Patent trolls, alternatively known as non-practising entities (NPEs) or patent monetizers, have been dominating discussion relating to patent reform for quite some time. For example, the White House, the FTC, Congress, individual U.S. states and the U.S. Patent and Trademark Office have each conducted their own investigations and proposed guidelines and legislation aimed at curbing the threats posed by patent monetizers to businesses and consumers.
All this attention is not without good reason. Over the last 12 years, median damage awards in litigation for NPEs in the U.S. have significantly outpaced those of practicing entities. A 2013 study conducted by PWC shows the continuation of a trend that started in 2001: a wide premium (almost double in the last 12 years) in the damages awarded to NPEs compared to those awarded to practicing entities. Studies have also shown that litigation in the patent space is increasingly a result of companies that do not develop, manufacture or sell their own products. Indeed, the proportion of patent litigation by entities that do not make products has increased from roughly 25% in 2007 to almost 60% in 2012, meaning more than half of patent litigation in the U.S. is initiated by entities whose sole business model is the assertion of patents. While there is debate regarding the actual damage caused by such activity to businesses and consumers, there is nonetheless a general consensus that such activity should be minimized, and in some cases, stopped. While the numbers in Canada are not quite as dramatic, there are signs that monetizers have begun to increase their activity here.
Conventional thinking typically confines the activities of patent monetizers to the high-tech space. Indeed, the highest profile cases generally relate to software, business methods, smartphones and computers (see, for example, our previous coverage of the Rockstar Consortium's recently filed infringement action against Samsung, Google, HTC, ZTE, ASUSTeK, Huawei, LG, and ZTE, the line of cases involving Soverain Software LLC and Newegg, as well as RIM's battle with NTP, Inc.).
Until recently, the pharmaceutical and biotech space, an area wherein patent infringement actions are already common, has been perceived as being isolated from the problems posed by NPEs. Biotechnology and pharmaceutical research involves a greater investment of time, money and expertise, resulting in fewer patents for monetizers to purchase and assert, fewer targets, and a longer lead time for problems to emerge. Biotech and pharmaceutical products tend to have fewer components, and patents in the field tend to be less broad than the software and business method patents that proliferate in the technology industry. All of this is said to disincentivize, or make outright impossible, the entry of monetizers into the space. Or so the thinking goes.
This perception may prove to be unfounded if a recent study conducted by Robin Feldman and Nicholson Price II is to be believed. The study, titled Patent Trolling: Why Bio and Pharmaceuticals are at Risk, investigates whether NPEs are primed to enter the biotech and pharma space, concluding that the space is ripe for the picking.
Feldman and Price point out that in contrast to high-tech patents, it is extremely expensive and time consuming to invent around a patent in the biotech and pharmaceutical space. 'Invent around' speaks to the ability of an inventor to change a product or production method to avoid infringing a patented technology. Since the cost to invent around is so high, biotech and pharma companies will be incentivized to settle any patent suit brought by a monetizer in order to avoid an injunction or heavy damages award and then having to invent around the asserted patent. This is particularly true when the biotech or pharma company has a drug product at stake with anywhere from $700 million to $1.3 billion in R&D and clinical testing costs behind it. With such a high degree of potential leverage, NPEs will increasingly look to pharma and biotech companies as a means of revenue, particularly as the 'low hanging fruit' of the high-tech space is consumed.
With incentives to enter the biotech and pharmaceutical space being so significant, patent monetizers may also begin looking for targets, but not before obtaining a portfolio of patents to enforce. Conventional wisdom suggests that finding such patents in the biotech and pharmaceutical space is difficult, if not impossible, but Feldman and Price demonstrate the weaknesses of such an argument.
Patent brokers are increasingly being contacted by pharmaceutical companies who are looking for monetizers that might be interested in buying their non-core patents. Such non-core patents may be used to sue competitors of the original owner of the patents, with portions of any settlement or license potentially being paid back to the original owner through the monetizer. In this way, the benefit to the original patent owner is two-fold: increase the costs for competitors, and turn existing assets into profit generators.
However, pharmaceutical and biotech companies are not the only significant holders of patents in this space. Universities are holders of enormous amounts of intellectual property (IP) in the biotech and pharma fields and, according to Feldman and Price, are a treasure trove of ammunition for NPEs. In examining the biopharmaceutical patent holdings of 5 major U.S. universities — the University of California, the University of Texas, the Massachusetts Institute of Technology, the California Institute of Technology, and the University of South Florida — the authors identified dozens of patents that could be deployed against biopharmas based on patterns that monetizers have used against other industries. These included patents on active ingredients of drugs, methods of treatment, screening methods to identify new drugs, manufacturing methods, dosage forms and ancillary technologies.
Much of universities' IP sits unused and unlicensed. In fact, it is said that only 5% of the vast patent holdings of U.S. universities are subject to licensing. The lack of commercialization often occurs when researchers and labs struggle to find post-research, pre-venture capital funding for innovations that are no longer considered research projects, but are not sufficiently prototyped to attract private investment. This phenomenon is commonly referred to as the commercialization "valley of death".
The notion that much of the investment into IP by U.S. universities has underperformed is mirrored in Canadian universities. A 2010 Statistics Canada report found that the total IP income (primarily from licencing) at reporting Canadian universities was $53.2 million, while the administrative costs associated with this IP investment was pegged at $51.1 million. Accordingly, the total surplus for all Canadian universities was $2.1 million, and the average income per university derived from the IP was only $425,000.
The lack of significant revenue generated by investment into IP occurs in a climate of reduced funding by provincial and federal governments here in Canada. Canadian universities have increasingly come under funding pressures, particularly in terms of government-provided research grants (see here, here and here). While organizations such as the U.S. based University Technology Managers have indicated intentions to re-examine policies that recommended against transferring rights to non-practicing entities, it would not be surprising if Canadian universities followed suit. One must therefore ask how long will it be before Canadian universities look to their vast, underperforming life sciences patent portfolios as a means of generating much-needed revenue through transfer or licensing to NPEs, particularly as monetizers are increasingly drawn towards the biotech and pharmaceutical space as a new source of revenue.
The convergence of the high-tech space with the life sciences space may also serve to raise awareness of the biotech and pharmaceutical space in the minds of patent monetizers. The emergence of complex medical devices, algorithms for the determination of health risks, bioinformatics, and the convergence of drugs, devices and diagnostics, increasingly draws together technologies from the high-tech and the life sciences spaces.
With all of this in mind, will we see an influx of NPEs in the biotech and pharma spaces? As Feldman and Price indicate, "[i]t is not inevitable that monetizers will descend on the bio and pharmaceutical industries, but in our opinion it is a serious threat." However, beyond simply the likeliness of these events, we should also ask how the entry of monetizers into this space will affect healthcare generally.
While patent suits in the technology space have resulted in injunctions in the U.S. against the smartphones that consumers crave, what is the acceptability of a U.S. injunction against a drug or treatment method necessary for the well-being and health of individuals in need, particularly when the entity asserting its patents offers no alternative treatment? For jurisdictions like Canada, where patent monetizer litigation and related-injunctions are rare, will the increased litigation in the U.S. serve to increase the aggregate costs of getting a drug to market, and therefore the potential costs of treatment? These are questions that should be seriously canvassed by businesses operating in this space, as well as legislators hoping to inhibit or stop such activity.
There are steps that businesses can take to reduce the likeliness that such events could unfold. As always, the development and maintenance of an IP portfolio focused on a business's current products and future roadmap will act as a disincentive to NPEs, and will give that business confidence to operate in its respective market. Additionally, businesses may want to consider evaluating the patent holdings of universities to augment their own IP portfolios, thereby shielding potential vulnerabilities while also keeping those same patents out of the hands of NPEs.
Norton Rose Fulbright Canada LLP
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