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October 30, 2007

Patent Fairness

Economist Pat Choate has produced a research paper for the U.S. Business and Industry Council (USBIC), examining "the arguments in favor of patent “reform” that are being spread by the Coalition for Patent Fairness (CPF), the organization representing Big Tech corporations on the issue." USBIC President Kevin Kearns asks the large-issue questions:

These Big Tech multinationals were themselves start-ups with a few patents and a few dreams not that long ago, and do not need to alter the U.S. patent system to conform to their business model at the expense of other models. Simply put, do some of the most profitable corporations in America need to add marginally to their bottom lines by undermining the patent protections that a full range of other companies depend upon for their livelihood – not to mention their employees? Having made it to the top, should they be permitted to deny the next generation of small technology innovators the opportunity to climb the American ladder of success?

Choate looked at seven corporations backing CPF: Intel, Dell, HP, Cisco, Oracle, Micron, and Apple.

The primary advocates of this historic alteration of U.S. patent law are a group of Big Tech corporations operating together as the Coalition for Patent Fairness (CPF). In this paper, I analyze the finances and actions of the seven founding corporations of that coalition. If patent laws truly require the drastic changes that would be mandated by The Patent Reform Act of 2007, the justification would be obvious in those corporations’ experiences. But in fact, they are not. My conclusion is that rather than trying to alter their business practices to conform to existing U.S. patent laws, these corporations are trying to alter those laws to fit their business model.

Choate examined the CPF arguments for statutory patent change.

On the U.S. economy increasingly bogged down in patent disputes:

Patent lawsuits as a percentage of patents granted have remained constant at 1.5 percent over the last 15 years (i.e., 1.57 percent in 1996 versus 1.55 percent in 2006). With an expanding economy and more innovation, the absolute number of patent applications filed and patents issued has increased, but there has been no abnormal surge of patent litigation.

On venue choice (the CPF wants to gimp patent suits to districts ill-equipped to deal with them, as contrasted to those districts well-versed in patents and able to handle this complex area of law):

In the period 1996-2006, the seven CPF founders were defendants in 285 lawsuits, of which 98 were in a rocket docket (34 percent). During that same period, they were plaintiffs in 116 cases, of which 43 were in a rocket docket (37 percent). When suing, in other words, they behaved just the same as those who sued them.

More telling is the litigation data of recent years. In the five-year period 2002-2006, the CPF founders were defendants in 192 lawsuits, of which 78 were in rocket dockets (40 percent). In the same period, they were plaintiffs in 71 cases, of which 34 were in rocket dockets (48 percent).

[R]ocket dockets are not a problem for the CPF founders when they are suing others. On a proportionate basis, these seven companies use the rocket dockets more than those suing them. As these statistics suggest, when a corporation believes its patents are being violated and cannot secure a settlement, it seeks a fast resolution in a docket skilled in patent law.

That patents represent a drain on innovation, or even a drain on CPF big guns, which have been more saddled with antitrust suits than patents:

In the 11-year period 1996-2006, the seven CPF founding corporations disclosed $1.9 billion in patent settlement payments, an average of $173 million per year. During that same time, these seven corporations had collective revenues of more than $1.7 trillion.

As a percent of their revenues for those 11 years, disclosed patent settlements were one-ninth of one percent (0.11 percent). In the entire 11-year period, the highest portion of total revenues devoted to patent settlement was in 2002, when it was 3/10th of one percent (0.3 percent). In 2006, the ratio of patent settlements to revenues was 1/25th of one percent (0.04 percent). This hardly seems a great burden on these seven companies.

If these seven companies face a litigation crisis, it is found in antitrust suits in which they have been involved. Between 1996 and 2006, these seven companies have been involved in 247 antitrust cases, of which 229 were in the period 2002-2006.

In 1996, the seven founders of the CPF invested $6.2 billion in R&D. In 2006, they invested $17.2 billion in R&D – an increase of 277 percent. Collectively, the CPF founders invested more than $131 billion on R&D for the period 1996 to 2006. Disclosed patent settlements equaled 1.5 percent of the total R&D investment, which suggests that patent litigation has had no significant impact on their research and development activities.

That patents divert resources that could have been invested in creating jobs:

The implied argument is that a change of U.S. patent law would free up monies to create more and better jobs for American workers. Yet, these seven companies have been at the forefront of the off shoring of U.S.-based R&D and jobs.

Some CPF corporations have even more of their jobs overseas. Hewlett Packard, at the end of 2006, had 54,000 employees based in the United States, but more than 101,000 in overseas facilities. Oracle had 26,000 U.S.-based employees and more than 48,000 located in other nations. So too, Dell had almost 40,000 foreign-based workers, but barely 26,000 in the U.S. Intel’s work force is split – half in the United States and half abroad. Micron Technology, which is the largest employer in Idaho with 9,000 jobs, recently announced that it is shifting a major portion of its manufacturing jobs to China. Because Apple relies on foreign contract manufacturers, it is impossible to determine how many workers are involved in the making of its products.

The patent license fees these big companies pay typically go to support U.S. inventors, who are presumably just the sort of smart and creative people policymakers want to encourage. Denying them a decent income so that large transnational companies, which these are, can spend more on cheaper foreign factories and workers makes little economic sense.

The point is these seven companies have extensive employment overseas and no change in current U.S. patent law is likely to change that economic dynamic.

The paper lists in the appendix: Amendments to the Patent Act (35 U.S.C. § 1 et seq.) since 1952; Significant International Patent Related Agreements since 1952; Significant Supreme Court Cases since 1952; Significant Amendments to Patent Regulations; Patents Granted and Lawsuits Commenced, showing the 1.5% asserted as remarkable steady 1993-2006; and other statistics regarding the "sister seven" of CPF.

Posted by Patent Hawk at October 30, 2007 3:17 PM | The Patent System

Comments

It came as quite a surprise that Senate Minority Whip Jon Kyl (R-AZ) had recently introduced the latest Patent Reform Act (S3600). In it includes a "Check 21" exception (sec. 13, page 80): "With respect to the use by a financial institution of a check collection system that constitutes an infringement under subsection (a) or (b) of section 271, the provisions of sections 281, 283, 284, and 285 shall not apply against the financial institution with respect to such a check collection system."
Although a small Technology Company named Data Treasury and its patents were NOT specifically mentioned, the intent of the exception is aimed directly at Data Treasury and its on going litigation against the banking industry for infringing upon its "Check Collection" remote image capture technology.

If passed, the exception would shift the financial responsibility for infringement to the American Taxpayer. Billions of dollars in taxes would be passed on to us in the name of (honesty and justice). The U.S. Commerce Department has recently objected to this type of legislative provision. Such a law would pave the way for Congress to start interfering in legal cases on behalf of the highest bidder. The Commerce Department -- the parent agency of the Patent and Trademark Office -- also pointed out that "limiting patent holders' rights and remedies in this instance could reduce innovation in the technology area." In other words, revoking someone's property rights affects not only the disenfranchised property holder but also the next round of inventors. In this instance, moreover, Congress would be sending the bill for the bailout to us -- the taxpayers. All this makes for quite a lobbying coup. The banking industry makes off with a few extra billion dollars, robs a small business of its intellectual property and again sticks taxpayers with the tab. Legislation should not be used to grant retroactive legal immunity to large corporations that willfully ignored the property rights of a small, innovative company. And no elected official who has pledged to maintain the integrity of our legal system should be a party to such a travesty. The windfall is not 2-6 billion of savings to the banks, but at 40 billion checks per year for the major institutions at $1 to $2 per check the savings is $40 to $80 billion dollars. The vast majority of banks who offer RDC have stated they have seen growth in deposits due to RDC. Deposits represent the lifeblood of any financial institution and have pervasive impacts throughout the organization. Recent research conducted by RemoteDepositCapture.com has revealed that for every dollar a financial institution has in deposits, they make over $2 in loans and investments. Of course Data Treasury is suing for 5 cents per check and settling for even less. The industry used to claim that it cost close to $2. per check so what justifies the banks STEALING this for FREE , except why pay if you are not forced to. The proposed legislation places the US government in the position of accountability. Since the US government both issued and affirmed the validity of the DT patents, it seems to place the government in the curious position of stipulating patent validity without having any control over the question of whether infringement is or is not occurring and with the bank's interest's non-aligned with the government's interests. The enactment of such an exception would result in litigation against the federal government for DT to seek compensation for the taking of its private property. The federal government would have to pay $1 billion+ to Data Treasury over 10 years as compensation for taking its property under the exception, according to estimates (albeit, a conservative estimate) by the Congressional Budget Office. Senator Kyle by championing this exception should be made (with a clear answer devoid of spin) to explain why exactly, banks should be immune to patent law that applies to everybody else and why the public should fund any patent royalties when infringing returns billions in operational savings to the banks !! Source: 2008 FDIC Data, RemoteDepositCapture.com
The funny part about this campaign is that everybody will take a sudden, but belated, interest in this fiasco if and when the bill comes due and has to be paid by the American taxpayer. But you don't mind, do you? After all, I'm sure you want to show as much love to Bank of America, Citibank, etc. as Citibank and its group shows to you. All this on the heels of the recent Wall Street bailout. I guess business as usual is still the main diet of some elected officials!! DISGRACEFUL!!!

Posted by: PAUL PRINCIPATO at February 20, 2009 10:10 AM

Does anyone know which patents they're using? Time for a little patent busting hawk? I bet you could make better than the pittance you'll get from MS by busting up that little portfolio.

Posted by: 6000 at February 21, 2009 4:14 PM

No one has hired Patent Hawk to invalidate the "Check 21" portfolio. That may be why the patents are still causing consternation - they haven't been able to pull the rug out.

Sometimes I feel like Patent Hawk is the best kept secret in this business. It's been our common experience that we find invalidating art for patents that others have tried and failed to, sometimes in multiple litigations.

That said, a small fraction of granted patents are novel, and deserving. I've got a very few of those myself, among the dross.

Posted by: Patent Hawk at February 21, 2009 4:57 PM