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Is China Really Stealing US IP Or Are Recent Changes To US Patent Law Giving It Away?

Currently, both of the major political parties in the United States agree that China is stealing the intellectual property (IP) of the US. The term “stealing” implies that IP is legally protected. Patented inventions are major component of IP. As a result, US patent law should provide a major portion of the protections for IP in the US.

Since the enactment of the America Invents Act (AIA) in 2012 and the Supreme Court decisions in Mayo Collaborative Services v. Prometheus Laboratories, Inc. in 2012 and Alice Corporation Pty. Ltd. v. CLS Bank International, et al.in 2014, US patent law has changed significantly. Some say that US patent law has been improved to weed out “bad” patents, employed by nonpracticing entities or “trolls,” that previously adversely affected commerce.

Others say that US patent law overall has been weakened to the point where entire technical fields are no longer eligible for patent protection. Indeed, Judge Moore of the Federal Circuit recently described in Athena Diagnostics, Inc. v. Mayo Collaborative Services, LLC that the Federal Circuit has “turned Mayo into a per se role that diagnostic kits and techniques are ineligible” for patent protection.

Whatever position one takes on the results of the AIA, Mayo, and Alice, there can be no dispute that more patent applications and issued patents are being invalidated than at any other time in US patent law history. IPWatchdog reports, for example, that compared "with the five years prior to Alice, there has been a 1056% increase in the number of decisions finding ineligible claims and a 914% increase in the number of invalidated patents."

Does this mean that patented inventions are losing legal protection in the US? One way to answer this question is to estimate the value of patents before and after these changes to US patent law. In general, it is quite difficult to assess the value of each patent that is issued. This is one reason why patents are listed as intangible assets on the balance sheets of most companies. Also, many transactions involving patents take place under confidential settlement agreements, making their valuation difficult to determine.

What is known, however, is that a patent is the right to exclude others. In order to exclude others, the patent owner must enforce their rights through litigation. As a result, one way to value patents is to look at how successful patent owners have been in enforcing their rights in litigation before and after the changes to US patent law.

In a 2018 petition for cert before the US Supreme Court in Advanced Audio Devices, LLC V. HTC Corporation, for example, the Petitioner reviewed 3,969 validity decisions made by district courts before the AIA. The Petitioner then compared this data to 2,213 validity decisions made by the PTAB of the USPTO under the AIA.

The Petitioner found that before the AIA district courts invalidated claims in 24.3% of the validity decisions. They found that after the AIA the USPTO’s PTAB invalidated claims in 80.7% of the validity decisions.

Data like this cannot render an absolute per patent value. It can, however, provide an estimate on the change in value of the average patent due to the changes in US patent law.

The data provided by the Petitioner in Advanced Audio Devices, provides invalidation probabilities. Based on such probabilities, it is well-known that an expected value can be calculated. For example, a simple expected value of a patent being found valid, E(x), can be expressed as E(x) = P(valid)*(damages/settlement-cost) + P(invalid)*(-cost).

From Advanced Audio Devices, P(valid) and P(invalid) are known both before and after the AIA. To simplify the expected value calculations, it can be assumed that the damages/settlement value (D) and the cost value (C) of patents were constant before and after the AIA.

Using the invalidity percentages found in Advanced Audio Devices, before the AIA, the expected value of a patent based on validity outcome was E(x) = 0.757(D-C) + 0.243(-C). After the AIA, the expected value of a patent based on validity outcome was E(x) = 0.2(D-C) + 0.8(-C).

Now, not all patents have a high damages/settlement value, so it is instructive to calculate expected values for both low-value patents ($1 million) and high-value patents ($10 million), for example.

Assuming D is $1 million and C is $150,000, before the AIA E(x) = 0.757($800,000) + 0.243(-$150,000) = $605,600 - $36,450 = $569,150. After the AIA, E(x) = 0.2($800,000) + 0.8(-$150, 000) = $160,000 - $120,000 = $40,000. The decrease in value for a low-value patent is, therefore, $529,150/$569,150 = 93%. In other words, for small patent damages or settlement on the order of about $1 million, the decrease in patent value caused by the AIA is 93%.

Assuming D is $10 million and C is $150,000, before the AIA E(x) = 0.757($9,800,000) + 0.243(-$150,000) = $7,418,660 - $36,450 = $7,382,210. After the AIA, E(x) = 0.2($9,800,000) + 0.8(-$150,000) = $1,960,000 - $120,000 = $1,840,000. The decrease in value for a high-value patent is, therefore, $5,542,210/$7,382,210 = 75%. So, for high patent damages or settlement on the order of $10 million the decrease in patent value caused by the AIA is 75%. Note that these calculations are based solely on validity. Note also that infringement is an important aspect of assessing a patent’s value. However, the issues regarding infringement did not change under the AIA.

In summary, just by using a simple expected value calculation it can be seen that the changes to US patent law since 2012 have caused patents to lose 75-93% of their value, depending on the size of the expected damages or settlement. Since most patents cannot expect high damages or settlement, the loss in value for most patents is closer to 93% or more.

Based on this objective valuation, inventions protected by patents have clearly lost legal protection in the US. In fact, they have lost the majority of their legal protection. This, of course, places in doubt the assumption that a large portion of the IP in the US is being stolen. How can it be stolen if the laws to protect it have been weakened to this extent? Is China really stealing US IP or is the US giving it away?

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