Troll slayer: Can Mark Cuban cure the U.S. patent system?

This is a guest post by Efrat Kasznik

The inauguration of the “Mark Cuban Chair to Eliminate Stupid Patents” is a great opportunity to take another look at the U.S. patent system, and how it fares with startups and software companies.

As appears from an email to the press, laced with statements such as: “Dumbass patents are crunching small businesses”, Cuban’s incentive in endowing the Chair is triggered by the problem of troll litigation and its negative impact on startups.  Cuban takes aim at so-called “software” patents (business method patents on ideas captured in software products), which he characterizes as “stupid” patents that should have been completely abolished or at least have a shorter legal life.

While well intentioned, this new initiative misses the mark for two reasons.

First, the real problem is not with “patent IQ”, but rather with patent validity.  And second, patent quality is only one of several factors leading to the rise of troll litigation, a phenomenon that has already been recognized as having an impact on competition in a much-publicized conference held jointly by the FTC and the DOJ last December.

The US Patent and Trademark Office (USPTO) grants patent protection to “novel and nonobvious” inventions, based on prior art which existed at the filing of the patent application.  The complicated task of patent examination is further compounded by the backlog conditions at the USPTO.  The December 2012 USPTO Dashboard shows a backlog of over 600,000 patent applications, with over 500,000 new applications filed annually, and an average pendency time of 32 months.

The problem with patents that are issued under such circumstances is not whether they are inherently “dumb” or “smart”, but rather whether they should have been issued in the first place, a question that addresses the validity of the patent. Improving patent validity is preferable to eliminating entire categories of patents.

One common way to challenge the validity of a patent is by filing a patent reexamination with the USPTO.  Statistics on reexaminations filed since 1981 show that they are about equally distributed among the three main patent categories: chemical, mechanical and electrical (at 27 percent, 33 percent and 38 percent of all filings, respectively).

Overall, a staggering 92 percent of reexaminations have been successfully granted.  The recently enacted patent reform, known as the America Invents Act (AIA), further introduces a new post grant review process for filing validity challenges with the USPTO  nine months months following the issuance of new patents.

Litigation by non-practicing entities (NPEs), commonly referred to as “patent trolls”, is closely tied to the patent validity problem.  The phrase “troll” loosely defines a diverse group of entities whose business model revolves around monetizing patents through assertion — licensing or litigation.

A recent study by Boston University Law School estimates the direct costs of NPE patent assertion activity at $29 billion in 2011, up from $7 billion in 2005.  While troll litigation has long been recognized as a problem for large operating companies, Cuban is right in pointing to a new and surprising trend where troll litigation is now focused more on smaller companies.

According to recent statistics presents at the FTC/DOJ hearing in December, at least 55 percent of unique defendants in patent troll lawsuits make under $10 million per year.

That being said, Cuban’s narrow focus on eliminating the so-called “software patents” ignores the fact that troll litigation is by no means the outcome of bad patents alone.  It is propelled and enabled by an ecosystem creating “perfect storm” conditions for NPEs, namely: the availability of patents with broad claims that can be asserted against multiple defendants; plaintiff-friendly courts where large damages are awarded; and a very active patent market fueled by capital dedicated to buying and selling patents.

Curbing troll litigation will require a more holistic solution addressing the entire ecosystem, and is certainly on top of the agenda for the public and private sector.

Efrat Kasznik is president of Foresight Valuation Group. a Silicon-Valley based Intellectual Property (IP) consulting firm focused on assisting companies with valuing and managing their innovation.

She is a Lecturer at the Stanford Graduate School of Business, and is a frequent speaker and author on topics related to IP valuation and strategy.  Efrat has also been involved as a co-founder and adviser with several startups, in the fields of cleantech, media and telecommunications. You can find her on LinkedIn or Twitter.