This approach of aggregating patents is still in use today in one way or another, so this has never been problem that required any government intervention.

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In the entire history of the US patent system, there has never been a case where an inventor sought or received an injunction just for fun.  Injunctive relief creates a fair market for the invention free of any free riders. Having eliminated the free riders who are a drain on innovation because they are not paying innovators, so they can continue to push forward, it becomes possibleto establish the fair market value of the invention.  Alternatively, if the innovator wishes to be a market participant, injunctions also serve to clear the market of competition so they can get a head start for a long enough period to establish a beach head in the market that can withstand competition from infringers when the patent expires.

Tech products were marketed and sold without new technologies before the technologies were invented.  If a tech multinational adds an invention to their product, they can certainly remove it, so the entire product would not be enjoined.   They could still sell the same product they were selling successfully without that new technology having been coopted without permission.  This is being done now by tech multinationals who offer older versions of computers and smart phones without the latest technologies.

Thorne’s argument that this slows innovation is simply not true. Again, if it is true he should be able to point to examples, which he cannot, and representing companies that are enjoying record profits makes it difficult to be convincing when he proclaims death is near at the hands of patent owners.

Thorne also misleads his readers about the damage brought on inventors by the Patent Trial and Appeal Board (PTAB).  He states that only 16% of challenged patents are fully invalidated.  That figure is derived from the number of all challenged patents, including those not instituted by the PTAB.  It includes only those patents where every single claim is invalidated and does not include patents where less than all claims are invalidated. It also includes settlements as victories for patent owner, but a settlement where the patent owner capitulates and gives a royalty free license is hardly a victory. Settlements occur about 25% of the time and are not victories and it is entirely disingenuous to pretend they are.

Further, the only claims that the PTAB evaluates are those selected by the infringer, and in reality when you look at the final written decisions approximately 70% of patents reaching a final written decision by the PTAB have all claims invalidated — a stat very different from the misleading and self serving 16% figure Thorne uses.  Another 13% of patents are found to have one or more claims defective. so when the PTAB reaches a decision on the merits they find patent examiners wrong in 83% of patents, an astonishing error rate that simply does not jibe with the 96% quality the USPTO claims. If examiners are providing 96% quality on examination then the PTAB is extremely over zealous, which is what nearly every objective observer believes.

Of course, Thorne also ignores the reality that many patent owners have their patents serially challenged in what appear to be coordinated attacks until one challenger finally is successful in killing the patent. See The Real IPR Gauntlet.

Thorne also omits gang tackling, a practice which his benefactors routinely engage in.  Often a PTAB procedure invalidates only a few challenged claims leaving some still valid.  When multiple infringers file multiple PTAB procedures (gang tackling) and/or an infringer files the aforementioned series of petitions, eventually all claims are invalidated, or the inventor must walk away due to cost and abandon the patent.  This effect is entirely omitted from Thorne’s PTAB invalidation stats for no other reason but to mislead the reader.

The effects of serial challenges and gang tackling are insidious. At the end of the day the patent owner is worse off than if they had lost on the first challenge. The patent owner gets bled dry little by little defending the patent grant over and over again until nothing is left. But the way the USPTO provides its statistics can allow those who want to mislead using those statics to paint an unrealistic picture. For example, if a patent owner prevents institution 4 times on Patent A, but a fifth challenge is successful and ultimately winds up with all claims being lost, the USPTO will consider the kill rate to be 20%. Of course, the kill rate from the patent owner’s perspective is 100% because the patent is lost.

The phony statistics of the PTAB have never been more on display than in the case of Zond. Zond owned 371 claims.  By the end of the 125 “gang tackling” challenges filed against them, they owned 0.  0 claims.  0% survival.  Every claim Zond had – ended up dead. But according to the USPTO, Zond had 1,220 claims instituted out of 1,377 claims challenged. But Zond had only 371 claims? Correct. Those 371 claims were challenged multiple times across those 125 challenges.  The USPTO consideres the institution rate to be 1,220 divided by 1,377 or 88.6%. But if 1,220 out of a possible 371 claims were instituted that means from the patent owner perspective the institution rate was 329%. Regardless, Zond lost everything, yet the USPTO can with a straight face say only 88.6% of the claims were instituted.

The argument most revealing about the goals of Thorne’s benefactors is his argument that business method innovations are abstract and should not be patented.  Google’s primary contribution to the mountain of technology we all live on today is their page ranking search algorithm, which is a business method.  Facebook, eBay, Amazon, and most other tech companies are also built on business methods. These tech multinationals rely on networking effects of millions of users to attract and retain users.  When the user base becomes a certain size, it acts as a virtual monopoly. They have their size and market power and can dominate as a monopoly. They do not want others behind them to have the same advantages they had, which is why they would prefer the patent system to weaken and the USPTO to close its doors.

Successfully launching a company based on a business method requires millions of dollars spent in marketing and user acquisition.  Thorne’s benefactors have been highly successful at killing this threat by striking a blow to the primary vehicle used to attract investment – patents.  A business method startup competing with these huge multinationals must have patent protection to attract investment.  Without patents, these huge multinationals just copy the business method and, using their deep pockets and massive customer base, take the market and run the startup into the dustbin of history.

Snap Chat is an example of this.  Snap built a large customer base very quickly with a system to put rabbit ears on pictures of babies.  Facebook noticed the high rate of user acquisition, felt the threat, and tried to acquire Snap.  When Snap refused, Facebook simply copied Snap lock, stock and barrel, and then leveraged their billion users to take the market from Snap.  Snap had virtually no patents, and the patents they did have were of questionable integrity thanks to more than a decade of efforts to weaken the patent system and change the laws both in Congress and the Courts. Snap was defenseless against Facebook’s attack. If it can happen to Snap, well-funded and publicly traded company, what chance do individuals or startups have?

The real problem created by invalidating patent protection for business method patents is that it eliminates the threat of creative destruction within the marketplace, thus making these huge multinational corporations untouchable.  From a public policy perspective, the effects are damning – massive data gathering and privacy intrusion, political corruption, limits on free speech, killing startups and other economic damage.  It has had the effect of consolidating power into just a few megalomaniacs who run these huge tech corporations.

Don’t drink the Kool-Aid. Don’t fall for the myth that the largest, richest, most profitable corporations in the world are on the brink of extinction unless we continue to destroy the U.S. patent system. If you say it out loud while looking at their SEC filings reporting their financial well-being it is as ridiculous as you imagine.

 

Image Source: Deposit Photos.

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