Financial Times to "the Patent Troll Narrative" -- Much Ado About Nothing

By Kevin E. Noonan --

Yesterday, the Financial Times (London) published an article by Rana Foroohar entitled "Big Tech vs. Big Pharma: the battle over US patent protection."  If the article can be encapsulated in a word, that word would be "debunked" for what the article calls the "patent troll narrative" that patent trolls are impeding innovation and costing U.S. jobs to go down and consumer costs to go up.  As has been said in other contexts, "it ain't necessarily so" and, in fact, it isn't so at all.

The article starts with a testimonial from Sherry Knowles, former Chief Patent Counsel at GlaxoSmithKline and a breast cancer survivor, who acknowledges that the drug that "saved her life" -- Adriamycin -- would not have been able to be developed had it been discovered under the unfriendly conditions patentees face today.  She recites an inconvenient truth sometimes ignored by policymakers unduly swayed by the desired outcome of cheaper drug prices:  "[i]f companies can't defend their intellectual property, they won't invest.  It's that simple."

While noting that Big Pharma is unlikely to garner much sympathy, the article properly notes that voices that have been raised against current trends in the USPTO, Congress, and the courts (particularly the Supreme Court) include start-up biotech companies, semiconductor and electronics firms, universities, and other innovators, precisely the sources of both innovation and job growth.

The article discusses the reasons for the complaints -- changes in patent laws including the America Invents Act and Supreme Court decisions like Mayo Collaborative Services v. Prometheus Laboratories and Alice Corp. v. CLS Bank and some of the negative consequences of these trends.  For example, the article shows that the U.S. (which spends 2.79% of gross domestic product on research and development, a total of $518,077,890,000 in 2015 according to the World Bank) has gone from 1st to 10th in patent protection according to Chamber of Commerce, and is now tied with Hungary (which spends 1.38% of its GDP on R&D, a total of $1,715,933,400).  As a consequence, the article says that some companies are encouraged to engage in "efficient infringement" defined in the article as companies that "simply copy or take the IP they want, then settle with aggrieved parties out of court for less than the full value of the IP."

The reason for the change:  "the patent troll narrative," which the author says had reached a "fever pitch" by the time President Obama was inaugurated.  This narrative was a large part of the impetus to change U.S. patent law that culminated in the America Invents Act.  But even after passage of the AIA and institution of inter partes and covered business method reviews (which were intended to solve the problem of improvidently granted patents more cheaply and efficiently than through litigation), the article states that some high tech companies wanted even more patent-unfriendly "reform."  According to David Kappos, former Director of the U.S. Patent and Trademark Office as quoted in the article, "[u]ltimately the read agenda sunk in.  This second round of drastic cutbacks to the patent system was a commercial ploy designed not to stop abuse but to cut supply chain costs by devaluing others' innovation."

In 2013, according to the article, the White House issued a report that 2/3rds of patent litigation was provoked by patent trolls.  This number was disputed by the nonpartisan Governmental Accounting Office (GAO), which estimated the number at about 20%.

The article quotes Randall Rader and Paul Michel, both former Chief Judge of the Court of Appeals for the Federal Circuit, as being against how the USPTO has administered the inter partes review process.  On the other hand Mark Chandler, General Counsel at Cisco, is quoted as saying that the problem is patents that should not have been granted, which "put[] a deadweight burden on the economy by blocking innovation by others and unnecessarily driving up prices to consumers."  But Gary Lauder, a venture capitalist from Silicon Valley, says that the patent system America needs is one where established companies pay innovator companies for their innovations rather than being able to expropriate them.  "We need to protect the larger start-up ecosystem, which is where the majority of jobs are created," he says.

Also cited in the article is a recent study from the National Bureau of Economic Research which found that having a patent increases the likelihood of acquiring venture capital by 53%, of start-up job growth by 36% and start-up sales by 51%.  And a paper by Stanford economist Stephen Haber is cited for finding that the patent troll narrative is inconsistent with the actual behavior of patentees and accused infringers.

The article closes with a view to what may happen next, which includes a bill by Senator Christopher Coons (D-DE) intended to shore up the U.S. patent system in the face of global competition particularly from China.  The article notes that there may be some acquiescence to changing the patent system to accommodate the needs of biotech and pharma with the different needs of the high technology sector, perhaps with different rules for each.

The most cogent commentary in the article regards statistics generated by Lex Machina regarding the effect of trolls on the patent system:  "There has been an abundance of data that both advocates and critics of the current patent system spin in all sorts of ways to make their case," according to the article.  The USPTO estimate that 2/3rds of patent cases involved trolls did not take into account changes in how patent cases could be brought so that this number was somewhat artificially exaggerated.  And the contemporaneous GAO study expressly refuted this number with an estimate of 20%.

Using "the best way to compare" patent lawsuit numbers pre- and post-AIA (using individual defendants as the metric), Lex Machina found that the number of patent lawsuits in fact didn't change with the change in the law, and that the brief spike in 2011 (which was the basis of much of the troll narrative) was accounted for by the law change occasioned by passage of the AIA.  These data are illustrated by Lex Machina's graph, reproduced below:

In short, the article concludes, "[t]rolls have been overblown as a patent issue."  But the consequences of this inaccurate narrative persist.

The paper's conservative bona fides are established on its website:

First published in 1888 as a four-page newspaper, the Financial Times' initial readership was the financial community of the City of London.  The Financial Times soon established itself as the sober but reliable "stockbroker's Bible", with its only rival being the slightly older and more daring Financial News.  In 1893, the FT turned salmon pink -- a masterstroke that made it immediately distinguishable from its competitor.  From their initial rivalry, the two papers merged in 1945 to form a single six-page newspaper.  The Financial Times brought with it a higher circulation, while the Financial News provided enormous editorial talent.

Insofar as many of our elected leaders profess to be conservatives, perhaps it would behoove them to listen to an authentic conservative voice on these matters.

Comments

[Michael O'Keeffe]

Congratulations on a great analysis, but if you factor in the "take-away$$" of the NPLs....?

[mike]

It's a change in view - electronics and software users don't see the value of investment or innovation. They assume it will happen because 1 million monkeys in their mothers basement can write all the code needed to accomplish what they want.

I don't think the Electronic Frontier Foundation (EFF) even understands that a patent is different than a copyright, or the scope of protection offered. Beside, they still analyze patents by the abstract, title, or a sound byte, and not the claims.

Programmers continue to argue for the free exchange of software code and ideas without any commercial gain. They use hindsight and unsubstantiated argument, and refuse to acknowledge facts. Unfortunately the patent troll narrative will continue to thrive in this environment.

[Kevin E Noonan]

Dear Michael:

Please expound further (and remember we are just reporting what was published; we have not done an independent analysis, and it is not our position that trolls cause no issues - just that it isn't as horrible or one-sided as the problem has been framed by some).

[EG]

Hey Kevin,

May be Justice Breyer should read this article from the Financial Times. He certainly spouted the "patent troll" narrative in the oral argument for Cuozzo Speed-that hardly advances the debate on IPRs, but simply inflames it.

[Kevin E Noonan]

Note that the post has been corrected to properly ascribe the troll frequency of 2/3rds of patent cases to the White House under President Obama and not the USPTO under Director Lee.

We regret the error.