Patent Failure 1

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James BessenResearch on InnovationBU Law

Michael J. MeurerBU Law

James Bessen and Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton University Presswww.researchoninnovation.org

Patent Failure 2

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Patent Lawsuits Filed in U.S. District Courts

Patent Failure 3

Disrespect for Property?

Piracy?

Or something else?

Patent Failure 4

Of Patents and Property

• Property rights encourage investment, transactions, and economic growth

• Patents have a mixed record, current outlook is troubling

• Patent law fails as a property rights system and imposes a tax on most innovators (outside of chemicals and pharmaceuticals)

Patent Failure 5

Historical Evidence on Patents

• Cross-national late nineteenth century study: patent regimes no impact on World Fair important inventions Moser

• Japan patent expansion no significant effect on R&D Branstetter & Sakakibara

• U.S. software patent expansion no effect or negative effect on software R&D Bessen & Hunt

• 177 expansions in patent law in 60 countries over 150 years, no increase in invention Lerner

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Profits from associated w orldw ide patents

Aggregate US litigation costs to alleged infringer

A. Chemical and pharmaceutical f irms

Patent benefits exceed costs in chem/pharma but …

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B. Firms in other industries

Patent benefits exceed costs in chem/pharma but the reverse is true in other industries!

Patent Failure 8

Why don’t patents work like property?

Land• Registry, third party

verification, deference to fact-finders

• Physical possession

• Low risk of invalidity, title insurance

Patents• Hidden claims, low

quality opinion letters, little deference

• Scope broader than embodiments; patents and claims are cheap

• No insurance, relatively high risk of invalidity

Patent Failure 9

?

An expensive mistake!

The Notice Function of Property Law

Patent Failure 10

Notice Function of Patent LawKodak v. Polaroid

• Failed attempt to invent around

• Patent review started seven years before product launched

• 250 patents reviewed, “67 written and countless oral opinions”

• 50 potential imaging chemistries reviewed

• $900 million damages and interest (1980s)

Patent Failure 11

Evidence Suggests Much Infringement Is Inadvertent

• Defendants are large, spend a lot on R&D, and obtain a lot of patents (not classic pirates) – only 4% are found to be copyist

• Increasing R&D increase hazard of lawsuit– Exposure effect

Patent Failure 12

Detailed Look at Notice Failure

• Fuzzy boundaries

• Public access to boundary information

• Property rights untethered to possession

• Search cost

Patent Failure 13

Detailed Look at Notice Failure

• Fuzzy boundaries

• Public access to boundary information

• Property rights untethered to possession

• Search cost

Patent Failure 14

Claims to chemicals offer clear notice

• Lipitor: Trans-6-[2-(3- or 4-carboxamido- substituted pyrrol-1-yl)alkyl]-4-hydroxypyran-2-ones

• Olanzapine:

Patent Failure 15

Detailed Look at Notice Failure

• Fuzzy boundaries

• Public access to boundary information

• Property rights untethered to possession

• Search cost

Patent Failure 16

Detailed Look at Notice Failure

• Fuzzy boundaries

• Public access to boundary information

• Property rights untethered to possession

• Search cost

Patent Failure 17

E-Data Lawsuits• Freeny invented retail kiosk that would produce

music recorded on cassette tapes• Patent claim language was abstract, possibly

covered all sales over the internet• E-Data got the Freeny patent and asserted it

against 75,000 e-commerce sites, licensed 139 companies, and filed 43 lawsuits

• Poor notice because meaning of claim language was unstable

• “Material object” (1980: cassette tape, 2000: hard drive?)• “Point-of-sale location” (1980: store, 2000: home?)

Patent Failure 18

Detailed Look at Notice Failure

• Fuzzy boundaries

• Public access to boundary information

• Property rights untethered to possession

• Search cost

Patent Failure 19

Search Cost

• Flood– E-commerce firm faces b/w 4000 – 11,000

patents– Semiconductor firm faces hundreds of patents– 3G standard 7600 patents

• Perverse willfulness doctrine

• “Distant” plaintiffs

Patent Failure 20

Parties to Lawsuit

No industry overlap28%

Weakly overlapping industries

43%

Same primary industry29%

Patent Failure 21

Evidence on search

• Cockburn & Henderson survey: – 65% of firms do not conduct a patent search

before initiating product development

• 39% of applicants disclose zero prior art patents (research personnel told not to read patents)

Patent Failure 22

0

500

1,000

1,500

2,000

2,500

3,000

3,50019

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Patent Lawsuits Filed in U.S. District Courts

Patent Failure 23

Suits/R&D ($b):

1987: 1.7

1999: 2.9

Patent Failure 24

Probability a Patent is in One or More Lawsuits within 4 years of issue

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 20000.0%

0.5%

1.0%

1.5%

2.0%

Software patents

All patents

Patent Issue Year

Patent Failure 25

Technology Differences Suggest Notice ProblemsProbability

suit/patent

Claim Con-struction

Value

($1,000)

All 2.0% 1.00 78

Chemical 1.1% 0.84 333

Biotech 3.2% 2.37 NA

SW 4.6% 2.18 55

BM 13.7% 6.67 NA

Patent Failure 26

Software Patents

• Distinguish SW Patents from SW Markets– From 1994-2004 most sw market segments, 80-95% of

incumbent firms have no patents related to that segment (Cockburn & MacGarvie)

– Only 5% of sw patents obtained by sw industry (Bessen & Hunt)

– SW patent thickets exist in computer and semiconductor markets

• Share of sw patents in litigation rising over time; in 2002 over 1/4 of patent lawsuits involved sw inventions

Patent Failure 27

Patent Reform to Improve Notice

• Make property rights more transparent– Continuation reform, better disclosure

• Better claim interpretation– Specialized trial courts– Expand PTO claim construction activity– More deference to PTO and trial courts

• Robust definiteness requirement• Limit remedies against innocent infringers

Patent Failure 28

Helpful Steps by Courts

• eBay -- increases bargaining power of defendants and reduces “patent tax”

• Seagate -- decreases deterrent to patent clearance

• Festo -- improves scope clarity

• KSR, In re Fisher -- stem patent flood

• In re Bilski -- decreases abstract claiming

Patent Failure 29

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