How patent troll rhetoric has wrecked the U.S. patent system

There can be little doubt that over the past few years, the U.S. patent system has been rocked by a series of seismic shifts which have either been enacted by Congress or stem from decisions of the U.S. Supreme Court. 2011 saw the enactment of the America Invents Act (AIA), a piece of legislation which created the Patent Trial and Appeal Board (PTAB) and post-grant review proceedings to challenge the validity of any patent, especially those which are being asserted in U.S. district courts. Federal court proceedings have been affected by major court decisions like 2006’s eBay Inc. v. MercExchange, L.L.C., which reduced the ability for patent owners proving infringement to successfully obtain an injunction, and 2014’s Alice Corp. v. CLS Bank International, a decision which has called into question the patent-eligibility of all software subject matter.

These and other challenges to the U.S. success engine were the focus of the second panel at the International IP Commercialization Council’s (IIPCC) May 8th event in the U.S. Capitol. The panel featured a collection of voices from business, legal advisory and even academic entities including Elvir Causevic, managing director of Houlihan Lokey Tech+IP Advisory; Robert Taylor, president of RPT Legal Strategies and a venture advisor for New Enterprise Associates; Damon Matteo, CEO of Fulcrum Strategy; Orin Herskowitz, senior VP of IP and tech transfer at Columbia University and the executive director of Columbia Technology Ventures; and Bill Elkington, chair and president-elect of Licensing Executives Society USA and Canada and senior director of IP management for Rockwell Collins. Moderating the panel was Art Monk, VP of IP transactions for TechInsights.

Compared to patent transactions seen during more stable incarnations of the U.S. patent system, Causevic said that transactions today often involve large portfolios which are trading at drastically reduced prices. “If you have less than a hundred patents, it’s really hard to get any kind of a deal done, because the masters of the universe will figure out a way to drain you out of cash or run you out or ignore you for long enough to where it doesn’t make sense to do a deal,” Causevic said.

Part of Causevic’s concern was that anti-patent reform efforts weren’t just hurting small inventors but also significant investments into research & development made by larger entities. “Even when large companies own these patents… they’re selling to the masters of the universe. The masters of the universe are forcing them to basically give them a free license… not just to the master of the universe, but to all of the customers of the master of the universe,” he said. The eradication of patent value leads to a “race to the bottom” among companies, which is why semiconductor companies have been merging to deal with increasingly low profit margins. “They are treated like the guys that supply toilet paper,” he said. “The guy that brings the next toilet paper a little bit cheaper, one cent per roll, gets the job.”

Elkington followed with his opening statement in which he focused on what he called a “completely different perspective” on ways that friction in the patent ecosystem are typically handled through litigation, legislation and regulation. “We try to use these sort of adversarial models to address a problem that can often be dealt with by experts in a cooperative way,” Elkington said. He brought up the example of product quality in certain industries which use voluntary consensus standards to self-regulate, such as aerospace standards promulgated by SAE.

Herskowitz’s opening remarks focused on the tremendous amount of innovation that occurs in academic environments, especially in the medical and life sciences fields, which is fueled by the U.S. federal government’s annual investment of $40 billion into basic research. In 2015 alone, U.S. universities and medical reported 25,000 inventions leading to more than 6,000 issued patents and more than 6,000 voluntary licenses to more than 1,000 startup companies, Herskowitz said. At Columbia, about 25 such startups have licensed the university’s patents but marketing these innovations is often very difficult. “Hard science is hard to commercialize,” Herskowitz said. “The challenge is if, with the weakening of the patent system that we’ve seen over the last few years… no [venture capital firms] will invest in these hard science products unless they have a clear title and the ability to exclude infringers.”

“The U.S. has had the largest, most productive, and most profitable economy in the world for decades,” Matteo said in his opening remarks. “And, for that, we owe an enormous debt of gratitude to our innovation capabilities and the patent systems that protects those assets.” Unfortunately, Matteo said, we’ve been neglecting this engine of American success as a result of both self-inflicted wounds to our patent system as well as improved patent rights in foreign jurisdictions. “Put simply, the rest of the world is stepping up their game,” he said. Matteo provided a comparison of the differences in the current patent regimes of China and the U.S. as an example of this. Chinese national investment in R&D has grown by 60 percent in the last five years due in no small part to the fact that innovation is named as one of only five major tenets in that country’s current five year plan. “Here in the United States, we spent the better part of a decade dismantling patent protection in every conceivable fashion,” Matteo said, noting the devastating patent mortality rates at the PTAB and the negative impacts extending from the eBay and Alice cases. In contrast, China offers better patent protection for software and business method innovations. “Increasingly, China is becoming the office of first filed,” Matteo said. “Which means it’s where people think it’s the most important (and most profitable) place to protect their innovations.” Matteo said that this trend was “incredibly alarming.”

“It occurs to me that an important question to ask is how we got here,” Taylor said at the top of his opening remarks. He recalled the U.S. patent system of the 1970s, a time when many entities weren’t enforcing patents, the U.S. Department of Justice (DOJ) discouraged licensing activities and the Supreme Court was also hostile to patents. “By 1980, we were watching entire industries leave the United States because we weren’t enforcing patents,” Taylor said. This tide began to change in the early 1980s with former President Ronald Reagan’s appointment of a Commission on Industrial Competitiveness which concluded, in part, that if the United States was to remain technologically superior on a global scale, the enforcement of intellectual property was essential. Other actions, such as the creation of the U.S. Court of Appeals for the Federal Circuit (Fed. Cir.) and a change of heart at the Supreme Court, led to a period of explosive growth in innovation which lasted nearly 30 years. “Somewhere in the 2000s that began to go the other way and it’s really important for us to understand the cause and effect,” Taylor said.

Monk started questioning by asking the panel what changes Congress could make to foster R&D investment in the U.S. Taylor said that federal lawmakers should restore exclusivity to inventors. “A patent is a property right and the Constitution was created to give inventors the exclusive right to exploit their property and in the eBay decision the Supreme Court took that away,” he noted. Taylor opined that, for all intents and purposes, what we currently have is a de facto system of compulsory licensing in the U.S. as a result. From a university perspective, Herskowitz said that the U.S. Patent and Trademark Office (USPTO) to stop its diversion of funding away from efforts to improve patent quality. “The general belief was if the PTO continues to make sure that the Examiners have enough time and experience and training to do their job, we’d end up with stronger patents getting out of the PTO and less uncertainty around whether those would stand thereafter,” Herskowitz said.

In terms of certainty driving investment, Causevic said that he works with big tech firms who are “seeing some of the short-sightedness of the overreach on the troll narrative,” using the current trade secret case between Uber and Google’s Waymo as an example. “The Google guy who took off from Google Waymo and went to Uber and now all they really have is trade protection? Well, guess what? That cat’s out of the bag,” Causevic said.

“This is one of those totally foreseeable and totally preventable unintended consequence situations, where all of the companies in the United States who worked so vehemently to eviscerate patent protection in the [U.S.] are going to be the same ones knocking on these very doors and asking Congress, ‘What on Earth did you do to us?’” Matteo said. He envisioned a potential future where Chinese products enter the U.S. market en masse and American entities cannot compete because they don’t have the competitive advantage of patent protection.

Monk moved to Elkington and asked him to explain his views on why a strong patent protection regime was critical to entrepreneurship and Elkington brought up the example of famed Scottish-Canadian inventor Alexander Graham Bell. “[Bell] was a troll. He was absolutely a troll,” he said, noting that the inventor had up to 300 patent infringement suits in district courts at one point. “And for Alexander Graham Bell to be successful, you have to have a strong patent system. But you have to have a common understanding of patent quality.” Many entities work very productively with patent owners, Herskowitz added, but “we’ve heard behind the closed doors, ‘I’m sorry, you’re going to have to sue me in order to get a license.’” He added that weakening the patent laws with respect to activities affecting one industry has the effect of weakening patents throughout the entire system which chills innovation across all industries, including medicine and life sciences. “And that would be not only an economic loss, that means people will die from this,” Herskowitz said. Causevic added that a weaker patent system also reduces the incentive for companies to engage in the R&D that lays the groundwork for industry standards for future infrastructure. “Now you remove the patents and they’re saying, ‘Well, we’re not stupid. We’re not going to spend another $10 billion developing the next 5G infrastructure and have it stolen again.’” Taylor also noted that the Obama Administration’s DOJ helped the thousands of end-user companies gang-up on the relatively far fewer innovators to the point that it has strained the willingness of companies to participate in standards set by the Institute of Electrical and Electronics Engineers (IEEE).

IPWatchdog founder Gene Quinn asked the panel about the typical progression of standards and standard-essential patents (SEPs): “Doesn’t it get to a certain point eventually, where the people who are the users want to take what the creators have created and pay increasingly less to the point where they marginalize the creators?” Taylor responded by noting that many of the current issues surrounding standards and SEPs came into their own with the smartphone revolution, where there are “literally thousands of standards interfacing between the various components.”

Inventor and patent owner George Aposporos questioned the panel on why venture capital firms tended to hold a negative view of patents despite IP’s importance in protecting an investment. Taylor noted that, in his work with the National Venture Capital Association (NVCA) during the development of the Innovation Act, that once members were informed on the issues, they came to the conclusion that strong patent rights were important. “The problem that we’ve had in this country is the troll narrative,” Taylor said, noting that the term has become a brand much like “fake news” has. “The troll narrative became so powerful, even within the venture capital community that venture capitalists didn’t fully understand what they were supporting,” he said.

The pressure to adhere to the patent troll rhetoric was difficult for people to grasp if they don’t live within Silicon Valley, Causevic noted. He noted a conference which he was invited to speak at which changed its title from “Have We Gone Too Far in Weakening Our Patent System?” to “Where Are We in Eradicating Weak Patents?”, a radical shift in focus. “The pressure is very personal,” Causevic said, citing a paper he had worked on which found that company directors were often pressured against telling shareholders to monetize their patents as it could hurt their chances at employment with an anti-patent tech firm later on. As Taylor would add, this pressure affects the “tens of thousands of little companies started by entrepreneurs” in that region which live under a cultural overhang created by the large Silicon Valley entities.

The panel’s final question came from Raj Davé of Pillsbury who asked if the general perception that patents were good and trolls were bad was a dichotomy. “The completely accurate and completely unsatisfactory answer is: it depends,” Matteo said. “It depends on which patents, which trolls, how they are practicing, and what they are doing.” “One of the places where we get out of whack is we divorce the valuation of the underlying technology from the valuation of the patent,” Causevic added, stating that the two shouldn’t be separated. “This is where the troll problem comes in, where we try to separate this idea and all of a sudden there are abusers of the patent system, either under litigation or the threat of litigation, that are able to extract what offends the sensibility of a lot of my clients,” he said. Herskowitz added that it was because of the rhetoric on patent trolls that we’re left with a PTAB with unacceptably high kill rates and a lack of injunctions for patent owners.