Study Suggests Individuals and Startups More Likely to Face Invalidity Under Alice

“Lemley and Zyontz noted that it was a ‘striking finding’ that entity status makes a big difference in patent subject matter outcomes. The story gets even worse for individual inventors.”

Study Suggests Individuals and Startups More Likely to Face Invalidly under Alice: Rabbit with TrumpetEarlier this week, Stanford Law School published a working paper co-authored by Professor Mark Lemley and fellow Samantha Zyontz, Ph.D.  The paper tilted Does Alice Target Patent Trolls? addresses various factors influencing how the courts have used Alice, such factors including industry, nature of the patent owner, and the judicial venue. One of the most statistically significant factors the authors found was entity status.

To the surprise of Lemley and Zyontz, their study uncovered a striking disparate treatment in the way federal courts handle patent eligibility matters based on entity size, with startup companies doing poorly when it comes to Alice-related patent eligibility matters, and individual inventors doing even worse. Their abstract summarizes their findings thusly: “Most surprisingly we find that the entities most likely to lose their patents at this stage are not patent trolls but individual inventors and inventor-started companies,” Lemley and Zyontz write. “As biotech worries about deterrence of new innovation and software worries about patent trolls dominate the debates, we may be ignoring some of the most important effects of Alice.”

Alice Revisited

It’s been nearly six years since the Supreme Court addressed the patent eligibility of computer-implemented subject matter in Alice Corp Pty Ltd v. CLS Bank Int’l.  The Court set forth a two-step test, which was derived largely from the “framework” of Mayo Collaborative Services v. Prometheus Laboratories, Inc., included determining (1) whether a claim was directed to a law of nature, an abstract idea or a natural phenomenon, i.e. a judicial exception, and (2) “whether the claim’s elements, considered both individually and ‘as an ordered combination,’ ‘transform the nature of the claim’ into a patent-eligible application.”  In addressing the first step, the Supreme Court held that the claims at issue were directed to a patent-ineligible concept: the abstract idea of intermediated settlement such as hedging. With respect to step two, the Court reasoned that an instruction to apply the abstract idea of intermediated settlement, including creating and maintaining shadow accounts, obtaining data, adjusting account balances, and issuing automated instructions, using an “unspecified, generic computer was not enough to transform the abstract idea into a patent-eligible invention.”

For software related innovations, as presented in Alice, the first critical question is always whether the claimed invention is an abstract idea. The Supreme Court did not define the term abstract idea in Alice and has steadfastly refused to define what constitutes an abstract idea even though it is absolutely essential to their self-acknowledged extra-judicial test for patent eligibility. The Federal Circuit has similarly refused to define the term abstract idea, at one point explicitly saying that if the Supreme Court found it unnecessary to define the term then it was unnecessary for the Federal Circuit to define the term. See Enfish v. Microsoft.


Entity Status is a Statistically Significant Factor

Lemley and Zyontz noted that Alice has been the center of a “firestorm of controversy” in the years since it was decided and has been the basis of nearly 1,000 court cases. The paper examined several factors influencing how the courts have used Alice, such factors including industry, nature of the patent owner, and the judicial venue. Lemley and Zyontz collected U.S. District Court and Federal Circuit decisions from July 2014-June 2019 that involved subject matter eligibility challenges or dispositions in order to determine how Alice affected such decisions. The analysis was based on 808 unique case decisions, 42.3% of which found a patent not invalid and 63.1% of which found a patent invalid and for being directed to patent ineligible subject matter. Further, an overwhelming majority of post-Alice decisions have been in the Software/IT industry, with only 9% in Biotech/Life Science.

The Lemley-Zyontz paper found that “the nature of the patent plaintiff bears significantly on how its patents fare under Alice.”  It reviewed the differences in outcomes when there was at least one practicing entity (“Product Company” or “IP Subsidiary”), a non-practicing entity (NPEs) or an individual inventor. The most common NPE patent owners in patent eligibility decisions were companies in the business of buying and asserting patents, i.e. Patent Trolls. Individual inventors included individuals and the companies they started.

Lemley and Zyontz noted that it was a “striking finding” that entity status makes a big difference in patent subject matter outcomes. The paper stated that “the story gets even worse for individual inventors” with only “13.8% of individual inventor decisions found the patents eligible outright, less than half the rate for both other NPEs and practicing entities.”  The paper also found that individual inventor status was a strong, statistically significant factor associated with invalidity despite adjustments to account for factors such as a drop in the post-Alice invalidity rate over time and previous litigation behavior. The paper also explained that cases involving Software/IT patents and those appearing before the Federal Circuit had significantly increased probability of an invalid outcome. In particular, the “marginal effect suggests that being an individual asserter increases the probability of an invalid outcome by almost 14 percentage points all else equal.”  Further, being in the Software/IT industry increases the probability of an invalid outcome by almost 10 percentage points and being at the Federal Circuit increases the probability of an invalid outcome by 31 percentage points.

“The high 101 ‘kill rate’ on appeal to the Federal Circuit (relative to outcomes in district court) needs to be better understood,” said Melissa Brand, Associate Counsel and Director of Intellectual Property Policy at the Biotechnology Innovation Organization (BIO) when reached for comment by IPWatchdog.  “With respect to biotech, the findings confirm what we already knew: that biotech is the second-most impacted technology. The authors note that there are a lot fewer 101 decisions in the life sciences compared to other areas, like software and e-commerce. This makes sense, as in comparison there are also fewer patents, and less litigation in our space. But that of course doesn’t mean the issue is less important for us.”

Inconsistent with the Goals of a Patent System

The Lemley-Zyontz paper noted that individual inventors and individual started companies “fare quite poorly under Alice.”  The paper further noted that additional research is warranted to determine “why individual inventors do so much worse than others in 101 court challenges and whether that reason is consistent with the goals of the patent system.”  Lemley and Zyontz explained that some contributing factors may be the quality of the individual’s patents, the quality of the lawyers hired by individual inventors to enforce their patents, or “deliberately” drafting and enforcing patents that are more vulnerable to subject matter eligibility challenges. Emphasizing that they cannot definitively explain why individuals fare so poorly, Lemley and Zyontz concluded that “the evidence complicates the narrative around Alice patent reform, and may suggest that we need a more nuanced, industry-specific rule than some have advocated.”

Although throughout the Lemley-Zyontz paper there is a dangerous drift towards suggesting that patents are, or should be different depending upon who owns them, or specific suggestions for industry-specific rules, this work should nevertheless provide a wake-up call to those in Congress, and hopefully also federal judges. A unitary patent system works best because a patent system is intended to incentivize innovation, period. Innovation comes from all areas and often surprises. Although the COVID-19 pandemic is truly a worldwide tragedy, what we know from experience is that that creative people will create and at moments in time where there is an incentive to create great minds are inspired to create. The point of a patent system is to fuel the fire of that creative genius all the time, not just episodically, sporadically or accidentally. We also know that individuals and small entities and startups are the ones who take risks and innovation requires risk taking. So, if a rule is negatively impacting that constituency it is the wrong rule, period.

All too frequently judges, particularly Supreme Court Justices, have been preoccupied by the patent troll not involved in the case. Time and time again Supreme Court patent decisions mention patent trolls when there is no patent troll as a party. But the effects of the patent eligibility policy shift chosen by the Supreme Court is being felt not by patent trolls, or large entities, but instead by those who are the risk-takers and ones most likely to bring into being new innovations—paradigm shifting innovations.

Not realizing the implications of such drastic policy shifts is precisely why courts are not supposed to legislate from the bench and leave policy to Congress. With respect to patent policy, however, the bizarro world of follow the leader has seen the courts, not Congress, take the lead on policy. Such a usurpation of Constitutional power by the Supreme Court and acquiescence by Congress is both outlandish and ridiculous, particularly over the past two decades with Congress nearly always investigating the Executive for something. Has Congress become so politically blinded regardless of which party is in charge that the courts are left to grab power at will? In the patent space that is precisely what has happened.


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Join the Discussion

14 comments so far.

  • [Avatar for David Lewis]
    David Lewis
    April 7, 2020 01:48 pm

    It seems to me that the courts see individual inventors and small startups as “trolls” (NPEs), and they were likely the real target of the fear mongering about trolls.

  • [Avatar for Brad Olson]
    Brad Olson
    April 5, 2020 01:28 pm

    Gene again is directly on point with this article. We really do not need a Captain Obvious academic variant to point out what practitioners already know, i.e., the Alice test has become another form of the old “Flash of Genius” test from the Cuno line of cases. I look forward to more of IPWatchdog on this topic. Stay safe everyone.

  • [Avatar for Night Writer]
    Night Writer
    April 4, 2020 11:55 am

    @8 Mr.259 Glad I am not the only one that has Lemley’s number. He regularly violates ethical guidelines as well such as claiming in one paper with no counter cites that software has no structure, etc. He also admits that hurting the patent system has made him a vast fortune.

  • [Avatar for Martin Nguyen]
    Martin Nguyen
    April 4, 2020 02:21 am

    It is very true. Many times individuals and startups don’t really have the money power to go all the way to the end of the litigations, and companies, especially big companies know that well.
    Hope the US economy will soon recover from jobs lost due to the Coronavirus!
    Stay safe and be healthy mentally and physically, everyone!

  • [Avatar for jacek]
    April 3, 2020 02:01 pm

    It shows a corrupted society hierarchy of “Values” or a lack of it present today in the US.
    You start from pedestrians going to work every morning and crossing the streets regardless of the color of lights displayed by the traffic lights I can see every day here in Chicago. I sometimes wonder if all these people are color blind or if “Red” in the new color of “Green.” No doubt, it shows high regard to the “Law.”
    The judges? There is the Arrogance fueled by a feeling of entitlement. People, who judge less lucky asking them: If you do not have Bread, why do you not eat the cake? Totally out of reality.
    And there is the vaccine of daily, sanitized news dissected by US media. Washing their brain every day in the same, “Money is everything, Hile to the King.” attitude. “Festival of Fools” like the one painted by Broughel.
    You can not blame the fools. Fish doesn’t know that there is another world above the water it swims in. Only outsiders can see, like in this study.

  • [Avatar for Anon]
    April 3, 2020 01:15 pm

    Virtue signaling of a wolf in sheep’s clothing….

  • [Avatar for Mr.259]
    April 3, 2020 12:04 pm

    The slow and consistent govt/judicial takedown of patent property rights has been a consistent theme, since my start over 20 years ago. As an individual inventor, who started and personally financed a web development company based on a patent portfolio, nothing could be more obvious-proper use of the word.

    This is the America we live and invent in. These are the evolving rules fostered by corporate lobbyist (cartels) to protect their place in their monopoly. This is the same history revisited, it may surprise some, but it should not.

    So this working paper by Lemley has straight data points, interesting and useful. So obvious on the street. Then when given a chance to pontificate-or puff- its just his propaganda piece to state what we already know and to keep the real innovators away from protecting their inventions. What really bothers me is the swipe at the inventor and contingency fee lawyers and firms working on the right side of law and its history protecting patent rights.

    Lemley, “Perhaps the problem isn’t with the patents but with the lawsuits. Individual inventors may hire worse lawyers to enforce patents as well as to write them, and may lose because those lawyers are not as good at navigating the shifting and inconsistent patentable subject matter precedent. That too doesn’t seem socially desirable, but it also doesn’t seem like and Alice-specific problem.”

    Even more treacherous was the Lemley puff,
    “It is also possible, however, that individual inventors have deliberately
    chosen to draft and enforce patents that turn out to be more vulnerable to
    patentable subject matter challenges.”

    That’s just what was done 10-20 years ago, the individual inventor deliberately chose to have their lawyer, at their cost, draft vulnerable patents, so that they could lose.

    One of the greatest marketing feats, of all time (although I’m prejudiced), was the term patent troll. Its lexicon has brought rancor that permeates even persons not skilled in the art. Pure genius. For another day.

  • [Avatar for concerned]
    April 2, 2020 08:19 pm

    As an individual inventor, it would be a step in the right direction and refreshing if my examiner actually substantiated one of his positions. My attorney labels my examiner’s arguments as non-responsive, a polite term.

    This article really does not come as a surprise. IBM and other large corporations certainly cannot have their vast portfolio of patents if every one of their patent prosecutions went through a ridiculous amount of non-substantiated rejections. I suspect IBM’s lobbying corp would expose such folly if every one of their applications was met with fiction.

    Of course, the above seems consistent. I am talking about a process where the Berkheimer court has to remind everyone that facts actually matter in a legal setting, an observation a lay person would just assumed should be the case.

  • [Avatar for Curious]
    April 2, 2020 07:11 pm

    As I have written many times before, patents are the Sport Of Kings. Independent inventors and small businesses get screw time and time again by the US Patent system.

    First, the cost of obtaining a patent is substantial. It can cost anywhere from $20-$50K to obtain a patent. These are substantial numbers for individuals/small businesses. Also, there is no guarantee that a patent can be obtained. I’ve seen independent inventors give up on valuable technology because they cannot afford to keep fighting the USPTO (with their essentially unlimited resources).

    However, getting a patent is only just the beginning. Once a patent is obtained on valuable technology, large companies treat the intellectual property of their smaller brethren as a free, all-you-can-eat buffet. Take what you want and don’t worry about coming back for seconds or thirds. Efficient infringement is real — large companies know that there is little chance that smaller companies or individuals will prevail against them.

    When it comes to litigation, either in District Court or before the PTAB in a IPR, larger companies know they can grind a little guy down. The small guy winning an IPR gains him nothing except getting teed up to go down that path again. This sucks up cash that the smaller players in the Sport of Kings can ill afford to spend.

    Even if an individual/small business can get a patent litigated in District Court, the Supreme Court has issued several anti-patent decisions over the years that makes them difficult to enforce. From Nautilus, KSR, Alice/Bilski/Mayo, it has become easier and easier for patents to be invalidated.

    How many large jury decisions have been affirmed by the Federal Circuit over the past years? They are few and far between, and that impacts the type of legal representation that individuals/small businesses can obtain.

    In the past, individual inventors and small businesses had to rely, in large part, on contingent fee lawyers to protect their intellectual property as the costs of a patent litigation were just too expensive for them to bear on their own. These days, however, there are very few talented contingent-fee attorneys willing to take these cases on. What smart attorney is going to take a case on when they know that the entire system has been crafted (over the past decade or so) to invalidate the patent? This has led to a lot of patent litigation being conducted (on the plaintiff side) by litigators a lot farther down the food chain. I’ve seen the briefs and listened to the oral arguments at the Federal Circuit — it is scary the level of incompetence out there. However, the small guys have little choice. They go to court outgunned and with the law/judges against them. It isn’t surprising that they lose so often.

  • [Avatar for Eric]
    April 2, 2020 07:07 pm

    This pablum from a notorious anti-patent advocate in the guise and position of a ‘respected’ professor, is intended to “get out in front” of any wrinkle this type of study might unveil in the whole anti-inventor ‘patent troll’ canard, he himself helped establish in the public eye, as its leading academic authority.

    By asserting that “…the quality of the individual’s patents, the quality of the lawyers hired by individual inventors to enforce their patents, or “deliberately” drafting and enforcing patents that are more vulnerable to subject matter eligibility challenges”, anything but corrupt, inventor-antagonistic Judges and bureaucrats, Prof. Lemley seeks to undermine any general perception of the actual truth of the matter.

    As well, should any subsequent inquiry raise questions or implications regarding his all-too-eager role in the destruction of the American Inventor in the past approximately two decades, it’s one way of playing cover-his-a__.

  • [Avatar for Pro Say]
    Pro Say
    April 2, 2020 06:53 pm

    “Most surprisingly we find that the entities most likely to lose their patents at this stage are not patent trolls but individual inventors and inventor-started companies.”

    Meaning . . . that it’s better for us little guys and gals to give up and sell out to NPEs . . .

    Congress: It’s now 2020. The dawn of a new decade.

    How much longer are you going to allow this to go on?

    How much longer are you going to allow job-creating, life-saving innovative individual inventors, startups, and small companies to dry up and die because they can’t protect their inventions?

    How much longer are you going to allow the courts to unconstitutionally usurp the authority that is yours and yours alone?

    How much longer?

  • [Avatar for Ternary]
    April 2, 2020 05:59 pm

    “Most surprisingly we find that the entities most likely to lose their patents at this stage are not patent trolls but individual inventors and inventor-started companies.”

    Yeah, right. From Lemley, no less! The whole AIA, Alice, anti-computer implemented campaign was against individual inventors right from the start. It is all too easy, it was alleged. Certainly after NTP threatened to shut down Blackberry and their addicted users, no less by an individual inventor. No more of that. Well, goals achieved. We are at a stage, wherein friends and relatives declare us, independent inventors, to be nuts to obtain patents. A futile effort leading to poverty, disappointment and potentially bankruptcy.

    The whole anti-patent campaign has been one to protect corporations and institutions. An unwarranted and bad harmonization with Europe. A once in a life-time opportunity to get rid of individual inventors who are so annoying (and sometimes threatening) to incumbent companies.

    The US economy will one again need its independent inventors and entrepreneurs to help with re-starting the economy out of the current disaster. Unfortunately, conditions are bad for independent inventors and very few trust the Patent System to help them to use IP to start new activities. Who was that again at the sideline cheering on anti-patent actions?

    And now a scientific study no less, to prove a point that he could have reached easily by reading IPWatchDog. Thanks for nothing Lemley. We never asked for special treatment. We just wanted what we deserve according to the constitution: a valid patent for our inventions.

  • [Avatar for Josh Malone]
    Josh Malone
    April 2, 2020 05:14 pm

    Compounding the problem is that a small business that loses patents rights usually cripples the business and costs jobs. Not so for large corporations and PAE’s.

    We need more studies like this and policies that focus on innovation, not litigation.

  • [Avatar for Model 101]
    Model 101
    April 2, 2020 05:06 pm

    Thanks for this article. At the end of the day it shows that the judges are biased. The 1000 cases mentioned should be applied to a new 101 retroactively. The judicial exceptions should be eliminated. Congress needs to get it going…