I recently had the pleasure of interviewing James Bessen, Lecturer in Law at Boston University School of Law and editor of the Technological Innovation and Intellectual Property newsletter. Professor Bessen has conducted phenomenal research into the intellectual property litigation. The following are some of the highlights from this interview as well as other of our findings:
Incidence of IP Lawsuits The number of intellectual property lawsuits soared almost three-fold from the beginning of the 1980s to the end of the 1990s. Even doing a regression analysis that controls for the rising number of patents issued and the greater amounts of money spent on R&D, there has been a significant rise in IP litigation. For instance, from 1987 to 1999, the probability of a public firm being a litigant over patents that it owned rose 4.3% a year. Similarly, the probability that a public company would be an alleged infringer rose 6.1% during the same period of time. Again, these increases represent the net rise in intellectual property litigiousness as they take into account levels of patenting at the firms, levels of R&D and size of firm.
Costs of Litigation From 1984 to 1999, the median loss absorbed by companies faced with IP litigation was $2.9 million and the mean loss was $28.7 million in total losses. Pure legal costs represent a relatively small financial burden of IP litigation expenses compared to the total business costs. However, one reason that legal costs are rising is that patents are growing in complexity and the associated litigation generates more expensive legal bills. Discovery costs can easily run up to $1 million.
Business costs include senior managerial distraction such as time preparing for depositions and trials, testifying, and managing the case. Significant business can be lost or delayed as a result of IP litigation and corporate reputations can be damaged. Injunctions could shut down a business as happened to Kodak when that company had to shut down its instant camera operation when it lost its suit. Furthermore, credit rating deterioration and the risk of bankruptcy are other major business costs. IP litigation is virtually an uninsurable risk as the limited number of policies have very limited coverage and are extremely expensive.
Cases Going to Trial A very small percentage of IP cases, about 5%, go to trial. The number going to trial, estimated at 100 per year, has not risen as steeply as the total number of lawsuits filed – more lawsuits are being settled or adjudicated. Much of the settlements come after the Markman hearings. There is not much mediation or arbitration.
Other Insights Among the other insights from Professor Bessen’s interview are:
Even in the 1980s, there were some large damages. Kodak had nearly $1 billion in damages.
There is a lot of inadvertent infringement. In the software industry, there are too many patents and the patents are not clear. Many software professions do not even try to understand the existing body of software patents.
In about 40% of the patent litigation cases, the Appeals Court comes up with its own interpretations of what claims are.
One downside to having only one appellate court dedicated to IP is that the Supreme Court is less likely to hear IP cases since it will not have the opportunity to referee disparate rulings among various appellate courts.
Due to a tremendous decrease in general corporate litigation, some class action lawyers are beginning to practice patent law.
Also, available through Professor Bessen’s website, Research on Innovation, is a brilliant summary by Leslie Schafer of Wharton of a groundbreaking paper written by John R. Allison (Texas), Mark A. Lemley (Berkeley), Kimberly A. Moore (George Mason), and R. Derek Trunkey (George Mason) on Valuable Patents. The summary is available at http://www.researchoninnovation.org/tiip/archive/2003_4_d.htm and the highlights of the eight key characteristics that distinguish litigated patents from non-litigated ones are provided below.
Compared to the average issued patent, litigated patents:
1. Tend to be new (litigated on average at three-years old). This implies that value is known early in the life of a patent.
2. Tend to be owned by domestic rather than foreign companies.
3. Tend to be issued to individuals or small companies as opposed to large corporations. This result may reflect what the authors refer to as the “genius of the small inventor,” issues of asymmetric stakes between small and large firms, or the existence of a market for patents. Small firms may have little to lose from entering patent litigation if they are only the inventors and not the manufacturers of products related to their patents. In addition, while large firms may have large patent portfolios to protect themselves against lawsuits, small firms generally do not. Finally, recent research indicates that a large percentage of patents that are litigated changed hands after the patent was issued but before litigation. The authors ask whether there is something about the “transfer” itself from a small firm to a large one that increases the likelihood of litigation.
4. Cite more prior art and are more likely to be cited by other patents.
5. Spend longer in prosecution at the U.S. Patent and Trademark Office (USPTO).
6. Are more likely to belong to a group of patents derived from the same original patent application (patent procedures permit applications to be divided into multiple patents).
7. Contain more claims. On average, litigated patents make 19.6 claims, while non-litigated patents make only 13.0. Because claims are costly to draft and prosecute, a willingness to invest in more claims suggests that a patent is valuable to its owners. The authors note that this could be an ex ante attempt to strengthen a patent in expectation of litigation.
8. Come disproportionately from specific industries. Patents from the mechanical, computer, and medical device industries are more likely to be litigated. Patents from the chemical and semiconductor industries are less likely to be litigated.
These are some of the issues that are discussed at IncreMental Advantage's Intellectual Property Conference Series. For more information, please contact Neomi Barazani at 609-919-1895 ext. 100 or neomi@incrementaladvantage.com.
