1 Dec

Michelle Lee has a big call to make about US patent reform

There are no doubts about the credentials of the first woman to be nominated as the permanent director of the USPTO. But once she is sworn in, Michelle Lee’s political skills will be strongly tested if she backs congressional moves for major changes to the US patent litigation system

The news that Michelle Lee has been formally nominated by the Obama administration to be the next permanent director of the US Patent and Trademark Office (USPTO) is no surprise. It has been widely trailed and, as the office’s current deputy director, she has effectively been running the agency for a year anyway. There are also no doubts as to her credentials: Lee had a long and distinguished career in private practice and corporate intellectual property, served two terms on the USPTO Patent Public Advisory Committee and has a background in computer engineering.

Much more surprising, though, is why it has all taken so long. If Lee is considered the right person to head the office now, why was she not the right person to do it the day after David Kappos announced his resignation in November 2012, or when Teresa Stanek Rea left her post as temporary director in November 2013? There are several possible explanations for the delay.

The first is that the White House did not consider Lee to be up to the job, spent a year looking for someone who was, but could not find anyone who was available. But this is hard to believe. At the very least, it is highly unlikely that Lee would have waited around in the knowledge that she was considered second best when she could have taken a much better paid, less stressful job in the corporate or private practice world. Another scenario is that finding a permanent director for the USPTO has never been a priority for the Obama administration and that it has only now bothered to fill the gap. But although that cannot be dismissed out of hand, on balance a third scenario seems the most likely: Lee has always been the White House’s first choice, but it has needed time to make her palatable to a wide cross-section of the patent community.

Until 2011 Lee was in charge of patents at Google. And Google, of course, has very specific IP-related interests. To say the least, Google’s views about the US patent system do not coincide with those of many others who use it. Thus, putting in place a USPTO director with strong Google connections is potentially high risk.

When Lee was named the agency’s deputy director after Stanek Rea left, the appointment did not require Senate scrutiny. Between then and now Lee has had an opportunity to establish herself in the role and to win over those who may originally have been sceptical about her. In June the White House also floated Phil Johnson, senior vice-president of IP policy and strategy at Johnson & Johnson, as a possible contender for the director’s job. As a prominent spokesman for the Coalition for 21st Century Patent Reform, Johnson had come out against some – but not all – measures in the Goodlatte Innovation Act, leading to howls of fury about his potential appointment from pro- reform groups and media outlets. Looking back now, it is hard not to see the Johnson suggestion as a highly effective way in which to prepare the ground for Lee. For those contemplating the Johnson debacle the realistic options are Lee – with her undeniably strong patent background –a battle over someone with less credentials or nobody. In the end, that is no choice at all. Thus, what might have been a fight in the Senate 12 months ago will now not be.

After Lee is confirmed she will face myriad challenges. One of these will undoubtedly be to ensure that all parts of the patent community feel that she has their best interests at heart. She has stated clearly that her time at Google will not affect the way in which she does her job and there is no reason not to take that at face value. Of some concern, however, is that while at Google she did equate non-practising entities with patent trolls – perhaps exhibiting a less-than-sophisticated understanding of the IP market. But more probable is that she said it because Google was her employer, and not distinguishing between different patent licensing models suited the company’s agenda. As of now, Lee deserves the benefit of the doubt on that – especially because people can change their minds.

Much more important is how Lee reacts to what is certain to be another attempt to get patent reform through the next Congress following the Republicans’ emphatic victory in the mid-term elections. Both President Obama and Bob Goodlatte – the chairman of the House Judiciary Committee whose bill was approved by the lower chamber in December 2013 but then stumbled in the Senate – have said that it should come back. Against that, however, is the fact that empirical evidence supporting the case for reform remains profoundly weak (non-existent, some might argue).

What is more, the combined effects of the America Invents Act and a series of court decisions have begun to have a substantial impact on the number of patent suits being filed – with Lex Machina reporting a 40% year-on-year decline in new cases in September and a 33% drop in October. Lex Machina founder Professor Mark Lemley – a highly respected figure on all sides of the debate and an oft-cited authority by those who favour change – told the IAM blog in September: “I think the need for legislative reform is a lot less right now than it was a year ago and it probably makes sense to wait a bit and see how these cases play out and what the new dynamic looks like before we try to rewrite the rules.”

Given what is happening on the ground and the lack of hard data supporting the need for changes that could potentially have a detrimental impact on plaintiffs of all kinds, but especially smaller actors with limited resources, could someone with the experience and knowledge of patents that Lee has make a credible case for legislation at this stage? The IP community will find out soon enough, although speaking at the American Intellectual Property Law Association annual meeting in October she did indicate that she supported reform, without specifying the detail.

If a new attempt at substantial change is something with which Lee is comfortable, it is almost certain that she will be fighting a much stronger coalition than that assembled against the last set of proposals. The pharma lobby seems likely to be more actively involved from the start, alongside organisations representing small company and lone inventors, and the mainstream venture capital community. What is more, the Republican Party as a whole may not be as enamoured of change as some have assumed. For example, prominent party player and former Hewlett-Packard CEO Carly Fiorina recently spoke out strongly against reforms which she believes could fundamentally weaken the US patent system.

On top of all that, it is also clear that the idea that tech speaks with one voice is highly erroneous. The Partnership for American Innovation – which is fronted by Lee’s predecessor David Kappos and includes IBM, Apple and Microsoft among its members – has talked very positively of the benefits that the current patent system delivers to the United States and has called for a debate about its future that moves “beyond rhetoric that ‘the system is broken and trolls are bringing businesses to a complete halt’ to a discussion of calibrated improvements”. Speaking in a personal capacity, Kappos has also expressed concerns about parts of the previous Goodlatte legislation, and if any new bill turns out to be a carbon copy it is possible that he will make his reservations clear. So, should Lee advocate major legislative reform, it will test her political skills to the maximum – not only with legislators, but also as a leader within the IP field. That will be quite a challenge, to say the least.

Note: The final paragraph of this report has been changed from the original after the Partnership for American Innovation contacted us to express its concerns that views expressed by David Kappos in a personal capacity about patent reform legislation might be confused with positions held by the group. This is not, in fact, the case.

The case against patent reform’s go-to professors gets stronger

There are few more influential voices in the debate over US patent reform than James Bessen and Michael Meurer, whose estimates concerning the financial burdens that non-practising entities (NPEs) – which they also term ‘patent trolls’ – impose on operating companies in the United States are routinely cited by those in favour of fundamental change.

The pair’s claims that between 2007 and 2010 NPE plaintiffs cost operating company defendants an average of $80 billion of lost wealth a year, and that in 2011 NPEs caused operating companies to pay out $29 billion of direct costs, have been referenced and quoted by advisers to President Obama, numerous legislators in the US Congress, all manner of lobbying groups and in any number of newspaper articles. Despite serious methodological and structural flaws in their work – exposed by the likes of David Schwartz and Jay Kesan (“Analyzing the Role of Non-Practicing Entities in the Patent System”) and Ron Katznelson (“Questionable Science Will Misguide Patent Policy – The $83 Billion per Year Fallacy”) – what they have said is consistently used as evidence that the US patent litigation system requires reform. Unfortunately, though, it is becoming increasingly clear that the two Boston University academics may not be the most reliable of witnesses.

In fact, an article they wrote for the Boston Globe, published on November 5, seems to suggest that they are either willing to misrepresent basic facts deliberately or are unable to conduct the most cursory research before putting pen to paper.

In the article, Bessen and Meurer claim that France Brevets, the Innovation Network Corporation of Japan (INCJ) and the Taiwan Industrial Technology and Research Institute (ITRI) are what they term “government-sponsored patent trolls”, which “are frequently active in US courts”. “Trolls”, they explain, “are firms with no interest in innovation or technology transfer; they hold patents to assert them against innocent businesses to extract some of the profit from genuine innovators”. The United States’ trading partners, they state, must “play by the rules”. The problem is that just about everything that Bessen and Meurer say about the three is demonstrably untrue.

Set up in March 2011, France Brevets works with French organisations to help them to license their portfolios, as well as to provide them with freedom to operate. It has brought two actions in the United States in three years – one against LG and the other against HTC. The case with LG was settled in August. France Brevets has sued one US company in three years, in Germany. It is not a frequent litigator anywhere. What is more, the firm splits revenues with its partners – innovative companies that have turned to it because they do not have the expertise or the resources to build licensing programmes themselves. “The patentee is thus given a supplemental cash flow while remaining the owner of its inventions”, the France Brevets website states.

One thing that you can say about France Brevets, though, is that its business model is built on patents. But not even that applies to either INCJ or ITRI. The former was established in 2009 as a private-public body funded by the Japanese government and 26 major Japanese corporations, the vast majority of which have long track records of investing in R&D and producing innovative products. They include the likes of Canon, Toyota, Hitachi, Toshiba, Panasonic, and GE Japan. INCJ’s brief is “to provide financial, technological and management support in order to promote the creation of next-generation businesses”. It has invested in and helped to establish a number of innovative small and medium-sized enterprises in Japan, and has funded several acquisitions domestically and abroad. INCJ has never litigated a single patent in the United States.

Over in Taiwan, meanwhile, ITRI’s website states that it “is a nonprofit R&D organization engaged in applied research and technical services”. Founded in 1973, “ITRI employs around 6,000 personnel, including over 1,300 who hold Ph.D.s and 3,000 with master’s degrees”. It is, in fact, a world-class R&D entity that owns a big patent portfolio because it does a lot of R&D. It is also heavily engaged in technology transfer.

It is clear that France Brevets, INCJ and ITRI do not come close to being patent trolls. To suggest otherwise is deeply insulting to them. There is no secret to what they actually do; information on their activities can be found quickly through a simple internet search.

If the work that Bessen and Meurer produce is to be used as evidence by those seeking to justify fundamental change to the US patent system, it must be beyond reproach. It is clear now that this is not the case. If they seriously believe France Brevets, INCJ and ITRI to be “government sponsored patent trolls”, the pair’s basic judgement has to be called into question; if they do not, the issue is one of integrity. Either way, it does not reflect well on them or the work they have done. At the end of their Boston Globe article, Bessen and Meurer talk about the United States’ trading partners playing by the rules. Perhaps they should have heeded this advice themselves.