The rise of patent monetization entities Part Two: the situation in the UK

A couple of weeks ago, this Kat took a look at the rise of patent monetization entities in the United States, where the phenomenon appears to have reached a critical stage. According to recent research, 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. In the EU, patent monetization entities clearly have not enjoyed the same escalation, but right holders and commentators voiced concerns about the possible spread of patent trolling under the Unified Patent Court Agreement (UPC) umbrella.

Back to Europe for Part Two!

The IPKat, a notoriously curious creature, could not refrain from delving deeper into the current situation in the EU and its foreseeable developments, and to share his thoughts with the readers [disclaimer: in these posts, the expression 'patent assertion entities' (PAEs) and PMEs are used as synonyms. They refer to a company which holds a portfolio of patents, or actively builds it, with the exclusive aim of asserting the patents (and not practising the invention) to secure lucrative licensing agreements. Research institutions and patent assertion entities created for strategic patent litigation by actual inventors are not included in the definition; the latter, however, are briefly examined at the end of Part Three. A deeper insight into PAEs can be found here and here].

The first (indirect) indication that the phenomenon is not currently perceived as a real threat comes from the meagre number of research projects dedicated to it (although fragmentation and difficulty of sourcing reliable data are frequently cited as serious obstacles to a detailed comparative study of patent litigation in the EU). To this Kat's knowledge, there is no EU-wide study on patent assertion entities. Thus, to make it safely across the pond, we had better fly to England and Wales, where the bright minds of C. Helmers and L. McDonagh at LSE [who enjoy a library open day and night, which makes this bibliophile Kat highly envious] jointly authored an interesting paper entitled 'Trolls at the High Court?'. The authors looked at all the lawsuits filed between 2000 and 2008 at the Patents Court of England and Wales (PHC), analysing all the cases that involved a patent assertion entity. Opening their research, Helmers and McDonagh provided a brief overview of the elements that determine the divergent development of the phenomenon in the US and EU:

[I]t is notable that 'patent trolls' are much less visible in Europe than in the US. For this reason it has been remarked that the European patent system may contain unique factors which are capable of ‘taming’ the patent trolls. For example, commentators note that a crucial factor concerns the fact that software and business method patents are much more difficult to obtain in Europe than the US. Also of importance is the fact that even within the European Patent Convention (EPC) system, patents ultimately turn into national rights, which must be enforced before national courts, something which substantially increases the costs and complexity of litigation when compared to the US jurisdiction.

The research points to Article 52(2)(c) EPC and to the absence of a unitary European patent as two key elements that prevent the rise of patent monetization entities in the EU. The latter forces right holders to seek enforcement (and opposing parties to seek invalidation) of the patent in each member state, with serious consequences on the complexity and costs of litigation, as well as on the limited scope of injunctive remedies [is everything going to change with the UPC Agreement? More on this in Part Three]. According to the paper, however, England and Wales have more bad news in store for PAEs:

[T]wo additional factors present within the patent enforcement system in England and Wales ... appear to mitigate, or ‘tame’, PAE behaviour. Firstly, the majority of patent cases that reach a judgment in the UK result in a ruling invalidating the patent. ... Secondly, the costs regime in the legal system of England and Wales requires that the losing party pay the costs of the other side. ... When taken together, these two aspects discourage litigation by PAEs at the PHC. As a result, within the UK jurisdiction the problems associated with PAEs stifling innovation appear to be somewhat mitigated.

'Mitigated', in this context, means that less than 6% of all patent cases filed at the PHC between 2000 and 2008 involved patent assertion entities, a staggering contrast with the US statistics [disclaimer no. 2: readers are certainly wise enough to weight the following analysis against the low number of PAE cases, which might affect their statistical significance, when they are compared to litigation data from foreign jurisdictions - in particular the US, where thousands of PAE cases occurred in the same span of time]. Of these 15 (out of 255) cases, 12 were initiated by a third party, which sought revocation of the patent held by a PAE (in 11 cases) or contested the essentiality of a patent included in an industry standard. Only in 2 cases, instead, a PAE filed a lawsuit for patent infringement. Thus the most frequent claim in PAE cases is for revocation of a patent (73%), in contrast with non-PAE cases, where the most frequent claim is for patent infringement (45%). According to the researchers, '[t]his suggests that companies may proactively attempt to invalidate patents owned by PAEs in the UK' before being sued, or in response to a lawsuit brought by PAEs in another jurisdiction, with respect to an equivalent patent.

As expected, settlement was the prevalent outcome of cases involving patent assertion entities (in 8 out of 15 cases). When cases proceeded to judgment, however, revocation was the vastly predominant outcome:

When the UK and EPO rulings are taken together, there is an overall revocation rate of 85% for cases that ended with a judgment. This figure is substantially larger than the numbers found for court cases in the US involving PAEs. Risch (2012) for example finds an invalidation rate of 28% of PAE cases that ended with a judgement on merits while Shresta (2011) only finds 16% of PAE patent cases to end with the invalidation of a PAE patent.

I'll catch you, PAE...

Although the high invalidation rate is commonly linked to the low quality of the asserted patents (for example, this was one of the key issue highlighted by Google here and the primary finding of this interesting paper), Helmers and McDonagh made an unexpected discovery. Analysing several indirect indicators of patent quality (forward citations, backward citations, size of the patent family, number of inventors, number of different IPC subclasses), they were unable to find major differences between PAE and other litigated patents, with the exception of IPC subclasses (more) and backward citations (fewer), which may respectively suggest that the former are broader than the latter and less derivative of existing technologies (similar conclusions were drawn in this US study, where Professor Risch observed that '[t]o be sure, not every patent is valid and most have at least one invalid claim, but NPEs choose to litigate patents that look like the patents that productive entities enforce', possibly because '[i]f NPEs are to bring any value to their constituents ... they can best do so by litigating strong patents and leaving weak patents on the shelf' - this suggests that analysing pre-trial settlements could help assess the overall quality of a PAE's patent portfolio). The researchers also found that most of the litigated patents were between 6 and 10 years or 16 and 20 years old (between 6 and 15 years old in non-PAE cases). Again, this finding is at odds with the US data, where a high percentage (40%) of the patents asserted in PAE cases are less than one year old. This may indicate that, while the number of patents filed for the purpose of assertion is surging in the US, England and Wales are still relatively untouched by this phenomenon.

Although these findings suggest that the situations in the US and UK are quite different, PAE litigation, both oversea and in the UK [and worldwide, adds Merpel], appears to be mainly focused on ICT patents. Overall, Helmers and McDonagh observe that, in England and Wales, 'PAEs judiciously select the patents that they enforce within the set of ICT patents potentially available to them'. According to the study, patents involved in PAE cases are 'more valuable, and therefore of greater quality, than comparable non-litigated patents' [the comparison was conducted with a control set of similar non-litigated ICT patents], which makes it hard to explain the high revocation rate before the PHC or the EPO [Merpel, however, has a number of plausible explanations in mind. She wonders, for example, if value and quality are so directly related as the paper suggest, and if quality can be the subject of a static, quantitative assessment, or, as some literature suggests, can only be analysed through potential or actual testing. Judicial activism also comes to her mind]. In spite of these observations, researchers sensibly conclude that 'the high rate of invalidation of patents at the PHC would probably discourage PAE litigation'.

Is the UK a particularly PAE-resistant jurisdiction? Or is a common recipe preserving the EU from the diffusion of PAEs? In Part Three, the IPKat will try to provide an answer to these questions, taking a look at the situation in the rest of the EU, including plausible effects of the UPC Agreement on PAE litigation.