Myths of the Patent Wars: The ITC and Excessive Patent Damages Myths

David Kline and Bernard J. Cassidy

What if (Almost) Everything You Thought You Knew About America’s “Broken” Patent System Was Wrong?

What follows is the third installment in the four-part “Myths of the Patent Wars” series.

The necessary legislative effort to curb bad actors in the patent industry has been “hijacked” by a small handful of very powerful global technology companies intent on forcing broader changes in the patent system to make it better serve their business interests.

Under the banner of “patent reform,” these giant firms have spent tens of millions of dollars on lobbyists and media relations to promulgate a series of dramatic but false claims about America’s supposedly-“broken” patent system — claims that are now almost universally accepted as true by the media, Congress, and the public at large.

In Parts 1 and 2 of this series, we examined the false claim that there is an “explosion of patent litigation greater than any in history” as well as the myth that non-practicing entities are a new breed of parasitic patent holder who contributes nothing to society. In fact, we showed that NPEs were consciously created by the U.S. Founding Fathers as a way to kick-start the fledgling American economy by involving as many people as possible — even those without the wealth or resources to commercialize their own inventions — to participate in innovation.

Today we will look at the 3rd and 4th great myths of the patent wars:

Claim #3: Non-practicing entities have “stampeded” the International Trade Commission (ITC) with spurious infringement claims, “holding up” products consumers need in order to extort settlements from deep-pocketed tech importers like Apple and Google.

The Facts: Although the ITC’s caseload has certainly increased since 2006 when the U.S. Supreme Court’s eBay v. MercExchange decision limited the grounds upon which federal courts could bar the sale of infringing products, NPEs have not been the primary cause of that increase. According to the ITC’s own report issued April 15, 2013, Category 1 NPEs — defined as “inventors who may have done R&D or built prototypes … research institutions such as universities and laboratories … and start-ups that possess IP rights but do not yet manufacture a product” — accounted for only 11 percent of the caseload since 2006. Meanwhile, Category 2 NPEs or “patent assertion entities” — defined as firms “whose business model primarily focuses on purchasing and asserting patents” — accounted for another 9 percent of the ITC caseload.

As for actual “exclusion orders” issued by the ITC to block the importation of infringing products, the ITC report notes that out of a total of 301 cases in the last seven years, a grand total of four exclusion orders have been won by NPEs. That’s right, only four. And each of those four NPEs spent millions of dollars inventing the technology they asked the ITC to protect.

This was confirmed in a Bloomberg news report by Susan Decker: “The International Trade Commission … hasn’t in the past six years issued a single import ban requested by patent owners who didn’t either make products or invent the technology in question.”

So if NPEs are not to blame for the surging ITC caseload — to the extent it is surging [1]  — who is? The ITC’s own data show a 500 percent increase in filings from the smartphone giants and other Big Tech importers.

So there it is: companies like Apple and Google are clogging the courts and the ITC, spending billions on patent arsenals and patent litigation — in 2012 for the first time ever, they each spent more on patents than they did on R&D. And yet they and the other members of the new “ITC Working Group” lobby spent $550,000 last year blaming the soaring ITC caseload on small non-practicing entities in hopes of getting Congress to bar them from the ITC.

Which is a bit like trying to blame World War I on a minor Austrian archduke named Ferdinand rather than on the imperial rivalry of the great European powers.

So why is the tech importer lobby making claims that are so demonstrably contrary to the facts? Other than being large-scale outsourcers of American jobs, the only thing these Big Tech importers have in common is that they have all been sued multiple times for patent infringement, and from time to time have been forced to pay the price for it.

Is it simply, then, a matter of wanting to reduce their costs of infringement? If that is the case, then perhaps they should reinstitute the once-standard practice in high-tech industry of obtaining “product clearances” to ensure that the products they manufacture overseas and then import do not infringe any U.S. patents. It’s perfectly legal to lower costs by hiring cheaper Asian labor. It is not legal to lower costs by infringing other companies’ patents.

THE MYTH OF “EXCESSIVE DAMAGES”

Claim #4: Undeserving patent holders are winning “excessive damages” from gullible juries for the alleged infringement of even the most minor patents.

The Facts: According to the 2013 Patent Litigation Study, the median damage award for patent infringement dropped 25 percent during 2007-2012 to $4.9 million from the previous $6.5 million median award level during the years 2002 to 2006.

Professor Paul Janicke of the University of Houston Law School conducted a study of all damage verdicts in patent infringement cases between 2005 and 2007. He found no pattern of “runaway jury awards.” In fact, many of the biggest damage awards of that time, including the $1.5 billion award Lucent won from Microsoft, were set aside or greatly reduced by the judges. Even Apple’s $1 billion 2012 patent verdict against Samsung was recently slashed 43 percent.

Why, then, are claims of a “broken” patent system rife with “excessive damage” awards so widely believed?

Two reasons. First, mind-boggling patent verdicts continue to be reported in front page headlines — the latest being the $1.17 billion that Marvell Technology Group was ordered to pay Carnegie Mellon University on December 26, 2012. You can be sure that when the verdict is set aside, reduced, or reversed on appeal, that fact will not be reported with as large a headline.

But the second and more worrisome reason is the media’s own poor understanding of the patent system. Reputable newspapers like the New York Times and Wall Street Journal routinely repeat claims that the patent system is “broken.” Usually, these articles are supported by sensational anecdotes, not hard facts — or in many cases not supported by any evidence at all.

No less an authority than the New York Times, for example, published an article November 16, 2012 declaring in a sensational headline that “Apple Now Owns the Page Turn.”

In the article, reporter Nick Bilton wrote that a new Apple design patent “gives Apple the exclusive rights to the page turn in an e-reader application.” And this, he claimed with righteous indignation, was certainly a sign of “just how broken the patent system is.”

In truth, the only thing broken here is the credibility of the New York Times on patent matters. Had reporter Bilton even read the Wikipedia entry on design patents — something any student would likely have done if writing a paper on the subject — he would have learned that design patents are granted only for non-functional ornamental designs. In fact, says Wikipedia, “design patents can be invalidated if the design has practical utility.”

What Apple actually “owns,” therefore, is not the “page turn” function itself but merely the particular ornamental design of the way a page turn is executed in their devices.

Similarly, on February 6, 2013, Forbes writer Tim Worstal headlined his article: “Is The Patent System Broken? Well, Amazon’s Just Patented The Sale Of Second Hand Goods.”

Amazon actually did no such thing, but Mr. Worstall probably made this assumption after reading the abstract of the patent describing its general subject matter. Like many reporters, he doesn’t realize that the abstract tells you literally nothing about the exclusive rights conferred by a patent. Only the claims of the patent detail the specific exclusionary rights of the patent holder.

And sure enough, when one reads the claims, one discovers that Amazon has not claimed ownership of the idea of a “market in second-hand digital goods” at all, but rather just a very specific and novel method of conducting such a market. Meanwhile, Apple, ReDigi, and other firms have patented their own alternative methods of conducting a secondary digital market.

[This post originally appeared at IP Watchdog.] 


[1] The ITC caseload on Section 337 cases has declined since reaching a high water mark of 70 cases instituted in 2011.  During the first half of the current fiscal year, the ITC has instituted only 16 Section 337 cases. http://www.usitc.gov/press_room/337_stats.htm.

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