The rise of patent monetization entities Part One: the situation in the US

When this Kat first set foot in Iceland, fascinated by the countless steamy glaciers, wind-swept lagoons and colourful mountains (here is this Kat's favourite landscape photographer), he discovered that elves, trolls and other magical creatures which populated Icelandic fiction and sagas. But he could not predict that, some ten years later, the world would have been on a quest to find and defeat modern patent trolls, which seem to have escaped from the fictional world, to take a preeminent place in today's patent law.

A benevolent troll? (John Bauer)

As with any magical creature, there is some uncertainty about the trolls' characteristics, but they are usually thought to be creatures (companies) that hold a portfolio of patents, but do not commercially manufacture their inventions, focusing instead on asserting their patents (or threatening to) in courts, in order to secure lucrative licensing agreements. The risk is that these non-practising (NPE) or patent-assertion entities (PAE) may engage in hold-up practices, threatening litigation or seeking a preliminary injunction against companies which have already invested the sunk costs for bringing the allegedly infringing product to the market (this is a simplified take on the issue: to dig deeper head here, here or here).

Although the phenomenon of patent trolling has a worldwide dimension, several studies showed that it developed differently in the US and EU, partly due to the different rules that govern patent issuance and litigation in the two continents. This Kat plans to provide some thoughts on the current situation in the EU, including plausible developments related to the Unified Patent Court agreement (UPC), in a second part of this post. In the first part, instead, we look at the situation in the US, thanks to a research paper published yesterday by Sara Jeruss, Robin Feldman and Thomas Ewing, which analyses 13.000 patent cases from recent years (2007-2008 and 2011-2012). The study uses data provided by Lex Machina (which also provided data for a US Government Accountability Office study on the same issue - a comment based on the GAO's data can be found here), a company which specialises in collecting and analysing IP litigation data (founded by Professor Mark Lemley at Stanford University). The researchers observed that there has been a steady rise in the number of infringement cases brought by patent monetization entities: in 2012, PMEs filed 56% of the patent lawsuits in the US, and occupied nine out of ten spots in the top ten list of patent litigators. There also appears to be an active market for patent transfers before and after litigation. Further, data hint at an increase in the number of patents filed for the primary purpose of assertion.

The authors opened their paper with a brief theoretical overview of the literature on NPEs. According to several studies, the phenomenon is rapidly rising, as the number of lawsuits initiated by NPEs constantly increases and remains much higher than that of commercially operating companies, on a per patent basis; the remedies applied so far (e.g. the Supreme Court's ruling on injunctions in eBay Inc. v MercExchange LLC, and the new joinder rules introduced by the America Invents Act, which allow the injunction of further defendants only

'if the plaintiff seeks joint or several relief or if the cause of action for each defendant results from the same transaction and gives rise to a common set of facts') have proven only marginally beneficial. Instead of NEP or PAE, the study uses the expression 'patent monetization entity' 

(PME), defined as 'one whose primary focus is deriving income from licensing and litigation, as opposed to making products' [Merpel suspects that this definition may be too broad, as it also encompasses entities whose primary focus is upon licensing due to the fact that their core activity is not the manufacture of new products, but the research and development of new technologies - typically, the risk of hold-up is much greater when the PME is not an inventor itself, but merely a company that trades, manages and asserts patents (some thoughts on this here)]. To identify PMEs, and to distinguish them from operating companies, the researchers turned to (i) public lists of known operating companies, (ii) the companies' websites, (iii) court filings, state incorporation records, patent assignment records and external entity description; (iv) company press releases, (lack of) evidence of operating status and address (or its identity with that of the litigation counsel). Let's have a look at the study's main findings:

(1) The majority of infringement lawsuits in the US now comes from PMEs

The data confirm that patent monetization entities are having a dramatic impact on US patent litigation. Patent litigation filed by patent monetization entities has increased substantially in recent years. The increase can be seen both in terms of actual number of lawsuits filed and in the number of defendants sued by monetizers. In 2007, monetizers filed only 24.5% of the patent infringement lawsuits. Monetizers filed 40% of the lawsuits in 2011. Most significantly, in 2012 monetizers crossed into the majority, filing 56% of patent infringement lawsuits.

Data also allowed the authors to observe that the number of defendants sued by operating companies has remained remarkably steady in recent years, whereas the number of defendants sued by patent monetization entities has increased from 1809 in 2008, to 6208 in 2011 (a decrease in 2012, to 4475 defendants, is tentatively attributed to the America Invents Act - but the authors warn that more data are needed before drawing any conclusion about its significance). These findings suggest, according to the paper, that there has been 'an increase in litigation activity, rather than simply an increase in the number of cases filed'.

(2) 9 out of 10 top lawsuit filers in the US are PMEs

Looking at the top 10 filers for the full dataset, 9 were monetizers and only 1 was an operating company. Moreover, other data indicate that the sole operating company on this list, Brandywine Communications Technologies, behaves in a manner that is more analogous to monetization companies than to many operating companies.

The authors provided the following graph that lists the top ten filers of lawsuits for patent infringement in the US (operating companies in blue, PMEs in red):

(3) PMEs are allergic to courts - best climate is in Texas

[T]he data suggest that patent monetizers rarely proceed to trial, or even to a summary judgment decision. When they do proceed to the summary judgment stage, monetizers win even more rarely. Out of 165 cases decided at summary judgment, we did not find a single one in which a patent monetization entity, individual or trust bringing the lawsuit won. ... Out of the 95 cases with a judgment at trial outcome, there were only seven cases in which a patent monetization entity that brought the case, won the case.

Following a trend that is also valid for lawsuits involving operating companies, lawsuits brought by PMEs are likely to be settled before a decision is issued, in three cases out of four [which is 75% of the cases, in line with settlement statistics for lawsuits brought by operating companies - Merpel, however, thinks that these data should be compared with the total number of actions (including those that do not end up in courts at all) initiated by the asserting companies, to assess if the overall propensity to settlement remains the same, even when ex ante settlements are considered]. There is probably no need to add that PMEs have a strong preference for the Eastern District of Texas, which 'remained the favorite choice for filing a patent infringement lawsuit' across all years of the study'. 

(4) Lack of public knowledge about litigated patents may favour PMEs

We assume that a lack of notice about litigated patents puts companies - especially small companies - at a disadvantage because it means they cannot easily tell if a patent has been litigated. This information might be tracked in certain subscription databases, but not everyone has the money or sophistication to subscribe to them.

Although 35 USC Section 290 and 15 USC Section 1116 prescribe that, within one month after the filing of an action, notice of it should be given to the USPTO, the researchers found that 'about 68% of the file histories for the patents in our dataset provide no notice to the public that the patent has been litigated, with only about 32% having an indication of litigation'.

(5) There is an active market for patent transfers pre and post litigation

[S]ome 52% of the asserted patents were owned by a different party than the original owner while only 47% of the asserted patents were owned by their original owner, excluding the unavailable patents. ... We discovered that for approximately 1,500 of the slightly more than 6,000 patents (about 25%) in our set, transfers were recorded after the litigation filing date. We suspect that in some of these cases, the defendant may have purchased the patent as part of a settlement agreement. In other cases, it is possible that the litigation made the patent more commercially attractive, which prompted someone to buy the patent.

The IPKat clearly isn't a NPE (non-playful
entity)  (c) Stephan Czuratis

The authors also found evidence of last-minute transfers and discovered that, 'if a patent asserted in litigation is transferred once, it is likely to be transferred again', a clear signal of the development of an active trading market. However, the study suggests that some of these data may relate to the 'failed investor scenario', where the original inventor, unable to exploit the invention commercially, turns to monetization, via litigation or patent transfer. This new phenomenon adds a layer of complexity to the task of identifying PMEs (and this Kat believes that it is indeed necessary to distinguish the entities that produce an artificial, avoidable risk of hold-up, from those that turn to monetization as a remedy for the difficulties of exploiting an invention originally intended for the production of goods or services - the latter is an unavoidable feature of market competition, which may grow or decline following economic cycles).  

(6) Good broth may be made in an old pot, but PMEs think otherwise

The age of the patents in our database at the time of their assertion was a little over 6 years ... We had expected that the distribution of asserted patents would have a bell shape around the mean. However, the distribution of asserted patents shows a consistent decay from patent issuance such that the newest patents are the ones most frequently asserted and the oldest patents are the rarest ones to be asserted.

The research found that, out of about 6,000 patents asserted, 144 were litigated on the day of their issuance; 75 within the first week since their issuance; 1,232 within six months; 835 between six and 12 months. The trend, according to the authors' interpretation, 'could be an indication that parties are increasingly filing for patents for the primary purpose of assertion'. If this is really the case, this Kat suspects that the PME phenomenon could soon turn into an even more serious threat to the patent law system, prompting the adoption of specific rules aimed at discouraging the filing of patents by non operating companies (with exceptions for those entities, such as universities, which primarily invest their resources in research and development).

This Kat plans to take a look at the situation in the EU soon. Meanwhile, he thinks that this comprehensive study may stimulate some discussion on the role of PMEs (or NPEs or PAEs or...) in patent law today. Certainly, the constant rise of patent lawsuits brought by companies which primarily trade, manage and assert patents, rather than inventing, protecting and exploiting new scientific inventions, is likely to seriously affect the efficiency of the patent system. The recent Soverain Software v Newegg case is a primary example of this effect, as it proves that hold-up practices and threats to sue over alleged infringement may generate a propensity towards settlements, even if the asserted patent is invalid. Similarly, the success of similar practices (not in courts, but in securing lucrative settlements) may contribute, as the data suggest, to the transformation of patent law from an invention-centric to a monetization-centric system, with obvious consequences on its ability to stimulate and promote scientific progress.