Earlier this year, despite some members of the media having prematurely described patent reform as dead, the U.S. Senate placed S. 1145, the Patent Reform Act of 2007, on the general calendar (the House had passed its version of the legislation last fall). With the Act calling for the biggest overhaul of United States patent law in more than 50 years, it’s hard to conceive of a sector of the American economy that won’t be affected in some way by this legislation.
One of the key components of the Act is to limit damages awards and litigation costs faced by companies accused of patent infringement—resources that technology, pharmaceutical, and biotech companies maintain could be better applied to research and development. Not only have events in Texas courtrooms provided impetus for these reforms, but North Texas-based companies like Texas Instruments and Research in Motion Ltd. figure to be among the companies most affected by the bill.
The problems with the current patent system start with the sheer numbers involved. There were 467,243 patent applications filed in 2007, according to the United States Patent and Trademark Office. That number is nearly double the number of applications in 1997, and more than triple the filings in 1987. As a result, not only is there a greater workload for the USPTO’s patent examiners, but a longer time lag for patent approval; the process can now take longer than two years. And the quality of the patent applications themselves has suffered, according to Jon W. Dudas, the undersecretary of commerce for intellectual property. He told The New York Times, “We are getting more and more unpatentable ideas, worse and worse quality applications. Historically, in the last 40 years, the allowance rate—the percentage of applications ultimately approved—hovered around 62 percent to 72 percent. It went up to 72 percent in 2000, but dropped to 43 percent in the first quarter of this year [2008].”
With the increase in the number of applications has come a growing number of so-called “patent trolls.” Like the fairy tale creatures who lived under bridges and exacted tolls from innocent passersby, these holders of weak patents use them primarily for the purpose of infringement litigation against successful companies. For many of these patent-holding entities, the potential returns are enormous. Affiliates of Erich Spangenberg’s Plutus IP, for example, have sued 476 different defendants in a total of 42 lawsuits; the overwhelming majority of this litigation alleges infringements of patents that Plutus IP and its affiliates purchased for $1,000. Critics say that “patent trolls” block entire fields, stifling technological innovation substantially because only companies with the financial capital to respond to the threat of patent litigation can keep innovating. IBM, for example, employs 370 in-house patent attorneys who not only help defend infringement allegations but who also help create a patent portfolio that can lead to counterclaims if IBM is sued for infringement. Having a war chest is vital; according to the Coalition for Patent Fairness (a technology lobbying group composed of industry heavyweights like Microsoft, Dell, and Cisco Systems), a typical patent case costs $4.5 million through trial.
In their paper “The Patent Litigation Explosion” presented to the American Law & Economics Association, Boston University scholars James Bessen and Michael J. Meurer make a compelling argument that, since the late 1990s, the costs of patent-infringement litigation have exceeded the profits from the patents themselves. And it doesn’t necessarily help to be right. The experience of Irving-based Research in Motion Ltd., makers of the Blackberry, serves as a cautionary tale. Facing an injunction that would have effectively shut down its business, RIM agreed in March 2006 to pay $612.5 million to patent-holding company NTP Inc. to settle an infringement ruling. As it was doing so, the USPTO rejected five of the questionable patents most at issue in the dispute. As if that wasn’t enough of a case of “too little, too late,” roughly two months later the U.S. Supreme Court decided a case, eBay Inc. v. MercExchange LLC, that would limit the availability of injunctions like the one faced by RIM. In its decision in the eBay case, the Supreme Court gave courts discretion to refuse to grant an injunction on the grounds that the plaintiff is only a licensor of intellectual property, and not a company actually developing and marketing a product. Unfortunately, the decision came too late for RIM.
Of course, where a company gets sued can make a huge difference in the outcome of a case. Up until 1990, corporations could only be sued for patent infringement in a jurisdiction where they had a regular place of business. An appellate court decision that interpreted where a company “resided” to include anywhere that the company did business (i.e., sold its products) gave plaintiffs the opportunity to choose their forum. The choice for many became Marshall, Texas.
In 1990, the Eastern District of Texas, where Marshall falls, had only one patent suit filed. By 2006, there were 264 patent-infringement suits filed there, against 996 defendants. In 2007, the number swelled to 364 cases filed against 1,402 defendants. Not only did the Eastern District average one new patent lawsuit a day, it also witnessed twice as many filings as any other federal district. Sixty percent of these cases—or roughly a tenth of the country’s entire patent docket—were filed in the hotbed of U.S. patent litigation, the federal court in Marshall. Some of the largest verdicts in patent cases (like this year’s $431 million verdict against Boston Scientific) have come out of Marshall. The odds seem to be pretty favorable as well: research firm Legalmetric studies patent verdicts nationwide, and concluded that patent plaintiffs whose cases go to trial in Marshall win 88 percent of the time, compared with 68 percent nationally.
Part of Marshall’s popularity with plaintiffs stems from the expedited procedural and trial schedule that makes cases proceed through the system at a faster pace. Critics maintain that this “rocket docket” gives defendants less opportunity to engage in discovery that might expose and help invalidate weaker patents. Another factor making plaintiffs gravitate toward Marshall is the jury makeup. Unlike the jury pools in large urban areas like Dallas, Houston, or Austin, juries in east Texas are less likely to have technical training or education, and have historically been more inclined to be liberal in awarding damages.
In fact, concerns about the threat of out-of-proportion damages, even more than worries about venue, have been a driving force behind the Patent Reform Act. Imagine, if you will, a patent suit in which the inventor of some marginal improvement to just one small component of a much more significant product—let’s say windshield wipers on a car—recovered damages based not on the enhanced value of the wipers themselves, but rather on the market value of the entire automobile. Ridiculous, right? Yet that’s exactly what can and does happen under the existing statute. Current law provides that the floor for damages is a “reasonable royalty,” but it doesn’t define that term. Instead, courts insist that jurors evaluate a 15-factor test to determine the reasonableness of a royalty. In the absence of clearly delineated rules for assessing damages, the result is a battle of the experts. In one 2007 Eastern District of Texas case, Hyundai was hit with a $34 million verdict over its web site’s purported use of a patent that would assist a salesperson in selecting particular parts needed by customers. In another 2007 case, what is now Alcatel-Lucent won a $1.5 billion verdict against Microsoft because the royalty for its MP3 compression technology was calculated—thanks to expert testimony—based on the value of every computer sold with a Microsoft operating system since May 2003 (the judge later vacated the award).
The Patent Reform Act contains many provisions, but two in particular are worth noting in light of the aforementioned concerns. First, in an effort to reduce the attractiveness of the Marshalls in this country, the Act would revise venue rules to permit patent suits to be brought in the judicial district where either party resides, or where a corporation has its principal place of business or was incorporated. Second, the standard for calculating damages would be changed so that damages based on a product or process’ entire market value would only be available if the plaintiff is able to show that the infringed patent’s “specific contribution” is the main reason for the market demand of that infringing product or process. If the plaintiff can’t meet that burden, then the court conducts an analysis of the value attributable to his infringed patent. This proposal eliminates the “windshield wiper improvement inventor recovering damages based on the value of the entire car” scenario.
Patent protection, which is good for up to 20 years, is a key part in encouraging innovation. Innovation is vital in today’s global economy. But with a patent system rife with what the Supreme Court justices during oral arguments characterized as “gobbledygook,” and with courtroom battles draining untold millions from research and development, innovation seems further away than ever.
