May 29, 2015Share this:
Two reports have recently been issued on patent litigation activity and trends in 2014: PricewaterhouseCoopers’ (PWC) 2015 Patent Litigation Study and Lex Machina’s 2014 Patent Litigation Year in Review. The reports make interesting reading for anyone who works with or invests in patents.
There’s a lot of discussion about patent reform and the problem of “patent trolls,” aka “Non-Practicing Entities” (NPEs), in the popular press. Much of what’s reported is wrong, and based on faulty information or assumptions. These reports provide welcome real-world data.
Patent Litigation Down 30%
The popular press reports that we need to change the laws governing patents because there’s been an “explosion” in patent litigation.
That may have been true a few years ago – from 2009 to 2013 there was a 24% per year growth in the pace of patent litigation. Even that number, however, is not a cause for concern because it simply tracks the increase in the number of patents issued. Logically and naturally, having more valid patents in force means there will be more patent litigation.
Another very important factor that resulted in a huge spike in 2012 is a change introduced by the America Invents Act (AIA). A new rule in the AIA made it much more difficult for patent owners to include multiple defendants in one lawsuit. As a result there was a sharp increase in the number of lawsuits filed; the total number of defendants rose at a much more modest rate.
Both the Lex Machina and PWC reports show that the trend sharply changed direction in 2014. Since the Lex Machina data on this point is more detailed, we are using their statistics for this discussion. According to Lex Machina, patent cases filed in 2014 actually decreased by 21%.
The real change is larger than that. From 2012 to 2013 there was an increase of 12%. Barring outside changes, that trend likely would have continued in 2014. That means the change was actually 33% -- the 12% the number of lawsuits didn’t rise as expected based on past trends, plus the 21% the numbers dropped. That’s pretty dramatic.
So what happened?
There are several factors, but the two most important are the impact of the post-grant review procedures instituted by the AIA and the US Supreme Court’s ruling in the case of Alice v. CLS.
The new post-grant review procedures mean that it’s much easier to challenge a patent’s validity at the patent office – at a much lower cost and much higher success rate (to the challenger) than in court. As a result, many weaker patents are being knocked out before they get litigated.
Alice v. CLS tightened the standards for software patentability. Many thousands of software patents that had previously been assumed to be valid are now likely to be found invalid. As a result, many patent owners aren’t even bothering to try to enforce patents that would likely be thrown out at an early stage in litigation.
With a 33% drop in the expected rate of patent litigation, is further legislative reform really needed? Or would it be solving a “problem” that no longer exists?
NPE Success Rate Similar to Operating Companies; Damage Awards 4X
Another “fiction” bandied about by those who attack NPEs is that they use “weak patents” to attack companies. The actual data regarding NPE patent litigation (from the PWC report) shows just how false that assumption is.
NPEs are only slightly less successful overall in litigation. If NPE patents are really “weaker” than those of operating companies, why aren’t they losing at a significantly higher rate?
For the relatively rare cases that go all the way to trial, the success rate for NPEs is the same as for operating companies: they win about 2/3 of the time. Again, nothing in that stat suggests NPE patents are “weak.”
Not only that, the damage awards NPEs have received over the last five years have been 4.5 times higher than the damage awards for operating companies: median damages awarded to NPEs were nearly $9m, compared with $2m for operating companies.
No one’s suggesting that federal judges and juries have a soft spot for NPEs and award damages just to be nice. NPEs get big damages because they have strong patents and present solid evidence of infringement.
But why are NPE damages so much higher than for operating companies?
NPEs litigate patents that are commercially valuable in order to generate revenue. That’s their business model and that’s all they care about.
Operating companies, on the other hand, will litigate not only to seek damages but as a strategic move to block (or even just bully) a competitor. They know a smaller competitor might potentially be driven out of business by the costs of litigation – even if it wins.
Operating companies have many more reasons to bring litigation than NPEs. So to the extent that there’s a problem with patent litigation (and we don’t think there is) it’s not because of the NPE business model.
As Congress considers further patent reform, we encourage our legislators to base their decisions on “real world” data, such as that found in this PWC report, rather than on speculative and flawed analysis.
To learn more about the bad data that’s driving the patent reform debate, see IPNav’s blog “Professors Deride “Flawed, Unreliable, or Incomplete” Patent Studies.”