Costs and benefits of (some) US patents

"The Costs and Bene fits of United States Patents" is the title of a paper by a four-man team consisting of John Turner, James Bessen, Peter Neuhäusler and Jonathan Williams. Labelled both as Boston Univ. School of Law, Public Law Research Paper No. 13-24 and Boston Univ. School of Law, Law and Economics Research Paper No. 13-24, it is conveniently available via SSRN here. According to the abstract:

"We use a detailed data set to estimate the costs and benefits of United States patents. To estimate costs, we combine data from Derwent Litalert with a proprietary dataset of non-practicing entity (NPE) lawsuits collected by Patent Freedom, and use an event study approach to estimate losses suffered by alleged infringers during 1984-2009. To estimate benefits, we combine patent data from the USPTO and EPO with financial data from CRSP and COMPUSTAT, and use market-value regressions to estimate the value of patent rents for publicly-traded US firms during 1979-2002. 

We find that costs exceed benefits overall and that the gap between costs and benefits has grown across time. Surges in the number of NPE lawsuits, lawsuits filed over Computers/ Communications patents, and lawsuits brought against non-manufacturing, software and telecommunications firms contribute to the increase in the gap. Growth in costs outstrips growth in lawsuits, in part, because events in these fast-growing categories have higher-than-average per-event dollar costs".

This blogger is no economist, but he can't help wondering: what about all those patents that are never litigated, as well as those which are happily and uncontentiously licensed -- and what about all those patents which are not asserted by NPEs?

Thanks go to Gerry Gavigan for forwarding this link

The Biotechnology Industry and the Choice to Patent or Rely on Trade Secrecy

The U.S. Supreme Court released its much anticipated decision in the Myriad case today.  Basically, the U.S. Supreme Court held that isolated DNA is not patentable subject matter.  While the U.S. Supreme Court apparently dealt a blow to some in the biotechnology industry, it did provide that cDNA could be patentable subject matter and the opinion carefully explained what it did not cover:

It is important to note what is not implicated by this decision. First, there are no method claims before this Court. Had Myriad created an innovative method of manipulating genes while searching for the BRCA1 and BRCA2 genes, it could possibly have sought a method patent. . . . Similarly, this case does not involve patents on new applications of knowledge about the BRCA1 and BRCA2 genes. Judge Bryson aptly noted that, “[a]s the first party with knowledge of the [BRCA1 and BRCA2] sequences, Myriad was in an excellent position to claim applications of that knowledge.  Many of its unchallenged claims are limited to such applications.”  689 F. 3d, at 1349. Nor do we consider the patentability of DNA in which the order of the naturally occurring nucleotides has been altered. Scientific alteration of the genetic code presents a different inquiry, and we express no opinion about the application of §101 to such endeavors. We merely hold that genes and the information they encode are not patent eligible under §101 simply because they have been isolated from the surrounding genetic material.

Notably, Myriad’s stock went up immediately after the decision and the stock did go back down by the close of the market.  And, at least one company has announced today it will offer BRCA testing for about a third of Myriad’s price.  My understanding is that many firms in the biotechnology industry have turned their back on patenting and have focused instead on trade secrecy (although a sound IP strategy surely includes both).  This supposedly has been happening for quite a while—maybe 5 years now.  I’ve been told that one reason firms are seeking to utilize trade secrecy instead of patents is because of the cost of patenting—particularly in seeking patent protection throughout the world.  The Myriad decision seems to further tilt the biotechnology industry towards trade secrecy with respect to some discoveries, but will it make that much of a difference?  In other words, the industry already was going down the trade secrecy path—does this decision push it a little faster down the road or does it have little to no impact?  (it matters to Myriad considering the way Myriad’s stock is going)  What about the signaling effect of patents?  If there is more reliance on trade secrecy over patents, does that mean that investors will have more difficulty ascertaining the expertise and value of small biotechnology companies? 

Tax-paying for Fun and Profit

"Tax-paying for Fun and Profit" is the title of an unusual working paper by Robert Kunstadt and Ilaria Maggioni, which you can read here on MPRA. According to the abstract,

"Modern advances give us the ability to re-engineer the taxation system to benefit from computerized automation and the insights of modern psychology. People like to do things that bring a tangible reward. Tax-paying should be made FUN, not a chore. You will want to participate if you perceive a direct benefit. This new model selectively adapts the old English system of raising money by granting royal monopolies. A tax-paying entity would be allowed to make a bid on the percentage of tax it would pay for acquiring monopoly rights on a particular venture, posted publicly on a government-auction website for others to see and to post their alternative bids. Proposals put out for bid could immediately be tested for market viability by getting a thumbs-up/thumbs-down from the general public. The rewards to the proposer and to the public can be immediately perceived by all. Hence, the conditions for a positive stimulus-response-reward loop are fulfilled. Tax-paying becomes both fun and profitable, even more gratifying than betting in Las Vegas, because the bidder gets a perceptible benefit from it right away. The advantage to the state and its citizens is that monopoly efficiency does not just serve the monopolist but also the public. The would-be monopolist must make a precise calculation of how much to offer the state in taxes; upon pain of losing the auction to a competitor. With minimal government intervention, the “invisible hand” of economic theory is put to the task of serving the public good".

Robert and Ilaria are attorneys with the intellectual property-based practice of R. Kunstadt PC: they also have a very original view of the world. This working paper is based on an earlier publication by the same authors on public patent pools, published in Les Nouvelles.

The Branding Challenges of Groupon: A "Sticky" Situation

A colleague, a senior official at a leading governmental IP body, said it best to me several years ago during a pleasant luncheon conversation. "Forget patents and copyright", he declared, "the ultimate source of long-term IP competitive advantage is the strength of the company's brand. At the end of the day, branding is where it is at." I took these thoughts to heart when, several years ago, I considered the Groupon phenomenon. Two years to the day (June 6, 2011), in light of the rejected multi-billion dollar acquisition offer by Google and on the cusp of the Groupon IPO, we opined ("The Groupon IPO: Where does IP fit in?"), here, that Groupon faced an uncertain future, despite all of the interest in the company.

Many of you will are probably familiar with Groupon, here, whose business model rests on signing up participating merchants and service purveyors to offer their goods and services on the basis of the deal-of-the-day, in the belief that the customer will then return for more at full price. Our thinking at the time in questioning the business model was that the company faced the prospect that its marketing and advertising costs would never reach the necessary economies of scale and that low barriers to entry made the prevalence of competitors likely. As a result, the company would find it difficult to develop a "sticky" brand, whereby a critical mass of customers would develop an ongoing affinity to the brand that would translate in customer loyalty.

In other words, in the absence of any other material source of IP right that might confer a competitive advantage, the company was left with the slender reed that it could develop sufficient goodwill and reputation to enable it to stand-out in what promised to be a crowded field. Based on what we saw, we were skeptical that the goodwill and reputation of the Groupon brand would ever achieve the kind of brand stickiness that is essential to its long-term business success. We maintain this position—Groupon made be widely covered as a media item, but it has failed to achieve the hoped-for degree of customer loyalty. If "branding is where it is at", Groupon faces a daunting uphill battle.

When I wrote these words, I did not take into account that there might also be material collateral damage to the company's partners, namely those numerous entities that provide the discounted offers that serve as the foundation for the company's activities. It turns out that not only has the company found it difficult to build the "sticky" brand necessary to create the requisite customer loyalty but, as suggested in a recent podcast rebroadcast of an interview heard on Bloomberg radio, the company's lack of success in creating a "sticky" brand may also have a deleterious affect on the company's business partners. The position expressed was that the discounted offers available through Groupon do not result in increased customer loyalty with the discounting entity. Rather, the customer is inclined to cherry-pick the offers, enjoy the discount and move on. No customer "stickiness" here.

But, from the branding point of view, that is not all. The opinion expressed in the podcast is that the participating company, by being associated with the Groupon offer, does not merely fail to increase its consumer custom: its participation in the Groupon program actually impairs the value of its brand. Not only does the participating company fail to increase its customer base materially but it creates a class of one-off customers who may have formed a negative view of the participating company. In the aggregate, therefore, not only has the Groupon business model been challenged to meet the challenge of my colleague's exhortation—"branding is where it is at"—but it threatens to inflict collateral branding damage to its business partners.

This conclusion must nevertheless be tempered by the recognition that it merely reflected the opinions of a single interviewee and no empirical evidence was brought to support the position. (Perhaps there is an eager graduate marketing student out there who wishes to take on the topic.) In any event, the Groupon tale does counsel companies engaged in business models that are largely bereft of other forms of IP protection to confront the remaining threshold IP questions—can I develop requisite brand loyalty and does my business plan affect the reputation of others?  From the point of view of the potential business partner in such a novel business plan, the question becomes—"have I sufficiently considered the implications to my company's name and brand?" The ultimate competitive advantage of both companies may rest in successfully providing a solution to these questions.

The White House Moves Against "Patent Trolls"

Today the Obama Administration announced “five executive actions and seven legislative recommendations to protect innovators from frivolous litigation and ensure the highest-quality patents in our system.”  The announcement is here.  The recommendations are below.  The recommendations that seem especially interesting include: expanding challenges to computer enabled patents at the PTO; changing the standard for issuance of injunctions at the International Trade Commission; incentivizing public disclosure of demand letters; increasing efforts to identify the real parties in interest; and making new rules concerning functional claiming in the software context. 

LEGISLATIVE RECOMMENDATIONS

In that spirit, the Administration recommends that Congress pursue at least seven legislative measures that would have immediate effect on some major problems innovators face.  These measures would:

1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.
2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).
3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB).
4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use.  Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.
5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.
6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public.
7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges.

EXECUTIVE ACTIONS

Today the Administration is also announcing a number of steps it is taking to help bring about greater transparency to the patent system and level the playing field for innovators.  Those steps include:

1. Making “Real Party-in-Interest” the New Default.  Patent trolls often set up shell companies to hide their activities and enable their abusive litigation and extraction of settlements.  This tactic prevents those facing litigation from knowing the full extent of the patents that their adversaries hold when negotiating settlements, or even knowing connections between multiple trolls.  Today, the PTO will begin a rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application.
2. Tightening Functional Claiming.  The AIA made important improvements to the examination process and overall patent quality, but stakeholders remain concerned about patents with overly broad claims — particularly in the context of software.  The PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.
3. Empowering Downstream Users.  Patent trolls are increasingly targeting Main Street retailers, consumers and other end-users of products containing patented technology — for instance, for using point-of-sale software or a particular business method.  End-users should not be subject to lawsuits for simply using a product as intended, and need an easier way to know their rights before entering into costly litigation or settlement.  Today, the PTO is announcing new education and outreach materials, including an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll.
4. Expanding Dedicated Outreach and Study.  Challenges to U.S. innovation using tools available in the patent space are particularly dynamic, and require both dedicated attention and meaningful data.  Engagement with stakeholders — including patent holders, research institutions, consumer advocates, public interest groups, and the general public — is also an important part of our work moving forward.  Roundtables and workshops that the PTO, DOJ, and FTC have held in 2012 have offered invaluable input to this process.  Today, we are announcing an expansion of our outreach efforts, including six months of high-profile events across the country to develop new ideas and consensus around updates to patent policies and laws.  We are also announcing an expansion of the PTO Edison Scholars Program, which will bring distinguished academic experts to the PTO to develop — and make available to the public — more robust data and research on the issues bearing on abusive litigation.
5. Strengthen Enforcement Process of Exclusion Orders. Once the U.S. International Trade Commission (ITC) finds a violation of Section 337 and issues an exclusion order barring the importation of infringing goods, Customs and Border Protection (CBP) and the ITC are responsible for determining whether imported articles fall within the scope of the exclusion order. Implementing these orders present unique challenges given these shared responsibilities and the complexity of making this determination, particularly in cases in which a technologically sophisticated product such as a smartphone has been successfully redesigned to not fall within the scope of the exclusion order. To address this concern, the U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that CBP and the ITC use to evaluate the scope of exclusion orders and work to ensure the process and standards utilized during exclusion order enforcement activities are transparent, effective, and efficient.