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The Myths Driving Patent Reform

Proponents of patent reform have drawn a grim picture of the state of affairs of intellectual property in America. Bad patents, patent trolls, runaway jury damages and rising litigation are some of the buzzwords bandied about to create a sense of a patent system out of control. The worse the situation seems, the more urgent the need to "reform" it and the more acceptable the proposed band-aid - in this case the Patent Reform Act of 2009.

But according to retiring Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit (CAFC), much of the hype suggesting a crisis in the patent system is just that - hype. Unlike many of the "experts" testifying before Congressional committees and behind closed doors with lawmakers, Michel is in a position to speak from experience. Over his 22 years with the Federal Court of Appeals, Michel has authored over 800 opinions, many on intellectual property and patent matters.

In a 2009 speech prepared for the Association of Corporate Patent Counsel, Michel appealed to ACPC member attorneys to "advise Congress" and "assist courts" to prevent harm from "poorly-drawn legislative proposals."

A vocal opponent of the current legislative patent reform proposals - Michel criticizes Congress for failing to "consult or call as a witness any judges, trial or appellate." Instead, Michel believes that a few companies have overstated their grievances and that this vocal minority should not be allowed to "wag the dog of the system" on which the nation's innovators and, ultimately, the U.S. economy relies. Many of these companies have banned together under the misnomer "Coalition for Patent Fairness" to influence legislators on these complex matters.

In the speech "A Strong Patent System", Michel broaches some of the myths that "reform" advocates advance to bolster their agenda and dismantles them handily as bunk.

Myth #1 - Jury awards in patent suits are out of control
Michel said, "Many on Capitol Hill have accepted the myth perpetuated by just a few that damage awards are routinely and wildly excessive..."

He goes on to say, "The only actual case I have heard cited is the Lucent-Alcatel case in which the jury awarded $1.5 billion... but that award was thrown out by the trial judge... That is exactly how the patent litigation system is supposed to work."

Michel believes that this is an indicator that the system is a success, not the failure proponents of reform would have us believe. A system with appropriate checks and balances is not perfect, but it does self-correct.

The companies lobbying for reform have all claimed that anticipated litigation verdicts forced them into excessive settlements. However, Michel cites a University of Houston Law School study "Patent Litigation Trends", presented by the Institute for Intellectual Property and Information Law, which showed that in jury verdicts between 2005-2008, most of these companies failed to suffer any award. Of these, two companies were subject to large awards, but they were operating in large markets and thus the awards were not comparatively excessive.

The same 2009 Houston law school report showed that of the ten largest patent damages awarded, four of these have been set aside. Further, while the occasional large award skews the average to roughly $46 million, the median is $6.5 million. This data may seem to show high dollar judgments, but one also has to ask whether these verdicts are out of line with the amount or scale of infringement that was discovered.

Michel asked in his speech how lawmakers could be persuaded without any concrete examples, statistics or case citations. He goes on to say, "No one cross-examined the witnesses making such claims; proof was never demanded." Worse, Michel says, "Statistics and representative examples were not required. Anecdotes were rampant."

Not wanting his audience to rely strictly on his word as gospel either, Michel said, "I have read the testimony and answers to written questions by legislators, but don't take my word or opinion. Read it and decide for yourselves."

Myth #2 - Patent litigation is running rampant and on the rise
According to Michel, these claims "were made in vague, general terms, devoid of statistics." He then offers his own statistic, saying the percentage of patents litigated has "remained constant for decades at 1% of in-force patents."

Michel's statistic is closely corroborated by data on patent litigation between 2000 and 2007 from the Stanford IP Litigation Clearinghouse (IPLC) that cites that 1.5% of all patents are litigated. What's more, IPLC data indicates that litigation is targeted in specific industries and is "disproportionately IT patents - software, software-implemented business methods, computer industry, and telecommunications."

Judge Michel is in a position to provide hard numbers and says roughly 3,000 suits are filed per year and "all but 300 settle". Of this 300, 200 are resolved according to Michel "without expensive trials by summary judgment, nearly always of non-infringement." Michel's data indicates that less than 100 cases per year actually result in a trial.

A 2009 report "Patent Litigation Trends" presented by the Institute for Intellectual Property and Information Law indicates that while patent applications and patents granted have been level for the last three years, patent lawsuits have actually declined.

The study goes on to cite that only 3% of suits result in a jury-based judgment which equates to roughly 50-70 actual jury verdicts in a given year. Of these, approximately 75% of the time the patent owner wins and many of these jury judgments are settled on appeal. Of those appeals that are decided by panel, most of the judgments are remanded (set aside) due to errors in favor of the patentee. This drives the percentage of success by patent owners even higher than the 75% statistic.

The decrease in patent lawsuits tracked by the University of Houston supports Michel's claim that the explosion in litigation is a myth.

Myth #3 - Federal Circuit reversals require a "wasteful" second trial
The third myth addressed is the allegation that in order to gain a reversal, a second trial occurs - an expensive prospect that clogs the courts. Michel parses this neatly, explaining "two-thirds of our appeals had no first trial, being resolved on summary judgment."

Michel goes on to indicate that a large majority of appeals are affirmed, with no need for an additional hearing. This is supported by the most recent annual report from the CAFC which indicates that, in 2009, roughly 57% of patent rulings were affirmed in full and another 25% affirmed in part. Roughly 20 trial results (or 15%) were vacated in full and only 5-10 of these needed to be retried.

For these few, Michel says the second trial is needed "to assure lawfulness and fairness" and he adds "that is not a crisis, but a real world necessity because no system is perfect. All have error rates and always will."

How do these myths survive?
Michel asserts that these half-truths and exaggerations have persisted because "they are repeated so vociferously so many times, they simply become accepted as true despite the absence of support in the form of representative examples and statistics."

As to the progeny of these myths, Michel points to a dozen or more companies who want to lower their litigation costs and damage awards when they are found to be infringers.

To counter this campaign of misinformation, Michel suggested to the group of attorneys that they all "bear responsibility to assure Congress gets the truth, the whole truth, and nothing but the truth." He then called on a cliché to drive home his point - everyone is entitled to their own opinion, but not their own facts.

The Danger of These Myths
"Our prosperity and our sovereignty and our independence as a country rest heavily on economic health, which in turn rests heavily on the American innovation system" Michel cautions, adding, "we are rich in every material and intellectual way you can imagine. Those riches are at risk now in a way they have never been at risk before."

Michel hopes that once the nation's lawmakers have accurate information they will make needed improvements in the form of "solutions to the real problems that will ameliorate them without hurting the legitimate interests of innumerable other companies and industries."

 

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