Wednesday, July 1, 2015

Fiona Scott Morton & Carl Shapiro on the Alignment of Patent Rewards and Contributions

Fiona Scott Morton (Yale School of Management) and Carl Shapiro (Berkeley School of Business) have posted Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?, which has a nice summary of some recent developments related to patent assertion entities (PAEs) and standard-essential patents (SEPs), even for readers who will disagree with their ultimate conclusions.

Scott Morton and Shapiro argue that there is often a "divergence between the reward that a patent holder can obtain by asserting its patent and the social contribution" of the patent. They do not attempt to measure the social value from patents; rather, their argument is based on economic theory. PAEs can impose high litigation costs with little downside risk, especially when they assert low-quality patents for their nuisance value. And royalty stacking and patent hold-up (backed up by the threat of an injunction) can increase the reward to patentees beyond the patent's value, especially for products that comply with standards for which there are many SEPs.

Monday, June 22, 2015

Supreme Court Affirms Brulotte, but Opens the Door to Creative Licensing

Just a short note that the court has affirmed Brulotte v. Thys in Kimble v. Marvel Entertainment. The question was a simple one: can a patent owner charge a royalty for sales after the patent expires? Brulotte said no. But the economic rationale for that has been whittled away, just as much has been in antitrust. But the court today Stare decisis governs, and the reasons for overturning are just not great enough.

An interesting aspect of this dispute is that many folks with whom I often disagree on patent policy were in favor of lifting the post-expiration ban, while I never thought it was that big a deal because you can always creatively license around it.

The good news is that the Court has affirmed my latter assumption. The most important quote in the whole case (at least on my very quick reading) may be (citations omitted):

And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights. Under Brulotte, royalties may run until the latest-running patent covered in the parties’ agreement expires. Too, post-expiration royalties are allowable so long as tied to a non-patent right—even when closely related to a patent. That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone). Finally and most broadly, Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention.
The trade secret example is especially important. As I note in my article Patent Challenges and Royalty Inflation, there is uncertainty about how much one must drop the license fee for trade secrets. For example, I cite one case where a fifty percent drop when the patent expires was still anticompetitive under Brulotte.

But not all patents come with trade secrets. The question is whether an optional know-how license will be sufficient. If I wanted to try for post-expiration royalties, I'd give it a shot but not count on it.

Tuesday, June 16, 2015

The Past and Future of Functional Claiming...

As Lisa predicted a couple weeks ago, the Federal Circuit issued a new en banc (11-1) opinion today in Williamson v. Citrix without argument or further briefing. Patently-O has full coverage, so I'll get right to the core issue: the Federal Circuit reversed its prior precedent on functional claiming, but not all the way.

By way of background, if you claim a "means plus function" element (e.g., means for adding two numbers) then you need to disclose the structure for your means in the specification, which includes both the hardware and the algorithm (a general purpose computer programmed to take two numbers as an input, add them together, and report the sum as an output). If you don't put that structure in the specification, your claim is invalid as indefinite. Seem absurd for easy or common functions? More on that later.

The question is what you do when the word means is replaced with something else, like "module" or "unit" or "logic." The presumption has long been that this would not be means plus function, and it would be treated like structure unless the opposing party could convince the court that it really was a means plus function in disguise.  Starting in about 2004, the Federal Circuit doubled down on this rule, making this a strong presumption against means plus function that was very difficult to overcome. As a result, the courts affirmed a bunch of patents that claimed functions but didn't actually teach how to do them. More on that later.

In this case, the court backtracked to pre-2004 rules. Rather than looking at the words, we look to see whether the limitation is really just claiming a means for doing a function, or whether the limitation has sufficient structure built right in. For example, you might have a limitation "adding module programmed to take two numbers as an input, add them together, and report the sum as an output." This is clearly functional, but the structure is right there in the limitation. Judge Reyna (along with some of my colleagues in the academy) would go further and argue that any functional claiming has to be in the specification, but I've never been convinced by that argument, in part because you can always put algorithms and structure right into claims. Judge Newman would have stuck with the formalistic requirement of requiring "means" to mean "means plus function," but it is clear that this view is currently disfavored.

My thoughts on what this all means after the jump.

Friday, June 5, 2015

Case watch: Is the Federal Circuit revising functional claiming rules in Williamson v. Citrix?

Last November, the Federal Circuit panel opinion in Williamson v. Citrix held that the district court erroneously construed the limitation "distributed learning control module" as a means-plus-function expression. The majority emphasized that failure to use the word "means" in a claim limitation creates a strong rebuttable presumption that it is not a means-plus-function limitation. In dissent, Judge Reyna argued that the limitation simply substituted the "nonce" word "module" for "means." On December 5 (exactly six months ago), Citrix et al. filed for rehearing en banc, supported by amicus briefs by the EFF and a group of IP professors (including me). The IP professor brief, written by Mark Lemley, argues that patentees have exploited the Federal Circuit's inconsistency in this area to engage in functional claiming without satisfying means-plus-function claim rules.

Based on the timelines in the Federal Circuit's internal operating procedures, it seems improbable that the court could still be deciding whether to act on the rehearing petition. So perhaps the court granted rehearing en banc without argument? Issuing an en banc decision can take a while—Akamai v. Limelight took over 9 months from argument to opinion—but that was unusual, so maybe we will hear something soon. (Here is the Williamson v. Citrix docket on Bloomberg Law, subscription required.)

Wednesday, June 3, 2015

Do Venture Capitalists Value Patents?

This is a simple, but important question. Do venture capitalists value patents? You would think the answer is an easy yes based on survey data, as well as my own findings from the Kauffman Firm Survey that firms with patents are about ten times as likely to have venture capital funding.

But I get pushback on this. See this TechDirt post, for example, called: No, You Don't Need Patents to Raise Money:
While some of them are filing for their own patents, a key point was that their investors definitely didn't require it or push them in that direction.
None said their investors had pushed them to file for patents.
When I speak with people who espouse this view, and tell them of my 10x finding, the response is almost always: "Well, that's just people getting patents after they have money, or IP firms telling them to do it."

So, here we have an apparent conflict between stated preferences and revealed preferences. On my to do list for two or three years now has been a study of all startups, with an examination of who got patents and when. But now I don't have to, because Celia Lerman (a Fulbright Scholar at Stanford, among other things) has done the study, called Patent Strategies of Technology Startups: An Empirical Study:
How does a patent strategy affect a tech startup company’s growth? This is a fundamental question for technology entrepreneurs, investors, lawyers and the innovation system as a whole. In this study, I shed light on this issue by conducting an empirical analysis of the patenting strategies of technology startups, examining the relationship between a company’s patent applications and different events over the company’s life: rounds of investment received, company acquisition and closure. I provide the first comprehensive cross-industry analysis of this question, by analyzing the patent portfolios of United States startups listed in CrunchBase, a crowd-sourced registry of tech companies used by the startup industry. By looking into these companies’ public patent applications from the United States Patent and Trademark Office (USPTO) database between 2008 and 2012, I examine the patenting patterns of startups as they progress through funding rounds.
Through a quantitative analysis, I find that companies based in California tend to patent more than in other states, and that companies that are venture-backed patent more than those who are not. I also unveil that most start-ups that patent file their first application before even receiving any reported funding. Moreover, I find that there is a significant positive relationship between patent protection, and receiving investment and being acquired. I further find that the number of patents (and not merely the fact that a company has patents or not) contributes to higher total funding. I finally observe that patenting early is also associated to higher funding, and that early may be more important for start-ups than what some views in venture capital may predict. I also conclude that while more patents are associated with higher funding, patents account for a relevant but small portion of a company’s success.
The study provides novel insights on startup patenting strategies. It lays empirical groundwork on key circumstances under which patents can contribute to a startup’s growth, to provide important guidance to the legal and entrepreneurial communities.
The study finds that startups patent before their first funding round, from a low of 50% in software, to 64% in IT/Hardware and 67% in medical. It also finds that firms with patents are funded more often and for more money. More discussion on this after the jump.

Tuesday, June 2, 2015

Why are many IP contracts contingent?

At the recent American Law and Economics Association (ALEA) meeting at Columbia, I provided some comments on Intellectual Property Contracts: Theory and Evidence from Screenplay Sales by Milton Harris, Abraham Ravid, Ronald Sverdlove, and Suman Basuroy. The paper works with a fascinating dataset: 1269 contracts for screenplay sales between 1997 and 2003, which are either for a fixed price (averaging $958,000) or contingent on production—but not success—of the script (with average initial payments of $458,000 and average total compensation of $914,000).

Why are many of these contracts contingent when the buyers are typically better at bearing risk? And why are contingent contracts more likely for less experienced sellers? One typical explanation is moral hazard, but apparently that is not an issue in screenplay sales: studios use other writers to edit scripts prior to production, so no further effort from the seller is required once the script is sold. Instead, this paper develops a model in which the seller's competence is not directly observable by either party, and the seller is more optimistic about her competence than the buyer. And as sellers become more experienced, more information is available, which narrows the difference of opinion between the buyer and seller.

I had two general sets of questions about the paper:

Monday, June 1, 2015

Jotwell Post: The PTO Is Not the Only Patent Agency

Jotwell—the Journal of Things We Like (Lots)—is a terrific way to keep up with interesting recent scholarship. When I created Written Description in 2011, I noted that Jotwell had only two patent-specific posts in the prior year, but the Jotwell IP section is now flourishing. The co-editors of the section, Chris Sprigman and Pam Samuelson, invited me to join as a contributor, so I'll be writing a review for them each year. For my first post, I wrote about two recent papers focusing on administrative agencies beyond the PTO: Patent Conflicts by Tejas Narechania and Administrating Patent Litigation by Jake Sherkow. You can read the full post here.

Thursday, May 28, 2015

Welcome to the Blogosphere: New Private Law

Harvard Law's John Goldberg and Henry Smith have started a new blog, New Private Law, which already has included a number of posts that might be of interest.
Welcome to the blogosphere, New Private Law!

Monday, May 11, 2015

Fee Shifting and Veil Piercing

One of the discussion points about the new PATENT Act reform proposal making the rounds is the "reach through" that pierces the corporate veil for those entities that must pay attorneys' fees. Like so many of these fee shifting proposals, I'm left scratching my head and wondering whether this is where we want to make our stand, heading down the slippery slope of corporate veil piercing. I can think of so many other worthy plaintiffs and defendants where I would rather pierce the veil, and yet we don't.

I don't want to minimize the concern. The protection offered limited liability companies is a real problem for those who want to collect against them. I've known this since I was shocked to read Walkovszky v. Carlton in corporations law. The defendant owned 20 taxicabs in 10 corporations, but the court allowed liability only against the one corporation that owned the cab that ran over the plaintiff. While it seems ridiculous to allow corporations to avoid liability this way, this is a deeply engrained rule of law in this country. In any event, I haven't seen any real data about how often fee awards go unpaid, so I don't know just how much of a problem this really is. I suppose it will become a more common problem if there is more fee shifting.

Make no mistake, though, the PATENT Act and all other veil-piercing fee proposals are not about under-capitalized shell companies - not at a deeper level. These proposals stand for the proposition that we hate patent enforcement by non-practicing entities so much that we're just going to throw out all the rules that apply to everyone else, no matter how bad an actor all those other people are. Only patent plaintiffs are so despicable that they are no longer entitled to corporate status.  And this is not just about patent acquisition companies - this covers inventor operated companies, research companies and think tanks, failed startups, and anyone else who doesn't make a product.

I should note here that I'm not wholly opposed to fee shifting. I think there can be some benefit to reciprocal fee shifting, and I also think that the "objectively unreasonable" standard is better than a presumption. I should also note that this is not a plaintiff only issue. Only a few short years ago, record companies sued a venture capital firm for investing in copyright defendant Napster, a company that had, at best, a crapshoot of winning its case. That investor suit was also unwarranted for the same reasons that this proposal is: targeted veil piercing to support substantive policy goals is not a great idea -- the bell tolls for thee.

After the jump is my nitty-gritty analysis of the fee-shifting and veil-piercing proposal, and discussion about why I think it's a problem.

Thursday, April 23, 2015

Desperately Seeking Stacking: Guest Post by Jorge Contreras

In this Guest Post, Jorge Contreras, Associate Professor of Law at the University of Utah College of Law, discusses the lack of reliable sources of data regarding the existence of patent royalty stacking, and makes a public plea for firms to disclose more of their patent royalty data in order to permit the academic community to assess it.

Saturday, April 18, 2015

Price and Rai on Biologic Secrecy

Nicholson Price and Arti Rai just posted Manufacturing Barriers to Biologics Competition and Innovation, which is forthcoming in the Iowa Law Review. Here is the abstract:
As finding breakthrough small-molecule drugs gets harder, drug companies are increasingly turning to “large molecule” biologics. Although biologics represent many of the most promising new therapies for previously intractable diseases, they are extremely expensive. Moreover, the pathway for generic-type competition set up by Congress in 2010 is unlikely to yield significant cost savings. 
In this Article, we provide a fresh diagnosis of, and prescription for, this major public policy problem. We argue that the key cause is pervasive trade secrecy in the complex area of biologics manufacturing. Under the current regime, this trade secrecy, combined with certain features of FDA regulation, not only creates high barriers to entry of indefinite duration but also undermines efforts to advance fundamental knowledge. 
In sharp contrast, offering incentives for information disclosure to originator manufacturers would leverage the existing interaction of trade secrecy and the regulatory state in a positive direction. Although trade secrecy, particularly in complex areas like biologics manufacturing, often involves tacit knowledge that is difficult to codify and thus transfer, in this case regulatory requirements that originator manufacturers submit manufacturing details have already codified the relevant tacit knowledge. Incentivizing disclosure of these regulatory submissions would not only spur competition but it would provide a rich source of information upon which additional research, including fundamental research into the science of manufacturing, could build. 
In addition to provide fresh diagnosis and prescription in the specific area of biologics, the Article contributes to more general scholarship on trade secrecy and tacit knowledge. Prior scholarship has neglected the extent to which regulation can turn tacit knowledge not only into codified knowledge but into precisely the type of codified knowledge that is most likely to be useful and accurate. The Article also draws a link to the literature on adaptive regulation, arguing that greater regulatory flexibility is necessary and that more fundamental knowledge should spur flexibility.
Small-molecule pharmaceutical drugs have long been the poster child for the patent system, but as Allison, Lemley & Schwartz have recently reminded us, pharma and biotech are not the same and may have very different patent ecosystems. For anyone interested in IP policy in the biologics space, this new piece by Price and Rai is highly recommended.

Monday, April 13, 2015

Do Biosimilar Manufacturers Have To Dance? A District Court Answers “No”

In 2010, Congress enacted the Biologics Price Competition and Innovation Act (BPCIA) as part of the Affordable Care Act. BPCIA is, in a broad sense, intended to be the analog of the Hatch-Waxman Act for biologic drugs. Hatch-Waxman provides a pathway for Food and Drug Administration (FDA) approval for small-molecule generic drugs. Vastly simplified, the Hatch-Waxman process comes down to this: if a follow-on (i.e., generic) manufacturer can make an identical copy of the branded drug molecule, it can obtain FDA approval to market the drug without the clinical trials that the drug’s originator had to go through to prove that the drug is safe and effective. This saves costs for the generic manufacturer and, once the generic goes on the market, lowers prices for consumers. Under Hatch-Waxman, a follow-on manufacturer’s act of filing a so-called Abbreviated New Drug Application is an act of patent infringement, and so the originator can try to keep generic drugs off the market using patent law. The Food, Drug, and Cosmetics Act also provides periods of market and data exclusivities even for originator drugs that are not covered by patents. But once those periods end and the generic manufacturer can prove chemical identity to the brand, the generic drug is good to go on the market as far as the FDA is concerned—and the only barrier left is the brand’s potential patent infringement claims.

Saturday, April 11, 2015

Ryan Holte on the Impact of eBay v. MercExchange

For anyone looking for recent evidence and analysis of courts' application of ebay v. MercExchange (2006) in the last few years, Ryan Holte has a new article in the Chapman Law Review, which he discussed yesterday at PatCon 2015. In the article Holte addresses eBay's impact on patent remedies on the ground and data on district courts' injunction grant rates. Much of this data is being collected by Chris Seaman, who also presented on post-eBay injunction rates at PatCon. Holte and Seaman are currently working on a joint empirical study regarding all Federal Circuit permanent injunction decisions post-eBay – this will certainly be worth a look.

Tuesday, April 7, 2015

Patent Examiners with Three Arms Tied Behind Their Backs

In Patent Asymmetries (forthcoming UC Davis L. Rev.), Sean Seymore (Vanderbilt) explores some of the hurdles patent examiners face when considering patent applications:

Everyone knows that it is far too easy to get a (bad) patent. Fingers often point to the U.S. Patent and Trademark Office (PTO), which is often criticized for making awful patenting decisions. Legal scholars have offered several reasons for the quality problem, including low substantive standards for patentability and problems with the PTO’s inner workings, decision-making, and policy choices.

This Article offers a very different explanation for the patent quality problem. Drawing attention to what happens inside the PTO is clearly the correct locus; however, any serious headway toward improving patent quality must focus more directly on patent examination. My basic claim is that low-quality patents issue primarily because of a confluence of three asymmetries — proof, information, and legal — that exist in the current patent examination paradigm. I explain how these asymmetries tip the scales of patentability so far in the applicant’s favor that anyone who seeks a patent on anything usually gets one. I propose a new patent examination regime which would eliminate the three asymmetries, derail frivolous filings, and make a patent grant far from guaranteed. Rebalancing the scales of patentability would improve patent quality and promote broader goals of patent policy.
The three asymmetries are not so clear from the abstract. In short: 1) the default is that applicants get the patent, and the examiner must prove otherwise, 2) applicants surely know more about their inventions and the state of the art than the examiners, and not all of this knowledge makes it into the specification, and 3) while examiners may be technically competent, they are often outmatched by legal experts.

Sunday, April 5, 2015

Lauren Henry: Privacy as "Quasi Property"

For those interested in the intersection of privacy, property theory, and intellectual property rights, Yale ISP Fellow Lauren Henry has a new article forthcoming in the Iowa Law Review in which she argues that privacy can and should be conceptualized as "quasi-property": a relational entitlement to exclude specific actors, a given type of behavior, and/or a given relationship between the actors. The quasi-property model is in contrast to the more complete exclusionary "rights against the world" afforded by, for instance, patents. Here is a quote from the abstract:
[Q]uasi-property provides the essential model for assessing the interest held by a privacy claimant against a defendant, and whether it has been infringed. The quasi-property model can account for the four privacy torts first advanced by William Prosser and adopted as law in the vast majority of states, and liberate them from the ossification that have stunted their development and ability to adapt to modern conditions. What’s more, the approach has implications for developing privacy rules for enforcement by other actors, such as administrative agencies, and even in conceptualizing other areas of privacy law outside of tort law, such as Fourth Amendment jurisprudence.
Henry's project is an explicit response to Pamela Samuelson's rejection of privacy as intellectual property. It reminds me of Mark Lemley's move in arguing that trade secrets should be treated as a form of intellectual property right rather than as subjects of contract and tort claims. But Henry's reliance on the quasi-property model, and her careful application of Shyam Balganesh's recent work revitalizing this paradigm, is more refined in its treatment of property theory. Recommend.