Anti-Troll LOT Network Expands to 500 members

The Anti-Troll (or Troll protection) LOT Network has expanded to 500 members.  I first wrote about the Google started LOT Network in 2015, and I believe it had about 47 members then.  Around four years later and we are at a significant increase.  For more on the LOT Network, please see these two prior posts, here and here.  Also, here is a blurb from a release by the LOT Network: 

"When you’re caught up in the day-to-day business of moving things forward, it’s easy to lose sight of accomplishments. It was in this way that a significant milestone — LOT Network’s membership reaching 500 members — caught us nearly by surprise. We are very proud of our community, which now counts Disney, Meituan Dianping, Centerpoint Energy, Synchrony, Yamaha,  VISA, Juniper Networks, 7-Eleven and Netgear as some of its newest members.

Our growth now spans industries — including automotive, finance, entertainment, cloud computing, retail, manufacturing, and emerging industries like blockchain — as well as continents. You can find LOT members in more than 35 different countries and counting; some of the biggest tech companies in Asia are among our strongest supporters.

Further, we’ve seen an uptick in startup membership, confirming that LOT is a solution for all companies regardless of their size or industry. Our momentum toward becoming a standard business practice grows stronger every day — more and more, we see members joining us based on information they’ve found online — often joining without contact from a LOT Network team member.  And that is because of you — the collective reputation of our membership makes joining LOT an easy decision."

Federal Circuit Pushes Back on U.S. Supreme Court’s Alice Decision on Procedure

In a pair of interesting software-related cases, the U.S. Court of Appeals for the Federal Circuit appears to push back on one of the supposed goals of the U.S. Supreme Court’s Alice v. CLS Bank International decision.  In Alice, the U.S. Supreme Court clarified and restated the Mayo Collaborative Services v. Prometheus decision’s test concerning patent eligible subject matter.  In doing so, the Supreme Court started a new era of U.S. patent law which made patent eligible subject matter a very important inquiry with respect to the patentability of inventions, particulary those in the software space—although Alice’s impact is felt in other technological areas.  Since Alice issued, the U.S. Court of Appeals for the Federal Circuit has clarified the Alice test and notably provided guidance to patent lawyers on how to “avoid” or “comply” with Alice. 

Importantly, one of the purported benefits of Alice was to allow for the early dismissal of claims based on patent eligible subject matter.  An alleged infringer could conceivably quickly raise patent eligible subject matter and get a claim dismissed on either a 12(b)(6) motion for failure to state a claim or a motion for summary judgment.  In additional push-back to Alice, the Federal Circuit in Berkheimer v. HP (February 8, 2018) has recently held that even after claim construction a motion for summary judgment on patent eligible subject matter may be improper because of genuine issues of material fact.  While this is standard law concerning motions for summary judgment, the case provides a blueprint for how genuine issues of material fact can be created with patent eligible subject matter.  Because of this possibility of creating that genuine issue of material fact, patentees will have additional settlement leverage to realistically threaten a case through trial—a costly endeavor.  What will the effect of this case be on Alice’s attempt to curb so-called patent troll litigation? 

In another recent case, the Federal Circuit in Aatrix Software v. Green Shades Software (February 14, 2018) remanded a case because the district court did not allow the patentee to amend its complaint to survive a 12(b)(6) motion on claim construction.  While the Federal Circuit was careful to note that a complaint can be dismissed on a 12(b)(6) motion to dismiss, this case cautions district court judges to carefully consider motions to amend complaints. 

It will be interesting to see if the Federal Circuit’s decisions about the procedural challenge of patents based on patent eligible subject matter in the courts will have an impact on the analysis in the pending Oil States case before the U.S. Supreme Court. 

USPTO Releases Report on Public Views on Patent Eligibility Rules

The United States Patent and Trademark Office (USPTO) has released a report titled, “PATENT ELIGIBLE SUBJECT MATTER:  REPORT ON VIEWS AND RECOMMENDATIONS FROM THEPUBLIC” (Report) concerning the comments of participants at USPTO sponsored roundtables concerning the patent eligible subject matter requirement, particularly post-Alice/Mayo.  The USPTO summary of the Report states:

Much of the feedback we received highlighted the complexities of determining the appropriate boundaries of patent subject matter eligibility. Commenters confirmed that the recent Supreme Court cases have significantly changed the standards for determining patent subject matter eligibility. Several commenters expressed concern that these decisions have created inconsistency, uncertainty, and unpredictability in the issuance and enforcement of patents, particularly in the life sciences, software, and e-commerce industries.

A diverse group of representatives from academia, industry, law firms, and legal associations proposed legislative changes aimed at reversing the recent trend in the law and restoring, in their view, a more appropriate dividing line between eligible and ineligible subject matter. In contrast, a sizable portion of representatives from the software industry argued that the Court’s two-step test provides an appropriate standard for patent subject matter eligibility. This group cautioned against legislative redress and instead recommended that the common law should be allowed to evolve.

The following is a list of the views against the new rules: “1) Decisions are Legally Flawed; 2) Exceptions are Overbroad; 3) Two Step Test is Unclear and Causes Unpredictability; 4) Preemption Conflates 101 with other Patentability Requirements; 5) Jurisprudence Stifles Innovation and Hurts Business; and 6) Consistency of U.S. Law with International Norms.” Here is a list of the views in favor of the new rules: “1) Common Law Process at Work; 2) Weeds Out Overbroad Patents; 3) Requires Claiming a Specific Way and Not a Result; 4) Litigation Tool Against Patent Assertion Entities; and 5) May Give U.S. Entities an Advantage.” 

On the point in favor of the new rules based on May Give U.S. Entities an Advantage, the Report states:

Even if the Supreme Court’s new eligibility standard differs from standards abroad, a few commentators projected that the difference could actually operate to the benefit of the United States. For example, one commentator argued that because foreign entities have an increasing stake in the U.S. patent system, “[g]eopolitical considerations . . . weigh heavily in favor of” the Supreme Court’s Mayo and Alice decisions.246 In fact, she cautioned that if the U.S. were to adopt an overly expansive patentability standard, then not only would “American inventors, American companies, American investors, and the American public” benefit, but an “equal or greater benefit [would] inure to foreign inventors, foreign companies, and, in some cases foreign governments.”247 Another participant asserted that “if a company is innovating because it can get patents in Germany or Europe but it may not be able to get as much protection in the U.S., that innovation is still happening.” 248 And, she added, “if our consumers can benefit from the additional competition that a lack of patent [protection] provides and pay lower prices here” and “the innovator can still get their investments recouped by getting monopoly profits elsewhere” that may not be a bad deal for our consumers.249

Members of the life sciences community were relatively united in their critique of the new patent eligible subject matter rules.  The computer/related technologies community was apparently less united on whether the patent eligible subject matter rules were a good thing or not. 

There are also several legislative proposals for change, including: Replace the current test with a technological arts or useful arts test; Expressly define exceptions to eligibility; Distinguish eligibility from other patentability requirements; and Establish a research exemption to infringement. 

The text concerning the research exemption states, in relevant part:

Several commentators proposed a legislative amendment to recognize a research exemption from patent infringement for experimentation conducted to better understand or improve a claimed invention.427 According to these commentators, such an amendment would address the Supreme Court’s preemption concerns, i.e., concerns that patents on foundational technological tools may stifle scientific progress by tying up the basic building blocks of human ingenuity.428 One commentator suggested that the exemption could be tailored such that “patents on research tools would be unaffected, but research on a patented invention itself would not be subject to infringement allegations.”429  

The USPTO should be applauded for its hard work in trying to make the patent eligible subject matter rules and their application accessible, and obtaining the public’s viewpoint. 

TC Heartland: Good for Patent Litigation?

In TC Heartland v. Kraft Food Group Brands, a recent opinion, the US Supreme Court decided to restrict the meaning of the patent venue statute.  This statute essentially provides in which judicial district a defendant may be sued for patent infringement.  The patent specific statute, 13 USC 1400(b), provides: “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”  The US Supreme Court had to analyze whether “where the defendant resides” means “where the defendant is in incorporated” per a previous US Supreme Court case analyzing that provision, or according to subsequent amendments by Congress to the general venue statute which has a much broader definition of what “resides” means.  Ultimately, the US Supreme Court in a unanimous Associate Justice Thomas opinion (Associate Justice Gorsuch not participating) decided to adopt the more restrictive definition: “resides” means where the defendant is incorporated. 

Practically, many believe that this decision is another attempt to restrict “abusive” patent litigation or patent troll behavior by directing litigation out of the Eastern District of Texas to other districts—interestingly perhaps to districts that may be more favorable to accused patent infringers.  One concern about patent infringement generally has been the competence of judges and juries to address technical and complicated patent cases.  Notably, the Eastern District of Texas has handled a large number of patent cases for many years and arguably the judges have developed technical and legal competency in patent cases.  Indeed, this could explain why the district handles patent cases relatively quickly.  Arguably, we’ve now made a policy decision pushing cases away from a competent district to those that are not.  However, some cases presumably may now be brought in districts in California or Delaware (where a large number of corporations are incorporated), which may also have developed competency in handling patent cases.  I have been told that juries in some districts in California are quite technically sophisticated—such as in the Northern District of California where Silicon Valley is located.  Perhaps one benefit of TC Heartland may be better juries; although remember how the Apple v. Samsung jury was criticized.  

"Opportunistic" Google and Intertrust Launch "Patent Shield": Protection for Startups

Google and Intertrust have announced the creation of Patent Shield, which is designed to protect startups.  Essentially, the exchange is access to a patent portfolio for an equity stake in the startup.  It seems to put startups in the position of a much more resourced company with a portfolio of patents and presumably freedom to operate.  This appears to be another attempt to get ahead of something like the patent troll problem; however, it seems to be aimed at patent demands from entities that are practicing not absolute non-practicing entities because the portfolio is supposed to provide leverage against the entity asserting infringement initially.  Interestingly, this appears to be a great way for Google and Intertrust to find licensing partners for their patented technology without looking like a “bad guy” by operating through patent demand letters—let them come to us.  Very clever.  It also gives Intertrust the opportunity to offer its IP services to startups, and maybe a chance for additional investment/acquisition opportunities through notice about great new startups that have attracted the attention of established players in the market. Very, very clever. For more details, please see here. 

China Ripe for Non-Practicing Entity Suits

A short time ago, I wrote about an article by Ma Si in the China Daily concerning the likelihood of an increase in patent suits filed in China.  On November 7, 2016, the Wall Street Journal has published an article by Juro Osawa, titled "China's Patent Lawsuit Profile Grows," about a Canadian non-practicing entity's (NPE) suit against Sony in Nanjing, China.  The article notes that China's IP enforcement system has changed substantially in the last few years and is less expensive than other systems making it an attractive place for NPE litigation for licensing leverage.  For one, according to the article, enforcement of the NPE's patents could result in stopping Sony from exporting infringing parts manufactured in China.  Notably, China's government has made clear its intention to move to an innovation and services based economy for continued economic growth and intellectual property protection will play an important part in that move.  The focus is usually on developing Chinese companies and protecting their technology, but there are obvious opportunities for other companies as well.  Indeed, I was in Beijing recently at a conference and there was talk concerning making patent enforcement in China even stronger than in the United States.  

China currently has three specialized IP courts: Shanghai, Beijing and Guangzhou.  It will be interesting to see if there is soon an expansion into other cities with intellectual property courts.  [hat tip to Professor Ed Lee of Chicago-Kent College of Law for the lead to the Wall Street Journal article] 

U.S. Federal Trade Commission Releases Report on Patent Assertion Entities

On October 6, 2016, the Federal Trade Commission [FTC] released a 269 page report titled, "Patent Assertion Entity Activity: An FTC Study" [Study].  The Study reviews PAE activity from 2009 to 2014.  The press release from the study excerpts some highlights: 

The report found two types of PAEs that use distinctly different business models. One type, referred to in the report as Portfolio PAEs, were strongly capitalized and purchased patents outright. They negotiated broad licenses, covering large patent portfolios, frequently worth more than $1 million. The second, more common, type, referred to in the report as Litigation PAEs, frequently relied on revenue sharing agreements to acquire patents. They overwhelmingly filed infringement lawsuits before securing licenses, which covered a small number of patents and were generally less valuable. 

The report found that, among the PAEs in the study, Litigation PAEs accounted for 96 percent of all patent infringement lawsuits, but generated only about 20 percent of all reported PAE revenues. The report also found that 93 percent of the patent licensing agreements held by Litigation PAEs resulted from litigation, while for Portfolio PAEs that figure was 29 percent. 

The study found that the royalties typically yielded by Litigation PAE licenses were less than the lower bounds of early stage litigation costs. This data is consistent with nuisance litigation, in which defendant companies decide to settle based on the cost of litigation rather than the likelihood of their infringement.

Interestingly, the report relies on the AIPLA economic survey on patent litigation costs to conclude that the majority of Litigation PAE litigation is nuisance litigation.  That merits additional scrutiny, I think.  The Study also includes reforms to address nuisance infringement litigation: 

  

“The FTC recognizes that infringement litigation plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws. Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior,” the report states. With this balance in mind, the FTC proposes reforms to: 

• Address the imbalances between the cost of litigation discovery for PAE plaintiffs and defendants;

• provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits;

• streamline multiple cases brought against defendants on the same theories of infringement; and

• provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.

Notably, the Study also reviewed " types of patents held by PAEs, and found that 88 percent were in the information and communications technology sectors; more than 75 percent of those patents were software-related patents." Interestingly, some Study PAEs frequently targeted a small number of firms in the "Computer and Electronic Manufacturing" sectors.  Further, the Study "also looked at whether PAEs were able to make money by mass-mailing so-called “demand letters”; however, the FTC observed an “absence of large demand letter campaigns for low-revenue licenses among the Study PAEs.”  This results in the Study stating that reforms concerning demand letters "on its own" would make little difference. 

Notably, the Study includes an review of the wireless chipset sector in particular: 

[T]he report also looked at the wireless chipset sector, examining how reported PAE assertion behavior compared to certain manufacturers and non-practicing entities (NPEs) (who primarily seek to develop and transfer technology ). For this study, the FTC obtained non-public data from eight manufacturers and five NPEs, for the same timeframe using its 6(b) authority. 

The wireless case study found that Litigation PAEs and manufacturers behaved differently. Within the study, Litigation PAEs brought far more infringement lawsuits involving wireless patents—nearly two-and-a-half times as many as manufacturers, NPEs, and Portfolio PAEs combined. Litigation PAE licenses involved simple lump-sum payments with few restrictions, if any, whereas the reported manufacturer licenses frequently included field-of-use restrictions, cross-licenses, and complicated payment terms.

Importantly, the Study does not draw conclusions concerning the merits of PAE activity in monetizing inventions for inventors and innovators: 

Study PAEs had diverse and heterogeneous data-keeping practices. As a result, the FTC does not report how much revenue PAEs shared with others, including independent inventors, or the costs of assertion activity. The FTC sought to evaluate the role of PAE activity in promoting patent monetization for inventors and innovation as part of its study. Towards that end, the FTC requested that Responding PAEs provide detailed data describing how they shared licensing revenue with outside parties and their costs of patent assertion. Responding PAEs used different methods to maintain information describing their revenue sharing and costs, however, which prevented any meaningful comparison of the degree of revenue sharing by PAEs or their assertion costs. For example, some Responding PAEs viewed payments to outside counsel as a cost of patent assertion, but others viewed such payments as revenue sharing (counsel often received a fixed proportion of licensing royalties). Moreover, the majority of Responding PAEs did not maintain information on assertion costs, and only a few Responding PAEs provided such data at either the Affiliate level or assertion campaign level. For these reasons, we did not analyze either the proportion of licensing revenue that they shared with outside parties, or the costs of patent assertion. Due to this limited data, this report does not address the efficiency of PAE business models. [emphasis added].

And, what impact will Alice have?  The Study notes that "it did not collect enough information regarding patent assertion after the Alice decision" to "directly measure" Alice's impact, but: 

In addition, because more than 75% of the patents in the FTC’s sample likely include software-related claims, and because the FTC estimates that Study PAEs held more than 75% of all U.S. patents held by PAEs at the end of 2013, any change in PAE behavior with respect to software patents that results from Alice will likely have a significant impact on both the overall volume of PAE assertion and the types of technologies that PAEs assert.

Study PAEs generated about $4 billion in licensing revenue.  And, the Study noted, "Fewer Than 1% of Study Patents Were Identified as Encumbered by a FRAND Commitment to a SSO."  [Hat tip to Professor Dennis Crouch's Patently Obvious Blog.]

Subsidized IP Litigation Insurance in Japan and Increased Enforcement in China

As reported by Ellie Wilson on the IP Kat blog, the Japanese Patent Office (JPO) has announced a program whereby half of the premiums for IP infringement insurance will be covered.  The program is a partnership between the JPO, the Japan Chamber of Commerce and Industry, The National Federation of Small Business Associations, and three insurance companies.  Specifically, the subsidy is directed at making affordable IP infringement litigation insurance for SMEs that are operating in countries outside of Japan. The announcement appears to cover both the need for the SME to fund IP infringement litigation against alleged infringers and to defend litigation.  Notably, the announcement explicitly mentions China as a market of concern; although my guess is that a concern with so-called patent trolls in the United States is also an issue. 

This announcement comes close in time to reports of increased enforcement of intellectual property rights in China, particularly as China reportedly is attempting to move toward an innovation and services based economy.  Interestingly, the official website for The Supreme People's Court of the People's Republic of China published an article by Ma Si (China Daily) concerning the move of smart phone wars to China titled, "Chances high for more patent cases."  The article discusses the recent stayed injunction against Apple and the prospects for more patent cases given actions in the United States concerning Huawei.  Huawei and Samsung are also embroiled in litigation in China.

Given the importance of SMEs to economic growth and job creation as well as the general high cost of litigation, it will be interesting to see if more countries move to subsidize IP litigation insurance.  Are there any other countries subsidizing IP litigation insurance?  Instead of regulating against so-called patent trolls, is this where government should intervene--helping insurance markets develop and lowering the cost of insurance, particularly for SMEs?  Should government back insurance funds for IP litigation?    

Nothing New in the World of Patents: "Patent Licensing and Secondary Markets in the Nineteenth Century"

In a recent blog post "Nothing New Under the Sun: “Patent Trolls” Have Been Around Forever," I discussed Professor Zorina Khan's review of Nineteenth century patent assertion entities.  In a recent essay, Professor Adam Mossoff of George Mason University Law School provides another supportive account of patent licensing and secondary markets in the Nineteenth century.  Specifically, Professor Mossoff, in a short and readable paper, "calls out" those commentators who assert that the "patent licensing business model" is a new phenomena. Professor Mossoff summarizes and reviews Professor Khan's research as well as the research of other historians that demonstrates there really is nothing new (at least not much) in the world of patents. 

Professor Mossoff provides the example of three inventors who licensed their patents.  He discusses Charles Goodyear (process for vulcanized rubber), Elias Howe, Jr. (lockstitch in sewing machines), and Thomas Alva Edison.  About Goodyear, Mossoff notes, "Some of Goodyear's assignees and exclusive licensees, who were patent licensing companies themselves, filed hundreds of lawsuits in the nineteenth century; they sued firms, individuals, and even many end-users such as dentists, for patent infringement."  He further states that, "Contrary to many claims today, end-user lawsuits even by patent licensing companies are nothing new in America's innovation economy."  

Notably, Mossoff states that Howe used "third-party litigation financing."  Howe also joined "the first patent pool in American history."  "[Howe] made almost the entirety of his fortune on the basis of the royalty stream from his license to this patent pool, which further licensed his rights to other companies."  Mossoff makes an interesting point about Edison.  Interestingly, he notes that Edison was famously a terrible businessman, but a great inventor.  The point here seems to be that specialization matters--licensing for commercialization to those who know how to do it is critical to getting patented inventions to the public. Not all inventors will be good businessmen--experts in manufacturing or finance. Edison's "employ[ment of] the patent licensing business easily meets today's definition of an 'NPE.'"  

Professor Mossoff also provides interesting examples of the secondary market, which include the classified advertisements in the magazine Scientific American. The classified advertisements included numerous "ads for the sale of patents and patent rights."  Moreover, he discusses the research of economists Naomi R. Lamoreaux, Kenneth Sokoloff, and Dhanoos Sutthiphisal: "Their research revealed the fundamental and significant role performed by a group of market intermediaries known at the time as 'patent agents.'"  Professor Mossoff asserts that these "patent agents" are "predecessors of today's patent aggregators." 

Finally, Professor Mossoff states that a historian notes "after detailing the problems for nineteenth-century inventors who usually lacked manufacturing and commercial finance skills, that 'given the risks associated with manufacturing, many nineteenth-century inventors preferred to either sell or license their patents.'"  He concludes that, "In sum, it is simply false to assert that these commercial mechanisms for bringing patented innovation to market are a new phenomenon today." What should be the role of this type of research given the state of the debate on NPEs/PAEs today?  Does it change the analysis concerning the merits of NPEs/PAEs?  

Patent Monetization Entities Generally Asserting Ordinary "Meritfull" Claims?

The Recorder has published data and conclusions concerning a study of district court awards of attorney fees post-U.S. Supreme Court decisions Octane Fitness and Highmark.  Both Octane Fitness and Highmark concerned the availability of attorney fees.  In the United States, parties generally bear the cost of their attorney fees absent an exception.  For patent infringement, there is a statute specifically allowing for the award of attorney fees for “exceptional” cases.  The U.S. Court Appeals for the Federal Circuit interpreted that statute to require a very high standard for proving attorney fees.  Some believed that this high standard did not provide a strong enough disincentive to prevent so-called “patent trolls” from bringing weak nuisance suits for licensing fees.  In the Octane Fitness case (2013), the U.S. Supreme Court rejected the Federal Circuit’s high standard and ruled that “exceptional” merely meant a case that was out of the ordinary with respect to substantive litigation strength of position or how the case was litigated.

The study apparently finds that about half of the awards of attorney fees apply to competitor cases and the other half to non-practicing entities.  Interestingly, the awards against non-practicing entities “have often been against small individual inventors, not Intellectual Ventures, Round Rock Research, IP Nav and other 800-pound gorillas that monetized patent litigation.”  The article does discuss how Acacia Research Group, a supposed NPE, is exceptional with four awards against it for a total of around US $1.8 million.  The article appears to speculate that the awards against small individual inventors were cases where the small individual inventors (inexperienced players) apparently perhaps overvalued their case based on the law and facts. There appears to be a difference in awards based on the district in which the case was filed. It does, however, seem to make sense that in the current climate sophisticated monetizers would only bring relatively strong cases (maybe in the E.D. of Texas).  The article also notes that district court judges are mixed in considering the practicing status of the party in awarding fees. Finally, the article discusses a recent US $7.8 million award of fees in the Northern District of California against the Alzheimer's Institute to Eli Lilly and Elan Pharmaceuticals. Unfortunately, the data is behind a paywall; however it is not too expensive to access it. 

Cumulative mobile-SEP royalty payments no more than around 5% of mobile handset revenues

As indicated in the recent IP Finance guest posting about the US Court of Appeals judgment in Microsoft Corp. versus Motorola Inc., by Kevin Winters, in some cases there can be a massive difference between what a licensor asks for and what a licensee ends up paying in fees and royalty rates for standard-essential patents. My latest blog posting assesses cumulative royalties paid on SEPs in mobile phones, including multiple licensors, by adding up what is actually paid and what is conservatively the maximum likely to be paid, where actual payment figures are not publicly available. This total is far lower than that calculated by simply piling-up every licensor's rate demands. Expressed as a yield on total mobile handset sales revenues, it is a much smaller percentage than this speculative and defective "royalty stack" calculation.

Cumulative mobile-SEP royalty payments no more than around 5% of mobile handset revenues

Vested interests including leaders at the mobile operator-dominated NGMN Alliance promote the notion that patent licensing fee rates are “perceived” to be too high in mobile technologies; but without substantiation for such claims. Speculation that patent fees, largely for mobile SEPs, may total 30 percent of smartphone costs are projected by Intel and others.[1]  This grossly inflated figure is based on theories of hold-up and royalty stacking that lack empirical support and it ignores marketplace realities including cross licensing and discounting rates for other reasons in patent-licensing agreement negotiations, as I have already noted here and here.  That percentage would equate to more than $110 billion being paid per year in patent fees based on total global handset revenues estimated by Morgan Stanley and IDC to be  $377 billion in 2013 and $410 billion in 2014.

Actual payments are much smaller than such perceptions and projections. The following table summarizes fairly exhaustive analysis of significant mobile-SEP licensing costs based on reported licensing revenues from the audited financial reports of major licensors and other public sources including patent pool rate-card charges.  Based on these figures, it is implausible that total royalties actually paid, including lump sums and running royalties, for standard-essential 2G, 3G, and 4G technologies, amount to more than approximately $20 billion per year. This figure represents a cumulative royalty yield for licensors of around five percent on mobile handset revenues.

Mobile SEP Licensing Fee Revenues and Royalty Yields on Global Handset Market

	2014
	Revenues	Yield*
Major SEP owners with licensing programs: Alcatel-Lucent, Ericsson, Nokia, InterDigital, Qualcomm	$10.6 billion	2.6%
Patent Pools: SIPRO (WCDMA), Via Licensing (LTE), Sisvel (LTE)	<$4 billion	<1%
Others: including Apple, Huawei, RIM, Samsung, LG	<$6 billion	<1.5%
Cumulative maximum:  fees and yield for mobile SEPs	~$20 billion	~5%

* Yields are total licensing fee revenues including lump sums and running royalties as a percentage of $410 billion in total global handset revenues

The majority of mobile-SEP licensing fees are earned by five companies with licensing programs who have collectively contributed most patented technologies to 2G, 3G and 4G standards.  Alcatel-Lucent, Ericsson, InterDigital, Nokia and Qualcomm altogether generate $10.6 billion per year in licensing fees for these and other technologies. Also collectively, this represents a yield of significantly less than three percent of total global revenues for mobile handsets including smartphones.

Cumulative mobile-SEP fees paid also include less than around one percent of total handset revenues to the three mobile-SEP patent pools plus, at most, one percent or so more to other companies licensing mobile SEPs bilaterally. Patent pools lay out their prices and so these indicate the maximum they might be able to collect with willing and responsive licensees and a lot of licensing effort on the part of the pool administrators. The remaining significant mobile-SEP owners are predominantly handset manufacturers who mainly cross-license to reduce royalty out-payments rather than generate royalty income, and so their royalty fee revenues are relatively small. With each percent of royalty yield on total handset revenues now representing more than $4 billion per year in patent fees, there is insufficient evidence and no justification to conclude that opportunists not included in any of the above categories, including so-called patent trolls, patent-assertion entities and other non-practising entities, yield more than a fraction of a percent of total handset costs.

As a percentage of all consumer charges, including handset costs and $1.13 trillion in mobile operator services (GSMA Wireless Intelligence figures), which are also highly dependent on SEP technologies, the cumulative royalty yield shrinks to 1.3 percent.  Deriving this lower percentage yield figure from the broader revenue base is also applicable because it is the innovative and relatively new SEP-based technologies including 3G HSDPA/HSPA and 4G LTE which enable and drive mobile broadband data service growth. Operator revenues in mobile data services (other than basic SMS text messaging) grew from single-digit percentages of total service revenues until the introduction of HSDPA a decade ago, to around 40 percent across the entire Vodafone Group with many different national operators, for example, in 2015, according to the company's annual reports.

My more detailed and much lengthier analysis is in a pdf here.

[1]  A working paper entitled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones was published by one in-house lawyer at Intel and two outside counsel from WilmerHale. Intel Vice President and Associate General Counsel Ann Armstrong and Wilmer Hale's Joseph Mueller and Timothy Syrett argue that aggregate patent licensing fees including SEPs and non-SEPs are excessive at around $120 per $400 smartphone.

Nothing New Under the Sun: “Patent Trolls” Have Been Around Forever (well, at least a couple hundred years)

In a fascinating paper titled, “Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century”, Professor Zorina Khan of Bowdoin makes many interesting points.  Professor Khan, an economics professor who studies law and economics history, essentially states that non-practicing entities (NPEs) have been with us for decades—back to the nineteenth century, that there has not been an "explosion" in patent suits when the last two hundred years are considered, and explains why prizes are not preferable to patents to incentivize invention and commercialization from a historical perspective.  To get a gist of her approach in considering critiques of the patent and copyright systems, Professor Khan states: “In general, these debates and policy proposals are primarily based on rhetoric and self-interest rather than on objective assessments of empirical evidence.”  And, she was referring to debates (very similar to today’s debates) in the nineteenth century. 

In reference to the U.S. Supreme Court eBay v. MercExchange decision concerning injunctions, Professor Kahn notes that:

According to a recent Supreme Court decision, "trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”  The historical evidence refutes such claims, since “non-practising entities” or patent rights-holders who do not manufacture their inventions or final goods are hardly anomalous. Rather, as Adam Smith suggested, specialization and the division of labour are endemic to efficient markets. NPEs were the norm during the nineteenth century, and technology markets provide ample evidence that patentees who licensed or assigned their rights were typically the most productive and specialized inventors. As markets in invention became more competitive, many patentees cross-licensed their patents to other inventors to avoid the potential for conflicting rights. In some cases, patent rights were allotted to companies that intended to produce the invention or associated final goods. But in many others, “speculators” invested in patents with the intention of profiting from the margins of price differentials, without participating in either inventive activity or manufacturing, much as a financial investor might trade in a share in a company in secondary and tertiary markets. These different patterns all characterized a process of securitization that proved to be as fundamental to the development of technology and product markets as it was to the mobilization of financial capital.

Professor Kahn also attacks the notion that there has been a “patent explosion” in recent years (the increase in patenting is likely the result of the introduction of a disruptive technology):

Americans from the beginning of the colonial period have always considered themselves to be exceptionally litigious, and equally hyperbolic about decrying its consequences. Litigation is a function of many factors, including changes in legal rules, uncertainty, conflicting interpretations of rights and obligations, defensive and aggressive measures, and the scale of the underlying market. One of the most straightforward explanations of the volume of patent lawsuits is related to the numbers of patents filed. Figures 1(a) and (b) support the hypothesis that the “patent litigation explosion” merely mirrors a parallel “explosion” in patenting. Patent applications and grants alike have risen sharply, from approximately 270,000 applications and 153,000 grants in 1999, to 543,000 and 253,000 respectively in 2012, with especially rapid growth between 2009 and 2010. Opinions may differ but, although it has increased over the past few years, the rate of litigation (cases as a percentage of patents), is still unexceptional. This is especially true since changes in legal rules (ironically intended to reduce litigation) have led to a nominal or administrative increase in the numbers of cases filed in the most recent years.  

However, two decades may be insufficient to assess whether patent disputes have reached a pathological level. We therefore estimate the long run patterns for patenting and litigation, between 1790 and 2012. Figure 2 shows patent grants per capita over the two centuries of the existence of the federal patent system, for total patents and patents filed by domestic residents. It suggests that the “long nineteenth century” was an extraordinarily creative period in terms of patented innovations, when the numbers of patents relative to population attained levels that have not been exceeded until the final three years. Figure 3 presents the patterns over time of reported patent cases relative to patents between 1790 to 2000.  This historical trend in litigation rates relative to patents granted clearly does not support claims that litigation in the past decade has “exploded” above the long term norm. In fact, the per patent rate of litigation was highest in the era before the Civil War and during the subsequent market expansion that started in the 1870s. Patent litigation rates were increasing toward the end of the twentieth century, but the increase comprised a return toward the long-term norm.

Technological innovations in the 21st century have undoubtedly transformed production and consumption. However, from the perspective of a world where mail was delivered by stagecoach, the advent of the telegraph was far more transformative to communications in the antebellum era than the change from a landline to a cellphone. This was not just true of “great inventions” but also of supposedly incremental discoveries such as safety pins, aspirin and manufactured soap. Every new innovation that mattered in the marketplace brought uncertainties, conflicts and consequences that were initially processed in state and federal courts, until these issues were resolved through various institutional mechanisms. Figure 4 shows new innovations like the telegraph, telephone and automobile were inevitably accompanied by an upswing in total civil litigation. . . .

Enormous profits awaited those who were able to successfully commercialize new inventions and satisfy or anticipate market demand, creating wealth for some entrepreneurs on a scale that was unprecedented then, or since. Numerous inventors were attempting to resolve similar problems, leading to multiple patent interferences, overlapping claims, and efforts to invent around existing patents. Complex combinations of hundreds of patents often covered any particular device, so it is not surprising that intense competition for these excess returns centered around these rights.  Licensing and litigation comprised a common strategy by “practicing” and “non-practicing entities” alike. Austin and Zebulon Parker of Ohio prosecuted claims for licenses against millers across the nation and engaged in countless lawsuits regarding an 1829 patent for an improved waterwheel. George Campbell Carson’s smelting patents were held to be worth an estimated $260 million in damages and royalties and he floated shares in the Carson Investment Company, which was formed to pursue potential defendants.  In the railroad industry “… a ring of patent speculators, who, with plenty of capital, brains, legal talent and impudence, have already succeeded in levying heavy sums upon every considerable railway company in the land…. This case is not an isolated one, but there were hundreds of them, and the railway company that made up its mind to insist upon its rights had to keep a large legal force, a corps of mechanical experts, and other expensive accessories, in order to secure that end.”

Her article is full of interesting examples of NPEs of the nineteenth century, and she also notes that Daniel Webster was paid $332,000 as lead attorney in a single patent case in 1852.  She also makes the argument that historically prizes failed to provide the same technological spillover benefits as patents.  Notably, she states that the only thing really different in patent practice and law today than from the nineteenth century is that legislators are actually passing many more laws to address the complaints about the enforcement and use of patents.  Apparently, there was a little more restraint on behalf of legislators in the U.S. back in the day. 

Who are the “Good” “Trolls”? Or, How to Monetize Well?

This blog, in the past, has discussed the merits of so-called “patent trolls” or patent assertion entities (PAEs), here, here and here.  For sure, some PAEs or "trolls" provide a helpful service for firms, universities and some inventors without the wherewithal to enforce their patents.  And, defining exactly what is a “troll” may be a difficult task.  But, are all PAEs and “trolls” the same?  Are there good PAEs and “trolls”, and bad PAEs and “trolls”?  How do you tell the difference?  Joe Beyers and Wayne P. Sobon (both of Inventergy) recently published an article on Corporate Counsel titled, “Do’s and Don’ts of Corporate Patent Monetization.”  The article helpfully explains why patent owners should beware the bad “trolls” or PAEs and should partner with the good “trolls” or PAEs.  Why should they be concerned?  The authors wisely state that protection of the brand is paramount.  Association with a “bad” PAE or “troll” could reflect negatively upon the patent owner.  The authors provide a list of criteria for choosing a “licensing partner”.  Here are the “Don’ts”:

1. DON’T choose a licensor with a reputation for acquiring poor-quality patents and quickly suing.

2. DON’T select a licensor with a history of settling claims for a lot less than the cost of litigation (i.e., “nuisance fees”).

3. DON’T work with a licensor that sends widespread demand letters to multiple companies with little or no evidence that its patents are being infringed.

4. DON’T use a licensor that’s been the subject of any state actions or consent decrees, or has been forced to pay an opposing party’s attorneys’ fees.

5. DON’T partner with a licensor that operates behind hidden shell companies or otherwise has a reputation for abusive patent assertion behavior.

Here are the Do’s:

1. DO select a licensor that has made a public commitment to transparency and ethical business practices—and then speak with its licensees to confirm that this commitment is genuine in deed as well as word.

2. DO work with a licensor that seeks licenses only from appropriate companies (rather than startups or small retail businesses), and that comes to negotiations with substantive claim charts and other evidence of use.

3. DO choose a licensor that selects, owns and manages high-quality patent assets developed by global operating companies with reputations for innovation, like you.

4. DO use a licensor that takes active steps and commits material resources to ensure the quality of its patents, and vets them prior to licensing.

5. DO ensure that members of the licensor’s executive team have product or service company experience, and understand the needs and concerns of companies like yours regarding patent value creation.

This brings me to my next question.  Well readers, who are the “good” “PAEs” or “trolls”?  Please name them.  

I suppose maybe there are no “trolls”--just naughty behavior. 

Chief Judge Rader’s Recent Comments on Patents and the Federal Circuit Bar Association

The Federal Circuit Bar Association (FCBA) recently released a copy of the remarks of Chief Judge Rader at the recent Eastern District of Texas Bench and Bar Conference.  The FCBA is the bar association for the U.S. Court of Appeals for the Federal Circuit, which hears patent appeals from the district courts in the U.S. along with appeals from the International Trade Commission and the U.S. Patent and Trademark Office.  Chief Judge Rader’s comments address criticisms against the U.S. patent system including the assertion of the tragedy of the anticommons as well as supposed litigation abuses by so-called patent trolls.  Chief Judge Rader notes that empirical evidence doesn’t support the tragedy of the anticommons theory and that the smart phone is a great example of, basically, how the anticommons does not exist.  I believe our fellow blogger Keith Mallinson supports Chief Judge Rader’s view; although I believe, if my memory serves me correctly, that some would argue there is an anticommons like effect in the genetic diagnostics field.  I also wonder about price.  Here are Chief Judge Rader’s comments about the anticommons theory:

As an illustration of the crisis of confidence in the benefits of Patent Law, I wished to just discuss one unsubstantiated charge against the merits of this system of Constitutional dimension.  Academics often charge the Patent system with creating a so-called “tragedy of the anti-commons.”  This academic canard suggests that a “thicket” of patents can actually inhibit innovation; that the administrative burdens of enforcing patents can multiply to frustrate the goal of the Act.  Thus, the law of innovation supposedly works against itself.  In an age of empirical research to verify every legal hypothesis, I would urge you and any policymaker to reject this academic supposition – whether it comes from a high court or any other source – until and unless it is verified by empirical data.   By the way, the only studies on this topic that I have seen could not verify this guess but generally confirmed the opposite – that patents spur innovation. 

May I offer a common sense rebuttal to this academic hypothesis?  [Hold up my smart phone]  This smart phone resides in the technological space most occupied by patents, perhaps in the history of patent law dating back to 1624.  With design patents as part of the equation, this device probably includes easily more than a thousand active patents.  If you count expired patents in this technology back to the advent of the computer age, this device would implicate tens of thousands of patents.  If ever the administrative burdens of a concentration of patents would inhibit innovation, this technology would be the place to observe that encumbrance.  Now you tell me: is this technology experiencing sluggish and encumbered innovation?   I doubt that I could keep track of the pace of innovation in this technology if I devoted my full time to the project.   

No doubt a study would show that the disclosure benefits of patents bring the entire world into the innovation circle that drives smart phone technology forward faster than any of us can fathom.    I am afraid the “tragedy of the anti-commons” has its own tragedy: it simply is academic nonsense.  The patent system does not inhibit invention.

Chief Judge Rader cites his experience working both in the judiciary and in Congress in cautioning the Congress to carefully enact reforms, if any, and to allow the judiciary to correct for any issues from litigation abuse.  Chief Judge Rader first points to the definitional problems concerning the “patent troll”:

Again in simple terms, litigation abuse is a court problem and courts have the best tools to supply the correction. 

Perhaps I could suggest a way that classification fails to address this problem.  Litigation abuse sometimes invites an equally abusive strategy of correction.  This misguided strategy attempts to define some patent-owning entities as the source of the problem.  Regardless of whether you call them NPEs or PAEs or “trolls” or whatever pejorative term suits your fancy, this definition strategy is itself an abuse.   

American law and ethics does not enforce or condition enforcement of basic laws and policy on the characteristics of a party.  American law treats big company and small company, foreign entity and domestic entity, different genders, races, and ethnicities ALIKE.  Our law does not make distinctions based on the characteristics of parties but on their actions proven in a court of law.  The definition of a “troll” will always be over-inclusive or under-inclusive to the detriment of justice.  Instead of finger-pointing and name-calling, the law needs to focus on blameworthy conduct.

Finally, Chief Judge Rader points to three potential avenues of help against so-called trolls.  First, the courts increased use of summary judgment to curb some claims.  Second, the award of attorney fees in exceptional cases—and he notes that the Federal Circuit is “on course” to make it easier for courts to find an exceptional case.  Finally, he points to litigation expense reform and model orders promulgated by the FCBA and the Federal Circuit Advisory Council.  The E-Discovery model order is available here.  The full text of Chief Judge Rader’s remarks are here. 

Since I mentioned the FCBA, I’ll give a “plug” for the FCBA and a panel I am moderating soon.  The FCBA offers a number of other activities, including webinars, conferences and interesting opportunities such as the International Series and the Global Fellows Series.  The FCBA also publishes a newsletter and a law review, The Federal Circuit Bar Journal.  Membership costs are relatively modest and all webinars offered by the organization are free for members.  I am pleased to work with the Diversity Committee of the FCBA and we are offering a webinar, in conjunction with the Law Clerks and Students Committee, concerning intellectual property career planning directed at law students and attorneys with 1-5 years of experience.  The webinar is free for students and members, and will be held this Wednesday (November 6) from noon to 1:30 pm (Pacific Standard Time).  The panelists are: Judge Paul Grewal, Magistrate Judge, U.S. District Court, Northern District of California; Jack Hobaugh, Counsel and Senior Director of Technology, Network Advertising Initiative, Washington D.C.; Paul Korniczky, Partner, Leydig, Voit & Meyer, Chicago, Illinois; Christy LaPierre, Associate, K&L Gates, San Francisco, California; Kim Tran, Associate, Perkins Coie, Palo Alto, California; and A. E. Williams, Retired Patent Examiner, U.S. Patent and Trademark Office. 

What Kind of Damages Does an NPE Deserve?

With all of the media attention that has been given the $1.05 billion dollar verdict in the Apple suit against Samsung, it is a bit surprising that there has been relatively less coverage of the $1.17 billion dollar verdict given on December 26, 2012 in favour of Carnegie-Mellon University (CMU) in its patent infringement action against Marvell Technology Group. The jury verdict, if it stands (and not surprisingly Marvell has sought to overturn it), ranks as one of the largest such awards ever given.

The case is now back in the headlines, following the court filing made by CMU this week, requesting that the court award it up to three times the jury award (so-called treble damages) on the ground that Marvell was a willful infringer of the CMU patents here. Under U.S. law, a court may make an award of three times the amount of damages for infringement in such circumstances. Also, CMU is seeking $321 million in pre-judgment interest. The patents in question were issued in 2001 and 2002 and the case was filed only in 2009. The claim is that Marvell, a major chip maker, has sold without CMU's permission billion of chips that incorporate the patented technology.

The court award and CMU's most recent court filing raise once again several related questions in connection with the current state of patent litigation in the U.S. The first is how to calculate damages when the plaintiff is a non-practising entity (NPE). While few would call CMU a patent troll per se, it being a major university engaged in high level research and teaching, the fact remains that CMU is not primarily in the business of creating technology for purposes of tech transfer and commercialization. True, the school seeks commercial opportunities for such transfer and commercialization, but this is certainly ancillary to its educational function. Moreover, whatever the place of such commercial activities within CMU, they do not include manufacture of products made under the university's patents. And so the question—should a special standard be applied for assessing damages be applied when the plaintiff is an NPE of the CMU type?

Second, what should we make of CMU's request for treble damages? Even for a PE-type of plaintiff, the issue of treble damages raises policy issues. In particular, does an award of treble damages provide any realistic deterrent against "willful infringement"? After all, the award is made from one private party to another. In a sense, the private party plaintiff is awarded a windfall in the name of the public interest in future deterrence of patent infringement. Unless there is some good evidence that deterrence does in fact take place, the argument for treble damages seems flimsy. This is especially so, given the sometimes legal hyper-technical nature of what constitutes willful infringement.

A fortiori, should an award of treble damages to an NPE of the CMU type ever be justified? True, as a private university, CMU can use every dollar that it can in maintaining the university (who can't). Still, do we really want CMU (or indeed any NPE) fully engaged in the same manner as Apple and Samsung over the issue of treble damages?

Patent trolls aren’t all they are cracked up to be

IP Finance is pleased to welcome back Keith Mallinson, whose guest posts on patents, standards and FRAND licensing in the telecom sector have been read with great appreciation.  This piece takes a look at the realities of licensing through the prism of Judge Randall Rader's "trolls and grasshoppers" analysis. Keith ends by calling for patience while existing licensing practices under the current law work things out.

"Patent trolls aren’t all they are cracked up to be 

There is a lot of pending patent litigation in mobile communications with 3G and smartphone technologies. This includes standard-essential and other patents, practicing entities that produce products and non-practising entities (NPEs) who do not. Numerous suits and countersuits in several nations between Apple and Android device producers Samsung and Motorola Mobility are particularly prominent. In addition, for example, NPE IPCom acquired a portfolio of mobile phone technology patents from defunct mobile phone manufacturer Bosch; and has vigorously pursued HTC, Nokia and others for royalties.

Smartphone ecosystem participants are jockeying for position in a new order with a rapidly changing and expanding ecosystem. This indicates an industry in rude health, not malaise. Following lacklustre mobile phone market developments beyond voice and text until the mid 2000s, the smartphone revolution began in earnest with the introduction of Apple’s iPhone in 2007. Previous smartphone market leaders Nokia and RIM have been completely up-ended by the rise and new leadership from Apple and Google’s Android including its many licensees. Meanwhile, this IP-rich industry is flourishing: innovation continues, customer choice is increasing and sales are booming for smartphones and other smart devices such as tablets. Smartphones and tablets are becoming the primary means of Internet connectivity with applications, services and usage levels that were unthinkable just a few years ago.  

Yet there are interventionist moves afoot to prevent allegedly harmful behaviour by patentees, particularly with respect to enforcing their rights in standard-essential patents (SEPs). In addition to interested parties and commentators, European and US competition authorities are also weighing-in publicly on this matter. Knee-jerk reactions by the latter that would overturn long-standing legal rights and remedies would be a grave mistake. The patent system including licensing of (F)RAND-based SEPs has worked extremely well. There is no reason to presume that current levels of smartphone IP litigation are more than a transient phenomenon, or that licensing offers prior to consummated agreements are anything abnormal in the cut-and-thrust of licensing negotiations that typically result in concessions, compromises and cross-licensing. There is no evidence of consumer harm--suspension of sales through injunctions has been minimal--or that outcomes, following the machinations of negotiation, litigation and in some cases commercial court rulings will be unfair, unreasonable or discriminatory. 

Trolls and grasshoppers 

NPEs that are solely in the business of asserting patents, typically acquired from others, are politely referred to as Patent Assertion Entities (PAEs) and disparaging as patent trolls when demands are regarded excessive and unreasonable. However, the latter are somewhat like the fantasy creatures after which they are named: they cause a lot of commotion and scare some folk, but tend not to receive what they demand and ultimately get their comeuppance. The troll in the Billy Goats Gruff tale hid under a bridge to ambush the goats and threaten to “gobble them up” as they tried to cross the stream. However, the troll met his match with the largest of the three goats who threw the troll into the stream out of harm’s way and never to be seen again.

Remarks by Court of Appeals Chief Judge Randall R. Rader in a conference speech last fall provided an astute perspective on extreme behaviours and outcomes in patent cases including trolls and their opposites the “grasshoppers”. 

“Of course, before we can control trolls and grasshoppers, we have to know who they are. And again, OF COURSE, that is the difficulty! Even some Supreme Court justices have referred to the non-practicing entity, the proverbial NPE. We also all understand that the NPE designation sweeps in some unintended “culprits” like universities and research clinics and can also extend to almost every corporation and business because they practice only a fraction of their patent portfolio. For that reason, I have always preferred an alternative definition of a “troll,” namely, any party that attempts to enforce a patent far beyond its actual value or contribution to the prior art.

Every “troll” discussion, however, needs a note of balance. Just as trolls litter the patent system with marginally meritorious lawsuits, so the system also suffers from the IP “grasshopper.” The IP grasshopper is the entity that is quick to steal the “inventor-ant’s” work and research investment because he did no work himself and the winter of competition approaches. We can recognize the grasshopper because he refuses to pay any license fee until his legs and claws are held to the proverbial litigation fire. Once again, a grasshopper is hard to define, but I can venture a description according to the same basic notion that helped us identify the troll: A grasshopper is any entity which refuses to license even the strongest patent at even the most reasonable rates.

Frankly I am not sure who causes more meritless litigation—the troll asserting patents beyond their value or the grasshopper refusing to license until litigation has finally made it impossible to avoid. I am surer, however, that both the troll and the grasshopper tend to blame and feed off of each other. Neither deserves encouragement or tolerance.”

When NPEs attempt to enforce their patents beyond their worth they typically fare poorly with court judgments. For example, in the long-running telecoms patent dispute between Nokia and IPCom, the High Court for England and Wales has recently ruled that IPCom’s European patent (UK), which related to the handover of mobile phones between different base stations (e.g., when the mobile user is on the move), was invalid as originally granted. According to Nokia, and as reported by the IPKat, this “marks the sixtieth patent invalid as granted since IPCom began its aggressive campaign against Nokia and other industry players more than four years ago”. Academic research also indicates that NPEs almost never win their cases in court. A 2010 paper by Allison, Lemley and Walker indicates that whereas product-producing entities win 40% of their cases on the merits, NPEs win only 8% of their cases. Given that out-of-court settlement figures tend not to be disclosed publicly, it is anyone’s guess how large payments are in these cases. 

Even though the above should be reassuring for product companies, the nuisance factor and costs of litigation including discovery and other legal fees can, nevertheless, be quite onerous. Judge Rader expressed a need to bring discipline to the disproportionally high US discovery expenses in patent cases. He went on to state:

“…it is difficult to control the troll or the grasshopper in advance because they cannot really be identified until their abuse is already over—the troll has lost its case of little value or gotten negligible value for a nominally winning case; the grasshopper has finally accepted a reasonable license fee after dragging the court and the patent owner through years of litigation. The troll and the grasshopper only emerge after the case is over..”

He proposes that when the case is over and the court can identify a troll or grasshopper, there should be a full reversal of attorney’s fees and costs. This would, for example, discourage plaintiffs from using discovery (costs) as a tactical weapon. Costs defending meritless claims are generally significantly less outside the US. For example, in the UK the loser typically pays the costs and US-style discovery is not possible in continental Europe. 

Extreme demands by practising and non-practising entity patent owners seeking unreasonably large sums for weak patents and extreme resistance by product-makers who refuse to pay a fair price for the IP they exploit are mostly kept in check by the courts, as indicated by Judge Rader. Large payments can grab press attention, but these are the exception and can result from tactical blunders by defendants who could have settled sooner at lower cost. RIM’s agreement to pay the NTP $612.5 million in a “full and final settlement of all claims” is the most well-known NPE settlement in mobile communications patent litigation. This dispute was not about SEPs. RIM could have avoided paying so much if it had not painted itself into a corner with the imminent prospect of having its email system shut down to the detriment of anxious customers, such as the US Department of Defense with its concerns about maintaining national security. 

Unintended consequences 

Competition authorities should have the patience to let the existing patent laws, established licensing practices with bilateral negotiations and, when necessary, commercial courts, work things out. The smartphone marketplace is in significant flux. No company or companies have anything like market dominance or the large and stable market shares observed elsewhere, such as in PC operating systems or microprocessors. There is no proof of patent “hold-up”; in fact, aggregate SEP royalties have fallen as standardisation has progressed in mobile technologies. Absent proven market failure or consumer harm, the market should be left to establish absolute values in patent licensing, or relative values for SEPs versus other patents. Alternatively, regulators would be drawn to employ simplistic analysis that overlooks the money invested and value derived from IP versus commodity costs in hardware manufacture. They would likely impose arbitrary royalty rate caps and subjective patent evaluations of great inaccuracy. Competition authority intervention could cause distortions that undermine incentives to continue making the large investments in SEPs and other IP while tilting the playing field in favour of one vested interest group or business model to the detriment of others".