Issue of continuations in patent reform proposal, H.R. 2795
Smith's draft bill [H.R. 2795] would make it more difficult to file "continuation" applications, which build on an initial application for the same invention. At the Senate hearing, Jon Dudas, director of the U.S. Patent and Trademark Office, advocated placing restrictions on these applications. He said that more than a third of the 355,000 applications filed with the PTO in 2004 were continuation applications, which he called a "form of rework."
To evaluate this, go back to the second Quillen and Webster paper, discussing the data of Allison and Lemley on 1000 granted patents:
"Using the Allison and Lemley data, we identified 297 patents (of the 1000) that had been granted on continuing applications (i.e., continuations, continuations-in-part, or divisionals) and determined that the USPTO had granted patents on 92 of their parent applications (31%). We also determined that 141 patents had been granted on continuation applications, and that patents had been granted on 19 of the 141 parent applications (13% of the 141, 6.4% of the 297)."
Only 141 patents of the 1000 were granted on continuation applications.
As I noted in Kent-J. Intell. Prop. in 2005:
One might also infer that there were 156 patents (297-141) which were divisionals and continuations-in-part. The probability of a parent patent on a continuation, 13% (=19/141), is significantly lower than a parent patent on a divisional/cip, 47% (=73/156).
It is likely that the text quoted by Sandburg of "more than a third" refers to continuing applications, not continuation applications.
Continuation applications are less than 1/2 of continuing applications, and are far less likely to result in granted patents than are divisionals. Further, divisional applications arise from restriction requirements imposed upon patent applicants by the PTO, and are thus "re-work" created by the PTO, not by patent applicants.
The actual number was supposed to be 26%, and, no, it was not just continuations. The 26% number (likely closer to 28% this year) is continuations, RCEs, and CPAs, but does NOT include divs and cips. Will try to have numbers for divs and cips later.
Of patent reform generally, see also Lawrence B. Ebert, "Patent Reform 2005: Sound and Fury Signifying What?", New Jersey Law Journal, July 18, 2005 (available LEXIS).
See also "Lord Save Us from Patent Reform," at
See also "Ex-Microsoft CTO claims patent 'problem' is myth," at
Nathan Myhrvold, now the chief executive of a start-up company that exists to create and license inventions, told a conference in Aspen on Aug. 23 that "before you get worked up about this gigantic problem, you ought to see what the facts are."
Patent litigation represents only 3 percent of federal lawsuits and there has been a steady decline in the number of lawsuits filed per patent, Myhrvold said. "Almost everything you have heard about patent litigation statistics is not true," he said. "Patents are the least litigious part of intellectual property law."
One of the comments to the Myhrvold post is the following:
I'm not sure that this proves anything, but at least it is a data point in an argument otherwise devoid of them:
In the late '70s Honeywell patented an autofucus [sic: autofocus] IC. The patent was so broad it covered essentially any IC that could do the trick. A few years later, Minolta produced the first commercially successful autofocus camera. Honeywell sued Minolta for infringing their patent. Minolta claimed they had developed their AF IC independently. 10 years later, Honeywell finally won all appeals. The total that Minolta had to pay Honeywell was nearly a billion dollars. Today Minolta is no more. There is no sign that Honeywell ever made the slightest move to manufacture either an AF IC or a camera. Tell me how that benefits me.
Anyone can spout ideas. Developing an idea into a product, and then producing and distributing that product, is where the real work is. The patent laws as they exist today provide cover for predators like Honeywell.
As a comment, the purpose of the patent system is TO PROMOTE DISCLOSURE of inventions that meet the statutory requirements. Inventions are more than ideas or concepts; they have to be described and enabled (and not anticipated or obvious). It's up to businessmen (not the government) to negotiate deals involving the rights conveyed by patents.
Separately, in all the discussion of patent reform, one does not see many in Congress talking about problems created by fee diversion. Simply put, if you want to fix problems at the PTO, don't take their money away with fee diversion.
Even the Australians get it:
I think most of us who have dealt with patents would agree with many who have already sounded off on the issue that first and foremost increased funding and more targeted and trained staff at the US Patent and Trademark Office would be a solid first step.
[from Blane Warrene at
**Separately, on oppositions [from San Diego Daily Transcript]
The Patent Reform Act of 2005, a sweeping set of proposed changes to U.S. patent law, aims to improve patent quality, reduce litigation costs and assimilate America with the rest of the world.
A provision that could accomplish all three is called post-grant opposition.
This provision has received a mostly favorable reception in the patent world, according to Dr. John Wetherell, a professor of patent law at the University of California, San Diego and a partner with Pillsbury Winthrop Shaw Pittman LLP. [QUERY: What about the statements of Hosteny, Quillen, and Ebert?]
"The idea is examiners are human," he said. "They make mistakes and there are variations from examiner to examiner. It would allow the elimination of weak patents that create a commercial barrier but, if they went to court, they wouldn't hold up."
San Diego's Don Martens, a founding member of IP firm Knobbe, Martens, Olson & Bear LLP, agrees.
"It will have the effect of providing a mechanism for the elimination of patents that clearly should not have been issued," he said, adding, "Re-examination is not nearly as effective for challenging the validity of a patent as post-grant opposition will be."
While post-grant opposition is less expensive and time-consuming than taking a case to court, Hangartner doesn't think the new provision will cause an explosion of challenges.
"The potential for abuse of this process is relatively low," he said.
Post-grant opposition, however, could serve to deter so-called "patent trolls," a term given to companies or individuals who acquire a portfolio of patents with the sole intent of using them for litigation.
With no intention of using their patents for a commercially viable product, these trolls instead look for people who are infringing on their patents and use the patent as leverage to win settlements.
"The patent is a blunt instrument ... a big old stick you can whack people with," Hangartner said. "With the cost of defending against it so high, it often makes no sense for the alleged infringer to fight.
"To the extent the Reform Act makes it less expensive to defend an infringement claim, it will work against patent trolls."
IP attorney James Cleary, a principal with San Diego's Fish & Richardson PC, said some companies have turned patent trolling into an art form, making a handsome profit.
Not all patent trolls are motivated by money, however.
Several small-time inventors can collect a series of patents for the purpose of creating a new product, and the proposed changes could hurt them as well.
It's created some strange bedfellows, with venture capitalist and small inventors aligning in support of strong patent protection.
"There's a group of small inventors who need access to the courts," Hangartner said. "They want to preserve the ability to sue for infringement and not be overwhelmed by a wealthy opponent."
The bill, which is constantly being tweaked by legislators as they prepare for a vote either late this year or in 2006, also contains a provision redefining prior art.
Prior art is technology that exists at the time of the invention. Currently, it must be either something in a patent, in a printed publication, in public use or on sale.
The new statute seeks to narrow the "public use or on sale" provision to require it be publicly known, meaning it's reasonably and effectively accessible through it's use, sale or disclosure by other means.
"Simply having something on sale or in public use ... it began to get vague, especially when you talk about software," Cleary said. "You want prior art to be something that the public has a reasonable way to access."
He said the bill might encourage the disclosure of technology, so it can be protected as prior art.
"It eliminates secret prior art," KMOB's Martens said. "Amazingly, in our present system there is prior art that the public really doesn't know about and has no way of knowing about."
Martens said it could prevent someone from expending lots of money on an invention only to have that invention ruled invalid because it infringes on prior art he or she didn't know about.
"The definition of prior art is critically important in almost all patent cases," Sheppard Mullin's Hangartner said.
Prior art could still be difficult to define in the software industry, Wetherell said, "because unlike biotech, there's not a lot of written prior art. People just (experiment) and come up with a new software program."
-->More on patent trolls-->
from IP Strategy:
The rising tide of patent litigation in the financial industry is not only a function of the new IP economy and the value and power of patents, but is also a function of what some target companies have referred to as patent trolls - companies or individuals whose primary business model is the licensing and litigation of patent assets, and who assert patents without regard to validity, solely for multimillion-dollar cost-of-litigation settlements.
As with all fundamental shifts in the economy, including the new IP economy, there are always problems lurking that need to be managed. Patent trolls are one such problem. The emergence of patent trolls in the financial industry is fostered by patents that issue with broad claims and by the willingness of companies to enter into cost-of-litigation settlements to avoid the risks of a jury trial even when the defence is strong. In some cases, the issued patents appear to cover business methods, products, or services already in widespread use in the financial industry. With the lack of an historical database of prior art publications, or access to product research and development activities in the industry to fully investigate the validity of such applications, the USPTO unknowingly allows such broad claims to issue.
A growing problem
The cost-of-litigation approach to resolving patent troll litigations in any industry, including the financial industry, has the benefit of avoiding the short-term risk but at the expense of a longer-term and much more costly problem: a feeding frenzy that results from becoming known as an easy target. Such cost-of-litigation settlements have created a win-win business model for a small army of contingency-fee law firms, individuals, and companies known as patent trolls: weak case, they make their legal fees back and possibly a small profit; strong case, the sky's the limit. This encourages more litigation, not less. Indeed, in the past decade the number of patent suits filed each year has increased from hundreds of suits filed each year to thousands today, with more than 3,000 patent suits filed in the past year, many in the Eastern District of Texas.
The driving force behind this surge in patent litigation is gold fever caused by early success stories (see the examples provided below), and the win-win business model created by a willingness to engage in cost-of-litigation settlements. The high cost of patent litigation has made cost-of-litigation settlements lucrative for patent trolls, even when odds of success are low. The average cost of patent litigation in the US through discovery and trial is in the range of $5 million, which makes settlement amounts below that number, in the hundreds of thousands or even million of dollars, attractive to many large companies facing a damages claim in the tens, or even hundreds, of millions of dollars.
The right response
The hard-line approach
While each case is different, experience has shown that, in most cases, the recommended approach is to be branded the difficult defendant, not an easy target. The fall-and-crawl approach advocated by some lawyers is not a solution; it is part of the problem because it brands a company an easy target. The best approach is to take a hard line against patent trolls when the defence is strong.
The situation is reminiscent of the days in the school yard when students were tormented by the class bully whose natural advantage was the fear his words instilled in the students' minds. The inaction on the part of the students created a win-win environment for the bully, making the problem worse, not better. It was a vicious cycle with no end in sight until one day some of the tormented students realized the short-term solution of laying low, hiding, and avoiding conflict made matters worse. Recognizing that appeasing the bully did not work, some of the students decided to take a stand and fight the bully, and when they won they realized that the bully was not as tough as they thought. The bullied students also realized that their own fears had paralyzed them from taking action. An amazing thing happened once the bully was confronted and beaten, the tormenting stopped. The problem was solved.
Success with the hard line approach rests on three principles. First, one must understand that patent trolls threaten industries and not just individual defendants and that lawyers with strong people skills are essential for convincing competitors to support a strong defence, including with access to prior art and other resources. In many instances, the prior art is in the hands of competitors who may not be named in the suit. Such competitors need to recognize that they are next on the hit list unless the defence succeeds.
Second, it is imperative that defence counsel seize control of the case at the outset, by investing up front in preparing the case to win. These trolling cases thrive in part because cost and other pressures leave counsel ill-prepared and unable to demonstrate they can take the case the distance to trial and win, which plays right into the hands of a patent troll. Preparing up front allows the lawyers to see the proverbial forest from the trees, and to take appropriate steps to resolve the matter as quickly as possible, including by summary judgment. Additionally, it ensures that the client is not left exposed by the actions of co-defendants should a trial become necessary. Indeed, it is a common strategy for plaintiff's counsel to remove the lead defendants with more favourable settlements just short of trial, allowing them to gouge the remaining defendants who are unprepared to try the case.
Third, and equally important, is the recognition that even with a more aggressive, take-control strategy, litigation costs can and should be managed through an emphasis on informal discovery, rather than the overbroad and less effective formal discovery, stone-walling, bulldog tactics, and repeated motion practice that is in widespread use.
Recent litigation examples
The following are representative examples of the kinds of major patent litigations hitting the financial industry.
Online broker dealers
In September 2003, a tiny Montana software company called Datamize sued the online broker dealer industry for alleged patent infringement in the Eastern District of Texas, located in Marshall, Texas, a small rural town near the Louisiana border. The defendants were Charles Schwab, CyberTrader, Terra Nova Trading, Fidelity, E*Trade, Scottrade, and Interactive Brokers. In the suit, Datamize alleged that internet and PC-based trading platforms used by the defendants infringed several Datamize patents that were alleged to cover the ability to customize and personalize the content and layout of a user interface screen. At the outset, Datamize demanded tens of millions of dollars from each of these companies.
Datamize sued the financial industry first - with other web-related companies in its sights for the next round or phase of litigation, including such companies as Yahoo!, eBay, Oracle, Peoplesoft, Gateway, Hewlett Packard, Citrix, and others - based on a perception that banks and other financial services institutions are willing targets for cost-of-litigation settlements - unhardened by a heavy docket of patent litigations, with deep pockets, and a high transaction volume with which to attach a royalty. Sophisticated plaintiffs take advantage of the fact that proving a patent invalid in court is a challenge for any defendant, especially an inexperienced defendant, for at least two fundamental reasons. First, invalidity defences are often focused on prior art products discontinued long ago, with records that were lost or destroyed in the ordinary course of the company's business, fading memories, and witnesses who no longer work for the company, and, in some cases, a company that no longer exists. Second, the defendant must prove the patent invalid by the heavy burden of clear and convincing evidence to a jury untrained in the law or technology, compounding the challenge. In contrast, a plaintiff patent owner need only prove infringement by a preponderance of the evidence - the scales need only tip ever so slightly in its favour.
Knowing how to build an invalidity case that can carry the day at trial is critical not only to success at trial, if necessary, but more importantly in convincing one's opponent and/or the court to dismiss the case without a trial, and without the multimillion-dollar cost-of-litigation settlements that serve as incentives to watchful patent trolls.
In the Datamize case, employing the hard-line approach, defence counsel located prior art trading platforms that were for sale and in public use before the February 1996 filing date of the Datamize patents. With the help of antique computer parts dealers who supplied the hardware necessary to resurrect and run the prior art software, and the good fortune of finding knowledgeable witnesses to prove the patents invalid, a clear and convincing case of invalidity was built. To remove all doubt, the case was presented to several mock jury panels from the Marshall, Texas area. Each panel agreed with defence counsel the patents were invalid - debunking the generally held perception that a patent cannot be invalidated before a Texas jury - and, not surprisingly, the case was dismissed following the filing of summary judgment motions.
The hard-line approach worked. There will be no next round or phase of litigation against other web-based companies.
The Datamize defendants benefited greatly from another recent Texas trial victory for Universal Instruments, a Dover company, that established loud and clear for Datamize that its patents could be invalidated by a Texas jury. In the Universal Instruments case, all 17 claims of the asserted software patent were found invalid in a three-week jury trial. In an earlier case against Motorola, involving the same plaintiffs and the same patent, Motorola chose to make the multimillion-dollar cost-of-litigation settlement - paving way for the next round of litigation against Universal Instruments. Universal Instruments, on the other hand, was tired of such settlement payments and frustrated by the encouragement it provided to others. They chose the hard-line approach and prevailed. Final judgment was recently entered officially ending the case. There will be no next round or phase of litigation against other companies in the electronics industry.
Another notable group of cases in the financial industry are the DataTreasury cases pending against banks and payment processors in the Eastern District of Texas, in Marshall, Texas.
DataTreasury is a small payment processor in Melville, New York, whose only business, other than one client, appears to be licensing and litigation of patent assets. DataTreasury has sued numerous banks and cheque processing companies, among them JP Morgan Chase, First Data Corporation, Ingenico, and Electronic Data Systems.
In the complaint, Datamize alleges that these companies have infringed two patents that it contends are directed to the capture, storage, and retrieval of cheque images. A new cheque processing law that took effect in October 2004 gives banks broader freedom to exchange digital images of cheques rather than the original paper cheques, and so more and more banks are beginning to implement image settlement systems. Press accounts indicate DataTreasury seeks a 50% royalty or 3.2 cents per electronic document imaging and storage. According to a recent press release by DataTreasury, Judge Folsom recently granted DataTreasury the full scope of patent protection it advocated at a Markman hearing held earlier in the year - a hearing during which each side was given an opportunity to argue what they believe is the proper scope to be afforded the patent claims. The DataTreasury cases continue.
Trading Technologies, a Chicago-based provider of trading software for the futures industry, has sued several futures traders in the Northern District of Illinois, including Refco and Man Financial, among others, and the four largest futures exchanges, including the Chicago Board of Trade, Chicago Mercantile Exchange, Eurex, and Euronet.
Trading Technologies has asserted infringement of two patents directed to its MD Trader system - an order entry screen that displays multiple prices so that users can view market depth in their trading decisions. In an open letter to the futures industry, Trading Technologies has demanded 2.5 cents per trade as a royalty fee from the big four futures exchanges or it threatens to litigate against anyone who infringes its patents, which it claims is half the futures industry, for which it will charge 10 cents per trade. The Trading Technologies cases also continue.
The gold fever
The following are examples of success stories that have created the gold fever that is driving the new IP economy, patent trolls, and the resulting increase in patent litigation.
In the 1990s, IBM implemented fundamental changes in its IP management and infrastructure that took it to the top of the patent charts for both number of US patents granted and royalties received, boosting licensing revenue from $30 million a year in the early 1990s to $1 billion a year by the year 2000, a 3,300% increase, with annual royalties now approaching $2 billion.
Dell Corporation is a classic example of aligning IP strategy with business strategy. Dell's formula for success is not selling computers with better technology than its competitors, but rather is attributable to the business methods and related software it uses to interact with its customers, including a build-to-order direct sales model, so-called have it your way computers, and top-notch 24-hour service and support. To maintain its high profit margins from competitive attack, Dell has patented, and continues to patent, every novel aspect of the way it does business, lest it become a free research and development laboratory for its competition.
Jerome Lemelson received more than $1.5 billion in royalties from a thousand companies for their use of bar code scanners and machine vision equipment in product inspection, product identification, and inventory management.
Ronald Katz Licensing
Katz claims that his patents cover a wide range of interactive technologies used in corporate call centers. He has earned more than $1 billion in total licensing fees, and expects that number to rise to $2 billion in the coming years.
Optical Recording Corporation
John Adamson founded Optical Recording Corporation (ORC), a small Canadian company, for the purpose of developing memory cards using optical storage technology from Battelle Laboratories. With the Battelle technology, Adamson acquired patents that are fundamental to the way digital audio is recorded and played from a CD. More than 40 disc and player manufacturers were licensed by ORC worldwide, with royalties approaching $100 million, including a $30 million jury trial victory against Time Warner in Delaware federal court.
After losing money in recent years from its core business of providing digital image storage systems to film studios and digital broadcasters, a decision was made to improve the long ignored management of its IP. A review of the company's existing patents uncovered a patent that some might call a Rembrandt in the attic. Ampex contends that this patent covers the way digital images are displayed in digital cameras, camcorders, and camera phones. In 2004, Ampex launched a licensing programme targeted at the who's who of consumer electronics giants. So far, Asian companies have cut licensing deals worth $77 million, more than Ampex's 2003 revenue from product sales. In 2004, revenues from licensing helped Apex turn a profit of $47.1 million on revenues of $101.5 million. In the past year, its stock price has responded by jumping from $1 to $40.
Five years ago, video networking company Vtel, now known as Forgent Networks, was on the wrong end of a shrinking market for videoconferencing equipment when a decision was made to focus on IP management. After reviewing its patent portfolio, the company uncovered several purported Rembrandts in the attic. One of the patents is alleged to cover the JPEG compression standard for the capture, storage, and exchange of digital pictures. This standard is widely used in consumer electronics and in the exchange of digital images over the internet. Forgent claims that its technology is used in digital cameras and other devices to compress, store, manipulate, print and transmit digital images. To date, the Forgent patent licensing programme has generated more than $100 million from dozens of companies. It now claims to have a patent that it says underlies the digital-recorder technology behind TiVo.
To thrive in the new IP economy it is essential that institutions in the financial industry put in place a culture of innovation and build proper IP infrastructure employing best practices in IP management. It also is essential such companies plan for patent litigation and act proactively to minimize the occurrence and risk of such litigation. To discourage further patent troll growth within the financial industry, a hard line is the right approach.