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Why Patent Litigation Was on the Upswing in 2012
Posted On July 2, 2013
Well, so much for patent reform. According to a recent study from the accounting firm of PricewaterhouseCoopers (PwC), 2012 was a “banner year in patent litigation,” with increases in the number of patent infringement lawsuits filed in the federal courts and larger damage awards.

The PwC study suggests that much of the increasing patent litigation may be due to “patent trolls,” those companies that purchase patent portfolios for the primary purpose of threatening and filing infringement lawsuits, along with the effects of the America Invents Act, the so-called “patent reform” legislation enacted in 2011. Damage awards in patent infringement cases also rose dramatically in 2012, with higher median damage awards and three cases resulting in damage awards of more than $1 billion.

The PwC study identified a number of findings. The first was a spike in the number of 2012 patent lawsuits that were filed to nearly 5,200. This represented a 29% increase over the number filed in 2011, as well as an increase in the rate of filing of patent-related lawsuits. Damage awards also increased with the median damage award going up to $9.5 million, reversing what had seemed to be a downward trend. The courts also seemed to be more willing to award billion-dollar-damage awards. Awards of $1 billion or more were issued in cases involving Apple, Monsanto, and Carnegie Mellon University, doubling the number of billion-dollar awards that had ever been issued.

But it was in analyzing the impact of the so-called patent trolls that the study generated the most interesting findings and the most significant response. The study used the term “nonpracticing entity” (NPE) to describe any patent-owning entity that “does not have the capability to design, manufacture, or distribute products with features protected by the patent.” In contrast, a “practicing entity” would describe patent owners who are actively manufacturing or distributing their patents. As such, NPEs can include entities such as universities or nonprofit organizations that obtain patents and then expect to market or license the patent to manufacturers in return for royalty income. Patent trolls would be NPEs whose primary business method is to obtain portfolios of obscure patents, and then seek to generate revenue by suing or threatening to sue manufacturers whose products may be using the patent.

The study identified several critical issues associated with patent litigation by NPEs. The study reported that NPEs accounted for more than half of patent infringement lawsuits filed in 2012, up from less than a quarter of the lawsuits filed in 2007. However, NPEs only made up 16% of final court decisions, suggesting that most NPE actions are settled before trial. Interestingly, of the NPE cases that did go to trial (as opposed to a settlement or license), the percentage of cases that resulted in a court decision for the NPE was notably less than the percentage of court decisions in favor of practicing entities. However, for those NPEs that did win their cases, they obtained damage awards that were nearly double those won by practicing entities, with the highest awards coming in the computer hardware and electronics, business and consumer services, and software industries.

The PwC study did not distinguish between different types of NPEs, limiting the study’s ability to specifically identify litigation filed by patent trolls from lawsuits pursued by individuals, nonprofits, and universities seeking to enforce their own patents. However, a previously published study by the RPX Corp. did evaluate this question and suggested that patent trolls filed 62% of all patent litigation in 2012. RPX’s study used the technical term “patent assertion entities” (PAEs) to identify “entities that make patent monetization a primary business function.” By this perspective, PAEs represent a subset of NPEs whose core business is to generate revenue through the enforcement of patents that the business purchased from the original inventor or patent owner.

Being heavily focused on statistics and data, neither the PwC nor the earlier RPX study drew conclusions about the costs and benefits of NPE or PAE litigation activities, particularly litigation by patent trolls. However, the dramatic increase in patent litigation, particularly litigation driven by PAEs, has not gone unnoticed by other patent stakeholders. In March 2013, the U.S. House of Representatives Judiciary Committee, Subcommittee on Courts, Intellectual Property and the Internet held a hearing on the abuse of the patent system by PAEs. A witness representing Cisco Corp. estimated that the company alone was spending $50 million per year defending against PAE-driven lawsuits.

More recently, both the Federal Trade Commission (FTC) and the International Trade Commission (ITC) have taken steps to address PAE-driven abuse of the patent system. The New York Times reported that the chairwoman of the FTC announced plans to begin a broad investigation of PAE activity with a goal of curbing “anti-competitive and deceptive conduct.” The ITC has the authority to investigate patent infringement claims involving imported goods upon receipt of a complaint from the patent owner. PAEs have been reportedly using the ITC complaint process as an additional avenue for pursuing patent infringement claims. On June 24, 2013, the ITC announced a pilot program that will more heavily scrutinize elements of PAE complaints at earlier stages of the investigations.

Advocacy and industry groups have also weighed in. The Software and Industry Information Association (SIIA) announced that it would urge “enactment of meaningful legislative and other policy reforms” to address patent trolls. And the American Public Transportation Association recently filed a suit against two PAEs to protect transit notification systems in use on public buses and trains.

But PAEs have their defenders. At an FTC workshop on PAEs, Santa Clara University professor Colleen Chien suggested that PAEs allow small inventors to monetize their patents through the sale or bundling of patents to PAEs. In the absence of PAEs, small inventors are often unable to finance patent enforcement lawsuits against large companies. Similarly, George Mason University law professor Adam Mossoff blogged that studies showing that patent trolls add up to $29 billion in unnecessary litigation costs are “fundamentally flawed,” suggesting that patent trolls are not that serious a problem.

In its final form, the America Invents Act of 2011 did not target NPE and PAE activities. The PwC study did blame part of the increase in patent litigation on provisions in the act that made it harder to file patent claims against multiple alleged infringers. The laudable goal of these provisions would have been to discourage broad and complex litigation, but the result seems to be more suits filed against individual defendants. It may be expected that Congress will return to this issue as well as the challenges of PAE patent trolls.

George H. Pike is the director of the Pritzker Legal Research Center and a senior lecturer at the Northwestern University School of Law. Previously, Pike was director of the Law Library at the University of Pittsburgh School of Law, and held professional positions at the Lewis and Clark Law School and at the University of Idaho School of Law, and was a practicing attorney in Idaho Falls, Idaho. Pike received his B.A. from the College of Idaho, his law degree from the University of Idaho, and his M.L.S. from the University of Washington. He is a member of the American and Idaho State Bar Associations, the American Association of Law Libraries, and the American Intellectual Property Lawyers Association.

Email George H. Pike

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