Friday, May 01, 2015

Is Patent Trolling a Problem -- And Why Is It Newsworthy?

by Neil H. Buchanan

[Note: My new Verdict column, published today, continues the discussion (which I initiated in another Verdict column last Thursday) of the Republicans' political strategy to set the IRS up for failure, then to blame it for failing.  As I noted in my complementary Dorf on Law post last Thursday, a new report from the Republican staff of the House Ways & Means Committee has added several new wrinkles to the all-out attack on the IRS.  I plan to publish a third Verdict column about this topic next week, at which point I'll write another companion post on this blog.  In the meantime, today's post below is on an entirely different topic.]

In my Dorf on Law post earlier this week, I observed that "lobbying" has become the content-free deus ex machina that we now use to explain all bad political outcomes.  I currently have nothing to add to my comments on that subject, but I do want to return to one of the examples that I used in that post.  I noted that the main story on John Oliver's most recent edition of his "Last Week Tonight" show was about "patent trolling."  Oliver blamed the failure of an anti-patent trolling bill to pass the Senate on lobbying, as if that were enough of an explanation.

As I was initially watching the segment, I was thinking about the merits of the case that Oliver was making.  Did I agree that patent trolling is a bad thing?  Did I agree with the way that the lobbied-to-death bill would have tried to fix the problem?  Because I am not an expert on patent law, and I have only heard occasional complaints about the supposed problem, my mind was open.  I was certainly put off by Oliver's resorting to rank lawyer-bashing, but I could have forgiven that (or at least discounted it), if the overall case were compelling.  (By comparison, even though I am very pro-union, I would have a hard time complaining about a news article that criticized prison guards' unions for standing in the way of important criminal justice reforms.)

Here, I want to think through some of the basics of patent trolling.  I will do this in part as an economist, and in part as a law professor.  My bottom line is that I am not convinced that patent trolling is a problem.  If it is a problem, however, it is not a matter of trolls creating "inefficiency," or anything like that.  Instead, the patent trolling issue highlights the open-ended nature of analyzing legally created sources of wealth -- which is to say, all sources of wealth.

This blog post has now used the term "patent trolling" six times in three paragraphs (and once in the title), yet I have not even defined what patent trolling is.  An article in the Business section of Wednesday's New York Times provides a very helpful analysis, but the problem is that the implicit definition of trolling is inevitably too broad.  The supposedly nefarious trollers are companies that have been set up for the explicit purpose of litigating patent violations.  That is, the so-called troll is a company that buys patents from the people or companies who were originally granted the patents (or from other intermediate owners), with the express purpose of "protecting" the patent by taking violators to court.  Such trolls usually buy large numbers of patents, so that they can spread their risks over a portfolio of ongoing risky litigation.

The economist in me says: So what?  Creators of property frequently sell their property, which they created in order to generate profits, and the buyers determine the price that they will pay by reference to the profits that the property will generate.  A buys land from B, after B has developed the land and built condos.  C buys shares of common stock in an initial public offering from D, which will pay dividends to C or to any subsequent owner to whom C sells the shares.  E buys the right to collect mortgage payments from F, which issued the mortgages in the first place.  If we think that patents, copyrights, and so on should truly be thought of as intellectual property, why should we have any problem with people buying and selling such property, and then protecting their property rights?

The objection, apparently, is that the trolls do too much litigating of the patents.  That is, the originator of the patent might not be inclined (or able) to go after patent violations, such that many possible patent violations are likely to go unpunished.  The business model of the troll is entirely based on not allowing any possible lawsuit to be undeveloped.  But again, so what?  Other than some vague notion of America being "overly litigious" (whatever that might mean), why are more lawsuits per se bad?  Why would we not view trolls as overcoming transactions costs that heretofore prevented the potential profits made possible by intellectual property from being fully mined?

I am certainly not the only person who has noticed this fundamental issue.  Near the end of that Times article, the reporter notes that "some conservative academics ... refer to trolls as 'patent monetization entities' who are engaged in price negotiations for intellectual property owners whom they represent.  Legislation, they say, is mainly an effort to change the game to favor politically influential technology companies, increasing their profits further."  I am hardly a conservative, but I understand the argument.  Their wonky relabeling of trolls is a bit silly, but there is nothing inherently wrong if the owner of a property right -- in this case, the right to prevent others from using one's inventions without paying for such use -- chooses to sell that right to a third party, even (or especially) when that third party is better at litigating than the original owner was.

By comparison, consider banks.  Introductory economics courses explain that banks are simply financial intermediaries.  There is some basis for saying that banks create nothing, because they merely connect people who have money to lend with people who want to borrow that money.  Yet that word "merely" is glossing over the entire point of intermediation: Without a bank (or equivalent), borrowing and lending would be much more difficult, costly, and infrequent.  Similarly, patent trolls act in ways that guarantee that a patent does what patents are supposed to do: reward the inventor, and charge the user.

In the abstract, a troll simply fronts the money to the inventor, taking on the risk that there will be no violations -- or, more interestingly, that violators will be wrongly allowed to take a free ride.  True, the trolls created nothing -- but then, in my examples above, none of the buyers of property (A, C, or E) created the properties, either.  They are merely hoping that their future profits from owning someone else's creation will be greater than the up-front cost.  And when B, D, and F created their properties, they were certainly aware of the possibility of selling to non-creators in the future.

The comparison to banks, however, brings us to the reason that I part company from the most direct implications of what I have laid out above.  Just as banking activity in the real world can be destructive -- predatory lending, over-leveraging to the point of becoming too big to fail, and so on -- it is certainly possible that the theoretically innocent act of becoming a patent intermediary could lead to seriously bad outcomes.

What are those bad outcomes?  The Times article describes how the targets of lawsuits have recently become retailers, hotels, and restaurants, and it quotes James Bessen of Boston University Law School: “The litigation problem [has gotten] worse, and it spread into mainstream America."  But, one more time, why is that bad?  If a retailer violates a patent, why is suing them somehow worse than suing a tech company that violates a patent?

Here, we come back to the core issues, which are not unique to patent law at all.  First, the concern is that the underlying law is somehow defective, such that the "wrong" side wins too many cases.  That is, somehow the litigation of patents makes it possible for a non-violator to be forced to pay, either because the patent itself is written too broadly, or because the courts interpret patents in ways not intended by the Patent and Trademark Office.  Second, the proposed legislation aims at nuisance suits, by which trolls supposedly collect money from targets who are too scared to go to court (or who, equivalently, view the cost of early settlement as an acceptable alternative).  The usual remedies are again being rolled out: loser-pays provisions, enhanced frivolousness rules, and so on.

I do not have a strong opinion about whether those particular proposals are wise or foolish in this situation, but color me skeptical about the claims of a crisis from the anti-trollers.  Patents are, after all, a government-sponsored monopoly.  Even the most sophisticated economic modeling leads to ambiguous results regarding the optimum patent terms, and so on.  (I am setting aside my skepticism regarding mainstream economic modeling here, because my point is simply that even people who buy into much of what I reject are still unable to reach definitive conclusions on this question.)  There is no obvious reason to think that there is currently too much protection for these government-granted monopolies, or too little.  And there is certainly nothing about patent trolling that seems meaningfully analogous to the problems that financial intermediaries have inflicted on the economy.  (Skeptical?  Try to imagine patent trolls causing a global economic crisis.)

As I noted above, however, nothing here is actually unique to patents.  A government in a capitalist economy sets up the rules that allow commerce to proceed.  Even when it does not specifically create a property right like a patent, the government is ultimately behind all property rights, all contractual rights, all tort responsibilities, and so on.  Nothing in the public discussion about patent trolls presents us with anything other than the familiar questions about how to draw proper balances between interests, when there are no non-law baselines against which to measure goodness or badness (or efficiency or inefficiency, which are just goodness and badness in pseudo-objective garb).

The title of this post asks two questions: (1) Is patent trolling a problem? and (2) Why is patent trolling newsworthy -- and, I would now add, legislation-worthy and lobbying-worthy?  My answer to the first question is, "If it is, I haven't seen a convincing case for it."  Telling me that there has been an increase in lawsuits tells us nothing, since we do not know whether there were previously too few lawsuits, too many lawsuits, or the Goldilocks quantity of lawsuits.  But the answer to the second question is easy: The people who are being sued having the ability to make their complaints heard.  "There are more lawsuits than there used to be, and the companies being sued aren't used to it," is not actually an argument, but it motivates the affected parties enough to get the political process moving.

Which means that I was sort of lying when I said above that I have nothing further to add to my discussion of lobbying.  After all, what is the process by which the affected parties get the political process moving?  That's right: lobbying.  But the point is that there is only something to lobby against when lobbying on the other side has created the proposed legislation in the first place.  Saying that lobbying killed a bill is like saying that a football team won a championship because they "wanted it more."  Both sides want to win, and focusing only on one side's efforts is meaningless.

17 comments:

David Ricardo said...

Mr. Buchanan’s defense of patent trolling mentions but does not fully address a very important part of the process of patent trolling. To understand the problem one must recognize three characteristics of the American legal system. It is (1) expensive, (2) time consuming and lengthy and (3) produces uncertainty because merit does not always win. Patent trolling exploits these problems for economic gain where in at least some cases economic gain is not justified.

A patent troll acquires patent rights usually for the sole purpose of identifying possible violators of the patent and extracting from those possible violators payments in lieu of litigation. A party accused of a patent violation will often find it easier and more economical to reach a settlement with the plaintiff rather than undergo the expense and uncertainty associated with a full trial regardless of whether or not they have infringed. The merits of the case frequently do not matter; just get the thing settled so life can go on. How is such a process beneficial to anyone except those extracting payment where none may be appropriate?

So the real question is how to separate the real infringement from the abuse of the system. Game theory gives us one potential solution; the loser pays solution which he mentions, is an economically efficient method of regulation. Changing the law so that the losing party pays two or three times the litigation costs (similar to triple damages under anti-trust legislation) of the winning party would encourage true violators to avoid infringement and to settle. It would also discourage frivolous and weak claims from patent trolls who would face extensive economic losses from bringing cases that seek to exploit the system and have little or no merit.

In fact such a system might produce an “anti-matter patent troll”, a party that buys the defendant’s position in hopes of gain through the process that would pay it several times its costs if it were victorious in litigation.

Joe said...

I think copyright monopolies are now ridiculously excessive. Know little about patents.

The concern seems to be that the rules for patents at times results in too much restraint and "patent trolls" have deep pockets that further trivial claims there.

But, as noted, that can go to the bigger issue of litigation generally. People now complain civil right laws including disability and other protections leads to too much litigation. Specializing in patents seems like an efficient means of property management here.

Net, I guess the issue is that monopoly and big money as a whole needs to be properly regulated. The small business type patent owner also needs perhaps to have some tax break or whatever to balance the playing field.

As noted, however, it is unclear what is special about patents here - it's an overall concern. I do think the John Oliver piece is helpful in at least this way: it's hard to get your head around the whole economy or something. So, we need a sort of case study.

Still, you have to look at it the right way & I appreciate this post because it does that while also not just having a "live and let live" view of the excesses of the economy.

Joe said...

A "loser pays" model concerns me. It sounds a bit like plea bargains -- the risks -- even if you have a pretty good case -- might make you settle or here not sue at all. "Patent trolls" would have deeper pockets and insurance to cover the costs. It might help in the long run, but don't know.

Paul Scott said...

I think the core problem with this post is that it treats, even endorses repeatedly, the idea that patents are "just like any other property." That is just not true.

Patents are created with express purposes to benefit the public. The exchange made is that the inventor will publicly disclose details about her invention and in exchange the government will vest in her the exclusive right to that invention for a short period of time.

This system is intended to foster the public exchange of ideas and if it were not for that public good patents would not exist at all. The short-lived government sanctioned monopoly is a cost of the patent system, not the intent of it. Everything about patents has to be viewed through the lens of "does X help foster the public exchange of ideas." If it does, then you need to ask "although X helps foster the public exchange of ideas, is its cost worth it." If you get a "yes" to both questions, then great. If not then it is an additional cost of the system that should be eliminated.

There are a host of issues wrt patents independent of patent trolls (that none-the-less play an important part of patent trolling), the chief among them is that patents were intended to cover a short period of an invention's usefulness, but that tech patents generally spend their entire useful lifespan under patent protection. While that is going to be true with or without patent trolls, it is not an accident that patent trolling grew up with the tech industry.

I'll leave this post for now. I know I come down as mildly against patent trolls, but as thinking their are bigger problems with our patent system than the trolls themselves.

My main point here is that an analysis of whether patent trolling is good/bad/neutral can only be answered by analyzing it from the lens of the benefit of patents, not by looking at it from the lens of the cost of patents.

I suspect if Neil were to consider the issue exclusively with regard to the two questions I posed above, he would come out the other way.

Michael C. Dorf said...

My take a few years ago @ http://www.dorfonlaw.org/2013/06/whos-responsible-for-patent-trolls.html

I agree with some of the comments that various problems in our patent system--especially over-patenting by the PTO and the difficulty of searching the prior art to avoid infringement--make "trolling" a drag on innovation. How big a drag is open to debate.

But I agree with the thrust of Neil's post, which I took to be a follow-up to his point about "lobbying." Calling people or institutions "patent trolls" obscures rather than illuminates the real issues (and scapegoats lawyers to boot). Put differently, trolls are at most a symptom. Fix the underlying problems and the "conservative" economic arguments will be largely correct.

Neil H. Buchanan said...

Mike's post from 6/4/13 does, indeed, reach the same conclusions that I reached here. In my defense, I will point out that on June 4, 2013, I spent the day getting my marriage license! Priorities.

I'm convinced by these comments (and by reading Mike's earlier post) that this is a topic that deserves at least one more post. I'll probably do that next week, pending goings on in Baltimore, etc.

I do want to be clear about one thing. Paul Scott suggests that, upon further reflection, I might "come out the other way." In fact, that would be impossible, because I have not made up my mind. I'm not saying that there is or isn't too much patent litigation. I'm just not sure how we'd know. But that's what my further online musings will be addressing.

Justin said...

The problem is that intellectual property is not really property. It lacks many of the economic attributes of real property. More troubling, is that the marginal cost of using intellectual property is zero, creating a monopoly over what would otherwise be an infinite, non-scarce resource.

What makes patent-trolling even worse is the fact that in approximately 100% of patent-trolling, the infringement is accidental. Nobody "stole" anyone else's idea, but merely happened to come up with a similar idea independently. The rent-seeking and economic harm from the many billions in transaction costs caused by intellectual property is damaging to our economy and prevents widespread distribution of cheap, and sometimes essential resources.

I urge you to read the following resources:

https://www.eff.org/patent

https://research.stlouisfed.org/wp/2012/2012-035.pdf

https://www.techdirt.com/articles/20110724/22250715225/when-patents-attack-how-patents-are-destroying-innovation-silicon-valley.shtml

Thanks.

Justin said...

I will say that I generally agree with Mike and others that patent-trolling is a symptom of a bigger disease. Apple, for instance, is just as bad as (and probably worse than) any patent troll, even though it practices its patents. The problem is the increased transaction costs, the stifling of innovation, and the artificial monopolization of non-scarce resources that often really should belong to the public at large.

Chicago Curmudgeon said...

There are some things to consider:

(1) The validity of the claimed property right is extremely difficult to define and assess. There is a lot of finger-pointing about why this is so. Some blame poor patent examination, and others the patent law itself. Then there is the fact that an entire world of prior technology is a lot to search to determine whether an invention is novel and not obvious. That's asking a lot out of a thousand-ish dollars. Litigants are much more thorough in searching for prior technology to assess whether the claimed right is to an invention. (There may be a real-world invention, just not the one protected by the legal right awarded. That's another problem.)

(2) #1 makes negotiated solutions extremely difficult to achieve on the basis of the merits of the legal right.

(3) Litigation is extremely expensive in patent cases.

(4) #4 means that the cost of litigation, not the merits of the legal right, often is the principal consideration in settlement. Paying the lawyers is not the only cost, there is the opportunity cost of company employees' time. For some businesses that is an extremely high cost. Companies in expansion phases based on the contributions of people needed to support patent litigation such as early stage entrepreneurial companies keenly feel the imposition on the time of their Chief Technical Officer.

(5) As the number of patents invalidated in PTAB proceedings seems to indicate, many patents asserted in litigation should not have been issued with the claims they have.

(6) There are good reasons for that. Given that many of those patents were issued before the Supreme Court loosened the Federal Circuit's law of how to prove a claimed legal right to have been to an obvious invention it is not surprising that they are overbroad. The same is true for computer-implemented software inventions. There may be no merit to the litigation apart from litigation costs. (Patents carry a statutory presumption of validity, so justifying the start of litigation is easy from the validity angle.)

All-in-all, there is plenty of room for abuse of patents. The problem is that large entities can abuse small entities by infringing with impunity because small entities rarely have the resources to enforce patents. It is not a one-direction game.

Before well-funded patent assertion entities, most patents were held by parties that could not back a patent with enough money to make its legal rights valuable regardless of the merits of the legal rights. On the flip side, now those same entities can give practical merit to patents that have little legal merit. That is the real problem. The money is the practical merit, not the legal right.

Joe said...

"It lacks many of the economic attributes of real property."

Such as?

"marginal cost of using intellectual property is zero"

I looked into the issue & it was mentioned that the cost was small but not zero.


I appreciate the discussion and note there will be another post since this is an area I am not that familiar with.

Justin said...

Joe: While the cost of reproducing information is merely near zero and not actual zero, the cost of information in the abstract is, itself zero. The difference is hypertechnical, but so is the difference today between near zero and zero when you are talking about information. The marginal cost of reproducing information is merely the time it takes to learn the information - literally, its transaction cost - and the essentially zero cost physical tools of sharing the information (web and server space, paper and pen, etc.).

As far as how intellectual property is not being property, this is a good, easy to understand essay on the topic by Cory Doctorow:

http://www.theguardian.com/technology/2008/feb/21/intellectual.property

Joe said...

Thanks. I find that of limited value. (ha) For instance:

If you trespass on my flat, I can throw you out (exclude you from my home). If you steal my car, I can take it back (exclude you from my car). But once you know my song, once you read my book, once you see my movie, it leaves my control.

Yes. Property is a "bundle of sticks." But, people can have limited control of property. You can have a "property control" so to speak even over real estate without having a total power of exclusion.

Why would knowledge alone mean it "leaves" his control? He still has some control. I can't from memory have a for profit performance of his book if it he has a copyright over it. Property repeatedly doesn't mean "total" control.

As to costs, okay, but that sounds like something in various cases particularly if the whole point of the intellectual property is to create something else. And, "patent trolls" shows part of the "cost" -- protecting the property from wrongful use.

The differences are noted and should be taken into consideration. How it affects the question at hand is somewhat unclear.

Justin said...

Joe,

I'm not going to be able to help you to the extent you are trying to find arbitrary reasons to keep your mind closed.

Sorry.

David Burns said...

For me, the big difference is, I usually know when I am trespassing your land or stealing your car, but I can violate your patent quite innocently. I have gotten the impression that the risk of patent suits has begun to put a significant chill on innovative startups, that they must divert a large amount of their limited resources to trying to avoid getting sued. In the extreme case, of course, the suit does not need to be very serious, just potentially expensive, for the troll to turn a broad patent into a money machine.
I used to work as a programmer and I still work in the computer field. I have always thought that software patents were a mistake, perhaps worse than patenting mathematics would be. Very few persons in very few circumstances might reinvent calculus. Programmers invent things all day long (usually trivial things, but invent none the less) and must inevitably reinvent something that has been patented.
I agree that the patent office owns the blame for most of this problem, and the proposed legislation would do nothing to fix that.
Patents are granted to encourage invention and sharing of information about inventions. I think that in the current incarnation they discourage invention and communication.

Shag from Brookline said...

David Burns makes good points with his comment, especially on the granting of software patents. What if a programmer "invented" software that would simplify identifying software that might infringe existing software patents and sought patent protection for this "invention"? How should the Patent Office react, keeping in mind David's closing thoughts:

"Patents are granted to encourage invention and sharing of information about inventions. I think that in the current incarnation they discourage invention and communication."

Greg said...

Speaking as someone in the technology industry who has been granted a number of patents, there are a lot of points here. I speak for myself, not for my employer.

First, there is a systemic problem here. A lot of patents that should not have been granted get granted, both for obviousness reasons and for insufficient specification reasons. Both of these errors are a problem, but the latter is the larger problem from so-called "patent trolls."

Second, a lot of patents that shouldn't have been granted in the first place will still win at trial. This is partially due to simple dumb luck.

Third, patent awards are typically disproportionate to the advantage provided by the specific invention. For instance, if an invention reduces manufacturing costs by 3 cents an item, the patent award, even for accidental infringement, is often more like 10 cents an item.

Fourth, it's basically impossible to prevent accidental infringement.

The end result is you get a lot of ideas like "sell stuff with a computer" that win patent lawsuits. That's obvious after online commerce, and insufficiently specified before online commerce. If 10% of those result in massive jury awards, it becomes economically viable to buy up patents you know to be junk and litigate them.

Now, there were patent trolls even before the modern era of patent trolls that don't produce anything. A great many large companies would basically go to any market newcomer and request a cut to license their patents as a payment for any accidental infringement. This was essentially patent trolling, just by large corporations with mostly legitimate patents.

What's different with modern patent trolls is that they are using mostly junk patents, and that there are a lot more groups doing it. Furthermore, they are going after new patents individually, rather than requesting a reasonable cut to license all of their patents as a group.

Realistically, I view this as some creative companies exploiting a problem in the system. Specifically, the system works pretty well when everyone is cross-licensing their patents as a group, and there is a limited risk of infringement being punished. The system works worse when every patent has to be litigated or settled individually.

I liken this to the problem with speed-limit cameras that some jurisdictions have found. Before these cameras, one speeder was likely to get at most a single ticket a day, and they were notified when it happened. With speed cameras, a single speeder on a single road could have literally dozens of infractions discovered in one trip, and never be told about any of them until after the violations. If all of these infractions were prosecuted, that would create a system very different from what the lawmakers intended.

This is essentially what these patent licensing and litigation companies are doing. Rather than license patents as a group for a reasonable fee like most other companies do, they are instead litigating every patent individually, and striving to extract the maximum possible out of each one. Furthermore, since they make no products, there is no way for the target company with a bunch of good patents to fight back, and they are completely on the defensive. This places too much power in the hands of the patent-holders, in a way that creates unreasonable risks to innovation. Thus, the new status quo is creating an imbalance in the patent system created by congress.

I agree that we need a better way to ensure that "the little guy" gets his patents enforced in cases of good patents and actual infringement. However, I'm not sure that "patent trolls" are the right way.

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