High-tech patent litigation study: NPEs and others

In her research paper titled “Of Trolls, Davids, Goliaths, and Kings: Narratives and evidence in the litigation of high-tech patents,” Assistant Professor Colleen V. Chien, at Santa Clara University School of Law, provides a snapshot of U.S. patent litigation that could not only inform current efforts to reform the patent system, but could also serve as a basis for future investigation into the functioning of patent litigation. The two main questions that the paper addresses include: who initiates patent lawsuits, and what types of suits are the most common.

The focus of the paper is on the high-tech patents, which comprises of hardware, software and financial inventions. The hardware category includes patents covering semiconductor technologies, memory and digital signal processing (chip) architectures and design. The software category includes patents covering user interfaces, database technology, software development, computer graphics and cryptography. The financial category includes patents classified as financial process, business practice, management or cost/ price determination data processing inventions.

While acknowledging the fact that each patent dispute is unique, the paper identifies different types of popular patent litigation profiles- non-practising entity (NPE) Suits; Litigation-Avoidance/ Patent Detente; Sport of Kings; David v. Goliath; Predation; and others.

NPE Suits:

In the paper, the term NPE refers to a corporate ‘patent enforcement’ entity that neither practices nor seeks to commercialize its inventions. The core business of NPEs is essentially patent enforcement. NPEs typically have a reputation of suing mature companies that have sold allegedly infringing products. Since the NPEs do not have products of their own, counter-suing for patent infringement is not possible.

An interesting feature of NPEs is their focus on high-tech inventions, instead of the ones catering to biotechnology. The reasons are multifold: 1) NPEs have historically acquired their patents from distressed or bankrupt companies, principally casualties of the Internet bubbles; 2) the products in computer and semiconductor-related industries tend to be covered by many patents, increasing the likelihood of infringements; and 3) in high-tech, it is arguably easier to file a paper patent that can be bought and sold free of the underlying technology. Biotechnology inventions have more stringent enablements and written description standards which are more difficult to meet without having actually made the invention.

Litigation-Avoidance/ Patent Detente:

Companies can discourage threats of suits by their competitors by building portfolios of patents. Companies that engage in defensive patenting tend to be large, which on one hand makes them vulnerable to patent litigation, and on the other gives them the ability to underwrite large patent portfolios. However, despite the increasing practise of defensive patenting, the share of suits involving hardware and software inventions has actually risen. This is explained by the fact, among other explanations, that defensive patenting is not intended to guard against lawsuits brought by plaintiffs with little product revenue- NPEs or individuals.

Sport of Kings:

This refers to the litigation involving large corporations, a consequence of which is usually patent warfare. The stakes could be as high as $25 million, and the average litigation costs could jump to $5.5 million. Some well-known examples include battles between Qualcomm against Broadcom, and Creative against Apple.  

David v. Goliath:

The lawsuits involving individual inventors against large corporations fall under this category.  The paper states that several studies have shown that individuals and small companies are more likely to sue than large companies. What distinguishes NPEs and such individual inventors is the motive behind the lawsuit. The independent inventors are perceived as seeking not only money, but also justice or vindication by a court. Also, an individual with fewer resources is likely to be more selective than an NPE about its targets and the patents it asserts.

Predation:

This is a strategic use of patent litigation by established companies to impose distress on their financially disadvantaged rivals. Such litigation can damage a defendant’s credit rating, its relationship with customers and its reputation with investors, regardless of how the suit ultimately resolves.

This paper uses the research data from Stanford’s IP Clearinghouse for cases initiated in the U.S. District Courts from January 2000 through March 2008. Some of the interesting findings are captured in Table 1.

 Table 1: Patent litigation suit study results calculated based on the absolute number of suits as a function of suit categories 

Table 1 indicates that the 28% of all suits fit the sport of kings profile.  This can be explained by the fact that most of the software and hardware patents are owned by large corporations. NPEs, considered willing and eager litigants, only constitute 19% of the total number of suits. Noticeably, the NPEs contribute the most towards the financial patents suits. It is speculated that this may partially be due to the substantial uncertainty associated with financial patents, which the NPEs are more willing to exploit.

Overall, the study provides insight into the patent litigation lawsuit environment in the U.S., and provides a perspective on how effectively the system is working. While it does not address patents never litigated, or patents never licensed, it nevertheless provides a guideline for direct reformations and developments in the patent regime.