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Some facts about business method and software patents at the USPTO and the EPO
Bronwyn H. Hall
UC Berkeley and University of Maastricht, NBER and IFS
June 2009 GWU Conference - DC 2
Overview
A few remarks on NPEs
Review previous findings in the US and Europe
Present a summary of facts about Class 705 and their owners
� Patents issued 1976 to 2006 (new NBER database)
June 2009 GWU Conference - DC 3
Non-practicing entities
Definition: a patent holder that does not practice the invention on which he holds a patent� Benefits
� Allows efficient specialization in knowledge production� Reduces reliance on scale and trade secrecy, which may favor
competition� Enables VC financing because increases the salvage value of
knowledge-intensive firms� Anand and Khanna (2000) – stornger IPR associated with more
and earlier tech licensing
� Costs� “Potential infringing” not a level playing field� Current bargaining strength in negotiations probably too strong
due to� Preliminary injunction threat (but, eBay)� Some low quality patents (but, KSR)� Reasonable royalty computations
June 2009 GWU Conference - DC 4
Complex products
Too much bargaining power granted to the owner of a small share of the technology in a complex product� “willful” infringement - ignoring a cease and desist letter even if there is good reason to believe one is not infringing
� “reasonable royalties” principle appears to yield excessive royalties in complex product cases� Lemley and Shapiro (2007) – court awarded royalties average 10% in electronics vs. 14% in chem/bio – seems too small a difference
� Threat of “patent ambush” in SSOs?Cross-licensing does not help with NPEs
June 2009 GWU Conference - DC 5
Number of new patent case filings by non-practicing entities (NPEs)Source: Patent Freedom Copyright 2008
0
50
100
150
200
250
300
350
400
pre-
1998
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Preliminary work by Hall and Ziedonis (2007) confirms this pattern in semi-conductors. Lerner (2006) finds very high litigation rates for small entities in financial methods patenting; also Allison et al. 2009
June 2009 GWU Conference - DC 6
Independent invention defense
Problem of inadvertent infringement when there are many minor patents, not always clearly writtenExacerbated by the imbalance in bargaining power between potential infringer and patenteeProposed by Shapiro (2007), among others� Obvious costs in terms of discovery, etc� Benefit – the fact of independent invention suggests that the invention was not “non-obvious”to persons having ordinary skill in the art
� Shapiro shows that welfare is almost always higher if indep invention allowed
June 2009 GWU Conference - DC 7
Independent invention defense
Lemley (2007) - concern that racing with no guarantee of being the sole winner may discourage some high cost innovations; he suggests the following modifications:� Wilfulness – only copying, not indep invention
� Prior user right instead (rules out simultaneous inventions)
� Make simultaneous invention relevant for obviousness in court
� Take indep invention into account when deciding to issue injunction
June 2009 GWU Conference - DC 8
Empirical studies of bus meth patents
Business methods� Defining them?
� Allison & Tiller 2003 – internet bus meth
� Wagner 2008 – postal meters; Europe
Financial� Lerner 2006a, 2006b - litigation
� Duffy & Squires 2008 – financial innov patenting
� Hall 2007 – payment systems
� Hunt 2008 – do they increase R&D?
� Hall et al. 2009 – Europe
� Takalo & Komulainen 2008 – exchange; Europe
June 2009 GWU Conference - DC 9
Summary of findings – bus meth
Allison & Tiller 2003 – internet bus methods� 1423 internet patents in 705, 707, 709 issued 1990-99
� Amt of prior art same as other patents, but more is non-patent
� US inventors dominate, small firms and individuals do well compared to large firms
Wagner 2008 – postal meters; Europe� 1901 bus meth apps found that are equivalent to class 705
US pats
� Differ wrt claims, prior art refs, litigation; opposition rates of 44% in franking device (postage meter) industry
June 2009 GWU Conference - DC 10
Summary of findings - financial
Lerner 2006 – litigation through 2005 on pats issued 76-03 in subset of 705� Higher litigation rate than any other technology� Very highly litigated by small entities (p>1)
Hunt 2008 – do they increase R&D?� Little effect visible (based on tech employment)
Duffy & Squires 2008 – financial innov. patenting� Long pendency� few in 705/35 (finance, e.g., banking, investment or credit)
directed towards highly innovative financial products
Takalo & Komulainen 2008 – 378 European exchange pats in IPC G06Q 40/00B � Growth follows US, most applicants US firms� Few granted, 45% opposition rate
June 2009 GWU Conference - DC 11
Summary of findings – financial
Hall 2007 – payment systems pats� Held by equipment mfgrs, large fin firms, new entrants
� Slightly less than half in class 705
Hall et al. 2009 – European applications defined by union of � EPO equiv of USPTO pats in fin class/subclass (Lerner)
� EPO pats in IPC/ECLA fin-related classes
� EPO pats in tech classes where “pure play” fin firms patent
� Also required words transaction, financial, credit, payment, money, debit card, portfolio, or wallet in title or abstract
� 3298 patents with priority year 1978-2005
� 1% control sample of all EPO applications (18,523 patents)
June 2009 GWU Conference - DC 12
Figure 2: EP and US financial methods patenting
0
200
400
600
800
1000
1200
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005Priority Year
Num
ber
of pate
nts
US financialpatents(granted)
EP financialpatents(granted)
EP financialpatents (apps)
Fall after 2000 due to truncation
June 2009 GWU Conference - DC 13
0%
10%
20%
30%
40%
50%
60%
before 1990 1990-1994 1995-99 2000-2005 Total
Priority year
Regional distribution of EPO financial patent applications
US EU Japan Rest of the world
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
before 1990 1990-1994 1995-99 after 2000 Total
Priority year
Regional distribution of USPTO financial patent applications
US EU Japan Rest of the world
85% owned by firms
EPO fin pats owners less heavily concentrated in the US than USPTO owners
But more than other EPO patents (not shown)
June 2009 GWU Conference - DC 14
Hall Thoma Torrisi 2009Top 6 Sectors with financial patents
0%
5%
10%
15%
20%
25%
30%
Office, accounting &
computing
machinery
Computer services
& related activities
Finance & insurance Post &
telecommunications
Other business
services
Radio, television &
communication
equip.
Sha
re o
f fina
ncia
l pa
ten
ts
All regions US EU27
June 2009 GWU Conference - DC 15
Hall Thoma Torrisi 2009ResultHypothesis
yes, but claims not significant
more controversial fin pats more likely to be opposed (more claims, XY cites)
4b
yesmore valuable fin pats more likely to be opposed (more frwd cites, larger family)
4a
yesgrant is less likely if fewer forward cites, more claims, more XY-type backward cites
3
9% vs 6.5%prob a fin pat is opposed is higher2
34% vs 64%fin pats have lower grant probability1b
1.2 years longerfin pats have longer decision lags1a
June 2009 GWU Conference - DC 16
Compare to US Class 705 pats
Using 2008 primary reclassification, patents granted 1976-2006
Other includes job scheduling, price determination, copy protection, postal metering, data record management, etc
5,129Other
7,343All
1,439Payment system
1,421Financial
Patents granted
Class 705
June 2009 GWU Conference - DC 17
Class 705 patents issued through the end of 2006
by application year
0
200
400
600
800
1000
1200
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
All Class 705 Financial or payment system
1998
Class 705 patents issued through the end of 2006
by grant year
0
200
400
600
800
1000
1200
1400
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
All Class 705 Financial and payment system
1998
Growth in apps jumps with Alappat and only slightly after State Street
Grants increase before and after State Street, but fall in the early 2000s and then jump up again
June 2009 GWU Conference - DC 18
Approximate grant lag distribution
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 1 2 3 4 5 6 7 8 9 10
Number of years
All patents Business method patents Financial and payment system patents
Bus meth pats take 1.4 years longer to be granted; 1.7 years if financial or payment system patents, as in earlier work.
June 2009 GWU Conference - DC 19
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Not assigned US corporations Foreign corporations Other
US Patent assignees
All patents Class 705 Financial & payment system
Many more unassigned, many fewer owned by foreign corporations; but more highly concentrated ownership
Top 100 firms: 24% all pats; 34% bm pats; 30% fp pats
June 2009 GWU Conference - DC 20
Summary
Business method patents difficult to define using US class; financial patents easierIn both US and Europe:� Rapid growth in applications after 1995� More valuable than other patents – more opposition and litigation
� Take 1+ years longer to grant� Reference more non-patent prior art� Effects on innovative activity unclear� Small entities are the majority of the plaintiffs in litigation
June 2009 GWU Conference - DC 21
Data issues
Given the extreme heterogeneity of patenting behavior and value, one can always find a case study in the patent area to support any particular position
Therefore, evaluating the importance of many of these problems depends on looking at the data more broadly
But much relevant data is either difficult to come by, or very selective due to differences in firm reporting practices
June 2009 GWU Conference - DC 22
Data issues
Two types of data especially desirable:
� Better and more consistent litigation data -financial settlements in patent suits.
� Firms that rely on the court system and public services to settle disputes should be obligated to report the details of any settlement reached.
� Would this cause settlements to happen before a suit is filed?
� Financial data for licensing – essential if we are going to understand the markets for technology
� require reporting of patent licenses in some standardized way.
June 2009 GWU Conference - DC 23
Data and value
Determining valuation a severe problem, given the paucity of public markets for patents� Ocean Tomo, Yet2.com promising
� In principle, data on litigation settlements and licensing transactions would help establish value benchmarks and improve the operation of the market
� mergers, alliances reported, why not licensing?