Tuesday, October 17, 2017

A Deep Dive on NPE Outcomes

I glibly commented on a friend's Facebook post last week that "patent troll" academic articles are so passe, despite the growing number of articles that use that term as compared to, say, 2012. Now, I shouldn't complain; given that my most cited article is called Patent Troll Myths (2012, naturally), I'd like to think that I'm driving that trend (of course, that's what the folks who wrote in 2007 would say).

But one of the reasons I joked about trolls being so 2012 is that this is where much of the detailed data comes from, and this is when the key articles that are cited by many were published. Indeed, I've published two follow-on articles to Patent Troll Myths, each of which contains more and better data (and thus took longer complete and published later), but which gets only a tiny fraction of the citation love of the original article.

And so it is no surprise that the latest in a series of articles by Chris Cotropia (Richmond), Jay Kesan (Illinois), and David Schwartz (Northwestern) was released with little fanfare. The article, called Heterogeneity among Patent Plaintiffs: An Empirical Analysis of Patent Case Progression, Settlement, and Adjudication is forthcoming in Journal of Empirical Legal Studies, but a draft is on SSRN. Here is the abstract:
This article empirically studies current claims that patent assertion entities (PAEs), sometimes referred to as ‘patent trolls’ or non-practicing entities (NPEs), behave badly in litigation by bringing frivolous patent infringement suits and seeking nuisance fee settlements. The study explores these claims by examining the relationship between the type of patentee-plaintiffs and litigation outcomes (e.g., settlement, grant of summary judgment, trial, and procedural dispositions), while taking into account, among other factors, the technology of the patents being asserted and the identity of the lawyers and judges. The study finds significant heterogeneity among different patent holder entity types. Individual inventors, failed operating companies, patent holding companies, and large patent aggregators each have distinct litigation strategies largely consistent with their economic posture and incentives. These PAEs appear to litigate differently from each other and from operating companies. Accordingly, to the extent any patent policy reform targets specific patent plaintiff types, such reforms should go beyond the practicing entity versus non-practicing entity distinction and understand how the proposed legislation would impact more granular and meaningful categories of patent owners.
In my article A Generation of Patent Litigation, I presented data about how often cases settle, and how that skews our view of how long they last, and who wins. This article extends the authors' earlier work on categorizing just who is filing NPE suits (in 2010 in this article), and asks when they settle for each and every defendant. This is hard work. In most of today's cases, each defendant is sued separately, so when the defendant settles, the case is over. Analytics companies track this all the time...now.

But in 2010, a patentee could sue 100 defendants at once, and you could not tell how long each remained in the case without tracking each defendant. If you only track the end of the case, you capture the one defendant who fought it out, but you miss all the defendants who exited early. The other added value of this series of papers is tracking all plaintiffs by type, rather than one big "NPE" status. I do this in The Layered Patent System, but I only had a subset of cases over a longer period of time, They have captured all of the cases in a single year.  I'll discuss what this all means after the jump.

Wednesday, October 11, 2017

The Case for a Patent Box with Strings Attached

[This post is co-authored with Daniel Hemel, an assistant professor of law at the University of Chicago Law School, and cross-posted at Whatever Source Derived.] 

Trump administration officials are hoping that their plan for steep business tax cuts will spur economic growth. Economists are skeptical of the administration’s rosy growth projections. But there may yet be a way to reduce business taxes that accelerates growth, encourages innovation, and delivers tangible benefits to American consumers.

To achieve these objectives, administration officials and lawmakers should consider implementing a “patent box” — a reduced tax rate for revenues derived from the licensing and sale of patents. But unlike the patent box regimes that the United Kingdom and several other advanced economies have implemented, a U.S. patent box should come with strings attached. Specifically, the reduced rate on patent-related revenues should be conditional upon the patent holder agreeing to a shorter patent term.

Here’s how it could work: Right now, a patent confers exclusivity for 20 years from the date of application. If the patent is held by a U.S. corporation, the corporation pays a top tax rate of 35% on patent-related income. Under a “patent box with strings attached,” the corporation would have the option to pay no tax on patent-related income in exchange for a shorter patent life.

The system would be structured such that the net present value of the patent holder’s expected income stream — in after-tax terms — would be slightly more attractive under a patent box and a shorter patent life than under the status quo. For example, assuming a 5% interest rate and a 35% corporate tax rate, the net present value of a constant stream of tax-free payments over 11 years is slightly more than the net present value of a constant stream of taxable payments over a 20-year term. Thus, if utilizing the patent box meant accepting an 11-year term, patent holders would have an incentive to choose the patent box and relinquish the last 9 years of exclusivity. (If we assume instead that the prevailing tax rate is 20%, as the Trump administration and congressional Republican leaders have proposed, then the patent box with strings attached becomes preferable to a 20-year term plus full taxability if the patent box allows 15 years of exclusive rights.)

Tuesday, October 10, 2017

Patents and Vertical Integration: A Revised Theory of the Firm

I'm a big fan of Peter Lee's work, and I'm a big fan of theory of the firm work. Imagine my joy upon seeing Prof. Lee's new article, forthcoming in Stanford Law Review, called: Innovation and the Firm: A New Synthesis. This article is a really thoughtful, really thorough re-examination of patents and the firm. The abstract is here:
Recent scholarship highlights the prevalence of vertical disintegration in high-technology industries, wherein specialized entities along a value chain transfer knowledge-intensive assets between them. Patents play a critical role in this process by lowering the cost of technology transactions between upstream and downstream parties, thus promoting vertical disintegration. This Article, however, challenges this prevailing narrative by arguing that vertical integration pervades patent-intensive fields. In biopharmaceuticals, agricultural biotechnology, information technology, and even university-industry technology transfer, firms are increasingly absorbing upstream and downstream technology providers rather than simply licensing their patents.
 This Article explains this counterintuitive development by retheorizing the relationship between innovation and the firm. Synthesizing previously disconnected lines of theory, it first argues that the challenge of aggregating tacit technical knowledge — which patents do not disclose — leads high-tech companies to vertically integrate rather than simply rely on licenses to transfer technology. Relatedly, the desire to obtain not just discrete technological assets but also innovative capacity, in the form of talented engineers and scientists, also motivates vertical integration. Due to the socially embedded nature of tacit knowledge and innovative capacity, firms frequently absorb entire pre-existing organizations and grant them significant autonomy, an underappreciated phenomenon this Article describes as “semi-integration.” Finally, strategic imperatives to achieve rapid scale and scope also lead firms to integrate with other entities rather than simply license their patents. The result, contrary to theory, is a resurgence of vertical integration in patent-intensive fields. The Article concludes by evaluating the costs and benefits of vertically integrated innovative industries, suggesting private and public mechanisms for improving integration and tempering its excesses.
The abstract does a pretty complete job of explaining the thesis and arguments here, so I'll make a few comments after the jump.

Sunday, October 8, 2017

Tejas Narechania: Is The Supreme Court Against "Patent Exceptionalism" Or In Favor of "Universality"?

Tejas Narechania's new paper, Certiorari, Universality, and a Patent Puzzle, forthcoming in Michigan Law Review argues that a major identifying factor for the Supreme Court's interest in patent cases is a field split: an area where a particular patent law doctrine plays out differently in patent law than in other fields of law where it is used. Narechania argues that the Court's apparent need to resolve, or at least address, these differences by taking review, has to do with the Court's overarching interest in preserving "universality." "[T]he Court," he writes, "is not interested in merely eliminating exceptionalism altogether. Rather, it appears concerned for calibrating a degree of consistency across doctrinal areas in light of its underlying interests in judicial efficiency, neutrality, and legitimacy." (47).

Narechania's article, especially when read alongside recent work by Peter Lee, teaches that there are two ways to explain the Supreme Court's increased interest in patent law. One is that the Court is against what is often called "patent exceptionalism" - i.e., against the Federal Circuit's use of patent-specific rules that differ from similar doctrines used other fields.  The other, which may or may not be the same thing, is that the Court is intent on preserving universal rules across all areas of law. Narechania has insightfully reoriented the "patent exceptionalism" discussion towards the latter.

Read more at the jump.

Tuesday, October 3, 2017

Repealing Patents, Oil States, and IPRs

If you haven't read any of Chris Beauchamp's (Brooklyn Law) work on patent law and litigation history, you really should. His book, Invented by Law, on the history of Bell telephone litigation, and his Yale L.J. article on the First Patent Litigation Explosion (in the 1800's) are both engaging, thorough, and thoughtful looks at history. Furthermore, he writes as a true historian, placing his work in context even if there is no clear answer for today's disputes. He points to where we can draw lessons and where we might be too quick to draw lessons. Chris doesn't publish that often because he does so much work toiling over source materials in the national archives and elsewhere.

Prof. Beauchamp posted a new essay to SSRN last week that caught my eye, and I thought I would share it here. Repealing Patents could not be more timely given the pending Oil States case - it discusses how patent revocation worked at our nation's founding, both in England and the U.S.  Here is the abstract:
The first known patent case in the United States courts did not enforce a patent. Instead, it sought to repeal one. The practice of cancelling granted patent rights has appeared in various forms over the past two and a quarter centuries, from the earliest U.S. patent law in 1790 to the new regime of inter partes review (“IPR”) and post grant review. With the Supreme Court’s grant of cert in Oil States Energy Services v. Greene’s Energy Group and its pending review of the constitutionality of IPR, this history has taken on a new significance.
This essay uses new archival sources to uncover the history of patent cancellation during the first half-century of American patent law. These sources suggest that the early statutory provisions for repealing patents were more widely used and more broadly construed than has hitherto been realized. They also show that some U.S. courts in the early Republic repealed patents in a summary process without a jury, until the Supreme Court halted the practice. Each of these findings has implications—though not straightforward answers—for the questions currently before the Supreme Court.
As with his other work, this essay is careful not to draw too many conclusions. It cannot answer all of our questions, and he explains why.

There were a few key points that really stood out for me; things we should be thinking about when we think about the "common law" right to a jury with respect to the Seventh Amendment, and more broadly how we think of revocation of patents as public.

First, the essay points out that the first Patent Act (with repeal included) predated the bill of rights. So when we think of common law, we usually look to England because the U.S. adopted English law at the time of the Seventh Amendment. But, here, the U.S. broke with England and installed its own procedure. It is quite possible that English practice at the time is simply irrelevant. I don't know how this cuts for the case, frankly.

Second, the revocation action came at a time when patents were essentially registered rather than examined. Beauchamp points out that the first three years had three cabinet members using discretion to grant patents, but they were not conducting prior art searches and the like. In other words, revocation, which was abolished when the patent examination system was installed in 1836, was a creature of non-examination, not a way to do re-examination.

Third, there were some summary revocations, but there was a dispute about whether a jury should decide factual issues on revocation. That debate lasted until 1924, when Justice Story (for the Supreme Court) ruled that the English procedure of a jury trial should apply. This, too, is ambiguous, because the right to a jury trial was really up in the air for a while. But what struck me most about this history is something different. As I wrote in my own article America's First Patents, Justice Story had an affinity for English patent law, and apparently liked to discard American breaks from the law in favor of English rule. In my article, it was his importation of a distrust of process patents (which gave rise to much of our patentable subject matter jurisprudence today). In this essay, it is his importation of the English revocation process, which required a jury. If it turns out that jury rule in early American repeal proceedings is important in this case, you'll know who to thank.