In search of the next patent war

Apple and Samsung made history last year when they agreed to end the legal hostilities which had been raging between them since 2011. This is now popularly regarded as the end of the smartphone wars, which for some time now have dominated discussions from Wall Street to the boardroom. A few CEOs even declared that they would go ‘thermonuclear’ themselves in their approach to litigation. But for better or worse, it is all over now.

However, companies have now started to look at patent wars from a geographical perspective. In two or three years’ time, Europe’s Unified Patent Court will be up and running and able to issue injunctions. Law firms and companies are recruiting European patent litigators to prepare for this eventuality. In future, when patent litigation is settled in one jurisdiction, it will be possible to continue it in a different jurisdiction with the possibility of obtaining a different result – especially with regard to injunctions. Certainly, the trends in countries such as India, Korea and China are beginning to show a propensity towards the grant of injunctions.

Motivations and causes of patent war

It is perhaps the emotional response of former Apple CEO Steve Jobs which led to the ‘thermonuclear’ attempt to attack the Android system head-on. Apple’s legal department may well have preferred an injunction to try to keep Android products off the shelves. It is now a fact that obtaining an injunction remained a mirage of sorts throughout the whole of the smartphone wars. This would be a major shift in the approach of major US companies to a future declaration of all-out patent war.

“The smartphone market was fed into by three major markets: personal computers, semiconductors and the Internet,” explains Fergal Clarke, director of IP business analysis at Lenovo. “The convergence of these three markets led to a rapid technological development in very quick time, which led to this unique event of the smartphone wars.”

If we take a step back and try to analyse this, the following questions arise:

• What is a patent war and what causes it?
• Is there a way to spot the signs of a patent war in advance?
• Do patent wars happen in high-tech industries alone or are they industry agnostic?
• Do patent wars happen where significant volumes of money and a lack of adequate patent quality are involved?

Study of patent wars

The following Dolcera Analytics study focuses on the patent war phenomenon by analysing a broad spectrum of industries and the emerging technologies in each. A detailed description of the study, along with the methodology, is provided in the final part of this article.

First, various industry-specific lawsuits (2004-2014) were selected and certain common quantitative factors which caused them were identified. Next, secondary research was conducted to find relevant data for these factors. Regression analysis was then used to uncover any correlations between these factors. This approach helped to eliminate non-factors from essential factors that contributed to a patent war. Some factors (eg, hype cycle and patent assertion entities) had a negative effect, while others (eg, R&D spend and number of patents) were revealed to have had a positive correlation, thus contributing to a patent war. Finally, a model was developed to predict the number of lawsuits in each vertical. This model predicted the number of patent lawsuits with 82% accuracy.

Figure 1. The smartphone wars

High patent count, high R&D spend, high hype, medium NPE involvement

Venue:

D Del – District of Delaware

ED Tex – Eastern District of Texas

ITC – US International Trade Commission

ND Cal – Northern District of California

ND Ill – Northern District of Illinois

SD Fla – Southern District of Florida

WD NY – Western District of New York

WD Wash – Western District of Washington

WD Wis – Western District of Wisconsin

Source: PCMag, January 2012

Figure 2. Patents and patent litigation by technology area, 2004-2014

Source: Dolcera

Impact of patent war on innovation and consumers

“The remarkable feature set in every smartphone product release has raised the bar in customer expectation,” says Ida Shum, senior manager for open innovation at Samsung. “The R&D teams working on smartphones are much more focused on shortening the product development cycle.”

When we consider the cost and sophistication of the smartphone both at the beginning of the patent wars and now, it is evident that these products have become less expensive and more sophisticated over time. Smartphone choice and availability have also increased significantly. Companies such as Samsung have become increasingly creative over the years. However, this may not be due to the patent wars. Overall, something good has happened to consumers. “The change that low-cost smartphones bring to the lives of people – especially in developing countries – is game changing and I welcome it,” points out Eric Schulman, former director of patents at Google.

Figure 3. Frequency of patent litigation by technology area 2004-2014

Source: Dolcera

Patent wars in other industries

The smartphone industry has had some illustrious CEOs, such as Apple’s Jobs, whose words often made headlines. However, CEOs in other industry verticals have not always received the same media exposure. In some ways, the situation is like a post-Hiroshima scenario, where everyone has witnessed the catastrophe of the smartphone wars and wants to accumulate stockpiles in the form of patents, both within and outside their core competencies. The medical devices space is a classic example. Say that Company A has a solid patent reading on one of its products which prevents Company B from entering that market. Company B decides to file patents around Company A’s product to ensure that it releases its product with a potential cross-licensing deal when Company A comes to negotiate. Strategies such as this are seen as an approach to enter a specific market.

Industry focus

Beyond the smartphone sector, we looked at four industries to judge the potential for patent stand-offs. Each had a slightly different outlook.

Figure 4. Skincare and cosmetics – patent lawsuits 2004-2014

Low patent count, medium R&D spend, low hype, low NPE involvement

Source: Dolcera

Skincare and cosmetics: This industry is a lucrative one characterised by strong on-going demand and consistent innovation. However, the potential for a patent war seems to be slight (see Figure 4)

Medical devices: This industry is not often covered by the mainstream media and is less likely to become the site of a patent war (see Figure 5).

Internet of Things: This industry is interesting, with a few NPEs suing operating companies – although that is about the extent of it (see Figure 6).

Wearables: This industry has a patentwar in the making, with a few operating company players suing each other. Most litigation involves NPEs suing operating companies (see Figure 7).

Figure 5. Medical devices – patent lawsuits 2004-2014

High patent count, high R&D spend, low hype, low NPE involvement

Source: Dolcera

Figure 6. Internet of Things – patent lawsuits 2004-2014

High patent count, high R&D spend, high hype, high NPE involvement

Source: Dolcera

Figure 7. Wearables – patent lawsuits 2004-2014

High patent count, high R&D spend, high hype, high NPE involvement

Source: Dolcera

Empirical study

Given the increasing complexity of the technologies of the past decade, patent wars have become an inevitable part of doing business. Major technology players are using patents to increase or secure market share. In other words, they are a complex techno-legal battleground where major global forces fight it out for supremacy. Data shows that between 2004 and 2014, patent lawsuits in the United States more than doubled, from around 2,500 to over 6,000 annually. These lawsuits affected more than 12,600 defendants in 2014. The number of cases has increased at an overall compound annual growth rate (CAGR) of 8% since 1991. However, since 2009, the CAGR of the number of patent cases filed has been 24%, or almost three times the growth rate over the entire period.

Using regression estimates, our research team provided a prediction model for the number of lawsuits based on various relevant and significant factors. The study aimed to investigate the statistical relationship between the number of patent litigations and parameters causing a rise or drop in this figure.

Conceptual model and methodology

Many trending areas in multiple industries – from high-tech and consumer packaged goods to pharmaceuticals and medical devices – were identified for the purpose of reviewing patent wars.

The following areas were selected for the study:

• high-tech – Internet of Things, wearable devices, unmanned aerial vehicles, biometrics and wireless power;
• consumer packaged goods – pollutants and their effects on skin and hair;
• pharmaceuticals – microfluidics and micro-processing, transdermal drug delivery;
• medical devices – energy-based surgical sealing or dissection, surgical stapling;
• food and beverages – nanoemulsions in food, gut biology and probiotics in food; and
• healthcare – disinfected rooms, bacterial infection sensors.

Influencing factors were identified which could have been postulated in research and popular opinion to affect the filing of lawsuits in any area. The expected drivers for predicting patent litigation in any technology across different areas are as follows:

• number of patents – this factor indicates the annual number of patents created in each area;
• R&D expenditure (in millions of dollars);
• revenue (in millions of dollars);
• number of NPEs;
• number of operating companies;
• number of individual inventors;
• number of research firms and universities;
• technology inception years; and
• hype cycle.

Methodology

As a part of our study, we analysed the data for the past 10 years (ie, 2004-2014), focusing on the above major drivers. The data for the past decade was collected from litigation and patent statistics. Secondary business research was also performed for a few specific factors.

We have identified a few key quantitative parameters which show a correlation with spikes in patent lawsuits. These will be helpful in predicting the number of lawsuits.

Lawsuit prediction modelling

After identifying various influencing factors which can help in forecasting the number of future lawsuits, we undertook convenience sampling, collected the data as per availability and refined our final list of factors. The data was found suitable for regression analysis to check and quantify the significant factors. The complete methodology can be categorised as follows:

• Data collection and cleaning:
• Historical data on litigations and patents for each area was extracted and normalised.
• Secondary research was conducted to obtain relevant data for the factors.
• The data was studied and the model was found suitable for regression.
• Regression analysis:
• Various factors were considered for possible correlation.
• Drawing inferences:
• Based on the correlations, a model was proposed and tested.
• The model was approximately 78% significant in explaining the variability of the factors.

Model implementation and results

After running regression on thousands of rows of litigation data, we identified the most significant factors that can play a role in forecasting the number of lawsuits in the near future. The factors driving the patent litigation trend are as follows:

• number of patents;
• R&D expenditure (in millions of dollars);
• number of NPEs;
• number of operating companies; and
• technology inception years.

Predictive model

The number of lawsuits in an area was found to depend on the following factors:

Year-wise lawsuit count = 0.799252 + 0.000861 (number of patents) + 0.00548 (R&D expenditure) + 0.556564 (number of NPEs) + 0.028867 (number of operating companies) – 0.09929 (technology inception years).

Inferences

The first inference that can be drawn is that the top players, as both plaintiff and defendant, account for respectively 87% and 76%, on average, of all litigations taking place.

Second, the number of patents filed for any technology across a different industry has a marked effect on litigation trends. The broader the patent portfolio or the higher the number of patents, the higher the number of lawsuits for that technology or industry. This is because technology firms initially race to assemble patent portfolios for defensive purposes in the context of a dynamic and competitive field; as the industry matures, they convert their shields to swords to eliminate competitors in pursuit of market dominance. This also explains why the technology inception year shows high dependence. The fewer the number of years of penetration for a technology, the more companies will try to reap the benefits by litigating.

Third, R&D expense is directly proportional to the complexity of the technology and encompasses spend on infrastructure, employees and much more. As expected, the model also finds a direct correlation between R&D spend and the likelihood of litigation (ie, greater R&D intensity exposes a firm to a greater risk of suing or being sued). According to James Bessen and Michael Meurer, the authors of The Patent Litigation Explosion (BU Law), increases in R&D spend significantly increase the likelihood of being sued for patent infringement, with a potentially chilling effect on innovation. This trend is more prevalent in the case of smaller firms.

Fourth, revenue turns out be an insignificant factor. The reason for this is that companies litigate to remove competitors from the market – regardless of whether these are large, small or even start-ups. Considering the expense of patent litigation, targeting companies with small revenues would not ordinarily appear to be a wise strategy. However, companies litigate against smaller targets with less money in order to establish favourable royalty rates and increase the number of parties that have licences prior to targeting larger entities that will provide a more significant return. In this way, companies tend to gain market dominance by eliminating the competition

Fifth, NPEs play an important role in the industry by developing new ways to protect patents from infringement. Firms which do not practise the patents they own instead engage in litigation to collect licences and other fees from alleged infringers. Recent analysis conducted by PwC reported that in 2013, NPEs filed 67% of all new patent infringement suits, compared to 28% in 2009. Operating companies, on the other hand, actually make products and provide services. The model statistically proves that operating companies file more lawsuits in cases where prospective competitors emerge.

Sixth, the drivers for research firms, universities and individual inventors are innovation, research and experimentation; they are more interested in predicting the future of the technology and working towards it. The legal wars and the rewards hold little attraction. This is clearly evident from our model, since this factor turns out to be insignificant when it comes to predicting lawsuits.

Other questions

Did the smartphone wars create an oligopoly in developed markets, excluding other players such as Xiaomi? It appears that other players consciously avoided developed markets, saving themselves the 10% to 20% cost of patent royalties that they would otherwise have had to pay. However, the smartphone wars may well have had the unintended consequence of keeping disruptors at bay. For instance, Freephone could not act as a disruptor because the rules of the game had been well established that royalties or potential lawsuits could not be avoided.

There are also questions over whether the truce will change the rules of the game and allow aggressive Chinese players to make incursions into the incumbents’ market share.

Some question whether the significant free media exposure which resulted from the patent wars actually helped the technology to secure a bigger market share than it might otherwise have done. For this reason, future patent wars are more likely to take place in consumer industries.

The smartphone wars were about more than just the hardware that consumers purchase (ie, the phone). Consumers end up tying themselves to their chosen operating system and the convenience that it offers; iOS fans are less likely to shift seamlessly to Android and vice versa. By keeping smaller players and upstarts at bay via a patent war and ensuring an oligopoly, a company can ensure that its own operating system becomes the standard. That could mean a lot of money in future through services and devices linked to the technology.

The Internet of Things may see a patent war for similar reasons. People want a big protective moat, and this strategy also involves making sure that the game is for major players only. Even when Coke and Pepsi went thermonuclear against one another, they indirectly kept third parties at bay in most countries.

Injunctive relief is hard to come by in the developed world, due to standard-essential patents. However, this does not preclude an oligopolistic structure, because the cost of gaining entry to the big boys’ club is high royalties.

Any industry in which standards – and hence network effects – matter will continue to see patent wars. Patent wars, like real wars, may end in a truce, signalling an acceptance that firms can co-exist within a specific territory. However, the rules of engagement are established through the war, such that challengers may find it hard to alter them significantly.

Convergence leads to complexity

The debate over whether to spend on engineers or on lawyers rages on in this age of technological convergence. As one might imagine, convergence leads to complexity when it comes to patent enforcement. It is safe to assume that this is all fodder for patent litigation. Does this signal that another patent war is likely on the scale of the smartphone wars that have gone before? Who can tell…