The puzzle that is patent quality

By Bruce Berman, CEO, Brody Berman Associates, New York, United States

What is a good patent? Patent quality is much discussed and frequently complained about, but not easily defined.

The discussion is typically about validity, not the quality of an invention or its market value. When someone speaks of a “good” patent they could be referring to one or more characteristics: the patent’s likelihood of being upheld if enforced (litigated), the importance of the invention it excludes others from practicing; or its relative value (in terms of protecting profit margins or generating direct licensing revenue) to a particular holder at a given time.

There are, in fact, no “bad” patents: just valid and invalid ones – or those that have been issued but do not withstand scrutiny. Bad or unreliable patents get issued for a host of reasons including the lack of examination time and examiner experience; and irresponsible applicants who desire IP rights whether or not they meet the appropriate tests. Valid patents that do not read on an infringing product are another matter. They may be good, but are not very useful.

Grants are not a reliable measure of validity

A good patent can mean different things to different holders in different contexts.

The legal definition of patent quality – a valid invention right that permits the holder to sue in order to exclude an alleged infringer from practicing the invention – provides limited direction. The United States Patent and Trademark Office (USPTO) today provides an issued patent with an interim status, referred to as a presumption of validity. This is, in effect, a provisional “thumbs up”, based on a less than definitive examination. Patents that are disputed frequently require the courts to determine their validity. Today, what looks like an excellent patent upon issuance may be just the first step in an extended application process.

In practice, once a patent is disputed the presumption of validity to which it is entitled may not be easily sustained. That is when scrutiny is brought to bear on the fine points of specific claims and their construction, which patent examiners often do not have the time, experience or resources to address.

Establishing whether an issued patent is valid, or infringed, is an expensive and arduous process. Procedures such as the USPTO’s inter partes review and the European Patent Office’s opposition procedure are designed to make disproving a patent’s validity less costly, and less onerous. Neither has helped much to improve certainty.

Do unreliable patents open the door to abuse by patent trolls?

Non-Practicing Entities, (NPEs), are patent licensing businesses that do not practice patents. They do not typically develop or sell products; they only license them. They are interested in monetizing patents through licensing and litigation, and have a reputation for enforcing bad ones to collect the nuisance settlements. In many instances, however, NPEs have little to gain from unreliable patents.

“Trolls” do exist, and they rely on the high cost of defense to secure small, quick settlements. But many NPEs are interested in reliable patents with significant value that will stand up to litigation. Those seeking to win substantial damages awards requiring millions in legal fees typically prefer to start with well-vetted patents. For a patent to achieve success in their world it must do more than “read” on (where its claims match all elements of) an infringed product, it must be valid and remain so through a series of costly tribunals and legal appeals.

No shortage of bad behavior 

In contrast, many operating companies, including those with a stellar reputation for innovation, secure and maintain tens of thousands of patents that would be found invalid under scrutiny. Their strategy is one more of quantity than quality. They rarely, if ever, enforce their patents, so if they hold questionable ones, few will ever know. The value of many large patent portfolios lies not in the quality of particular rights or even the inventions they cover, but in their size, and the shadow they cast. These patents are typically used “defensively,” that is, for design freedom and not for out-licensing or direct revenue generation.

Truth be told, 90 percent or more of many significant high-tech portfolios are comprised of dubious patents which are used for leverage. In areas like software and business methods the number may be even higher. As most patent holders and IP professionals know, establishing validity is not a simple act of good faith. An issued patent that is enforced is just beginning a long journey.

Does validity equal value?

Patent validity is not the same thing as value. In theory, patents that are likely to be found invalid should have no value. But, often, they do. Litigation costs make invalidating and neutralizing even obviously bad patents onerous. As a result, even a hastily issued right can confer financial asset status on its owner because it still enables the right holder to prevent another business from practicing what appears to be a protected invention. The patent holder’s right to sue is ultimately part of the patent’s relevance and arguably its value.

On the other hand, a perfectly valid patent may be worthless. An excellent, well-prosecuted and objectively valid patent that reads on an invention associated with little or no revenue generation (product sales) may be a legally sound IP right, but is it a valuable one? One hundred percent of nothing is -- nothing.

After validity what a patent reads on and who requires it often will play a major role in determining its importance if not its quality. Who owns the patent; the scale of infringement damages; and how difficult it is to prove infringement are factors that are difficult to separate from quality, even if they can be distinguished from validity.

For a patent to be really valuable to a holder it must not only be government-issued but battle-tested, or must provide some defensive leverage, design freedom or financial value. In short, the stars and planets must align. The patent must be held valid; and it must read on a successful product or products sold by one or more financially solvent companies.

Patent holders who enforce their rights today need more than well-prosecuted and examined rights. They need an abundance of patience and capital, and must pray that they can establish a level of certainty. More often they settle disputes not because the patents are questionable, but because it costs too much to prove them valid and infringed, and going to trial is riskier than in the past. If one claim is upended, there goes the case.

Patent quality is critical

But the quality of all patents matters a great deal. It is central to the DNA of current and future innovation, and to the credibility of inventors and their inventions, patent systems and right holders around the world. It also matters to investors.

The quality of all patents is central to the DNA of current and future innovation.

Among other things, a lack of patent quality can impede businesses and require them to take expensive licenses or engage in costly lawsuits. Bad patents undermine the integrity of the patent system, and the institutions and professionals that sustain it.

There is a great deal of interest in improving the reliability of patents. The USPTO wants it, as do lawmakers and the courts. Investors and most holders also would not mind it. But what are we really talking about? Is patent quality simply a binary legal definition, where a patent either meets or fails the appropriate tests of patentability? Or does quality really require a more complex analysis, which must incorporate market elements, like risk and demand, and the business goals of a particular holder?

Patent holders must be careful not to confuse the legal and market criteria of patent quality, although it can be difficult to establish one without the other. Greater certainty about the meaning of patent quality would make it easier to determine patent validity and value. Continued uncertainty about the reliability and value of patents benefits some patent holders more than others, and potentially undermines innovation. For many, the best patent is one whose validity cannot be easily established or maintained, and that cannot be proven to read on their products.

More work is needed on the legal and market implications of patent quality, as is a better system for determining patent quality and value earlier and more efficiently for a broader range of technologies. The uncertainty associated with patents costs companies billions and dissuades innovation and investment.

More transparency about who actually owns a particular patent and how it is being used will help. So will recognition that many companies despite having amassed huge patent portfolios frequently do not have all of the IP rights that they need to sell some of their products. They must in-license, acquire or otherwise buy businesses to secure the rights they need. This should not be seen as a weakness. In fact, pro-active IP management is business strength, and arguably a best practice. Securing reliable patents, internally or through transactions serves to nurture an evolving IP eco-system and improve the certainty and value of patents, and the quality of inventions.