By Efrat Kasznik
The inauguration of the “Mark Cuban Chair to Eliminate Stupid Patents” is a great opportunity to take another look at the U.S. patent system, and how it fares with startups and software companies.
As appears from an email to the press, laced with statements such as: “Dumbass patents are crunching small businesses”, Cuban’s incentive in endowing the Chair is triggered by the problem of troll litigation and its negative impact on startups. Cuban takes aim at so-called “software” patents (business method patents on ideas captured in software products), which he characterizes as “stupid” patents that should have been completely abolished or at least have a shorter legal life.
While well intentioned, this new initiative misses the mark for two reasons.
First, the real problem is not with “patent IQ”, but rather with patent validity. And second, patent quality is only one of several factors leading to the rise of troll litigation, a phenomenon that has already been recognized as having an impact on competition in a much-publicized conference held jointly by the FTC and the DOJ last December.
The US Patent and Trademark Office (USPTO) grants patent protection to “novel and nonobvious” inventions, based on prior art which existed at the filing of the patent application. The complicated task of patent examination is further compounded by the backlog conditions at the USPTO. The December 2012 USPTO Dashboard shows a backlog of over 600,000 patent applications, with over 500,000 new applications filed annually, and an average pendency time of 32 months.
The problem with patents that are issued under such circumstances is not whether they are inherently “dumb” or “smart”, but rather whether they should have been issued in the first place, a question that addresses the validity of the patent. Improving patent validity is preferable to eliminating entire categories of patents.
One common way to challenge the validity of a patent is by filing a patent reexamination with the USPTO. Statistics on reexaminations filed since 1981 show that they are about equally distributed among the three main patent categories: chemical, mechanical and electrical (at 27 percent, 33 percent and 38 percent of all filings, respectively).
Overall, a staggering 92 percent of reexaminations have been successfully granted. The recently enacted patent reform, known as the America Invents Act (AIA), further introduces a new post grant review process for filing validity challenges with the USPTO nine months months following the issuance of new patents.
Litigation by non-practicing entities (NPEs), commonly referred to as “patent trolls”, is closely tied to the patent validity problem. The phrase “troll” loosely defines a diverse group of entities whose business model revolves around monetizing patents through assertion — licensing or litigation.
A recent study by Boston University Law School estimates the direct costs of NPE patent assertion activity at $29 billion in 2011, up from $7 billion in 2005. While troll litigation has long been recognized as a problem for large operating companies, Cuban is right in pointing to a new and surprising trend where troll litigation is now focused more on smaller companies.
According to recent statistics presents at the FTC/DOJ hearing in December, at least 55 percent of unique defendants in patent troll lawsuits make under $10 million per year.
That being said, Cuban’s narrow focus on eliminating the so-called “software patents” ignores the fact that troll litigation is by no means the outcome of bad patents alone. It is propelled and enabled by an ecosystem creating “perfect storm” conditions for NPEs, namely: the availability of patents with broad claims that can be asserted against multiple defendants; plaintiff-friendly courts where large damages are awarded; and a very active patent market fueled by capital dedicated to buying and selling patents.
Curbing troll litigation will require a more holistic solution addressing the entire ecosystem, and is certainly on top of the agenda for the public and private sector.
[This post originally appeared at VentureBeat.]
ipstrategy.com 
Hate to sound flippant, but when people bring this up to me I say “a stupid patent is one you don’t own.” While I have represented people who have been sued by “trolls” (or “patent entrepreneurs”) and therefore have personal knowledge that NPE’s are a risk for business, this “huge problem” has as much to do with lazy journalists who hang out with the “cool kids” in Silicon Valley. Real numbers are needed to assess the real scope of the risk for startups (the numbers above are a very dull knife), but this would be too much like work for the press. Instead, the press would rather serve as a megaphone for their entrepreneur and VC sources, which results in photo opp hearings in DC to demonstrate that the US government is concerned. As an entrepreneur myself, I can tell you that my peers spend little, if any, time worrying about patent trolls. There are 99 problems in starting a startup, and for the vast majority, patent trolls aren’t one of them. But, even if there were a problem, there are better ways to address this than for rich guys to throw their money at a perceived problem.
Hi IPStrategist! Not sure if the comment about “lazy journalists” was aimed at me, the author of this article, but if you checked my background you could easily have found out that I am not a journalist, nor lazy… I happen to be an IP valuation and strategy expert with 20 years of IP industry experience, based in silicon valley (where I have co-founded and advised several startups, so I also know a thing or two about starting a company), and also happen to be a lecturer on IP strategy at the Sanford Graduate School of business, where we heavily research the relationship between startups and IP strategy. I would be happy to respond to any comment that you have about my data or conclusions – you are welcome to write me at: ekasznik@foresightvaluation.com
Sir, the comment about “lazy journalists” is not aimed at anyone in particular. I have to assume that you worked hard on your research and your data is solid, so you don’t appear to be a journalist at all, but a researcher. And congrats on your credentials. I expect that someone will grab one or two points with from your research and use a much bigger megaphone than you have, probably without attribution-like someone from the NY Times, ABC News or even someone from the floor of the US Congress. Your conclusions will be twisted to make a point that supports a desired conclusion, possibly to pass ill-conceived legislation that creates more problems than it solves. The devil is in the details with “trolls”–but studied and considered review of the issue (like you indicate is in your research) is unfortunately in short supply.