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Focus on Life Sciences: Intellectual Property – Patent Demands, Venture Capital, and IP Legislation: Part 1

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The U.S. economy is becoming more reliant on innovation to drive growth. Patenting for example, is correlated with high productivity growth, lower unemployment, and business creation.1 Strong intellectual property ("IP") rights, like patents, are critical to incentivizing innovation and ensuring that capital flows to support innovative activity. As a result, the prosecution and litigation of patents have taken center stage in IP strategies and discussions.
November 11, 2013
The U.S. economy is becoming more reliant on innovation to drive growth. Patenting for example, is correlated with high productivity growth, lower unemployment, and business creation.1 Strong intellectual property ("IP") rights, like patents, are critical to incentivizing innovation and ensuring that capital flows to support innovative activity. As a result, the prosecution and litigation of patents have taken center stage in IP strategies and discussions.

There has been a lot of recent activity regarding IP, in particular patents and patent legislation. The past few years has seen the passing of the "America Invents Act" (H.R. 1249), the White House Task Force on High-Tech Patent Issues, and most recently the introduction of the "Innovation Act" (H.R. 3309).

One of the primary issues in the discussions around patent policy is the impact of potentially "abusive" litigation on the economy and innovation within the economy. One argument is that "abusive" litigation and pre-litigation demand letters,2 often initiated by patent assertion entities ("PAEs," also referred to as "patent trolls")3 , reduces innovation and is a burden on the economy. Another argument is that PAEs facilitate innovation by expanding markets for technology and offer innovators ways to monetize their technology.

This two-part article looks at recent items focusing on this issue. This first part provides an overview of two recent studies; one on patent litigation, the other on the impact of patent demands on the venture capital community. The second part focuses on patent legislation.

U.S. Government Accountability Office Report

In August 2013 the U.S. Government Accountability Office ("GAO") issued report GAO-13-465 Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality. This report focused on quantifying trends in patent litigation. Patent litigation was roughly flat between 2000 and 2010, before spiking in 2011.4 The 2011 spike has been attributed to the America Invents Act signed in to law in 2011. Patenting has also increased over this period. Overall annual patent grants approximately doubled between 1991 and 2011 with a significant proportion of that growth in information technology.5 Software-related patents now account for about one-half of new patents, up from about one-quarter of new patents in 1991.6

Despite the recent scrutiny, PAEs only initiated about 19% of suits between 2007 and 2011.7 However, the study also indicated that PAEs share of suits has increased over this time period, accounting for 24% of suits filed in 2011, up from 17% in 2007.8 Also, and maybe even more important to note, is that the GAO report is not capturing patent demand letters, which are believed to be a significant method utilized by PAEs to monetize their patent rights. Patent demand letters can still be costly and disruptive for recipients. By and large, software patents account for the majority of PAE filed suits, about 84% over 2007 through 2011.9 Evidence suggests a major reason for this is because of overly broad patents and/or unclear, imprecise claims and definitions within the patent. In other words, low quality patents dealing with processes or business methods are ripe for litigation.

The GAO also identified three key factors (echoed in other discussions on this subject) contributing to patent infringement litigation:

  1. Unclear and overly broad patents
  2. Very large damages awards in litigation
  3. Increased awareness around the value of IP, even shelved or abandoned IP10

Given this observation, the initiatives geared towards ensuring higher quality patents in the future may help stem the tide of costly litigation, regardless of initiatives aimed specifically at patent assertion entities.

University of California / National Venture Capital Association Report

In October 2013, Robin Feldman of the University of California issued a report, conducted through members of the National Venture Capital Association entitled Patent Demands & Startup Companies: The View from the Venture Capital Community. This report focused on patent demands (litigation and pre-litigation demand letters from patent owners) against venture capital ("VC") backed start-up companies.

According to the VC and portfolio company respondents, IP and strong IP protections are critical to obtain funding and for the ultimate success of the venture (IPO or sale). According to the study, venture stage companies will not get funding without a sound patent strategy, freedom to operate, and a high probability of patentability.11

The report finds that approximately 1 in 3 VC backed companies has received a patent demand, and that the frequency of such demands is increasing.12 Consistent with the GAO report discussed earlier, the information technology sector (i.e. software) is the largest target of patent demands, followed by life sciences companies.13 Unlike the GAO report, the VC community reports that PAEs initiate the majority of demands against them and their portfolio companies.14 This discrepancy is likely because of the GAO's focus on litigation while the VC focused report uses a broader definition of patent demands (both litigation and pre-litigation demands).

This report makes clear that a significant portion of the VC community does not view PAEs as benefiting startup companies. According to the study, a majority of VC and VC backed companies believe that patent demands have a negative impact because they distract management, divert scarce resources (time and money), and can force the altering of business strategies.15 This report also implies that PAE's may not be a viable or desirable outlet for venture capital firms or their portfolio companies to monetize IP, and, in fact, limit investment and innovation at start-up companies. Thus, the increased costs and risks associated with PAEs patent demands can have a negative impact on VC investment. This runs counter to the PAEs argument that they are a vital outlet expanding the market for these entities' technology. However, one caveat is that this study is specifically focused on the VC community, and not focused on other operating companies, research entities and universities, and individual inventors, where the PAE's arguments may have more validity.

Concluding Thoughts

The GAO and Feldman reports both indicate that litigation by PAEs is not insignificant, has recently increased in frequency, and seems to be particularly concentrated within the technology and life sciences industries. The Feldman report indicates that abusive litigation by PAEs limits investment in start up companies seeking venture capital. If true, it is reasonable to infer that constraints on venture level investment constrain innovation, with ripple effects throughout the broader economy.

Other studies have also drawn a link between PAE activity and declines in innovation (see Tucker 2013).16 What hasn't been examined as closely are the potential benefits that PAEs have on the economy and patent system, assuming the arguments of providing additional monetization alternatives to innovators is valid. A comprehensive view would measure the costs against the benefits (if any).

Click here to read part 2 of the article.


1Rothwell, Jonathan, et al. Patenting Prosperity: Invention and Economic Performance in the United States and its Metropolitan Areas. Metropolitan Policy Program at Brookings. 2013. Page 1.
2Demand Letters refer to "demands" from patent owners (or affiliated entities) to entities that they believe may be infringing on their technology to enter into licenses with them or face potential patent infringement litigation.
3Patent assertion entities are loosely defined here as entities that do not invent, but rather purchase or license IP such as patents in order to "assert" their rights and monetize the IP through licensing and/or litigation, rather than producing a good or service.
4U.S. Government Accountability Office. Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality (GAO-13-465). Report to Congressional Committees. 2013. Page 14.
5Id. Page 12.
6Id. Page 12.
7Id. Page 17.
8Id. Page 17.
9Id. Page 22.
10Id. Page 28 - 34.
11Feldman, Robin. Patent Demands & Startup Companies: The View from the Venture Community. 2013. Pages 24-25.
12Id. Pages 34 - 35.
13Id. Page 35.
14Id. Page 37.
15Id. Page 39 - 40.
16Catherine Tucker. Patent Trolls and Technology Diffusion. 2013.


RubinBrown has a dedicated group focused on the Life Sciences Industry to provide assurance, tax, and business advisory services for entities participating in the Life Sciences industry or supporting those that do. Specialized segments include Animal Health, Plant Sciences, Human Health, and Renewable Energy.

 

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