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mlex
MAGAZINE
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An out-of-control patent system is overloading U.S.
courts and federal agencies with complex decisions
on the digital economy they may not be equipped
to make, and which could trigger a backlash.
Juliane von Reppert-Bismarck investigates
Juliane von Reppert-Bismarck
MLex U.S. Managing Editor, Juliane von Reppert-Bismarck has written for The Wall
Street Journal, Newsweek, the Associated Press and Thomson Reuters among others,
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trade and environmental issues won her several awards, including a 2006 Business
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October-December 2012
mlex magazine13
patent litigatiOn
An out-of-control patent system is overloading U.S. courts and federal agencies with
complex decisions on the digital economy they may not be equipped to make, and
which could trigger a backlash. Juliane von Reppert-Bismarck investigates
I
n 2000, David Martin approached
the U.S. Patent and Trademark
Office in Washington, D.C. with an
unusual offer: at no initial cost, the agency
could run U.S.-issued patents through a
software program he had designed, and
on the basis of the results, declare a third
of all U.S. patents invalid.
“They turned me down, politely.
There’s no interest in revealing that
the U.S. is not as inventive as everyone
says it is,” the 45-year-old patent expert
said recently over a cup of mint tea in
downtown D.C. “The patent business is a
bubble that no-one dares to burst.”
Senior officials at the patent office
dismissed Martin’s technology in 2001,
after it had turned up thousands of patent
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October-December 2012
duplications. Yet, as executive chairman
of innovation-finance firm M-Cam,
Martin has been taking the message of
invalid and plagiarized patents to as many
people as are willing to listen. In a recent
collaboration with the World Bank’s
Information for Development Program,
he launched an online database of
gadgets, whose duplicate or lapsed patents
in computer technology, advanced energy
and agricultural technologies represent
potential license savings worth more
than two trillion dollars, according to the
World Bank.
Still using his linguistic analysis
software that seeks out duplicates in
thousands of subtly-worded patents
from around the world, Martin is little
closer today to piercing the bubble.
But he counts among his clients large
investors, hedge funds and banks who
base investment decisions on analysis that
declares about one third of U.S. patents
as invalid duplicates – analysis that makes
policy makers uncomfortable.
“There is a powerful interest in keeping
intact the idea of America the Great
Innovator, alongside Europe and Japan,”
Martin said.
National attention
Since Martin began calculating the value
of patents for financial and government
clients – and declaring many invalid on
the way – the question of patent validity,
ownership and litigation has come to
iStockphoto
papeR WeigHt
national attention in the U.S.
U.S. agencies, politicians and the
highest court have been trying to restrain
a surge in patent litigation in the U.S. that
has clogged up courts across the country,
as patent empires battle for a share of the
digital-technology-patents market, which
is booming with little certainty over its
true value. Among other things, concerns
are rising that financial institutions may
be making loans to companies based on
patent pools of questionable worth.
But several pressures are exacerbating
the trend for increased litigation:
pressure on patent offices to grant new
patents; shareholder pressure on large
corporations to sell unwanted patent
pools at a profit; the promise of lucrative
licenses and settlements; and the growing
trend by corporations from emerging
economies such as China to license their
innovation.
Faced with overburdened U.S. courts,
patent litigators’ attention is shifting
to faster, cheaper alternative legislative
venues such as the International Trade
Commission, as well as courts abroad.
And now, warnings are growing that these
venues may be ill-equipped to decide IP
battles.
The surge in patent and IP litigation
has had some very tangible effects.
Tyler, Texas, was a backwater known
for roses and brick streets until the local
headquarters of the Eastern District
Court of Texas reinvented itself as a
plaintiff-friendly patent court alongside
the Court of Appeals for the Federal
Circuit. Since then, patent holders
around the country have been setting up
post-box offices, filing their complaints
and sending armies of lawyers to the
district. That is, until the court became
so back-logged that lawyers started
targeting alternative courts in Delaware
and Virginia. And even those courts
are becoming dangerously clogged with
complaints.
Two developments in U.S. law were
expected to lessen the onslaught of
patent cases and requests for injunctions.
The first of these was a Supreme Court
ruling over eBay, which limited the
possibility of requesting injunctions for
patent infringements. The second was a
patent-law reform known as the America
Invents Act, signed into law by President
Barack Obama in September 2011.
Among its many elements, the reform
crushed the kill-many-birds-with-one-suit
tactic employed by professional patent
holders also known by the less flattering
term patent trolls – by restricting the
number of defendants in any one case.
The law did little to quell appetite for
litigation, but it did do something else:
It forced litigants to file multiple rather
than single complaints, slowing the courts
down further and triggering case transfers
to other districts, where plaintiffs are less
sure of a positive outcome. And it raised
the cost of the fight. A run-of-the-mill
patent case, including legal discovery and
legal fees, costs upward of $ 5 million,
according to people familiar with the
industry.
“What people want to know now
is, what courts are there that are
fast, inexpensive and fair,” said Craig
Opperman, a partner at DLA Piper in
California who advises clients on patent
strategy.
Fast turnaround
For holders of patents for technology
sold into the vast consumer market of
Europe, German courts in Düsseldorf
and Munich are emerging as popular and
efficient venues that turn cases around
fast and can cut litigation cost by as much
as 80 percent. For holders of technology
the law did little to
quell appetite for
litigation, but did
force litigants to file
multiple rather than
single complaints
used globally, such as smartphones,
even cheaper and faster venues such as
Australia’s courts have started seeming
attractive.
For companies that still want a U.S.
venue that will decide patent rows
in a fraction of the time taken by a
regular court, and that may, despite the
Supreme Court’s eBay decision, issue an
injunction of sorts, a favored venue has
now emerged: the International Trade
Commission.
The ITC is a glum-looking building far
from D.C.’s central agency strip. Its long
corridors and some of its courtrooms
have low-slung ceilings; its judges often
shield sensitive hearings from prying
ears, and lawyers fighting over patents
here are famously taciturn. Growing to
prominence in the 1970s and ‘80s when
U.S. fears of rival Japanese technologies
peaked, its instincts are still rooted in
trade protectionism, experts say, and it
has gained a reputation for helping patent
owners fend off imports of foreign foes,
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patent litigation
patent litigation
According to a 2011 study by the
Federal Reserve Bank of San Francisco,
36 percent of the price U.S. consumers
pay for imported goods goes to U.S.
companies and workers. A study in the
same year by the Personal Computing
Industry Center estimated that Apple’s
profits on iPads imported from China
made up 30 percent of the iPad’s cost to
consumers.
iStockphoto
Risk of damage
Bright ideas need protection
thanks to its power to impose import
bans on goods when it deems they
contain infringed U.S. patents. Struggling
with a burgeoning caseload, the agency is
building a new courtroom especially for
IP proceedings.
“The ITC is not very well equipped
to be issuing preliminary injunctions
when it comes to these very complex
cases. There’s a lot of pressure to act in
a way that seems protective of domestic
products,” said Keith Maskus, a research
fellow at the Peterson Institute for
International Economics in Washington,
D.C. and professor for economics at the
University of Colorado.
But while U.S. plaintiffs would
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October-December 2012
previously have been attracted by any
pro-U.S. protectionist characteristics
in the ITC decision-making process,
“increasingly the companies see cases
there as a nuisance,” Maskus said.
One of the reasons for this is that
the ITC is not sensitive to the reality of
increasingly globalized production chains,
and that foreign firms are increasingly
licensing their patents in the U.S. In the
case of tech giants Apple and Microsoft,
such production chains mean that the
firms’ own technology ends up being
injected into hardware such as iPhones
or Xbox game consoles abroad, and
then imported into the U.S. as foreign
products.
So when the ITC issues an import
ban based on its remit to protect
U.S. intellectual property from unfair
competition, it risks hurting domestic
economic champions such as Apple.
Still, the ITC faces a growing IP
caseload, much of it targeting U.S. firms.
This summer, the ITC released a report
showing a 530 percent increase between
2000 and 2011 in investigations triggered
by patent and trademark complaints
brought under Section 337 of the Tariff
Act of 1930. Smartphone companies
involved in such investigations during the
first half of 2012 included: Apple, with
14 investigations opened against it; HTC,
with eight investigations; Motorola with
four; Samsung, Research in Motion and
Nokia each with three; and LG with one.
Numerous legal firms have ramped up
their IP and ITC practices in D.C., with
some doubling the size of their teams,
according to data from London-based
Chambers and Partners, which compiles
legal rankings.
Stern statements by senior U.S. officials
and policymakers – from the Department
of Justice and Federal Trade Commission
to Capitol Hill – that the ITC should
consider the effect of smartphone import
bans on U.S. consumers have triggered
considerations of legislative reform for
the agency.
But any such moves will take years to
evolve, if at all. Recent plans at Congress
to rein in patent-troll suits are stumbling
over the virtual impossibility of defining
trolls – even though they have been
credited in D.C. with raking in $ 29 billion
in settlements and licenses in 2011 alone.
And critics warn that at the nub of it,
the problem is deeper than that: among
other things, it is rooted in the inability
of patent offices to truly assess whether
inventions presented for patents are truly
original.
“Theoretically you can’t get a patent for
an invention that someone else made. In
practice, nobody can check everything. I
have no idea what is being invented and
patented in China at the moment,” said
DLA Piper’s Opperman. Short-staffed
patent offices around the world have
acknowledged for years that they cannot
give due attention to each application,
and – with communication difficulties
exacerbated by a race for innovation –
there is little communication between
national patent offices.
Moreover, it is proving almost
impossible to value existing patents
that are submerged in vast patent pools
containing thousands. Patent analysts use
either software or manual evaluations on
a small sample of patents to extrapolate
the total value of a patent pool. Given
analysis by the UK Intellectual Property
Office that 42 percent of UK patent
value is derived from 0.8 percent of
all UK patents, extrapolations may be
problematic.
“Of course inaccurate patent valuations
create financial risk, but that is no
different than inaccurate stock valuations,
inaccurate real estate valuations, or
whenever anything needs to be valued
as the basis of an investment. A lot of
work is going into creating systems for
proper patent valuation, including David
Martin’s efforts, but valuation is not a
perfect science,” said Jay Erstling, a law
professor at the William Mitchell College
of Law who previously served as director
of the Patent Cooperation Treaty and
adviser to the Director General of the
World Intellectual Property Organization
in Geneva.
Racing the bubble
Any improvements in patent valuation
still rely upon the authorities’ willingness
to probe a decades-old bubble, and they
are racing against new bubbles forming in
emerging economies.
Between 2009 and 2010, global
patent applications rose 7.2 percent to
1,979,000, according to Wipo’s most
recent statistics report. Of these, Asian
economies submitted 51.3 percent –
almost twice as many as the U.S., and
three times as many as Europe. China
was the most prolific applicant, filing 24.3
percent more applications in 2010 than in
2009, and trailing only the U.S. in annual
applications.
That trend is leading industry observers
to predict an expanding stage for patent
battles, as powerful innovators such as
China, Brazil and India decide whether to
shape IP legislation in the U.S. mold.
“As China, India, Brazil and Taiwan
develop their own stronger and stronger
industries and become IP powers
themselves, it’s likely that they may begin
to mimic the U.S.,” Erstling said.
Stepping out into the street in D.C.
and eyeing an iPad poster with suspicion,
David Martin puts it more bluntly:
“American policy makers have no idea
how gigantic the yawning jaws are that
will bite back before too long.” n
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