Report from US Government Accountability Office on patent litigation does not say much about NPEs

As mentioned by blogmeister Jeremy recently, it can be hard to find an interesting IP topic during the month of August. With very few court decisions and the absence of legislative activity, it seems that everybody is enjoying summer and saving IP matters for rainy days. "Not everybody!", says Merpel: a topic that has been extensively discussed over the past two weeks still remains alive and brings a welcome news flow for this GuestKat: Non Practising Entities (NPEs)!

Here is a fact: when in doubt about something to discuss about patent law, there will always be a new story to write about PAEs/NPEs/PMEs (patent monetisation enterprises)/Trolls. Whether it is based on a biased documentary on the Eastern District of Texas, an Attorney General measure against frivolous demands in Minnesota or the role of a public patent fund, NPE always remain an endless topic.

On the menu today, we have an important report made by the US Government Accountability Office (GAO) about patent litigation and most specifically, NPEs. For the record, GAO defines itself as “an independent, nonpartisan agency that works for Congress. Often called the "congressional watchdog," GAO investigates how the federal government spends taxpayer dollars”.

This report, published on August 22 is entitled “Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality”. It is worth noting that this long awaited study was mandated by law. Contained in the Leahy-Smith America Invents Act (AIA), section 34 sets its goals:

SEC. 34. STUDY OF PATENT LITIGATION.
(a) GAO STUDY.--The Comptroller General of the United States shall conduct a study of the consequences of litigation by non-practicing entities, or by patent assertion entities, related to patent claims made under title 35, United States Code, and regulations authorized by that title.
(b) CONTENTS OF STUDY.--The study conducted under this section shall include the following:
(1) The annual volume of litigation described in subsection (a) over the 20–year period ending on the date of the enactment of this Act.
(2) The volume of cases comprising such litigation that are found to be without merit after judicial review.
(3) The impacts of such litigation on the time required to resolve patent claims.
(4) The estimated costs, including the estimated cost of defense, associated with such litigation for patent holders, patent licensors, patent licensees, and inventors, and for users of alternate or competing innovations.
(5) The economic impact of such litigation on the economy of the United States, including the impact on inventors, job creation, employers, employees, and consumers.
(6) The benefit to commerce, if any, supplied by non-practicing entities or patent assertion entities that prosecute such litigation.
(c) REPORT TO CONGRESS.--The Comptroller General shall, not later than the date that is 1 year after the date of the enactment of this Act, submit to the Committee on the Judiciary of the House of Representatives and the Committee on the Judiciary of the Senate a report on the results of the study required under this section, including recommendations for any changes to laws and regulations that will minimize any negative impact of patent litigation that was the subject of such study [Considering that the date of the enactment of the AIA was September 16, 2011, the report has been published with a 23 month delay. It seems that GAO uses the same routine as most IP offices].

To address these four objectives, the GAO reviewed relevant laws and academic papers, and interviewed officials from the PTO, FTC and ITC as well as 44 stakeholders from the patent market (including operating companies, NPE, economists, legal commentators, patent brokers).

Regarding methodology, GAO makes a previous statement that gives rise to some concern:

"As noted in a September 7, 2011, letter from the Comptroller General to the chairs and ranking members of the congressional committees with jurisdiction over patents, the bill being considered at that time would have required a GAO study involving several questions for which reliable data were not available or which could not be obtained. The bill was enacted without change, but the Chair of the Senate Judiciary Committee, responding to these concerns, stated that GAO should note data and methodology limitations in its report prepared in response to the mandate. ...  Consequently, we developed report objectives consistent with these limitations, and we have noted specific data limitations throughout this report, as appropriate."

This Kat is not familiar with reports from US accountability authorities, but this statement sounds a little as if GAO was declaring "we may not have the resources to achieve this work properly but we did  it anyway since it we had to". The real lack of information is to be found on market data regarding "patent assertion outside of the court". So here is a report, being allegedly empirical about NPEs, which for the most try to avoid litigation through negotiation (i.e outside of the court), but there is no data available on it [Merpel points out that this still does not explain the significant delay].

However, going through the 50 page report, there are some precious findings to be read about patent litigation and NPEs. This GuestKat happens to be enjoying these delightful statistics on a rainy London afternoon. Here is a list of the most relevant facts:

- Operating companies brought most of the lawsuits between 2007 and 2011 (68%), not NPEs (19%). The rest were filed by independent inventors (8%), universities and research firms (3%). For you maths experts wondering who were the rest of the plaintiffs -- they were "undetermined plaintiffs" [Merpel says that maybe they were NOOBS: Not Operating Organization nor Business Speculators]. However, according to a recent article written by Sara Jeruss, Robin Feldman and Tom Ewing, 2012 was the first year in which NPEs brought more lawsuits than operating companies (56%).

- From 2010 to 2011, the number of patent infringement lawsuits increased about 31 percent (+900 in a year). Although this might sound impressive, this growth seems to be artificial and caused by the AIA's implementation. The AIA restricted the number of accused infringers who could be joined in a single lawsuit. This was done by prohibiting the joining of unrelated defendants in the same action even if they were allegedly infringing the same patent. Anticipating this new rule, plaintiffs filed more lawsuits during this year. The report subsequently details the different types of business that occur in the patent market and for which entities could be labelled as PMEs or NPEs. We end up with a list describing classical PME entities related to operating companies (privateers), research firms, universities or even operating companies asserting patents for which they do not market any product. One thing appears clear here and stands among the other facts: there are many types of NPE and you can not assess this topic with a simplistic, one would say Manichean, vision. Therefore, if any issue is to be found in the US patent system, restrictions on specific types of corporate structures may not be of any help to resolve it.

- By 2011software-related patents made up more than half of all issued patents. Between 2007 and 2011, 46% of lawsuits involved software-related patents. More worryingly, software patents were used to sue 93% of the defendants in PME lawsuits. This author wonders if this can be seen as the key point for this discussion. It seems to be the main reason why Europe is not experiencing the NPE phenomenon in the same proportions. 

- The Eastern District of Texas is the favourite choice of venue for PME lawsuits, mainly for procedural reasons and efficiency. 

- Besides cases that are still ongoing, 86% of studied cases likely ended in a settlement within one year of being filed.  

- Quoting a study made by the AIPLA, GAO recalls that in 2011 the average cost of defending a single patent infringement was between $650,000 and $5 million, depending on how much was at risk. The median damages were over $5 million and damages in NPE cases were higher than in other types of suits. 

- Based on the stakeholders interviews, three main factors contributed to the rise of PME litigation:

(1) Overly broad and unclear patents, causing uncertainty as to the scope of their claims. This may be caused for example by the lack of common terminology in some industries (software industry). That is no surprise. The number of patents that should not have been granted in the first place appears to be tremendously high, making the freedom to operate or product clearance researches very hard to conduct. 

(2) Disproportionately large damages giving incentives for PMEs to litigate. The GAO uses the FTC report from March 2011 to emphasize the need to ground damages calculation in an economic analysis and not the 25% rule. For example, the ratio between France and US when it comes to damages is 1 to 29. The report takes good notes that some judicial precedents occurred in recent years to modify the calculation rules, but considers that the issue is not yet settled. 

(3) increasing interest in patents as a valuable asset. The rise of financial investors in the patent market over the past ten years may have had an impact on the increasing number of patent infringement lawsuits especially when they help fund a lawsuit that due to the costs may not have been funded.

Now does the future look brighter according to the GAO?

After these alarmist considerations, the report goes on the remedies that would be suitable to make the US patent system a better place. It differentiates the procedural measures from the PTO changes.

The GAO first emphasises the efforts that have been recently made to reduce litigation cost and improve the courts' handling of patent cases, notably the Congress patent cases pilot program. This program was made to encourage the enhancement of expertise in patent cases among court judges. It consists in creating a cadre of patent specialist judges. But apparently, judges who were interviewed pointed out the possible failure of this program due to the lack of resources.

Another remedy would be to reduce litigation cost by reducing the discovery phase costs, which are known to be really expensive in the US (from $350,000 to $3 million). This represents a lot, especially when very few documents are being used during the trial (fewer than 1 in 10,000). The way to reduce it would be to use the Advisory Council for the U.S. Court of Appeals for the Federal Circuit model regarding discovery for emails (e-discovery). The model appears to be a template for judges to adopt and issue in patent infringement lawsuits.

Regarding USPTO, the report emphasizes four initiatives taken by the office to address patent quality: update of patent examination guidelines and issuance of new one regarding the definiteness requirement, partnership with the software industry (known as "the Software Partnership") to determine common terminology, creation of the Cooperative Patent Classification system to facilitate patent searches and, finally, a PTO initiative to provide more transparency in patent ownership.

The report also insists on post-grant review proceedings as a mean to reduce future litigation. However, this last point may not be really helpful considering the cost of such proceedings ($166,000 and $390,000), much more expensive than the EPO system. Furthermore, operating companies may want to challenge their competitors patents but obviously this will not have any effect on lawsuits brought by NPEs. Considering that NPEs do not file patent applications but acquire them mostly from non-competitors, and that very few patents end up in litigation, it is unlikely that post-grant review proceeding may help reduce it. This new feature may not even be used in its classic functions like before the EPO if federal judges do not consistently delay a trial until the PTO board completes its review.

Finally comes the time for conclusions. The GAO makes a very true statement: "the focus on the identity of the litigant -- rather than the type of patent -- may be displaced."Most of the recommendations are made to the PTO, to plead for an improvement of patent quality. Therefore the PTO seems to be the key to progress.

Here this author begs to differ. Enhancing the quality of granted patents may be helpful but the litigation issue, (if it exists) should be treated in the litigation field i.e by changing the rules of civil procedure. What about a "loser pays" rule?

Merpel wonders if our readers have any comment on this report. Does it bring anything new to discuss or is it the same old story?