Thursday, May 14, 2015

Trolling for Content in the Patent-Trolling Debate

by Neil H. Buchanan

Two weeks ago, I posted some thoughts here on Dorf on Law about so-called patent trolling.  On the comments board for that post, Professor Dorf noted that he had published a post on the same subject almost two years ago.  I had missed that post, due to personal matters that were preoccupying me at the time, which means that any overlap between our posts was pure happenstance.  But the overlap in what we wrote really is rather remarkable.  It is true that Professor Dorf and I are co-bloggers, occasional co-authors, and longtime friends with very similar opinions on most issues, but we were writing 23 months apart, responding to different news articles about patent trolling (he to an NPR story, I to a NYT column and a "Last Week Tonight with John Oliver" segment), and bringing our very different scholarly toolboxes to the issue.  That we disagreed on nothing, and that what we wrote was about 90% overlapping, is notable.

The big issue upon which we agree is that the problems usually attributed to patent trolling are actually not caused by trolling at all.  In Professor Dorf's closing words: "In short, patent trolls are a symptom.  Fix the underlying substantive problems with the patent system and there will be no distinct problem of patent trolls."  We also both argue that any litigation-related problems are not unique to patents, but are simply repackaged complaints about supposedly frivolous lawsuits clogging U.S. courts, with a strong dose of lawyer bashing tossed in for good measure.

On the comments board for my post, readers engaged in a serious and (with one unfortunate exception) respectful debate, raising a number of issues that I think are worth thinking through a bit more.  This is an especially welcome opportunity, because I continue to have a very open mind about all of this.  That is, although I am genuinely skeptical about much of what I have seen on the anti-troll side of the discussion, that skepticism mostly arises from empirical and quantitative questions that I have not seen answered (and that, in some cases, might be impossible to answer).  I will discuss some of those questions below.

One of the disadvantages of using the blog format for this kind of discussion is, of course, that there are many layers of this subject that are simply too deep to be tractable within a decent 2000-or-so-word essay.  Should patents exist at all?  Is intellectual property actually property?  Except as they directly impinge on the smaller points that I want to make below, I will not address such foundational questions here.  (I realize that this is a bit like someone saying to me: "Yes, I know that you have written that Social Security is not 'going bust,' but I'm going to respond by assuming that it is going bust.  Stay with me here."  As frustrating as such a move can be, however, even that conversation can still be useful.)

Some of the comments on my recent post at least implied that patents are a kind of property (if it is property at all) that should be nontransferable.  As I argued in my earlier post, however, there does not seem to be anything fundamentally problematic with the idea that a patent holder could sell the legal rights in that patent to an unrelated party.  If I invent something, and I am not especially keen on spending time guaranteeing that the patent is respected, it seems perfectly reasonable to try to find someone who is good at that kind of thing, and to negotiate a price that takes into account the various risks that determine the value of owning that particular patent.

That the company to which I sell the rights "produces nothing" is a meaningless complaint, because I could accomplish the same result by hiring in-house to enforce the patent, and none of those new employees would produce anything, either.  More importantly, that the firm to which I sell my patent rights might exclusively be in the business of bringing patent suits should not worry us, and should in fact be viewed as good news, because enforcing patents is surely a process in which specialization can reduce a lot of transaction costs.  Conceptually, it is no different than deciding whether to hire a moving company to relocate one's offices, or to hire temporary employees to do the same thing.  In fact, this is all merely an application of Ronald Coase's famous "nature of the firm" question.

Even if there is nothing special going on here, there is still nothing stopping Congress from limiting the transferability of patent litigation rights.  If it did so, it would simply be telling potential inventors: "If you invent something patentable, you can still get a patent.  But if anyone violates that patent, you and only you must go to court to seek damages."  If we are worried about setting up bad incentives, however, it strikes me that such a change in legal rights could be reasonably expected to reduce the incentive to invent things.  Currently, a potential inventor can say, "If I invent something patentable, I can make money by (1) producing and selling the patented item myself, (2) licensing it, (3) suing violators who have not licensed it, or (4) selling to a specialist the right to license and/or sue under the patent."  Taking away option (4) might have other virtues, but it certainly would take away one avenue to profiting from one's inventions -- notably, the one avenue that promises the most immediate return on one's investment (albeit surely at a discount).

As I noted above, this is ultimately an empirical question.  Maybe inventors are generally not aware of option (4), or if they are aware of it, they view it as somehow illegitimate or unappealing.  If so, it could be that a non-transferability law would have virtually no downside from the social standpoint of patent law's raison d'etre, while potentially reducing or eliminating the hold-up problems and other costs that come with any system of law enforcement.  Again, I am skeptical, but this seems completely plausible, pending empirical investigation.

An important related point is that there might be a problem with a system that punishes not only deliberate copying, but that treats innocent and culpable violators the same.  Consider a (non-patentable, but still IP-related) example.  When I decided to write this post (two days after writing my earlier post), I was going to give it the title "Missing the Forest for the Trolls."  I was very proud, thinking myself quite clever in coming up with a cute play on words.  This morning, however, as I was reading back over Professor Dorf's post, I saw an addendum in which he noted that Mark A. Lemley and A. Douglas Melamed were at that point (in 2013) about to publish a law review article with that very title.  Obviously, I had absorbed that title when I read Professor Dorf's post on May 1, but within only a matter of days, I had forgotten about it, remembered it, and thought that I had invented it.

Similarly, a few years ago, I published a law review article titled "Medicare Meets Mephistopheles."  I later discovered that David Hyman (of the U. of Illinois's law school) had published a book by the same name.  In that case, I could honestly say that I had never heard of Hyman's book.  However, I then recalled that the title had been recommended to me by a colleague who teaches at Loyola-LA.  My guess is that he had seen Hyman's book title, and then went through the same process of forgetting and reinventing that I described above.

All of this means that it is often possible to be completely innocent, yet somehow also guilty, of copying another person's idea.  It is also, of course, possible to be completely innocent.  (Recall the first paragraph of this post, in which I noted that in 2015 I had unknowingly made arguments that were nearly identical to Professor Dorf's arguments in 2013.)  Is there really any reason to punish someone for stealing ideas, even when there was no intent to steal?  Here, the differences between intellectual property and real property become especially important, because intellectual property's "non-rivalrous" nature (that it, that it can be used by non-originators, whose use does not prevent the originator from continuing to use the idea) makes one suspect that the theft analogy here is, at best, inexact.  (Even in real property law, of course, there are exceptions to the notion of theft, most obviously the adverse selection doctrine.)

In any case, the comments on my post, and Professor Dorf's post, suggest that in real life it is sometimes quite difficult to figure out whether a patent exists that one might be violating, which means that the licensing market is seriously compromised by information asymmetries.  That suggests that there could be a pure win-win policy solution, by which Congress could mandate that patents be registered on a searchable database, with that database widely available.  This would, as Professor Dorf suggested, get at the real problem, rather than giving Congress the excuse to scapegoat lawyers.

The ability to set up such a database, moreover, would create an impetus to fix the other big issue toward which my earlier post gestured (and which various comments confirmed): Congress, the PTO, and the courts all seem to have allowed an overly generous definition of patentability to have harmed the system.  Making the ability to sue violators contingent on a patent's having been properly registered on a public database would all but force the players in the system to confront and fix the overbreadth problem.

Even this solution, however, does not get at the question of how companies are supposed to know that they should be checking the database in the first place.  I can force myself to google any of the blog titles that I think I have invented, and Google can certainly be expected to keep a keen eye on a patent database, but surely this cannot reasonably become one of the standard operating procedures for non-tech companies.  There, unfortunately, the case-by-case litigation approach seems to be required.  (A restaurant might really have violated a patent.  If so, the court system is there -- in all of its imperfect glory -- to sort it out, and to assess proper penalties.  That process might lead some companies to settle dubious cases, and so on.  But it is, at a minimum, not obvious why the rules for such litigation should be different than for any other kind of litigation, where the same insuperable problems exist, no matter whether one enacts loser-pays rules or any other change to the system.)

Finally, this discussion points toward a problematic analogy that I used in my earlier post.  There, I likened patent trolls to banks and other financial intermediaries, as a way to say that there is often a big economic upside to allowing people to engage in activities that facilitate commerce, even when the specific activity itself is not obviously valuable.  So far, so good.  I then said, however, that the problem with banking is uniquely worrisome, because "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.)"

And this is where I want to reemphasize my ambivalence about all of the questions that I have raised here.  Simply because problems in the patent system cannot plausibly lead to another Great Depression does not mean that they are not harmful.  It really is quite simple to describe situations (and, I have no doubt, to find them in the real world) in which people have lost their jobs and their livelihoods because of the imperfections in our system of granting and enforcing patents.  Such costs are incremental, but they certainly can add up to a real problem that is worth addressing, even if doing so creates other costs along the way.

My skepticism arises from my sense that the anti-trolling argument is based on unsubstantiated empirical assertions.  An entertainer like John Oliver can be excused, I suppose, for asserting that "the only viable business left in America will be one that relies on no patents whatsoever," if patent-trolls are not brought to heel.  Exaggeration has its place in such debates.  Even so, generic anti-lawsuit "reforms" are almost certainly not the best way to fix the excesses of the patent system -- excesses that arise from fundamental errors that have essentially nothing to do with trolls (or lawsuits).  At the very least, the case for such reforms is contingent on some highly contestable empirical suppositions.  Legislating in such an environment of ignorance seems like a rather bad idea.


Paul Scott said...

I'll have more later (not even done reading), but when I saw the suggest that patents be in a searchable database I thought I'd let you know the USPTO has had such a database for at least as long as I have been a patent attorney and google also has one (google patent). The inputs on the USPTO database are more robust, but also require "codelike" search parameters to get what you are looking for (e.g. not much use to most people).

Kilo said...

One way in which patent trolling might be distinctive is if most of the people who both invent patentables and violate patents are engineers. In my experience, engineers have a fairly strong and distinctive culture which is notably at odds with the equally strong and distinctive culture which appears to unite many lawyers. The ways that engineers tend to deal with inter-engineer problems are different from, and far less costly than, legal proceedings.

Even this is just a particularly egregious example of the more general problem that, as legal culture differs from the cultures of those represented, it will come to seem less legitimate and produce suboptimal results. My understanding is that the virtue of the rule of law is that it leaves everyone feeling like, even if they lost, they had a fair say in the process. Many engineers no longer feel that way (and my perception is that many software engineers have gone the open source route specifically as a way of opting out of the legal system).

So, one way of justifying a policy of non-transferability of patents would be to suggest that at least keeping someone of the culture of engineering involved on each side of the dispute will help to keep the mores of that culture relevant, which will produce outcomes more likely to seem fair to both sides. I'm not certain either of the prevalence of engineers among patent-originators nor of the value of this benefit as compared with others (particularly in light of the distaste for the legal system some engineers feel, which might cause them to under-advocate for their own rights), so I'm not qualified to have a position on this issue. But the concern above seems like it ought to be part of the conversation.

Michael C. Dorf said...

I had the same reaction as Paul but with an important qualification: The USPTO database and Google Patent are searchable in theory but often not in fact due to the further problem of vagueness in patent claims. My colleague Oskar Liivak has a nice piece addressing this issue, , styled as a response to an important paper by Professors Solumn and Chiang (who is a frequent thoughtful commenter here).

The practical difficulty of searching creates a distinctive "trolling" problem. Let's say that G company could have designed its gizmo by engineering around W company's widget patent at a cost of $1/unit, but because G didn't (and as a practical matter couldn't) discover W's patent, G built the widget in a way that infringed. Given its sunk costs, it will now face liabilities of substantially greater than $1/unit. So unsearchability does create incentives for the Intellectual Ventures of the world to lie in wait.

Justin said...

1) I don't think the key problem with patent trolls is whether they have purchased the patent or invented it, but that they try to obtain money via measure (3) - to extract settlements (and settlement-like licenses) from people who at best innocently infringed the device, without any attempt to teach the invention, market the invention, or contribute to the broader knowledge base. In that sense, to the extent that a legal rule would prevent their actions and discourage invention, who cares? If the invention does not lead to teaching it or using it, society loses nothing.

Thus, defending patent trolls on a non-abusive attribute is like defending fracking on the basis that "lots of decent companies use water in their business."

2) Your "assume a database" solution reminds me significantly of the problems of software patents). I cannot begin to imagine an effective, usable database that could identify patents that might teach the art at issue. Yet, if you did invent this magical database, and then tried to patent it, you probably could do so with claim language that any of us could write, right now, without figuring out how you actually are going to accomplish this Herculean task. How is that claim language, which we can write without inventing the thing in question, going to inform someone adequately about infringement? And yet this is what you expect the database to be able to do.

Greg said...

I think this idea of asymmetry of knowledge is pretty key. What happens is that a manufacturer invests in something only to be told after it is released that some company claims to hold a patent on some part of it. At this point the manufacturer is in a bad position because they have no opportunity to design around the patent. This is almost precisely the situation that Prof. Dorf is referring to.

(I'll set aside for the moment that two groups independently came up with the same solution, and what that likely means for obviousness.)

Perhaps the best way to handle this would be for any manufacturer found to infringe without prior knowledge of the patent (or a prior licensed implementation of the patent?) to have liability only for products released a reasonable amount of time after they were notified of a possible infringement by the patent rights-holder. This would still encourage manufacturers to pay for good patents to put into future products, but would enable them to work around trivial ones. It would somewhat restrict a rights-holder's ability to collect licensing revenue, but in a way that would encourage them to spread knowledge of their patent as widely as possible.

The effect of this on a patent licensing company would be to turn them into something more like a patent evangelism firm. They would send out thousands of patents indicating possible infringement as a way to start the clock on knowledge. The receiving company would then have time to say "Do we do this? Do we want to do this? Can we design around this? Is this patent fundamentally invalid?" for each of the received patents, and before products are released rather than after.

P.S. The idea of a searchable patent database is almost silly. What my company calls an issue queue, another might call a reservation station. One might call it dispatch and another issue. One might call it mapping and another renaming. These are just the cases I know about. The problem is that it's almost impossible to know when two things mean the same thing without reading the full text of the patent itself.

David Ricardo said...

I would still argue that patent trolling must be understood within the context of how our legal system actually works, not how it should work in theory. In theory everyone is operating in good faith, and the system works so that violators of patents are punished and those who do not violate the patents are not. All of this is decided in a court of law that gets the decision correctly every time.

In practice patent trolling is just one of many ways in which parties use the system to extract gain when that gain may or may not be justified. It works like this. The holder of a patent, whether or not the originator or a subsequent purchaser (Party A) has reason to believe that a claim of patent infringement may be justified against Party B. Party A informs Party B that it is violating the patent and that Party B will be sued. Party B thinks it is innocent but the estimated cost to defend against the coming lawsuit is, say $600,000 in legal fees and other costs, and of course the outcome is uncertain. And Party B knows its business will be highly disrupted by discovery and other aspects of defending a lawsuit. (I wonder if anyone here has actually been part of the discovery process; the massive document request, preparations for depositions, depositions, more document requests, more answers to filings etc). Party A knows the cost to Party B and so proposes a settlement in the amount, say $400,000.

Does Party B settle? Of course they do. They are looking at paying $400,000 for a certain outcome against paying $600,000 for an uncertain outcome and disruption to their operations. The merits of the case are largely irrelevant, there just has to be enough of a case to avoid an immediate summary judgment (and even there a defendant is subject to substantial legal costs). And no, this process is not unique to patent litigation. For example, in many personal injury cases a third party will purchase the claim from a plaintiff in the expectation that the defending party will settle in a way that compensate the third party for its expenses and generates a profit. Another example is where I practice, tax cases. The IRS asserts a claim, which may or may not be correct. The offending party settles because the cost of settlement is less than the cost of defending the position even if the position is correct.

The same thing happens in the overwhelming number of criminal cases. Contrary to popular opinion and in defiance of those who believe the legal system actually operates the way it is shown on television, a defendant almost always plea bargains, accepting a certain penalty for an uncertain one. And as we all know, prosecutors use this to their advantage, telling defendants to “plead guilty and accept the proffered punishment or we will prosecute to the full extent of the law and you will spend your life plus 50 years in jail”.

Our legal system is pretty ugly in many cases, and if it is going to be reformed one must at least understand how it works. In civil cases, having a situation where the loser pays and pays big time is one way to force lawsuits to rest on merit, not on gaming the system.