“Lemley and Zyontz noted that it was a ‘striking finding’ that entity status makes a big difference in patent subject matter outcomes. The story gets even worse for individual inventors.”

Earlier this week, Stanford Law School published a working paper co-authored by Professor Mark Lemley and fellow Samantha Zyontz, Ph.D. The paper tilted Does Alice Target Patent Trolls? addresses various factors influencing how the courts have used Alice, such factors including industry, nature of the patent owner, and the judicial venue. One of the most statistically significant factors the authors found was entity status.

To the surprise of Lemley and Zyontz, their study uncovered a striking disparate treatment in the way federal courts handle patent eligibility matters based on entity size, with startup companies doing poorly when it comes to Alice-related patent eligibility matters, and individual inventors doing even worse. Their abstract summarizes their findings thusly: “Most surprisingly we find that the entities most likely to lose their patents at this stage are not patent trolls but individual inventors and inventor-started companies,” Lemley and Zyontz write. “As biotech worries about deterrence of new innovation and software worries about patent trolls dominate the debates, we may be ignoring some of the most important effects of Alice.”

Alice Revisited

It’s been nearly six years since the Supreme Court addressed the patent eligibility of computer-implemented subject matter in Alice Corp Pty Ltd v. CLS Bank Int’l. The Court set forth a two-step test, which was derived largely from the “framework” of Mayo Collaborative Services v. Prometheus Laboratories, Inc., included determining (1) whether a claim was directed to a law of nature, an abstract idea or a natural phenomenon, i.e. a judicial exception, and (2) “whether the claim’s elements, considered both individually and ‘as an ordered combination,’ ‘transform the nature of the claim’ into a patent-eligible application.” In addressing the first step, the Supreme Court held that the claims at issue were directed to a patent-ineligible concept: the abstract idea of intermediated settlement such as hedging. With respect to step two, the Court reasoned that an instruction to apply the abstract idea of intermediated settlement, including creating and maintaining shadow accounts, obtaining data, adjusting account balances, and issuing automated instructions, using an “unspecified, generic computer was not enough to transform the abstract idea into a patent-eligible invention.”

For software related innovations, as presented in Alice, the first critical question is always whether the claimed invention is an abstract idea. The Supreme Court did not define the term abstract idea in Alice and has steadfastly refused to define what constitutes an abstract idea even though it is absolutely essential to their self-acknowledged extra-judicial test for patent eligibility. The Federal Circuit has similarly refused to define the term abstract idea, at one point explicitly saying that if the Supreme Court found it unnecessary to define the term then it was unnecessary for the Federal Circuit to define the term. See Enfish v. Microsoft.

Entity Status is a Statistically Significant Factor

Lemley and Zyontz noted that Alice has been the center of a “firestorm of controversy” in the years since it was decided and has been the basis of nearly 1,000 court cases. The paper examined several factors influencing how the courts have used Alice, such factors including industry, nature of the patent owner, and the judicial venue. Lemley and Zyontz collected U.S. District Court and Federal Circuit decisions from July 2014-June 2019 that involved subject matter eligibility challenges or dispositions in order to determine how Alice affected such decisions. The analysis was based on 808 unique case decisions, 42.3% of which found a patent not invalid and 63.1% of which found a patent invalid and for being directed to patent ineligible subject matter. Further, an overwhelming majority of post-Alice decisions have been in the Software/IT industry, with only 9% in Biotech/Life Science.

The Lemley-Zyontz paper found that “the nature of the patent plaintiff bears significantly on how its patents fare under Alice.” It reviewed the differences in outcomes when there was at least one practicing entity (“Product Company” or “IP Subsidiary”), a non-practicing entity (NPEs) or an individual inventor. The most common NPE patent owners in patent eligibility decisions were companies in the business of buying and asserting patents, i.e. Patent Trolls. Individual inventors included individuals and the companies they started.

Lemley and Zyontz noted that it was a “striking finding” that entity status makes a big difference in patent subject matter outcomes. The paper stated that “the story gets even worse for individual inventors” with only “13.8% of individual inventor decisions found the patents eligible outright, less than half the rate for both other NPEs and practicing entities.” The paper also found that individual inventor status was a strong, statistically significant factor associated with invalidity despite adjustments to account for factors such as a drop in the post-Alice invalidity rate over time and previous litigation behavior. The paper also explained that cases involving Software/IT patents and those appearing before the Federal Circuit had significantly increased probability of an invalid outcome. In particular, the “marginal effect suggests that being an individual asserter increases the probability of an invalid outcome by almost 14 percentage points all else equal.” Further, being in the Software/IT industry increases the probability of an invalid outcome by almost 10 percentage points and being at the Federal Circuit increases the probability of an invalid outcome by 31 percentage points.

“The high 101 ‘kill rate’ on appeal to the Federal Circuit (relative to outcomes in district court) needs to be better understood,” said Melissa Brand, Associate Counsel and Director of Intellectual Property Policy at the Biotechnology Innovation Organization (BIO) when reached for comment by IPWatchdog. “With respect to biotech, the findings confirm what we already knew: that biotech is the second-most impacted technology. The authors note that there are a lot fewer 101 decisions in the life sciences compared to other areas, like software and e-commerce. This makes sense, as in comparison there are also fewer patents, and less litigation in our space. But that of course doesn’t mean the issue is less important for us.”

Inconsistent with the Goals of a Patent System

The Lemley-Zyontz paper noted that individual inventors and individual started companies “fare quite poorly under Alice.” The paper further noted that additional research is warranted to determine “why individual inventors do so much worse than others in 101 court challenges and whether that reason is consistent with the goals of the patent system.” Lemley and Zyontz explained that some contributing factors may be the quality of the individual’s patents, the quality of the lawyers hired by individual inventors to enforce their patents, or “deliberately” drafting and enforcing patents that are more vulnerable to subject matter eligibility challenges. Emphasizing that they cannot definitively explain why individuals fare so poorly, Lemley and Zyontz concluded that “the evidence complicates the narrative around Alice patent reform, and may suggest that we need a more nuanced, industry-specific rule than some have advocated.”

Although throughout the Lemley-Zyontz paper there is a dangerous drift towards suggesting that patents are, or should be different depending upon who owns them, or specific suggestions for industry-specific rules, this work should nevertheless provide a wake-up call to those in Congress, and hopefully also federal judges. A unitary patent system works best because a patent system is intended to incentivize innovation, period. Innovation comes from all areas and often surprises. Although the COVID-19 pandemic is truly a worldwide tragedy, what we know from experience is that that creative people will create and at moments in time where there is an incentive to create great minds are inspired to create. The point of a patent system is to fuel the fire of that creative genius all the time, not just episodically, sporadically or accidentally. We also know that individuals and small entities and startups are the ones who take risks and innovation requires risk taking. So, if a rule is negatively impacting that constituency it is the wrong rule, period.

All too frequently judges, particularly Supreme Court Justices, have been preoccupied by the patent troll not involved in the case. Time and time again Supreme Court patent decisions mention patent trolls when there is no patent troll as a party. But the effects of the patent eligibility policy shift chosen by the Supreme Court is being felt not by patent trolls, or large entities, but instead by those who are the risk-takers and ones most likely to bring into being new innovations—paradigm shifting innovations.

Not realizing the implications of such drastic policy shifts is precisely why courts are not supposed to legislate from the bench and leave policy to Congress. With respect to patent policy, however, the bizarro world of follow the leader has seen the courts, not Congress, take the lead on policy. Such a usurpation of Constitutional power by the Supreme Court and acquiescence by Congress is both outlandish and ridiculous, particularly over the past two decades with Congress nearly always investigating the Executive for something. Has Congress become so politically blinded regardless of which party is in charge that the courts are left to grab power at will? In the patent space that is precisely what has happened.

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