A Matter Of Timing? On Innovation, Patent Trolls And Litigation

A Matter Of Timing? On Innovation, Patent Trolls And Litigation

Brian Chau is a JD candidate at Osgoode Hall Law School.

Brian J. Love, a teaching fellow at Stanford Law School, conducted an empirical analysis of litigation by various classes of patentees in a randomly selected sample of 1,143 patents issued from May 11, 1993 to May 10, 1994. The draft paper, entitled "An Empirical Study of Patent Litigation Timing: Could a Patent Term Reduction Decimate Trolls Without Harming Innovators?" considers the time from filing in which a patent owner asserted their rights in an infringement action. His results indicated a drastic disparity between entities primarily acting as “product companies” and “non-practicing entities” (NPEs).

NPEs were broadly identified in a 10 class classification system adopted from work by Mark Lemley and Nathan Myhrvold. Generally speaking, any non-product producing company was identified as an NPE in this paper; what may be colloquially referred to as a patent troll.

For a product producing company, the exclusive rights granted by a patent are important to aid the company in recouping its substantial investment into research and development. The rights are significant – they prevent a competitor from free-riding while the company develops the market for its product. While there are some strategic incentives for engaging in litigation in the early years of protection, litigation in the later years of protection may have serious repercussions. Litigation against established competitors may spark a cycle of counter-litigation or could potentially damage the goodwill and reputation of the company. Further, product companies may not have the capabilities to assess the potential value of their exclusive rights – litigation is not a primary source of revenue and product companies not specialists in the business of patent litigation.

For a NPE, the exclusive rights granted by a patent are more lucrative once an alleged infringer has developed a market incorporating the technology described within the patent. An NPE can free-ride on the success and the accumulated value of such a market, extracting a lucrative settlement or licensing agreement. It would make financial sense to wait until the market is most ripe prior to initiating litigation which is generally the latter years of patent protection. Further, NPEs are in the business of asserting patent rights and likely employ teams of specialists who identify and monitor potential infringement. As such, they are better positioned than product companies to engage in litigation. This is especially true for NPEs whose sole source of revenue is through litigation and licensing agreements – if they weren’t good at enforcing their rights, then they would be quickly out of business.

Mr. Love found that the average product company patent was asserted in the early years of protection and the average NPE patent was asserted in the final years of protection. In particular, his results indicated that product companies begin litigating their patents on average more than 12 years before patent expiration and finish with an average of more than 9 years of patent life remaining. NPEs on the other hand begin litigating their patents less than 9 years prior to patent expiration and finish with an average of 4.5 years remaining. He also found that the traditional belief that NPEs assert an outsized number of high tech patents holds true - possibly due to the short technology lifecycles and the ease of obtaining broad patents rights.

The results are not startling – a rational actor would litigate based upon the particular business objectives in mind. However, the results provides light into two arguments raised by Mr. Love: (1) Serious doubt should be cast upon the final years of the patent term and; (2) Congress should act to increase the frequency and magnitude of maintenance fees in the latter half of the patent term.

With respect to his first argument regarding the length of protection, there are international law obligations that may make this change infeasible without a great deal of international cooperation. Under GATT/TRIPs, signatories are required to give patent owners 20 years of protection following filing. Such a change would be difficult at best to push through without serious trade ramifications. However, I do believe that additional research in this direction is merited, given that the acceleration of technological change especially as related to high-tech fields.

The results beg the question as to whether the existing balance between exclusive rights and the public interest is appropriate. Let’s consider the cellular phone space, for example. Interpolating on recent history, every few years a paradigm-changing technology is introduced which renders old technology obsolete. Does it make sense to give a patentee 20 years of patent protection in these circumstances? Perhaps as Mr. Love argues, shortening the protection period may have a beneficial effect on innovation by reducing rent-seeking behaviour by NPEs while minimally deterring innovators.

With respect to the second argument, increasing the amount of maintenance fees in the latter half of the patent term may prove to be a good idea – the years of protection that is arguably more important to product producing companies would be left intact, and the latter years of protection would only be maintained where a patent has a foreseeable value above the costs of maintenance. An increase of maintenance fee would require entities to be more judicious in determining which patents to maintain and which to lapse, as it could become financially infeasible to maintain large patent portfolios of dubious patents.

An Empirical Study of Patent Litigation Timing: Could a Patent Term Reduction Decimate Trolls Without Harming Innovators?