New patent review process has saved billions—so why is it under attack?

Five years ago this month, the first "inter partes review" began, a process laid out in the America Invents Act, which was passed in 2011. In a piece of legislation that was timid in its scope, the IPR process gave some hope to those in the tech sector who hoped to reduce the scourge of so-called "patent trolls."

Now that IPRs are seeing their five-year anniversary, it's a good time to take stock of the process. That's especially true since the Supreme Court will take a close look at IPRs when it hears Oil States Energy Services v. Greene's Energy Group, a case that challenges the constitutional basis of IPRs.

During the five years of its existence, the IPR process has become basically a cheaper, faster way of resolving patent disputes. It's similar to court, in that a typical case involves an accused infringer trying to prove that one or more patents being used against it are invalid, while the patent owner tries to make the case that her patents are worthy. A fully drawn-out IPR process culminates in a kind of trial, in which witnesses are questioned before the panel of judges.

There are key differences, though. The process is still guided by patent lawyers on both sides, but it's shorter than drawn-out patent litigation, with IPRs usually not lasting more than a year and a half. IPRs only consider the validity of the patents at issue, while a court proceeding will also consider whether a defendant has infringed or not.

It's also far cheaper than patent litigation in federal court, which can cost millions in a case that goes to trial. By contrast, an IPR proceeding that goes to a final decision costs $250,000, on average. By dramatically lowering the cost of a patent challenge, IPRs changed the economics of patent licensing and litigation. In particular, they've been a potent tool against patent-holders, often maligned as "patent trolls," who use wide-ranging campaigns of lawsuits to extract licensing fees that are less than the cost of litigation.

What has been saved

Josh Landau, a lawyer and pro-reform patent lobbyist at the Communications and Computer Industry Association, has written a blog post about the IPR anniversary with some back-of-napkin math estimating how much money IPRs have saved the US economy.

His conclusion: IPRs have prevented $2.31 billion of "deadweight losses" to the economy, mainly in the form of legal fees. How did he get there? Landau used data from defensive patent aggregator RPX that puts the average amount spent by a defendant facing a "non-practicing entity" (the polite term for patent troll) at $950,000. He then limited the universe he was looking at to only IPRs that were on patents that had associated litigations and in which the related litigation was stayed. In other words, he focused only on the subset of IPRs that objectively ended some type of litigation costs.

Using the average costs, Landau added up the cost of the litigation that would have gone on but for IPRs. The total was $3.95 billion. That money was saved by spending $1.637 billion on the IPR process, leading to a net savings of $2.31 billion.

"That's approximately $460 million a year that companies can spend on creating new jobs and researching new technologies, instead of paying lawyers to write motions and argue in court," Landau writes. "To me, those numbers say IPR has been a tremendous success."

To be fair, there are some costs not accounted for in Landau's rough estimate. For instance, he assumes that IPRs always end lawsuits. But in at least some cases, where the patent survives, the IPR process doesn't lead to a quick settlement, meaning court litigation will continue.

Yet if anything, that's probably a conservative estimate. The back-of-napkin math doesn't include unknown savings from wiping out threatening patents with IPRs before they can be asserted (or asserted again) in court. An entire company, Unified Patents, has been created around the model of using IPRs to knock out questionable patents, establishing "protected zones" in which its nearly 200 members can do business freely.

What’s at risk

IPR has faced opposition since its creation. Pharma and biotech companies, fearful that their prized patents would be busted, raised the specter that short-sellers would continuously attack their most valuable patents, threatening innovation for their own profit. There were two big problems with that argument: first of all, it ignores the fact that if the most well-defended patents in the world can't stand up to an IPR challenge, then perhaps the drug company holding those patents shouldn't be reaping monopoly profits. Second, the short-selling strategy didn't even work. Hedge fund owner Kyle Bass, the fiercest and most well-funded proponent of using IPRs against drug companies, has more or less given up.

Another source of opposition has been from certain quarters of the "IP community." Former Chief Judge Randall Rader famously called the Patent Trial and Appeal Board, which oversees IPRs, a "death squad" for patents. It's true that, when subject to an IPR challenge, patent owners have lost more often than they've won. Statistics collected by Unified Patents show that in about 73 percent of cases where the PTAB institutes a review, it results in a cancellation of all claims. About 13 percent of cases end with some claims being canceled, and just 14 percent result in all claims being upheld.

IPRs still have plenty of support, though, including from some surprising quarters. Plenty of patent attorneys are pro-IPR, despite the fact that the process probably costs law firms a lot of money. The Patent Office itself supports IPRs, even though the whole proceeding is a kind of "do-over" questioning USPTO's first crack at patent quality.

In 2017, IPRs have come under attack. Sen. Chris Coons (D-Del.), a longtime opponent of patent reform, introduced the STRONGER Patents Act, a bill basically intended to gut the inter partes review process and roll back Supreme Court decisions that favor defendants. So far, STRONGER has gone precisely nowhere, but the fact that it's being vocally supported is a disturbing sign that some pro-patent lobbyists think they can make major headway this year.

IPRs haven't wiped out patent trolls. But combined with the Supreme Court's Alice decision, which banned many types of "do it on a computer" patents, it has made the business much less profitable. In recent weeks, the opponents of IPRs have laid their best arguments on the table, filing briefs in the upcoming Oil States case urging the high court to wipe out the process altogether. The anti-IPR forces that have lined up include IP law groups, pharmaceutical companies, patent licensing firms, and a few conservative political groups that endorse a simplistic equivalence between patents and real property.

At the moment, the conventional wisdom is that IPR will survive its encounter with the high court. But it's far from guaranteed that this still-developing review process, providing a critical second look at the patent rights generated in Alexandria, will see its 10th birthday.