More Misinformation Regarding the Patent System and Non-Practicing Entities

By Michael Borella and Andrew Williams --

The press has been all too eager to decry the so-called "broken" U.S. patent system and the alleged "scourge" of non-practicing entities (NPEs).  However, few if any articles attempt to provide an even-handed analysis of these issues.  Recently, Jon Potter and Julie Samuels published a piece in Roll Call, urging Congress to pass comprehensive patent reform legislation to clamp down on NPEs, while James Bessen, in The Atlantic, lauded the Supreme Court's recent Alice Corp. v. CLS Bank Int'l decision for already having a deleterious impact on business method patents.  Samuels was formerly of the Electronic Frontier Foundation (EFF), a group with an anti-patent agenda.

The need for patent reform has arguably diminished.  Three decisions handed down by the Supreme Court last year, Alice, Octane Fitness, LLC v. Icon Health & Fitness, Inc., and Nautilus, Inc. v. Biosig Instruments, Inc., each addressed one of the alleged weakness in the patent system that so-called trolls are thought to exploit.  These cases have been credited for the drop in patent litigation seen since the end of the Court's last term.  Moreover, the Patent Trial and Appeals Board ("PTAB") has been accused of becoming a patent "death squad" because of the large number of inventions that it has recently found to be unpatentable.

These articles, therefore, appear to be desperate attempts to flame the anti-patent fervor that existed last year.  As we have come to expect, both articles present only one side of the story, and do not consider the negative consequences that further anti-NPE legislation could bring about, and that the Alice decision has already produced.  Further, the authors make unsupported assertions, draw questionable conclusions, and exhibit a profoundly flawed understanding of patent law.

For example, as with similar articles, the Potter and Samuels's article starts from the presupposition that "our patent system is out of balance," citing the Alice decision for support.  The unsuspecting reader will assume that this is a forgone conclusion.  Nevertheless, it is through their explanation of how this decision and proposed legislation are meant to "solve" the supposed crisis, the authors reveal a lack of understanding of the historical and philosophical basis of the patent system.

To that point, the authors equate "trolls" with NPEs (non-practicing entities).  The term NPE, however, encompasses all entities that do not manufacture products, including most universities, research institutions, and individual inventors.  Interestingly, Ms. Samuels's previous organization, the EFF, accused universities of fueling the patent troll problem.  Patent asserting organizations have been acknowledged by most, including the White House, to serve an important role as mediator between such NPEs and operating companies often necessary to commercialize inventions.  In fact, the United States' patent system purposefully encourages such actions by making patent property rights freely assignable and eschewing a "working" requirement.  This philosophy goes back to the framers of the Constitution, and allows the patent system to be accessible to everyone, not just those with abundant resources.

Potter and Samuels go on to assert, without citing any support, that NPEs "grievously injure innovators, bankrupt small companies, and waste judicial resources."  Yet, the current functioning patent system is essential to the business models of these same innovators and small companies.  Without patents, the innovations of a small software company can be easily reverse engineered and copied by larger players with more market clout, or foreign companies with lower overheads.  Trademarks, copyrights, and trade secrets do little to help in these situations.

In addition, the authors fail to consider the fact that these "innovators" and "small companies" (or any defendant in a patent litigation case for that matter), might actually infringe a valid patent.  If so, should they be allowed to freeload off the labor of others without penalty just because the patent at issue encompasses a business method or software, or happens to be owned by an NPE?

Bessen states that a recent the Government Accountability Office ("GAO") report "attributed 89 percent of the increase in patent litigation [in the 2007-2011 time frame] to software patents."  This report, however, conflated actual software patents and business method patents, collectively referring to both as "software patents."  In fact, the GAO found that "operating companies brought most of the patent infringement lawsuits from 2007 to 2011."  Additionally, the report indicated that the number of defendants in software and business method patent litigation increased 89 percent, but the number of lawsuits increased more modestly.  According to the report, the increase in the number of patent lawsuits in 2011 "was most likely influenced by the anticipation of changes in the 2011 Leahy-Smith America Invents Act (AIA), which made several significant changes to the U.S. patent system, including limiting the number of defendants in a lawsuit, causing some plaintiffs that would have previously filed a single lawsuit with multiple defendants to break the lawsuit into multiple lawsuits."

Of course, even if there was an increase in software patent litigation, it would have likely been a reflection of the increased importance of software in our everyday lives.  The 2007-2011 time frame tracks the rise of the smartphone and always-on computing, dramatic growth in social media, and a multimedia streaming revolution led by Netflix and YouTube, among other factors.  Like it or not, software is now an integral part of our personal and professional lives, as we carry our laptops, tablets, phones, e-readers, and digital fitness trackers with us whether we are going to work or on vacation.  An increase in the number of software patents granted, as well as an increase in software patent litigation, is a natural consequence of the ubiquity of software.

Certainly, no one is denying that there are bad actors that abuse the litigation system both with regard to intellectual property rights and otherwise.  However, elevating this minority of cases to be representative of the norm is not a reason to dispense with the entire system.  In fact, Bessen's methodologies for assessing the cost of so-called patent trolls have been called into question.  See, e.g., Schwartz & Kesan, Analyzing the Role of Non-Practicing Entities in the Patent System, Cornell Law Review, Vol. 99:2, pp. 425-56 (2014).  As a result, the implications that can be drawn from the data with regard to the impact of NPEs on the system are dubious at best.

With respect to the Alice decision, both sets of authors ignore the damage that this case has already caused to the patent system.  Under Alice, when determining whether a patent claim meets the statutory requirements for patent-eligibility, one must determine whether the claim is directed to a patent-ineligible law of nature, natural phenomenon, or abstract idea.  If so, then one determines whether any additional claim elements transform the claim into a patent-eligible application that amounts to significantly more than the ineligible concept itself.

This two-prong test has been widely criticized for its vagueness and subjectivity.  The Supreme Court refused to define what it meant by the term "abstract idea," leading to consternation among patentees, patent attorneys, and even federal judges.  For instance, Judge Wu of the United States District Court for the Central District of California criticized Alice for setting forth an "I know it when I see it" test.  Judge Pfaelzer, a colleague of Judge Wu, wrote that the Supreme Court's patent-eligibility cases "often confuse more than they clarify [and] appear to contradict each other on important issues."

The Supreme Court also blurred the lines between the assessment of patent-eligibility and other patentability requirements.  The patent law requires that, among other things, claims must be novel and non-obvious, as well as encompassing patent-eligible subject matter.  In 1981, the Supreme Court clarified that each of these inquiries were separate and distinct, and that it was "inappropriate to dissect the claims into old and new elements and then to ignore the presence of the old elements in the analysis."  Alice, as well as its 2012 predecessor case Mayo Collaborative Servs. v. Prometheus Labs., Inc., turned this notion around.  Now, when conducting a patentable subject matter review, claims can be analyzed element by element and compared to prior art.

As many commentators have articulated since the Mayo opinion was handed down, determining whether the breadth of a claim is appropriate is better served by conducting the well-understood and more objective and established analyses of novelty and obviousness.  Despite the lack of any suggestion from Congress that patent-eligibility is to be used for these purposes, the Supreme Court, now followed by the Federal Circuit, has made patentable subject matter a perverse weapon for the unsupported rejection and invalidation of claims.

The well-understood obviousness analysis asks whether the differences between the claimed invention and the prior art would have been obvious to one of ordinary skill in the art.  The Alice test, for a claim that incorporates a preexisting algorithm or a longstanding practice, inquires if the claim adds "significantly more" to that algorithm or practice.  The substantive difference between the two is that the obviousness test is grounded using prior art as a reference point for what is known, while the Alice test is not.  This eliminates much of the objectivity from the Alice analysis, putting thousands of patents in a state of legal uncertainty.  The "validity" of such patents may depend on which judge or panel conducts the test.

Bessen goes as far as to suggest that while the Alice decision is limiting the number of granted business method patents, it hasn't gone far enough to similarly limit software patents.  But why should we view patents in such sweeping terms, with the connotation that business method and software patents are inherently bad?  Patents are either valid or invalid, regardless of the technology claimed therein.

Furthermore, the implication that software should not warrant patent protection unfairly singles out one of the greatest drivers of the U.S. economy over the last forty years.  A major aspect of innovation is to make products and services faster, cheaper, and better.  The patent system is intended to incentivize individuals and organizations to publicly disclose such inventions, and as a result receive a limited exclusive-use property right thereover.  Despite contentions of the deleterious impact of a "broken" patent system on the software industry, the computer and information industry as a whole continues to grow, as evidenced by recent record-breaking stock values, billion-dollar acquisitions, and successful initial public offerings. A broad exclusion of computer-implemented inventions is illogical and disregards the fundamental tradeoff on which the system is based.

Graphic of troll (above) by JNL was modified (cropped) from a graphic available at the Wikipedia Commons, pursuant to the Free Art License.  Any use of the modified graphic is subject to the same license.

Comments

[Skeptical]

Careful there Michael and Andrew, lest you invite the scourge of being labeled an "invested interest" and have your correction of misapplied facts and the use of real facts spun so that it appears that you are doing that which the accused are doing: being biased to fit a particular agenda and spreading misinformation and confusion.

[EG]

Michael,

A very nice article. The factual support for any position taken by Bessen and his cohort Meurer has been repeatedly shown to be suspect. Unfortunately, the media choose to overlook factually flawed basis for these disingenuous positions taken by Bessen/Meurer.

[Kaptain Korwood]

I'm glad to see that Patent Docs is finally giving up the pretense of trying to be a thoughtful blog and instead diving straight to the bottom of the barrel where it seems most comfortable:

"Samuels was formerly of the Electronic Frontier Foundation (EFF), a group with an anti-patent agenda."

Here's the EFF's statement on their website which is orders of magnitute more accurate than this lame "anti-patent" smear:

"The system of patents as it currently stands, especially in the world of software, is unsustainable. We need a patent system that actually fosters innovation—or at least, one that gets out of the way. That's why EFF has launched Defend Innovation. This campaign suggests 7 proposals to address the most egregious problems with the software patent system and solicits the opinions of Interenet users for their thoughts about software patents and ideas for addressing the problem."

This blog isn't helping itself lately. You all should try to keep your shirts on because you're not going to "win" this way.

[Kaptain Korwood]

"As we have come to expect, both articles present only one side of the story, and do not consider the negative consequences that ... the Alice decision has already produced."

What "negative consequences" has Alice produced? Ineligible claims that should never have been granted are not being granted; those that were granted are being invalidated.

What's "negative" about that? Are you suggesting that there aren't enough ineligible or invalid claims out there already? Last time I checked the PTO was still granting patents in historically unprecedented numbers, something they've been doing annually every year for the past twenty years.

[Mike Borella]

Kaptain, re-read the last six paragraphs of the post for a discussion of the negative consequences.

[Kaptain Korwood]

Mike, with all due respect, those paragraphs appear to have been written by someone completely clueless about subject matter eligibility, why it exists, and how it must be dealt with.

You're correct that people have been whining that "obviousness can do the job." But those people were always wrong, they were told why they were wrong, they were unable to respond to the criticisms of their position ... and yet they keep making it.

Guess what? Didn't work then. Won't work now. Won't work ever.

Let me know if you need me to hold your hand and walk you through it.

[Bruce]

One thing that is routinely ignored is that there hasn't been a patent litigation explosion - except for the additional suits filed as a result of the AIA requiring separate suits for different alleged infringers. If you look back enough years (yes, hard to do, but possible, as shown by the work of Dr. Ron Katznelson), there was much more patent litigation, as a percentage of patents issued, etc., in the 1920s and 1930s, all the way up to the U.S. entry into WW II.

[Skeptical]

Perhaps Kaptain Korwood (aka KK, aka MM, aka Malcolm Mooney, aka sockpuppets-are-the-worst-thing-ever-unless-I'm-the-one-using-them) would care to explicate why the paragraphs appear to be "written by someone completely clueless about subject matter eligibility" - and do so without trying to over-expand a theory based on mere aggregation (which applies with or without any claim elements that may sound in any type of "totally in the mind" character).

Can he do so in a straight forward, intellectually honest and competent manner?

Me, I am....