Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality
Published: 2013-08-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Legal commentators, technology companies, Congress, and others have raised questions about patent infringement lawsuits by entities that own patents but do not make products. Such entities may include universities licensing patents developed by university research, companies focused on licensing patents they developed, or companies that buy patents from others for the purposes of asserting the patents for profit.
Section 34 of AIA mandated that GAO conduct a study on the consequences of patent litigation by NPEs. This report examines (1) the volume and characteristics of recent patent litigation activity; (2) views of stakeholders knowledgeable in patent litigation on key factors that have contributed to recent patent litigation; (3) what developments in the judicial system may affect patent litigation; and (4) what actions, if any, PTO has recently taken that may affect patent litigation in the future. GAO reviewed relevant laws, analyzed patent infringement litigation data from 2000 to 2011, and interviewed officials from PTO and knowledgeable stakeholders, including representatives of companies involved in patent litigation.
section_title: What GAO Found
paragraphs: From 2000 to 2010, the number of patent infringement lawsuits in the federal courts fluctuated slightly, and from 2010 to 2011, the number of such lawsuits increased by about a third. Some stakeholders GAO interviewed said that the increase in 2011 was most likely influenced by the anticipation of changes in the 2011 Leahy-Smith America Invents Act (AIA), which made several significant changes to the U.S. patent system, including limiting the number of defendants in a lawsuit, causing some plaintiffs that would have previously filed a single lawsuit with multiple defendants to break the lawsuit into multiple lawsuits. In addition, GAO's detailed analysis of a representative sample of 500 lawsuits from 2007 to 2011 shows that the number of overall defendants in patent infringement lawsuits increased by about 129 percent over this period. These data also show that companies that make products brought most of the lawsuits and that nonpracticing entities (NPE) brought about a fifth of all lawsuits. GAO's analysis of these data also found that lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants over this period.
Stakeholders knowledgeable in patent litigation identified three key factors that likely contributed to many recent patent infringement lawsuits. First, several stakeholders GAO interviewed said that many such lawsuits are related to the prevalence of patents with unclear property rights; for example, several of these stakeholders noted that software-related patents often had overly broad or unclear claims or both. Second, some stakeholders said that the potential for large monetary awards from the courts, even for ideas that make only small contributions to a product, can be an incentive for patent owners to file infringement lawsuits. Third, several stakeholders said that the recognition by companies that patents are a more valuable asset than once assumed may have contributed to recent patent infringement lawsuits.
The judicial system is implementing new initiatives to improve the handling of patent cases in the federal courts, including (1) a patent pilot program, to encourage the enhancement of expertise in patent cases among district court judges, and (2) new rules in some federal court districts that are designed to reduce the time and expense of patent infringement litigation. Recent court decisions may also affect how monetary awards are calculated, among other things. Several stakeholders said that it is too early to tell what effect these initiatives will have on patent litigation.
The U.S. Patent and Trademark Office (PTO) has taken several recent actions that are likely to affect patent quality and litigation in the future, including agency initiatives and changes required by AIA. For example, in November 2011, PTO began working with the software industry to develop more uniform terminology for software-related patents. PTO officials said that they generally try to adapt to developments in patent law and industry to improve patent quality. However, the agency does not currently use information on patent litigation in initiating such actions; some PTO staff said that the types of patents involved in infringement litigation could be linked to PTO's internal data on the patent examination process, and a 2003 National Academies study showed that such analysis could be used to improve patent quality and examination by exposing patterns in the examination of patents that end up in court.
section_title: What GAO Recommends
paragraphs: GAO recommends that PTO consider examining trends in patent infringement litigation and consider linking this information to internal patent examination data to improve patent quality and examination. PTO commented on a draft of this report and agreed with key findings and this recommendation.

section_title: Letter
paragraphs: History is filled with examples of successful inventors who did not develop  products based on the technologies they patented. For example, Elias  Howe patented a key component of the sewing machine––a mechanism  for making a lockstitch––but it was Isaac Singer who most successfully  brought these machines into the homes of thousands of Americans by  obtaining crucial patents of his own and paying Howe and other inventors  to license the technology described in their patents. In the United States,  the party that owns a patent––the patent owner––is not required to put  the patent to use in order to profit from it; he can also license others to  use it. In some instances, patent owners may need to actively assert  their patents in an adversarial context if another firm’s product infringes  their patents. For example, Singer initially refused to obtain a license to  Howe’s patent, but when Howe sued Singer for infringing his patent, the  two parties ultimately entered a licensing agreement.
According to economists who have studied these issues, the U.S. patent  system—authorized by the U.S. Constitution—aims to promote innovation  by making it more profitable. For example, a patent owner can generally  exclude others from making, using, selling, or importing the patented  technology for 20 years from the date on which the application for the  patent was filed. By restricting competition, patents can allow their owners  to earn greater profits on their patented technologies than they could earn  if these technologies could be imitated freely. Due to the exclusive rights  provided by patents, patents can help their owners recoup the costs of  the research and development (R&D) of new technologies. On the other  hand, any limiting effects on competition caused by the exclusive nature  of patents may result in higher prices for products having patented  technologies. The patent system, therefore, gives rise to complex trade- offs involving innovation and competition. These trade-offs can be  affected by decisions made by the United States Patent and Trademark  Office (PTO), which issues patents; the federal courts, which decide  patent infringement lawsuits; and the International Trade Commission  (ITC), which can order imports that infringe U.S. patents to be excluded  from entering the country.
The Federal Trade Commission uses the related term “patent assertion entities” to focus  on entities whose business model solely focuses on asserting typically purchased patents.  As such, the PME term also encompasses entities that might use third-party NPEs to  assert patents for them. for those products. Experts agree that NPEs have a variety of business  models, which makes it difficult to fit them neatly into any one of these  categories. For example, even companies that produce products related  to their patents—known as practicing patent owners, or operating  companies—sometimes assert patents that they own but that are not  related to the products they produce, which further complicates defining  an NPE.
Some legal commentators, technology companies, the Federal Trade  Commission (FTC), and Congress, among others, have raised concerns  that patent infringement litigation by NPEs is increasing and that this  litigation, in some cases, has imposed high costs on firms that are  actually developing and manufacturing products, especially in the  software and technology sectors. Among the concerns of some  technology companies and legal commentators is that because NPEs  generally face lower litigation costs than those they are accusing of  infringement, NPEs are likely to use the threat of imposing these costs as  leverage in seeking infringement compensation. These technology  companies and legal commentators also have noted that NPEs often  claim that their patent covers an entire technology when in fact it may  cover just a small improvement in an existing technology, and that it can  be difficult for judges and juries to determine the patent’s scope when  complex technologies are involved.
The Leahy-Smith America Invents Act (AIA), signed into law September  16, 2011, made several significant changes to the U.S. patent system.  Section 34 of the AIA mandates that GAO conduct a study on the consequences of patent litigation by NPEs.this study were to determine: (1) what is known about the volume and  characteristics of recent patent litigation activity; (2) the views of  stakeholders knowledgeable in patent litigation on what is known about  the key factors that have contributed to recent patent litigation; (3) what  developments in the judicial system may affect patent litigation; and (4)  what actions, if any, has PTO recently taken that may affect patent  litigation in the future.
We identified some of these stakeholders from patent infringement litigation data from  2000 through 2011 that we reviewed. Representatives of companies and PMEs we talked  with had regularly been sued or had regularly sued others over the past decade. Other  stakeholders we identified through our review of academic literature on patent litigation  and the patent system and were knowledgeable in the issues we were asked to study.  Because stakeholders varied in their expertise with various topics, not every stakeholder  provided an opinion on every topic. no more than plus or minus 5 percentage points over all these years and  no more than plus or minus 10 percentage points for any particular year.  Lex Machina used a variety of characteristics from court records, U.S.  Securities and Exchange Commission (SEC) filings, and corporate  websites to categorize litigants, including as an operating company or  likely operating company, PME or likely PME, university, or an individual  or trust. A limitation of this categorization is that litigants were not  contacted to verify their identity, so there is some uncertainty about the  accuracy of the category in which Lex Machina placed them. We also  obtained patent infringement data from RPX, another firm that collects  data on patent infringement lawsuits, in an effort to verify Lex Machina’s  litigant categorizations. Also to describe what is known about the  volume and characteristics of recent patent litigation activity, we reported  data collected by the American Intellectual Property Law Association  (AIPLA) on the costs of patent litigation.literature on patent litigation and the patent system in general and  assessed the methodology of the studies we reported on for soundness.  To assess the reliability of data from Lex Machina, we met with Lex  Machina staff, examined documentation, and tested and reviewed the  data provided for completeness and accuracy. To assess the reliability of  data from PTO, AIPLA, and RPX, we conducted interviews and reviewed  relevant methodology documentation. We found these data to be  sufficiently reliable for purposes of this report.
In addition to the steps we took to address all four objectives, in order to  describe views of stakeholders on what is known about the key factors  that contribute to recent patent litigation trends, we reviewed academic  literature on the patent and judicial systems and the benefits and costs of  patent assertion, including economic and legal studies. To describe  developments in the judicial system that may affect patent litigation, we  interviewed officials and judges from the U.S. District Courts for the  District of Delaware and for the Eastern District of Texas. We selected  these district courts because they had high levels of patent infringement  lawsuits according to Lex Machina data. We also interviewed judges with  the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) in  Washington, D.C., which hears appeals of patent cases decided in  federal district courts, as well as officials from the Administrative Office of  the U.S. Courts (AOUSC) and the Federal Judicial Center––organizations  that provide broad administrative, legal, and technological services and  support to the judicial branch. We also reviewed documents and data  from the courts, as well as economic and legal studies. To describe what  actions, if any, PTO has recently taken that may affect patent litigation in  the future, we conducted interviews with officials from PTO and reviewed  documents and data from the agency, as well as economic and legal  studies. Appendix I provides more details on our scope and methodology.
We conducted this performance audit from November 2011 to August  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: When PTO receives a patent application, it assigns it to a team of patent  examiners with relevant technology expertise. PTO does not begin  examining patent applications upon receiving them and PTO’s data  shows that, as of June 2013, the average time between filing and an  examiner’s initial decision on the application was about 18 months. On  average, it takes 30 months for PTO to issue a patent once an application  is submitted.
The focus of patent examination is determining whether the patent  application satisfies the statutory requirements for a patent, including: (1)  novelty, (2) nonobviousness, (3) utility, and (4) patentable subject   Generally, other patents, publications, and publicly disclosed but  matter. unpatented inventions that pre-date the patent application’s filing date are  known as prior art. During patent examination, the examiner, among other  things, compares an application’s claims to the prior art to determine  whether the claimed invention is novel and nonobvious. The examiner  then decides to reject or grant the claims in the application and deny the  application or grant a patent.
U.S. patents include the specification and the claims:
The specification is a written description of the invention that, among  other things, sufficiently discloses the invention and the manner and  process of making and using it. The specification must be written in  full, clear, concise, and exact terms so as to enable any person skilled  in the art to make and use the invention. As an example, an excerpt  from the specification for a cardboard coffee cup and insulator  invention describes “corrugated containers and container holders  which can be made from existing cellulosic materials, such as paper.”
The claims define the scope of the invention for which protection is  granted and must be definite. There are often a dozen or more claims  per patent, and they can often be difficult for a layperson to  understand, according to legal commentators. For example, one claim  for the cardboard coffee cup insulator begins by referring to “a  recyclable, insulating beverage container holder, comprising a  corrugated tubular member comprising cellulosic material and at least  a first opening therein for receiving and retaining a beverage  container.” A patent’s claims can be written broadly or be more  narrowly defined, according to legal commentators, and applicants  can change the wording of claims—which can affect their scope— during examination based on examiner feedback. Patents are a  property right and—like land—their claims define their boundaries.  When a property right is not clearly defined, it can lead to boundary  disputes, although to some extent uncertainty is inherent.  Consequently, legal commentators define high-quality patents as  those whose claims clearly define and provide clear notice of their  boundaries.
Once issued by PTO, a patent is presumed to be valid. However, the  patentability of its claims can be challenged in administrative proceedings  before PTO or its Patent Trial and Appeal Board and its validity can be  challenged in federal court. For example, the AIA established three new  administrative proceedings for entities to challenge the patentability of a  patent’s claims:  Inter partes review.patent owner to request review of an issued patent by presenting prior  art to PTO—either patents or other publications—to challenge the  claimed invention’s patentability as obvious or not novel. This review  proceeding became available on September 16, 2012, 1 year after the  enactment of the AIA, but entities cannot request this review until the   This proceeding allows anyone who is not the  later of (1) 9 months after a patent is granted or (2) completion of  post-grant review, if such a proceeding is held.
Post-grant review. This proceeding allows anyone who is not the  patent owner to request a review of an issued patent that challenges  at least one of the claims’ patentability in more circumstances than  inter partes review—such as the invention not being useful—and not  solely based on prior art. This proceeding is available for patents  issued from patent applications with a filing date of March 16, 2013, or  later and requests must be filed within 9 months of the patent’s  issuance.
Transitional program for covered business method patents.
This  proceeding allows anyone who is sued or charged with infringing a  covered business method patent to request a review of the patent to  challenge a claim’s patentability in generally the same circumstances  as post-grant review. This review proceeding became available on  September 16, 2012, and requests must be filed within 9 months of  the patent’s issuance.
In addition, a patent’s validity can be challenged in the 94 federal district  courts throughout the country by, for example, presenting additional prior  art that PTO may have been unaware of when it granted the patent.  Challenges to a patent’s validity are often brought by an accused infringer   Patent owners can bring  who has been sued for infringing the patent. infringement lawsuits against anyone who uses, makes, sells, offers to  sell, or imports the patented invention without authorization because a  patent is a right to exclude others from practicing the invention. Exactly  what a patent covers and whether another product infringes the patent’s  claims are rarely easy questions to resolve in litigation, according to legal  commentators. As noted, appeals of district court decisions in  infringement cases are heard in the U.S. Court of Appeals for the Federal  Circuit in Washington D.C.
In patent infringement lawsuits, the accused infringer often challenges the patent’s  validity as an “affirmative defense,” meaning that even if the infringement allegations are  true, the would-be infringer is not liable because the patent is invalid. A party accused of  infringement can also file a lawsuit to obtain a court decision on whether they are  infringing or whether the patent is valid, which is known as a declaratory judgment action.
If a patent infringement lawsuit is not dismissed in the initial stages, it  proceeds to discovery (a process that exists in all federal civil litigation)  and claim construction. Discovery requires the accused infringer to  produce documents or other information that shows, among other things,  how the allegedly infringing product is made and operates to help the  patent owner establish infringement. Similarly, the patent owner must  produce documents or other information that the accused infringer can  use to challenge the patent’s validity, among other things. However,  parties that do not offer products or services using the patents at issue  often have far fewer documents to disclose—because they do not have  any documents related to their products or services—than patent owners  or accused infringers who do offer products or services.
With this information the patent owner specifies which patent claims  allegedly are infringed and the alleged infringer responds by explaining  why the allegedly infringing product is not covered by the patent’s claims.  This identifies the patent claims the court needs to interpret. Known as  claim construction, this is a fundamental issue in patent cases, and each  party tries to persuade the court to interpret the patent claims in its favor.  The court has broad discretion in how it goes about this process, which  can involve a hearing with testimony from witnesses, according to legal   In addition, if the patent’s validity is being challenged,  commentators. the alleged infringer specifies why the patent allegedly is not valid,  including any prior art.
This hearing is often referred to as a Markman hearing after the Supreme Court’s  decision in Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996). for the infringement that are at least what a reasonable royalty would be  for the use made of the invention by the infringer.
In addition to being enforced in the federal courts, patents can also be  enforced at ITC, which handles investigations into allegations of certain  unfair practices in import trade. Specifically, certain patent owners can file  a complaint with ITC if imported goods infringe their patent or are made  by a process covered by the patent’s claims. If ITC determines after an  investigation that an imported good infringes a patent, the agency can  issue an exclusion order barring the products at issue from entry into the  United States, which the President can disapprove for policy reasons. ITC  decisions can be appealed to the U.S. Court of Appeals for the Federal  Circuit. Legal commentators have reported that a 2006 Supreme Court  decision led to increased complaints alleging imported goods infringed  U.S. patents being filed with ITC, and recent ITC data show that the  number of investigations instituted by ITC increased from 32 in 2006 to 37  in 2012.
According to PTO data, applications for all types of patents have  increased in recent years, and patents granted for software-related  technologies have seen dramatic increases over the past 2 decades (see  fig. 1). Software-related patents occur in a variety of technologies  containing at least some element of software, and cover things like  sending messages or conducting business over the Internet (e.g. e- commerce). Patents related to software can, but do not generally, detail  computer software programming code in the specification, but often  provide a more general description of the invention, which can be  programmed in a variety of ways.
According to legal commentators, the number of software-related patents  grew as computers were integrated into a greater expanse of everyday  products. By 2011 patents related to software made up more than half of  all issued patents. Software was not always patentable, and Supreme  Court decisions in the 1970s found mathematical formulas used by  computers were not patentable subject matter. However, a 1981  Supreme Court decision overturned PTO’s denial of a patent application  for a mathematical formula and a programmed digital computer because,  as a process, it was patentable subject matter. Subsequently, in 1998,  the Federal Circuit ruled that a mathematical formula in the form of a  computer program is patentable if it is applied in a useful way.  According to PTO officials, the agency interpreted these cases as limiting  their ability to reject patent applications for computer processes. Legal  commentators also said that after these decisions, particularly the 1998  Federal Circuit decision, software-related patenting grew as many  technology companies made the conscious effort to generate more  patents for offensive or defensive purposes—that is, to use them to sue  or countersue competitors in infringement lawsuits, rather than use them  to recoup R&D costs. As recently as 2010, the Supreme Court has noted  that the patent statute acknowledges that business methods are  patentable subject matter.
section_title: Number of Patent Infringement Lawsuits Increased Significantly in 2011 and the Number of Defendants Increased between 2007 and 2011
paragraphs: From 2000 to 2010, the number of patent infringement lawsuits fluctuated  slightly, and from 2010 to 2011, the number increased about 31 percent.  Our more detailed analysis of a generalizable sample of 500 lawsuits  estimates that the overall number of defendants in these cases increased  from 2007 to 2011 by about 129 percent over the 5-year period. This  analysis also shows that operating companies brought most of these  lawsuits and that lawsuits involving software-related patents accounted  for about 89 percent of the increase in defendants during this period.  Some stakeholders we interviewed said that they experienced a  substantial amount of patent assertion without firms ever filing lawsuits  against them.
subsections: section_title: Number of Patent Infringement Lawsuits Fluctuated Slightly before Increasing in 2011, but Number of Defendants Increased from 2007 to 2011
paragraphs: From 2000 to 2011, about 29,000 patent infringement lawsuits were filed  in U.S. district courts. The number of these lawsuits fluctuated slightly  until 2011, when there was a 31 percent increase (see fig. 2).
Specifically, about 900 more lawsuits were filed in 2011 than the average  number of lawsuits filed in each of the previous years. Some stakeholders  we interviewed generally attributed the increase in 2011 to patent owners’  anticipation of the passage of AIA, which restricts the number of accused  infringers who can be joined in a single lawsuit. Prior to the enactment  of AIA, plaintiffs could sue numerous defendants in a single lawsuit. AIA  restricts this practice by prohibiting joining unrelated defendants into a  single lawsuit based solely on allegations that they have infringed the  same patent. According to the legislative history of AIA, this provision was  designed to address problems created by plaintiffs joining defendants,  sometimes numbering in the dozens. As a result, some stakeholders we  interviewed generally agreed that the increase in 2011 was due to the fact  that plaintiffs had to file more lawsuits at the end of 2011 after AIA’s  enactment in order to sue the same number of defendants or anticipated  this change and rushed to file lawsuits against multiple defendants before  it was enacted. In addition, our analysis of a generalizable sample of data  from 2007 through 2011 estimates that the number of overall defendants  in patent infringement suits increased by about 129 percent over the 5- year period (see fig. 3).
Representatives of several operating companies that we interviewed said  they are being sued more often since the mid-2000s. For example, one  former official at a large technology company told us that, in 2002, the  company was a defendant in five patent infringement lawsuits, but in  2011, it was a defendant in more than 50. However, a few legal  commentators we interviewed said that such increases are common  during periods of rapid technological change—new industries lead to  more patents and the number of patent infringement lawsuits also  increases because there are more patents to be enforced. Similarly, one  researcher working on these issues told us that, historically, major  technological developments—such as the development of automobiles,  airplanes, and radio—have also led to temporary, dramatic increases in  patent infringement lawsuits.
section_title: Characteristics of Plaintiffs in Recent Patent Litigation
paragraphs: Operating companies brought most of the patent infringement lawsuits  from 2007 to 2011. According to our analysis of data for this period,  operating companies and related entities brought an estimated 68 percent  of all lawsuits. PMEs and likely PMEs brought 19 percent of the  lawsuits. PMEs and likely PMEs brought 17 percent of all lawsuits in  2007 and 24 percent in 2011, although this increase was not statistically  significant. In contrast, operating companies and related entities filed 76  percent of the lawsuits in 2007 and 59 percent in 2011, a statistically  significant decrease. Individual inventors brought about 8 percent of the  lawsuits, and research firms and universities brought less than 3 percent  over the 5 year span. In about 3 percent of the lawsuits there was  insufficient evidence to determine the type of plaintiff (see fig. 4).
Our analysis of the data from 2007 through 2011 shows that PMEs  tended to sue more defendants per suit than operating companies. For  this period, there were about 1.9 defendants on average for suits filed by  operating companies, and about 4.1 defendants on average for suits filed  by PMEs. In addition, a disproportionate share of PMEs sued a relatively  large number of defendants. For example, about 12 percent of PMEs  sued 10 defendants or more in a single lawsuit, compared to about 3  percent of operating companies, a statistically significant difference. Thus,  even with bringing about a fifth of all patent infringement lawsuits from  2007 to 2011, PMEs sued close to one-third of the overall defendants,  accounting for about half of the overall increase in defendants.  Additionally, the estimated total number of defendants sued by PMEs  more than tripled from 834 in 2007 to 3,401 in 2011, while the increase in  the total number of defendants sued by operating companies was not  statistically significant.
Often both the NPE and operating company appear as plaintiffs in the same suit. agreements where they transfer patents from an operating company  to a PME, and one legal commentator who also structured such deals  told us that operating companies often retain an interest in the gains  from any lawsuits the PME files. This commentator also said that  there are many PME lawsuits in which the identity of interested  operating companies is intentionally hidden; our review of court  records indicates that corporate relationships may not be easily  deciphered. In some cases, business relationships were easily  identifiable from court records and in other cases the links were more  difficult to identify.  Further, some operating companies, like PMEs,  also assert patents not related to products they produce, according to  some stakeholders.
Research firms. Representatives from a few of the companies we  interviewed said that they invested heavily in R&D and made efforts to  share their technology with other companies and to help them develop  new products. Specifically, these representatives told us that their  companies did not focus on producing products but, rather, mainly  developed new technologies and then licensed them to operating  companies to pay for continued R&D. These representatives also said that they provided technical support to the firms they license  patents to helping them to make the best use of their patented  technologies, which distinguishes them from PMEs.
Universities. Many universities license their patented technologies to  companies who use them in their products, according to a  representative from each of two large research universities we spoke  with, although they said that the licensing revenue is generally small  in relation to other sources of university revenue. They also noted that  licensing at many universities is mostly driven by life sciences  research and that, sometimes before research begins, universities  develop partnerships with private sector firms, such as  pharmaceutical companies, who have the first right to bring patented  ideas into the marketplace.
Our analysis of patent infringement lawsuit data from 2007 to 2011 shows  that on average about 46 percent of the lawsuits involved software- related patents. Between 2007 to 2011, 64 percent of defendants were  sued over software-related patents, and these patents were at issue in  the lawsuits that accounted for about 89 percent of the increase in  defendants over this period (see fig. 5). About 49 percent of the patents in  our sample were asserted within 5 years of being granted, and there was  no statistically significant difference between software-related patents and  other patents in this regard.
Our analysis of patent infringement lawsuit data from 2007 to 2011 shows  that operating companies and PMEs both asserted software-related  patents, although PME lawsuits involved these patents to a much greater  extent. Specifically, about 84 percent of PME lawsuits from 2007 to 2011  involved software-related patents, while about 35 percent of operating  company lawsuits did. However, operating companies brought a greater  number of lawsuits involving software-related patents, given that they filed  more lawsuits overall. By defendant, software-related patents were used  to sue 93 percent of the defendants in PME suits and 46 percent of the  defendants in operating company suits (see fig. 6).
Technology-related operating companies were not the only companies  sued for infringing software-related patents; other sectors were also sued  for infringing such patents, including retail companies and local  governments. We estimate that 39 percent of suits involving software- related patents were against firms in nontechnology sectors, according to  our analysis of 2007 to 2011 data. One representative from a retail  company noted that historically, all of the patent infringement lawsuits  brought against the company used to be related to products they sold.  However, as of mid-2012, the representative said that half of the lawsuits  against the company were related to e-commerce software that the  company uses for its shopping website—such as software that allows  customers to locate their stores on the website—and were brought by  PMEs. Representatives of retail and pharmaceutical companies told us  they also defend lawsuits brought by PMEs related to features on their  websites––typically software that outside vendors provide to them, rather  than something they developed. Additionally, city public transit agencies  have been sued for allegedly infringing patents by using software for real- time public transit arrival notifications, according to a few stakeholders we  interviewed.
For 2007 to 2011, an estimated 32 percent of patent infringement lawsuits  were filed in 3 of the 94 federal district courts: the Eastern District of  Texas, the District of Delaware, and the Central District of California.  These districts also had the most lawsuits filed for the period of 2000 to  2011 (see fig. 7).
In addition, our review of 2007 to 2011 litigation data shows that PMEs  filed more lawsuits in the Eastern District of Texas than other types of  plaintiffs. Specifically, from 2007 to 2011, 39 percent of PME and likely  PME lawsuits were filed in the Eastern District of Texas, compared to  about 8 percent of lawsuits filed by all other plaintiffs. Some stakeholders  we interviewed said that in their view this occurs because juries in this  district favor patent owners over alleged infringers. In addition, one  study we reviewed that looked at all decisions for all patent lawsuits from  1995 to 2011, showed that the Eastern District of Texas, the Eastern  District of Virginia, and the District of Delaware were among the top  districts for quicker trials, higher success rates, and higher damage  awards for patent owners.
An estimated 21 percent of patent infringement cases from 2007 to 2011  were still ongoing. Of the remaining cases, our analysis shows that about  86 percent either ended or likely ended in a settlement. This occurred  because both parties agreed to a judgment that the judge sanctioned,  both parties agreed to end the lawsuit, or the plaintiff, who had brought  the lawsuit, asked for it to be dismissed. Lawsuits brought by both  operating companies and PMEs settled or likely settled at similar rates.  Less than 3 percent of the cases that were not ongoing ended in a trial  and judgment, or were on appeal, which was consistent with what some  representatives of operating companies told us—very few of their lawsuits  go to trial because they settle quickly to avoid high litigation costs.
We were not able to determine litigation cost information from our sample  data, and we found very little information on the costs of patent  infringement lawsuits in court records. Further, as one stakeholder we  interviewed noted, all litigation is expensive, not just patent infringement  litigation. According to a 2011 nongeneralizable survey of patent lawyers  by AIPLA, the cost of defending one patent infringement lawsuit, which  excludes any damages awarded, was from $650,000 to $5 million in  2011, depending on how much was at risk. As for damages awarded, a  2012 study that looked at all district court patent decisions that proceeded  through trial from 1995 to 2011 found that the median damage award was  over $5 million dollars and that damage awards in NPE cases were  higher than in other types of suits. The authors of a 2012 paper who  collected data from a nonrandom, nongeneralizable set of 82 operating  companies noted that total litigation costs for NPE suits, including  damages awarded and legal fees, were around $300,000 for small and  medium companies and $600,000 for large companies. The author of  another 2012 paper sought to examine the impacts of NPE litigation on  small companies and collected data from a nonrandom, nongeneralizable  set of 223 small technology companies. Of the 79 companies that  indicated that they had received a patent demand, 31 reported that the  demand affected the company in various ways, including reduced hiring  or a reduced value of their company—which the author collectively  described as “significant operational impacts.”
section_title: Stakeholders Reported That Patent Assertion Occurs Without Firms Ever Filing Lawsuits
paragraphs: In addition to lawsuits, patent assertion occurs without firms ever filing  lawsuits, but the extent of this practice is unclear because we were not  able to find reliable data on patent assertion outside of the court system.  According to representatives of some operating companies we spoke  with, they often get letters from patent owners offering licenses for the  use of their patents. They said that these letters, which they refer to as  “demand letters,” sometimes threaten lawsuits if the parties do not reach  a licensing agreement. These company representatives told us that for  every patent infringement lawsuit filed against them, they might receive  many times more letters notifying them of potential infringement and  offering licenses. Representatives from a few operating companies we  spoke with said that these letters can sometimes help to resolve issues  without litigation, but that at times the letters can be so vague that they do  not reference the patents at issue or what products the operating  company sells that may be infringing these patents.
However, a few PME representatives told us that operating companies  generally ignore their letters, thus leading the PMEs to sue the companies  first to get their attention. A few of these PMEs also told us that they are  more likely to sue without sending a demand letter after a 2007 Supreme  Court decision expanded accused infringers’ ability to file preemptive  declaratory judgment lawsuits seeking determinations that the patent is  invalid, unenforceable, or not being infringed. judgment lawsuit can derail patent owners’ attempts to reach a licensing  agreement, according to a few PMEs we spoke with.
The threat of a declaratory  Because licenses or payments resulting from out-of-court patent  assertions are almost always confidential, it is difficult to know the cost of  these settlements. The authors of the 2012 study noted above of a  nonrandom, nongeneralizable set of 82 operating companies attempted  to identify this cost. The 46 companies that provided data on costs  reported that they spent an average of about $30 million on NPE suits,  including both legal fees and settlements, which were settled without  litigation from 2005 to 2011.
MedImmune Inc. v. Genentech, 549 U.S. 118 (2007).
section_title: Stakeholders Identified Three Key Factors Contributing to Many Recent Patent Infringement Lawsuits
paragraphs: Stakeholders we spoke with identified three key factors that likely  contributed to many recent patent infringement lawsuits: (1) unclear and  overly broad patents, (2) the potential for disproportionately large damage  awards, and (3) the increasing recognition that patents are a valuable  asset.
subsections: section_title: Stakeholders Said That Some Patents Have Unclear Property Rights and Make Overly Broad Claims
paragraphs: Several of the stakeholders we spoke with, including representatives from  PMEs, operating companies, and legal commentators, said that many  recent patent infringement lawsuits are related to the prevalence of low- quality patents; that is, patents with unclear property rights, overly broad  claims, or both. Although there is some inherent uncertainty associated  with all patent claims, several of the stakeholders with this opinion noted  that claims in software-related patents are often overly broad, unclear or  both. Unclear and overly broad patents do not provide notice about their  boundaries and the uncertainty of a patent’s scope then usually needs to  be resolved in court, according to some stakeholders we spoke with.
Stakeholders we interviewed identified several reasons why patents may  be overly broad, unclear, or vague:
Some stakeholders representing different interests, including  operating companies, PMEs, and legal commentators, said the use of  unclear terminology in patents can lead to a lack of understanding of  patent claims and, therefore, what constitutes infringement, which  needs to be resolved in court. For example, two of these stakeholders  said the computer software industry does not have clear terminology  or common vocabularies for describing concepts, innovations, and  ideas. Language describing emerging technologies, such as software,  may be inherently imprecise because these technologies are  constantly evolving. In contrast, pharmaceutical drug patents are  relatively clear because they use standardized scientific terminology,  according to a few stakeholders.
Some stakeholders, including operating companies and legal  commentators, emphasized that claims in software patents  sometimes define the scope of the invention by encompassing an  entire function––like sending an e-mail––rather than the specific  means of performing that function. According to a few stakeholders  we spoke with, functional claims and other overly broad claims may  allow patent owners who sue for infringement to argue in court that  their patent covers (1) an entire technology when it may only cover a  small improvement, or (2) future technologies that their patent did not  originally intend to cover. For example, representatives from one PME  we spoke with said they had successfully sued companies for  infringement even though the companies were implementing their  idea in a completely different manner than described in their patent–– noting that they had patented their invention before the technology to  best implement it was actually available. In addition, a few  stakeholders noted that in certain circumstances patent owners can  file a reissue application with PTO, which can sometimes broaden the  scope of patents after they are issued. In addition, a few  stakeholders noted that patent owners can also file continuation  applications during patent examination, which, depending on the type  filed, allow new subject matter to be added to the patent application.
According to some stakeholders—including PMEs and  representatives of operating companies that were sued for patent  infringement—broad patents on concepts they would not expect to be  patented make it easy to infringe a patent without intending to do so,  although this is not a defense since patent infringement is a strict  liability offense.capital firms we spoke with said that many software-related patents  they encountered were for obvious concepts and did not represent  any real contribution to new technology. Other stakeholders, including  operating companies, judges, and legal commentators, also said  some patents, particularly software-related patents, should never  have been issued because they were obvious, not novel, or lacked  definiteness.
For example, the software start-up and venture  Unclear boundaries make it hard to determine whether a patent is actually  related to a particular technology. Several diverse stakeholders, including  PMEs, operating companies, legal commentators, and judges we  interviewed said that many overly broad or vague patent claims do not  sufficiently identify the scope of the patent’s coverage. This lack of notice  makes it difficult for entities to identify relevant existing patents and prior  art before developing new products, according to some legal  commentators and operating companies. This difficulty reduces the  effectiveness of searching for existing patents to ensure the product being  developed does not infringe on valid patents and, according to several  stakeholders, including PMEs, legal commentators, and venture capital  and start-up firms, entities do not always conduct patent searches. For  example, representatives from a software start-up company we spoke  with told us that searching for relevant patents before developing new  products is unrealistic and diverts already scarce resources, particularly  because their product development process can be as short as 2 months.  In contrast, pharmaceutical company representatives we spoke with said  that development of new drugs is so expensive that patent searches are a  necessity and that they can conduct thorough searches because their  patents are described clearly and are easy to find in industry databases.
In addition, a few stakeholders we spoke with told us that the sheer  volume of patents makes searching for relevant patents before  developing new products particularly difficult, especially for products that  combine many patented technologies. For example, these stakeholders  we spoke with estimated that a typical smartphone uses from 50,000 to  250,000 patented technologies because such devices incorporate  technologies from digital cameras, global positioning systems, and  wireless communication. In contrast, pharmaceutical company  representatives we spoke with said they are able to conduct thorough  patent searches, in part, because there are fewer patents per drug.  Determining the licenses a new product needs can be costly when many  patents are involved; according to data from the AIPLA survey, the  median cost for a legal validity and infringement opinion is $15,000 per  patent. Additionally, a technology start-up company told us that they  may avoid patent searches because damage awards can be tripled for  willful infringement, and by not searching for existing patents, they can  claim ignorance.
Even if an entity conducts a patent search, identifies a relevant patent,  and wants to avoid infringing it by obtaining a license to use it, according  to several diverse stakeholders we spoke with, including PMEs, legal  commentators, and operating companies, identifying the owner could be  difficult because patent owners are not required to notify PTO of changes  in assignment or ownership. According to some stakeholders we spoke  with, finding patent owners is further complicated by the fact that some of  these patent owners create subsidiary companies solely to hold their  patent rights. In fact, several stakeholders we interviewed, including legal  commentators, operating companies, and a PME, said that some entities  intentionally hide the existence of their patents until a sector or company  are using the patented invention without authorization and can be sued  for infringement. Further, some economic literature we reviewed suggests  that the numerous technologies in many products are sometimes  patented by many different patent owners and can have overlapping  rights, making it difficult and costly to determine which patents the  operating company needs to license. We discuss PTO’s current efforts to  address these notice problems later in the report.
Most of the representatives from operating companies we interviewed  said that PMEs specifically have played a role in the rise in patent  infringement litigation. Some of the representatives from operating  companies also said that PMEs are often more willing to bring lawsuits  based on a broad interpretation of their patents’ claims because they  cannot be countersued for patent infringement since they do not produce  a product. Some economic literature we reviewed suggests that accused  infringers have an incentive to settle quickly to avoid the uncertainty of  claim construction and high litigation costs, particularly if they face very  high costs of changing their products to avoid infringement. Although a  few stakeholders said that operating companies have also brought  lawsuits alleging infringement of poor quality patents that they do not  practice, and several stakeholders, including PMEs, operating  companies, and legal commentators, said they believe the prevalence of  low quality patents was driving recent increases in litigation more than  PME suits.
section_title: Stakeholders Believe the Potential for Disproportionately Large Damage Awards from the Courts Can Incentivize Litigation
paragraphs: Disproportionately large damages awarded by the courts can motivate  patent owners to file lawsuits, according to several stakeholders, we  spoke with, including operating companies, PMEs, and legal  commentators. According to some stakeholders, the potential for large  damage awards may encourage some patent owners to file lawsuits in  the hope that the accused infringer settles to avoid going to court. A few  representatives of operating companies told us that companies prefer to  settle lawsuits before trial for smaller amounts of money rather than risk  having to pay large damage awards and legal fees, even if they know the  case against them is weak. They said that some patent owners file  infringement lawsuits knowing that defendants will settle the case before  the court determines whether infringement occurred or the patents are  valid. In addition, some operating company representatives said that  patent owners often sue operating companies that have purchased  licenses to use software in order to get settlements from numerous  infringers rather than suing the vendor. One PME we spoke with said that  although it tries to sue technology vendors whenever possible, it sues end  users most of the time because these are usually profitable companies,  and there is greater potential for larger settlements.
Until 2011, damage awards could be calculated using the 25 percent  rule—whereby the alleged infringer would pay a royalty rate equivalent to  25 percent of the expected profits for the product that incorporates the  patent at issue. As a result, according to some stakeholders, damage  awards were outsized and did not reflect the value of the patent or the  patent’s contribution to the product at issue, making it possible for the  owner of only a few patents to capture most of the profit from a product,  even though thousands of other patents also contributed to the  development of the product. In a 2011 report, FTC noted that some legal  rules for calculating damages were not grounded in economic analysis  and therefore may under- or overcompensate patent owners for  infringement in comparison to the market. FTC reported that  overcompensation can overincentivize patenting and patent litigation.  Moreover, the FTC report included concerns from some industry  participants that the value added by one patented technology may be  very small relative to the price of the entire product for complex products.
Uniloc USA, Inc., v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011). enhanced damages.noted that there is still a need for improvement in the way damages are  calculated.
section_title: Stakeholders Noted the Recognition of Patents as a Valuable Asset May Have Contributed to Recent Patent Issuance and Litigation
paragraphs: Several stakeholders, including PMEs and legal commentators, we  interviewed said that the recognition that patents are a more valuable  asset than once assumed may have contributed to recent patent issuance  trends and patent infringement lawsuits. Within the last 10 years,  technology companies in particular have increasingly realized that patents  are valuable and can be important to their corporate strategy, according  to some of these stakeholders. This trend may have started, according to  literature we reviewed, when Texas Instruments Inc. was looking for  additional sources of revenue in the 1980s and started to more  aggressively assert its patents to increase revenue.used patents to protect inventions rather than to generate revenue,  according to some stakeholders, including legal commentators and a  PME, we spoke with.
Prior to this, entities  Despite the new value placed on patents, some industries may have  slightly different approaches to patenting. For example, a few  representatives of venture capital and software start-up firms told us that  they do not always apply for patents until their companies are well  established because patent attorneys are expensive, and the process is  time consuming. They told us that the cost of R&D is low relative to the  cost of applying for a patent, so there is minimal incentive in the software  industry to patent in order to recoup R&D costs. For example,  representatives from one small software company we spoke with said that  they could develop a product in a little as 2 months with only a few  programmers. They also noted that it is relatively easy to get patents on  their software even with their minimal R&D efforts—it is just a matter of  paying the patent attorney’s fees. On the other hand, several  representatives from the pharmaceutical industry told us that patents are  actually critical to their ability to recoup the costs of developing a new  drug, which can cost as much as $1 billion and take from 10 to 15 years.
Further, several stakeholders, including operating companies, PMEs, and  legal commentators, we interviewed said that investors have played a role  in the increasing number of patent infringement lawsuits. Specifically,  according to some of these stakeholders, some PMEs have financial  backers who fund the purchase and enforcement of patents and expect to  see a return on their investment, sometimes turning to contingency fee  law firms to carry out the lawsuits, where the law firm pays all of the  litigation costs but shares in any award or settlement.
Furthermore, economic literature suggests that inventors who do not have  the resources or skills to enforce patents on their own benefit from  partnering with PMEs that specialize in patent monetization, and this was  confirmed by some of the stakeholders we spoke with. For example, one  inventor we spoke with said that he was able to sell his patents to a PME  that specialized in patent litigation when his start-up company failed,  which allowed him to fund a new company. Representatives from a  university we spoke with also said universities look to outside entities,  such as PMEs, to finance patent infringement litigation because  universities cannot cover the up-front costs of filing a lawsuit.  Representatives from one PME we spoke with said that they helped a  small inventor get the attention of large technology companies that were  infringing his patent and ignoring his licensing requests. In addition, one  patent broker we spoke with said that well-known operating companies  often do not want to file patent infringement suits because of potential  public backlash, so they sell or transfer their patents but retain an interest  in any settlement or award.
section_title: New Initiatives in the Courts May Affect Patent Litigation
paragraphs: The federal court system is implementing some new initiatives to improve  the handling of patent cases. A pilot program was established for certain  U.S. district courts to encourage the enhancement of expertise in patent  cases among district court judges and a model order was issued in  response to high discovery costs for e-mails and other electronic  documents in patent cases—known as e-discovery. In addition, some  recent decisions in the Federal Circuit and the Supreme Court may also  affect future patent infringement litigation.
subsections: section_title: Efforts to Improve Courts’ Handling of Patent Cases
paragraphs: In January 2011, Congress established a pilot program in certain U.S.  district courts to encourage the enhancement of expertise in patent cases  among district court judges. This pilot program would create a cadre of  judges who have advanced knowledge of patents due to more intensified  experience in handling the cases, according to a statement made during  the congressional debate for the law. Specifically, the law required  AOUSC to designate at least 6 district courts that met certain eligibility  requirements to participate in a 10-year pilot program. As of December  2012, AOUSC had designated all 14 federal district courts that applied as  participants. Currently, 7 of the 14 district courts participating in the pilot  program have adopted case management rules to govern patent cases,  such as how cases are allocated to judges in the program, although some  districts’ rules predated the program.
Some legal commentators and other stakeholders we interviewed said  they were hopeful that the pilot program would lead to some meaningful  improvements in patent case management in the courts. However, a few  judges we interviewed said that more resources are needed to improve  the handling of patent cases and that the needed resources were not  appropriated to implement the pilot program. For example, they told us  that hiring additional law clerks would help with the increased workload  and processing of patent cases resulting from participation in the pilot  program. Because participation in the pilot program does not come with  additional resources, some districts decided not to participate, according  to the judges we spoke with. For example, a district court judge told us  that his district court did not volunteer for the pilot program because funds  were not appropriated to implement it. In general, several stakeholders  we spoke with agreed that it is too early to tell what impact the patent pilot  project will ultimately have on patent litigation.
section_title: Efforts to Reduce Discovery Costs
paragraphs: In response to high discovery costs, in September 2011, the Advisory  Council for the U.S. Court of Appeals for the Federal Circuit issued a  model order regarding discovery for e-mail and other electronic  documents (known as e-discovery) targeted to patent cases. According  to some legal commentators and judges we interviewed, the technical  complexity of patent cases leads to expansive discovery requests that are  time consuming and expensive and, as is typically the case with most  documents produced in discovery, do not necessarily produce documents  used at trial. For example, a study conducted by AIPLA found that  discovery costs can range from $350,000 to $3 million, depending on the  size of the potential settlement. One judge we spoke to said that only a  few of the documents in discovery are actually used at trial—often less  than one document in 10,000—and representatives from one operating  company told us that about 2,000 of the 10 million documents they were  asked to produce were actually used in a recent trial.
After the issuance of the e-discovery model order, a few federal district  courts have adopted similar rules to streamline e-discovery in patent  cases, according to legal commentators we spoke with. Courts with e- discovery rules are more efficient and reduce litigation costs for everyone  involved, according to a few judges we spoke with. For example, under  the model order, discovery begins with an exchange of core  documentation concerning the patent, allegedly infringing product, prior  art, and finances before an exchange of e-mails. However, at least one  federal district court that handles a large volume of patent infringement  cases declined to adopt specific discovery rules, noting that it would be a  mistake for the courts to bind themselves to specific rules given  differences among cases.
In general, several stakeholders we spoke with agreed that it is too early  to tell what impact e-discovery rules will ultimately have on patent  litigation.
section_title: Evolving Case Law
paragraphs: Several federal judges and other stakeholders we interviewed said that  the judiciary had the ability to address some of the aforementioned  factors contributing to patent infringement litigation in court decisions and  that certain recent court decisions have helped to address some of these  problems. In the future, they said the courts would continue working to  address them. Specifically, these stakeholders said that recent court  decisions about what constitutes patentable subject matter and what  satisfies the obviousness and definiteness requirements would help  combat overly broad and ill-defined patent claims once the decisions  were incorporated into PTO’s patent examination guidelines and  implemented by examiners. For example, two stakeholders said that a  2012 Supreme Court decision restricted what constitutes a patentable  process and a 2007 Supreme Court decision made it easier to combine  separate pieces of prior art to prove a patented invention was obvious  and, thus, not eligible for a patent.some stakeholders also identified several decisions that have changed  damages law. Despite these cases, some stakeholders said that the  judicial system has contributed to recent problems in patent infringement  litigation and is either unable or unwilling to rectify them. For example,  they noted that judges should be more willing to award attorney fees in  exceptional cases to the winning party in order to address the growing  number of patent infringement lawsuits.
section_title: PTO Has Taken Actions to Improve Patent Quality and Implement New AIA Proceedings That May Affect Patent Litigation in the Future
paragraphs: PTO has taken several recent actions that are likely to affect patent  quality and patent litigation in the future, including agency initiatives and  changes required by AIA. For example, PTO is implementing initiatives to  continue to improve the quality of software-related patents and to improve  patent examination searches. The agency is also implementing the new  administrative trial proceedings created by AIA.
subsections: section_title: PTO Is Implementing Initiatives to Address Problems with Unclear Patents and Patent Search
paragraphs: We identified four initiatives that PTO is currently undertaking to address  patent quality and patent search:  In February 2011, PTO issued supplemental guidelines to assist in the  examination of claims in applications for compliance with the  definiteness requirement and began training patent examiners in how  to implement them. PTO often updates its patent examination manual  or issues guidance to patent examiners in response to changes in  case law and these recently issued supplemental guidelines try to  ensure that all technologies receive consistent examination practices,  according to PTO officials. These guidelines specifically address  examination of claims with functional language—which recites a  feature by what it does rather than by what it is—in computer- implemented claims. For example, the guidelines state that examiners  should determine whether the application discloses the computer and  algorithm that perform the claimed function in sufficient detail that  someone of ordinary skill in the art would know how to program the  computer to perform the claimed function, and that the inventor was in  possession of the claimed invention. The guidelines further noted that  the algorithm may be expressed in any understandable terms and  generally do not call for the application to contain actual computer  code. The supplemental guidelines attempt to make examination of  applications consistent and resulting patents clearer across all  technologies, according to PTO officials. In May 2012, an internal  PTO review showed that PTO examiners were making 4 to 6 percent  more rejections in patent applications across all technology areas  based on claims not being clear and definite than before the  supplemental guidelines were issued. PTO officials said patent  requirements are established by statute and case law, which  constrains the agency’s ability to alter requirements for patent  applications. PTO officials told us that only court decisions or statutory  changes could change the law to require more detail for algorithms in  software-related patents, for example.  In November 2011, in response to the recommendations from FTC’s  2011 report, PTO acknowledged that more uniform terminology would  help to improve the quality of software-related patents and began  working to establish a partnership with the software industry to  address this issue. In January 2013, PTO announced the Software  Partnership—a cooperative effort with the software industry to explore  ways to enhance the quality of software-related patents, including  through the use of more uniform terminology. Subsequently,  roundtable meetings with the software industry were held in New York  City, New York and Stanford, California in February 2013.
Additionally, PTO is working to implement a new patent classification  system, called the Cooperative Patent Classification (CPC), which  launched in January 2013. Since October 2010, PTO and the  European Patent Office (EPO) have been collaborating to develop the  CPC, which is a joint patent classification system that is intended to  allow companies and patent applicants to conduct more effective  searches for patents that might be related to technologies they are  developing or planning to use, which may reduce some of the  infringement that contributes to current patent litigation, according to  documents we reviewed. CPC is also designed to allow for more  frequent updating of patent classes, so that similar technologies can  be grouped together, which should improve PTO’s ability to adapt to  emerging technologies quickly, according to agency documents we  reviewed.
PTO is also working to provide greater transparency on patent  ownership by and issued a notice in November 2012 to obtain public  input on regulations it was considering to require patent ownership  information to be verified and updated at certain times during patent  examination and after patent issuance. Specifically, PTO is currently  considering issuing regulations that would require ownership  information to be verified and updated periodically. In addition, PTO  held a round table discussion in January 2013 to obtain public input  on how the agency could collect and provide such information to the  public. Since holding the round table, PTO officials have been  considering the input and written comments and have been  discussing what the appropriate next steps should be. PTO officials  noted, however, that the agency does not have substantive  rulemaking authority so its ability to issue regulations requiring  updates to the ownership information is limited without additional  statutory authority.
In addition to these initiatives, in 2009 PTO began a patent quality  initiative to measure and improve overall patent quality. After public  comment and round table discussions, PTO released a set of new metrics  in 2010 for fiscal year 2011 to assess patent quality throughout  examination, rather than solely at the end of examination, which had been  its practice. These metrics include, among other things, looking at the  timeliness of patent examiners’ decisions and whether examiners reject  claims for the right reasons.review patent examination quality after patents are issued. PTO officials  said that they did not examine the nature of patent infringement litigation  and issues in dispute or review trends in such litigation. In 2003, the   However, the agency generally does not  National Academies reported that litigation rates could be a useful  measure of post-grant patent quality, presuming that litigated patents  define less clear boundaries. One study in the National Academies’  report examined the link between examiner inputs, including the number  of hours used to examine a patent, and the likelihood that the patent  would end up in a lawsuit. The study found a statistically significant result,  implying that patents that examiners spend more time examining are less  likely to be involved in litigation, suggesting the patents are of higher  quality.
In February 2013, PTO officials said that they generally try to adapt to  developments in patent law and industry to improve patent quality, as  they are doing with their new examination guidelines and their software- related patent partnership. However, the agency does not currently use  information on patent litigation in initiating actions like these. However,  some staff in PTO’s Office of the Chief Economist have suggested that  analyzing relationships between the types of patents involved in  infringement litigation and internal patent examination data, including the  timeline between the filing and grant of a patent and changes in the  wording of claims could potentially benefit patent quality and examination  by identifying meaningful patterns in the examination of patents that end  up in court. As noted, our analysis of litigation data showed that about two-thirds of patent infringement defendants were sued for infringing  software-related patents. Given the extent of litigation associated with  these patents, examining trends in patent infringement litigation, including  the types of patents and issues in dispute, and linking this information to  internal data on patent examination, could provide PTO with information  to improve patent quality and the examination process. However, PTO  staff economists said that looking at litigation trends was not without  challenges. For example, they said that less than 2 percent of patents  end up in court. In addition, patents usually end up in court long after they  are issued, and examination procedures may have long since changed.  PTO officials and a few stakeholders also noted that there are other  factors that affect litigation trends, including economic conditions and  inherent differences among industries.
section_title: PTO Is Implementing AIA Post-Grant Review Proceedings
paragraphs: PTO is in the process of implementing the three new post-grant review  proceedings created by AIA and described previously—inter partes  review, post-grant review, and a transitional program for covered  business method patents. These proceedings replace or supplement  certain reexamination proceedings conducted by patent examiners with  proceedings conducted by judges at PTO’s Patent Trial and Appeal  Board—making them more closely resemble a patent trial, according to  PTO officials we spoke with. According to some stakeholders, these  proceedings are most likely to be used by companies that have been  sued for patent infringement. PTO issued rules to govern the proceedings  in August 2012 and hired additional judges soon after AIA was passed.  Specifically, PTO’s Patent Trial and Appeal Board plans to move from  100 to more than 200 judges on staff by the end of 2013, according to  PTO documents we reviewed. In addition, judges at the Board have been  coordinating with stakeholders in the patent community to create a  streamlined discovery process for these proceedings. The judges told us  they want to avoid the massive discovery requests that add time and  expense to patent trials in federal district courts, but said that details of  how they handle discovery will continue to evolve over time.director of PTO is required to study and report to Congress on how these  and other provisions of AIA are being implemented no later than  September 16, 2015. According to agency officials, PTO plans to meet  this 2015 deadline, and the agency has started collecting and publishing  information on the number of times the new AIA proceedings are being   The  used and the timing of implementation. As of July 31st, 2013, there had  been 395 requests for inter partes reviews and 39 requests for review  under the transitional program for covered business method patents,  according to data from PTO.
Given that challenging a patent’s validity is a common defense for those  who have been accused of patent infringement, PTO officials we spoke  with mentioned that the new post-grant proceedings may have the  potential to reduce future patent litigation because they offer a less costly  and faster alternative to settling patent disputes in federal district courts.  For example, a representative of a number of technology companies we  spoke with estimated that the legal and filing fees for using one of these  proceedings would be between $166,000 and $390,000, depending on  the proceeding, for an average patent, while legal fees could be upwards  of $5 million for an infringement case filed in district court. According to  the Board judges we spoke with, these proceedings will be faster than  most litigation in district court—which takes 2-½ years for the patent  infringement trial to begin on average, according to a recent study— because the regulations stipulate that they normally are to conclude  within 1 year of being initiated. However, representatives from some  operating companies said that they will not use these post-grant review  proceedings if federal judges do not consistently delay the costly trials  until the Board completes its review. In the past, federal judges have not  always been willing to suspend a lawsuit while waiting for PTO to conduct  reexaminations, but may be more likely to do this given the regulatory 1  year timeline, according to these representatives. Judges at the Board  told us they are working to ensure that the post-grant review proceedings  are completed within 1 year. In addition, some operating company  representatives we spoke with said that post-grant review in particular  would be of limited utility since they only have 9 months after a patent is  issued to file a request for review, but usually only learn about a patent’s  existence after being sued or receiving a demand letter, which is often  many years after the patent has been issued.
Finally, representatives from some operating companies said they are not  planning to use post-grant review to challenge a patent’s validity because  an adverse final decision by the Board generally prohibits them from  challenging the patent’s validity again in court. These representatives  said that they consider this to be a major flaw in post-grant review.  However, a few other stakeholders said that patent owners need certainty  in their patent’s validity and that the same party should not be able to  challenge the patent’s validity through post-grant review and in the federal  courts. Judges at the Board said they were aware of this issue and would  continue to monitor it.
section_title: Conclusions
paragraphs: Public discussion surrounding patent infringement litigation often focuses  on the increasing role of NPEs. However, our analysis indicates that  regardless of the type of litigant, lawsuits involving software-related  patents accounted for about 89 percent of the increase in defendants  between 2007 and 2011, and most of the suits brought by PMEs involved  software-related patents. This suggests that the focus on the identity of  the litigant—rather than the type of patent—may be misplaced. PTO’s  recent efforts to work with the software industry to more uniformly define  software terminology and make it easier to identify relevant patents and  patent owners may strengthen the U.S. patent system. Further, PTO has  available internal data on the patent examination process that could be  linked to litigation data, and a 2003 National Academies study reported  that using these types of data together could provide useful insights into  patent quality. Examining the types of patents and issues in dispute  represents a potentially valuable opportunity to improve the quality of  issued patents and the patent examination process and to further  strengthen the U.S. patent system.
section_title: Recommendation for Executive Action
paragraphs: We are recommending that the Secretary of Commerce direct the  Director of PTO to consider examining trends in patent infringement  litigation, including the types of patents and issues in dispute, and to  consider linking this information to internal data on patent examination to  improve the quality of issued patents and the patent examination process.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a copy of our draft report to PTO for review and comment.  PTO concurred with key findings and our recommendation in its written  comments, which are reproduced in appendix II. PTO also provided  additional clarifying comments, which we incorporated as appropriate.
We are sending copies of this report to the Secretary of Commerce, the  Federal Trade Commission, the International Trade Commission, the  Administrative Office of the U.S. Courts, the appropriate congressional  committees, and other interested parties. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Section 34 of the Leahy-Smith America Invents Act (AIA) mandated that  GAO conduct a study on the consequences of patent litigation by  nonpracticing entities (NPE). Our objectives were to determine: (1) what  is known about the volume and characteristics of recent patent litigation  activity; (2) what is known about the key factors that contribute to recent  patent litigation trends; (3) what developments in the judicial system may  affect patent litigation; and (4) what actions, if any, has the Patent and  Trademark Office (PTO) recently taken that may affect patent litigation in  the future.
To address all four of these objectives, we reviewed relevant laws,  including AIA, and interviewed officials from PTO, the Federal Trade  Commission (FTC), and the International Trade Commission (ITC). We  also interviewed the following 44 stakeholders knowledgeable about  patent litigation:
Ten representatives from operating companies and industry groups  from an array of industries, including software, computer hardware,  retailers, and pharmaceuticals, who had been regularly sued in recent  years for patent infringement. We identified these operating  companies and industry groups by using patent infringement litigation  data from 2005 through 2011, which we discuss below.
Eight representatives of patent monetization entities (PME) and  research firms that had regularly sued others in the past 10 years. We  identified these PMEs by using patent infringement litigation data from  2005 through 2011, and they represent a range of business models.
Fourteen legal commentators, economists, and consultants that had  conducted research closely related to our objectives. We identified  them through our review of academic literature on patent litigation and  the patent system and they each had done work related to the issues  we were asked to study.
We also interviewed one representative each from two large research  universities that license patents, two patent brokers who help others  buy and sell patents, four venture capitalists, and four individual  inventors at software start-up companies and at a small inventor  advocacy group. We identified these universities, brokers, venture  capitalists, and start-up companies based on our review of academic  literature on patent litigation and the patent system and they were  knowledgeable of the issues we were asked to study.
Because stakeholders varied in their expertise with various topics, not  every stakeholder provided an opinion on every topic.
We were not able to find reliable data on patent assertion outside of the  court system—which often consist of patent owners sending letters  demanding licensing fees to potential infringers before filing suit and, as a  result, our data analysis focuses on patent infringement litigation rather  than patent assertion more broadly.
In addition to steps we took to address all four objectives, to describe  what is known about the volume and characteristics of recent patent  infringement litigation activity, we reported data from the American  Intellectual Property Law Association’s (AIPLA) 2011 survey on the costs  of patent litigation.litigation and the patent system in general and assessed the methodology  of the studies we reported on for soundness. To assess the reliability of  data from PTO, AIPLA, and RPX, we conducted interviews and reviewed  relevant methodology documentation. We found that these data were  sufficiently reliable for purposes of this report.
We also reviewed academic literature on patent  We also analyzed patent infringement litigation data that we purchased  from Lex Machina, a firm that collects and analyzes data on patent  litigation. Lex Machina maintains a database created from public electronic court filings for all patent infringement lawsuits filed in U.S.  federal district courts, beginning in the year 2000. From this database,  Lex Machina selected a random, generalizable sample of 100 lawsuits  per year from 2007 through 2011, identifying for each lawsuit the  patent(s) being litigated, the court hearing the lawsuit, and the lawsuit’s  outcome. The sample size allowed us to draw conclusions about patent  infringement lawsuits filed in each of these years, with a margin of error of  no more than plus or minus 5 percentage points over all these years and  no more than plus or minus 10 percentage points for any particular year.  Each sample element was subsequently weighted in the analysis to  account statistically for all the members of the population, including those  that were not selected. To assess the reliability of data from Lex Machina,  we met with Lex Machina staff, examined documentation, and tested and  reviewed the sample data for completeness and accuracy. We found the  data to be sufficiently reliable for our purposes. We also obtained patent  infringement data from RPX, another firm that collects data on patent  infringement lawsuits, in an effort to verify Lex Machina’s litigant  categorizations.
For the plaintiffs named in each lawsuit, Lex Machina also provided an  entity description, classifying the plaintiffs as follows: an operating company, or a likely operating company; an entity related to an operating company; a PME or a likely PME; a university; an individual or trust; or a research firm.
To classify a plaintiff, Lex Machina placed more weight on statements  made by the plaintiff in official documents, such as its own court and  Securities and Exchange Commission (SEC) filings, and statements  appearing on a website maintained by the plaintiff. From these sources  Lex Machina obtained information that would help it to determine the  entity type, such as statements indicating that the plaintiff made or sold a  product or offered services, or evidence that the plaintiff shared corporate  ownership with such an entity. Some statements, such as a statement  describing a plaintiff’s business as focused on patent licensing, indicated  that the plaintiff was in the business of patent monetization.
In some cases, the plaintiffs’ own statements did not lead to a definitive  classification, and Lex Machina consulted other sources to obtain relevant  information about the plaintiff’s business activities. To the extent possible,  Lex Machina relied on additional sources they characterized as “verified  and objective,” such as corporate databases and articles of incorporation.  To the extent that Lex Machina lacked official information, it used  professional judgment to classify plaintiffs based on information from  other sources, such as news articles, blogs, court filings by opposing  parties, and Lex Machina’s own database. Examples of information from  these other sources that were used to classify plaintiffs include: (1) the  number of patent infringement lawsuits filed by the plaintiff; (2) whether  the plaintiff had been sued for patent infringement in other lawsuits or  counterclaims; (3) whether the plaintiff had been subject to a declaratory  judgment lawsuit for noninfringement or invalidity; (4) the number of  defendants sued in each lawsuit and in total; (5) statements about the  plaintiff in news articles, blogs, or in court filings by an opposing party,  such as a statement characterizing the plaintiff as a patent monetization  entity; (6) whether the plaintiff was represented by an attorney known to  represent patent monetization entities; and (7) evidence of linkages  between the plaintiff and a patent monetization entity, such as a common  principal or a street address shared in common. In some cases, the  difficulty of finding information about the plaintiffs, their business activities,  and their corporate relationships led Lex Machina to choose no entity  classification at all. Such plaintiffs were classified as “Insufficient  Evidence.”
We reviewed Lex Machina’s classifications of first named plaintiffs to  ensure their reliability and consistency. We found 29 cases where we  differed with Lex Machina’s original classification. They adjusted their  classifications in all but five of the cases. We agreed on different labels in  these cases mainly based on our preference for the “entity related to  operating company” label. Table 1 presents the evidence or information  we used to review Lex Machina’s classifications of first named plaintiffs.
In addition to steps we took to address all four objectives, to describe  what is known about the key factors that contribute to recent patent  litigation trends, we reviewed academic literature on the patent and  judicial system and the benefits and costs of patent assertion, including  economic and legal studies.
In addition to steps we took to address all four objectives, to describe  developments in the judicial system that may affect patent litigation, we  interviewed officials and judges from the U.S. District Courts for the  District of Delaware and for the Eastern District of Texas. We selected  these district courts because they had high levels of patent infringement  lawsuits according to Lex Machina data. We also interviewed judges with  the U.S. Court of Appeals for the Federal Circuit in Washington, D.C.,  which hears appeals of patent cases decided in federal district courts. We  also interviewed officials from the Administrative Office of the U.S. Courts  (AOUSC), and the Federal Judicial Center––organizations that provide  broad administrative, legal, and technological services and support to the  judicial branch. We also reviewed documents and data from the courts,  as well as economic and legal studies.
In addition to steps we took to address all four objectives, to describe  what actions, if any, PTO has recently taken that may affect patent  litigation in the future, we conducted interviews with officials from PTO  and reviewed documents and data from this agency, as well as economic  and legal studies.
section_title: Appendix II: Comments from the Patent and Trademark Office
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Tim Minelli (Assistant Director),  Justin Fisher, Cindy Gilbert, Karen Keegan, Rob Marek, Susan Offutt,  Alison O’Neill, Nalylee Padilla, Dan Royer, Susan Sawtelle, Jeanette  Soares, Ardith Spence, Kiki Theodoropoulos, and Jacqueline Wade made  key contributions to this report.