Patent trolls hurt R&D say scholars in letter to Congress

“Be careful about changing patent law — it could harm innovation,” is a favorite talking point for those who oppose plans to reform to America’s troubled patent system. But what if the opposite is true? What if it’s the status quo, in which patent trolls sock productive companies with abusive lawsuits, that is hurting innovation?

That’s the position of more than 50 law professors and economists, who submitted a letter to Congress, encouraging elected officials to do something about the current mess. In one striking passage, the academics suggest patent trolls (also known as PAE’s) are wreaking havoc on both R&D and venture capital investing:

“An econometric analysis finds that the more R&D a firm performs, the more likely it is to be hit with a patent lawsuit, all else equal. Another study associates lawsuits from PAEs with a decline of billions of dollars of venture capital investment; another found that extensive lawsuits caused small firms to sharply reduce R&D spending; and yet another found that costly lawsuits caused publicly listed defendant firms to substantially curtail R&D spending,” said the letter (the cited studies can be found in the letter below).

Such a finding stands in sharp contrast to the patent troll lobby, which argues that the current system is effective for promoting innovation. That system often involves investors and lawyers teaming up to create shell companies that acquire old patents, and then threatening lawsuits against hundreds or thousands against businesses.

This model is effective because patent trolls exploit an economic asymmetry in which patent lawsuits are relatively cheap to file, but extremely expensive to defend, which prompts companies to simply pay the trolls to go away.

The trolls can also strike it rich by seeking out favorable jurisdictions like East Texas, where juries last month granted a $533 million verdict against Apple, and another for $16 million to a troll who claims to own Bluetooth.

The scholars’ letter calls the wisdom of this system into further question. Its signatories include economists and some of the country’s most prominent intellectual property scholars, including Mark Lemley of Stanford University, Pamela Samuelson of University of California, Berkeley and Robert Cook-Deegan of Duke University.

The letter comes at a time when Congress is attempting patent reform for the third time in five years. The previous two attempts floundered, despite bipartisan support, after trial lawyers and other special interest groups pressured former Senate Majority Leader Harry Reid (D-Nv) to scuttle key bills.

Supporters of the measure are optimistic that the third time will be the charm. A source familiar with the process predicts reform will gain momentum if Sen. Chuck Schumer (D-NY), a long-time patent troll opponent, supports a reform bill that is expected to be introduced this month by Sen. John Cornyn (R-Tx). Rep. Bob Goodlatte (R-Va) already introduced such a bill in the House of Representatives in February. The White House is in favor of patent reform as well.

Here’s the letter from the scholars, which was circulated by Jim Bessen and Mike Meurer of Boston University, and Brian Love of Santa Clara, in order to refute suggestions there is no empirical evidence about flaws in the patent system:

IP Scholars’ Letter to Congress

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Study shows patent licenses don’t lead to tech transfer

It’s been another bad week for America’s benighted patent system: a Texas jury ordered Samsung to pay a patent troll $16 million for using Bluetooth — even though the “inventor” admitted Bluetooth had been on the market for years before he patented it. The system is a mockery.

Still, its defenders say, the system is working because it facilitates “tech transfer” and the passing of critical knowledge from inventors to companies. But now even that justification is collapsing in light of a new study that suggests patent licensing often does nothing at all to promote research or new products.

The study, titled “Does Patent Licensing Promote Innovation?,” is by Mark Lemley of Stanford and Robin Feldman of UC Hastings, and is based on a survey of 188 people whose job involves negotiating patent licenses at major companies and elsewhere.

The results, to put it mildly, are depressing. The screenshot below relates to patent trolls, and shows how often the survey respondents say that deals with the trolls result in technology transfer (top graph) and in personnel transfer (bottom graph):

Lemley/Feldman

In other words, those who paid patent trolls (which are responsible for the lion’s share of legal activity around patents these days) for a license say they received virtually zero benefit from doing so.

This is significant because the patent troll industry — which consists of a coterie of law firms, investors, judges, insurance fixers and so on — likes to claim that patents induce inventors to share knowledge that they would otherwise keep to themselves. But as the survey suggests, the licenses do no more than force companies to pay a tax for old technology, or for products they’re making anyways. Here is how two respondents, quoted in the survey, expressed it:

“Virtually every license my company has taken has been to ensure freedom of action for products or services we already offer. We have never received any value from a patent license other than to avoid litigation.”

“[Trolls] do not have any of the details worked out and they do not put any capital at risk developing any product, service or market. NPE’s simply exact a tax . . .”

The paper also notes that the same phenomenon, in which licensees pay money for nothing, is also pervasive when universities are the ones wielding the patents. Instead, as with the trolls, university patent deals rarely lead to meaningful tech transfer or innovation. The findings could have important implications at a time when more universities, including MIT and Boston University, are using decades-old patents to demand money from Apple and other big companies.

While the study doesn’t offer specific prescriptions for reform, it does repeatedly raise the fact that many of the (apparently useless) patents at issue are being asserted at the end of their life-cycle. This points to a solution in the form of shorter patent terms or, as Professor Brian Love has suggested, the President could order the Patent Office to change its fee structure so as to discourage trolls from hoarding patents on obsolete technologies.

The paper notes that its sample size is small, and that more study is needed, but the survey could still gain attention in light of the provenance of the authors.

Feldman has been instrumental in revealing the massive trolling operation, involving hundreds of shell companies, carried out by Intellectual Ventures, the standard bearer for the patent trolling business. Lemley, meanwhile, is one the country’s most prominent antitrust and intellectual property scholars, whose work has shown how patents and innovation are not one and the same, and that many of the conventional justifications for awarding patent monopolies are false.

The study also comes at a time when Congress is trying for a third time to pass a bipartisan bill to reform the patent system.

Here we go again: 5 key questions for patent reform in 2015

Will the third time be the charm? In the last five years, Congress has twice tried to fix the country’s dysfunctional patent laws only to see those efforts founder at the hands of shrewd lobbying by reform opponents.

Now, lawmakers are at it again, vowing to cut down the patent trolls who have made a mockery of a system that is supposed to promote innovation by instead turning it into a tool for economic extortion. Here’s a short look at the story so far, plus five factors that will determine if this year’s patent reform effort will fare any better than 2011 and 2014 — and a prediction of how it will all turn out.

A short, unhappy history of patent reform

Patents became a major problem in the early 2000s with the rise of so-called patent trolls, which are companies that don’t make tech products or provide services, but instead acquire old intellectual property and threaten expensive lawsuits against those that do.

The trolls (who prefer to call themselves “non-practicing entities,” or NPEs) soon grew rich by exploiting an economic asymmetry in federal law that makes it relatively cheap and risk-free to file a patent lawsuit but ruinously expensive to defend one. As a result, many companies have chosen to simply hold their nose and pay the trolls — those who didn’t often landed in the patent swamps of East Texas, where lawyers and plaintiff-friendly juries have built a cottage industry based around multimillion dollar verdicts. The trolls’ recent scalps in Texas include Google, which faces an $85 million jury award over push notifications on smartphones, and comedian Adam Carolla, who was browbeat into a settlement by a troll that claims to own podcasting.

The growing economic toll of the trolls, which came to target everyone from big tech companies to small coffee shops, eventually led to calls for Congress to pass laws to stop them. Proposed remedies included fee-shifting, which would undercut the economic imbalance that makes trolling so lucrative, and the creation of expedited review procedures to challenge the validity of so-called “business method” patents, which the Patent Office began issuing by the thousands after 1998, and which can grant 20-year monopolies on basic business practices.

While Congress did pass a reform law in 2011 known as the America Invents Act, it had virtually no effect since lobbyists for patent owners had gutted almost every key provision by the time President Obama signed it into law. Indeed, after 2011, the scale of patent trolling actually increased to the point where it became a source of national notoriety through mainstream media exposes, including a landmark radio documentary titled “When Patents Attack.”

As a result, Congress tried again in 2014 and came close to achieving meaningful reform with a proposed law called the Innovation Act, which passed the House of Representatives by a large margin, and which enjoyed bipartisan support from influential Senators like John Cornyn (R-Tx) and Chuck Schumer (D-NY), as well as President Obama. The law foundered last spring, however, when Sen. Patrick Leahy (D-Vt) abruptly cancelled a key vote. Leahy never offered an explanation for his decision to pull the plug, though it’s rumored he did so in order to win favor from trial lawyers and other key Democratic constituencies ahead of last year’s mid-term elections.

Now, patent reform is brewing in Congress for a third time. Last week, an unusually broad coalition of tech companies and main street retailers announced a campaign to “take back our system from trolls,” and the wind appears to be in their sails thanks to support from the Republican-controlled Congress and the White House.

While a proposed bill is expected to arrive next month, skeptics who have seen this movie before may wonder if patent reform will go 0-for-3 — either by failing to pass, or suffering an Innovation Act-style gutting. It’s too soon to know, but here is what will determine the answer:

5 questions that will make or break patent reform in 2015

1. Will there be one reform bill — or more?

Despite bipartisan support for “patent reform,” lawmakers in 2014 offered up a potpourri of different bills that drew supporters in different directions.  This played into the hands of patent trolls, who were able to claim the mantle of “reform” for themselves by supporting the weaker legislation, which offered only cosmetic changes and none of the measures (like fee-shifting or discovery reform) that would threaten their operations.

2. Will tech and retail stick together?

On previous occasions, opponents have been able to portray patent reform as a pet project of Silicon Valley, and suggest reformers were no more than slick tech villains looking to ride roughshod over inventors.

Now, as patent trolls present a growing burden to the likes of restaurants and retailers, companies like Macy’s and JC Penney are standing side by side with big tech names like Google, Adobe and Oracle. According to a person close to the campaign, the tech and retail companies have agreed to an all-or-nothing approach, and committed to seven core reform principles as a condition of membership. But it remains to be seen if this will hold up once the lobbying dollars start flying around.

3. Will anyone fall for the “good trolls” versus “bad trolls” distinction?

In recent months, the strategy of big players in the patent troll space has become clear: head off reform by drawing a distinction between themselves and the small-time shakedown players who have been targeting mom-and-pop coffee shops. In the case of Intellectual Ventures, which is the largest and most famous NPE/patent troll, the company has been scrambling to create associations with startups and charities in an effort to downplay its core business.

Likewise, in an interview late last year, the CEO of Finjan Holdings — which looks, walks and talks like a patent troll — assured me that his company was not a patent troll, but that its reputation has been harmed as a result of people associating it with “bad actors.” Whether lawmakers will appreciate this distinction, or if they will continue to swallow the trolls’ “be careful not to harm innovation” shtick, is an open question.

4. Will Apple step up?

While tech companies like Google and Rackspace have been at the forefront of patent reform, Apple has been less vocal — even as it has groused about being the very favorite target of trolls. So far its name is not among the other tech giants, including Facebook and Amazon, who are anchoring the new “United for Patent Reform” coalition.

If Apple goes all-in pushing for reform, the iPhone maker’s powerful reputation among inventors and consumers could persuade any wavering lawmakers to drive a fatal stake into the patent trolls.

5. Will pharma stay on the sidelines?

In the past, the pharmaceutical industry has been one of the most powerful opponents to patent reform on the grounds that it could weaken incentives to develop new drugs. This has been a sticking point for reform because the justification for patents in pharma, where innovation is slow and incredibly expensive, is much different than in tech where innovations are often obsolete in a year or two.

This time, however, the source familiar with the patent coalition said that the pharma industry may stay out of the legislative debate — so long as the drug companies feel comfortable the measures are aimed at patent trolls and not pills.

Is reform for real? Handicapping the 2015 outcome

Patent reform proponents are optimistic 2015 is their year. Of course, this was also the case last year when the Innovation Act was one of the few pieces of bipartisan legislation that people predicted could pass in a dysfunctional Congress.

The difference this time, however, is it will be harder other Senate Democrats to throw wrenches in the process.

But the best indication that this really could be the year for genuine patent reform may come from Erich Spangengberg, a notorious patent troll, who boasted to the New York Times in 2013 about how he likes to “go thug” on those who resist his licensing demands.

Early this year, Spangenberg blogged that 2015 would be the worst year yet for his much-maligned industry. Many companies and consumers, who pay higher prices due the trolls, no doubt hope he’s right. My own prediction is that Congress will pass some sort of reform, but that real reform — which must include fee-shifting and the end of discovery abuse — is still a crapshoot.

Intellectual Ventures founder steps down: “market is tough right now”

Peter Detkin, a lawyer and former Intel executive, is standing down as vice chairman from the notorious patent trolling venture he co-founded alongside three others, including one-time Microsoft exec Nathan Myhrvold, in 2000.

As IAM Magazine reports, Detkin will quit his post at Intellectual Ventures as of January 1, 2015, but will stay involved in the company’s decision making process. Detkin also denied the existence of rifts within IV following a rough year for the company:

However, Detkin stated categorically that his decision was not prompted by a falling out with the other IV founders or any worries about the firm’s future. “I am in it for the long term and have complete faith in our business model – which is needed and promotes investment in innovation. The market is tough right now, but I believe that the pendulum will swing back,” he said.

Detkin’s departure comes after a year in which IV had to lay off a significant portion of its workforce, and after the company struggled to raise money for its newest patent fund, in part because Apple and other one-time investors refused to participate in the fund.

More broadly, Intellectual Ventures and Detkin himself remain unpopular due to the company’s controversial business model, which entails arming thousands of shell companies with old patents in order to demand licensing payments from productive businesses.

While Intellectual Ventures initially earned buzz over the prospect of using patents to crowdsource genius, the company’s tactics quickly came to be perceived by many as a form of legal extortion that harmed innovation. Detkin himself figured prominently in a widely-publicized This American Life documentary called “When Patents Attack” that helped bring the problem of patent trolls to mainstream attention.

In response to a request for details about Detkin’s departure, an Intellectual Ventures spokesperson said the company had nothing to add.

In recent months, Intellectual Ventures has set its sites on emerging tech areas like wearable computers, even as Republicans in Congress vow to revive a patent reform bill that nearly passed in the spring, but was derailed by Sen. Harry Reid (D-Nv) at the behest of patent trolls and trial lawyers.