Friday, August 28, 2015

Dow v. NOVA: Maybe Nautilus Does Matter

In June 2014, the Supreme Court held in Nautilus v. Biosig that the Federal Circuit's "insolubly ambiguous" test for indefiniteness was "more amorphous than the statutory definiteness requirement allows," and that the proper test is whether the claims "fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention." But is this actually a stricter test?

Jason Rantanen (Iowa Law) posted a nice essay this spring, Teva, Nautilus, and Change Without Change (forthcoming Stan. Tech. L. Rev.), arguing that in practice, the answer has been no: "The Federal Circuit continues to routinely reject indefiniteness challenges . . . . Indeed, with one exception, the Federal Circuit has not held a single claim indefiniteness under the Nautilus standard, and even that one exception would almost certainly have been indefinite [pre-Nautilus]." (Since then, the court also held the Teva v. Sandoz claims indefinite, but it had done the same pre-Nautilus.) Rantanen also noted that the Federal Circuit has failed to grapple with the meaning of Nautilus and has continued to rely on its pre-Nautilus cases when evaluating definiteness. In one case the court even reversed an decision that claims were indefinite for reconsideration after Nautilus—implying that the Nautilus standard might be less stringent! (I've noticed the Federal Circuit similarly undermine the Supreme Court's change to the law of obviousness in KSR.)

But the Federal Circuit's decision today in Dow Chemical Co. v. NOVA Chemicals Corp. carefully examines the change Nautilus has wrought. Dow's asserted claims cover an improved plastic with "a slope of strain hardening coefficient greater than or equal to 1.3," and NOVA argued that the patents fail to teach a person of ordinary skill how to measure the "slope of strain hardening." In a prior appeal (after a jury trial), the Federal Circuit had held the claims not indefinite under pre-Nautilus precedent. The district court then held a bench trial on supplemental damages, leading to the present appeal. In today's opinion by Judge Dyk, the Federal Circuit holds that Nautilus's change in law "provides an exception to the doctrine of law of the case or issue preclusion," and holds that the claims are indefinite under the new standard.

The Federal Circuit dismisses the hand-wringing over whether Nautilus really meant anything, stating that "there can be no serious question that Nautilus changed the law of indefiniteness." The court notes that "Nautilus emphasizes 'the definiteness requirement's public-notice function,'" and that "the patent and prosecution history must disclose a single known approach or establish that, where multiple known approaches exist, a person having ordinary skill in the art would know which approach to select. . . . Thus, contrary to our earlier approach, under Nautilus, '[t]he claims . . . must provide objective boundaries for those of skill in the art.'"

Examining the claims at issue, the court notes that the patents state that "FIG. 1 shows the various stages of the stress/strain curve used to calculate the slope of strain hardening," but the patents contain no figure showing the stress/strain curve. There were four ways to measure the slope, which could result in different results, but the patents provided no "guidance as to which method should be used or even whether the possible universe of methods is limited to these four methods." The claims thus fail the new test: "Before Nautilus, a claim was not indefinite if someone skilled in the art could arrive at a method and practice that method," but "this is no longer sufficient."

Tuesday, August 25, 2015

Evaluating Patent Markets

I've been interested in patent markets for some time. In addition to several articles studying NPE litigation, I've written two articles discussing secondary markets explicitly: Patent Portfolios as Securities and Licensing Acquired Patents.

Thus, I was very interested in Michael Burstein's (Cardozo) draft article on the subject, called Patent Markets: A Framework for Evaluation, which is now on SSRN and forthcoming in the Arizona State L.J.

What I like about the approach of this article is that it takes a step back from the question of whether certain types of parties create a market, and asks instead, is having a market at all a good thing?

Here is the abstract:
Patents have become financial assets, in both practice and theory. A nascent market for patents routinely produces headline-grabbing transactions in patent portfolios, and patent assertion entities frequently defend themselves as sources of liquidity essential for a patent market to function. Much of the discourse surrounding these developments assumes that a robust, liquid market for patents would improve the operation of the patent system. In this Essay, I challenge that assumption and systematically assess the cases for and against patent markets. I do so by taking seriously both the underlying innovation promotion goal of the patent system and the lessons of financial economics, and asking what might be the effects of a market for patents that looked roughly like other familiar markets for stocks, real estate, or secondhand goods.

I conclude that, like much in patent law, the effects of robust patent markets are likely to vary with specific technological and business contexts. When there is a close fit between patents and useful technologies, a patent market can support a market for technology that aids in connecting inventors with developers and sources of capital for commercialization. But when that fit breaks down, market pricing could favor litigation over commercialization. Similarly, a liquid patent market might help to allocate the risks of innovation and of patent infringement to the parties best able to bear it, but a kind of moral hazard familiar to the market for subprime mortgages could lead not to more innovation but to more patents, thereby increasing the overall risk in the system. This analysis suggests that we are having the wrong conversation about patent markets. Rather than assuming their utility and asking how to improve them, we should be undertaking empirical research to determine the circumstances in which they will or will not work and exercising caution in invoking the logic of markets in policy debates about the contours of the patent system.
Like other markets, they are good when they are good, and bad when they are bad. Burstein adds a lot of nuance throughout the article, focusing on arguments why markets may be good or not, but without making too many assumptions about any particular technology or patent owner type.

One thing I would add to the article is the importance of timing. Markets early might be better than markets later, even in the same technological contexts. The article would probably put this into the "business context" category, but I think the importance of diffusion, cumulative innovation, and path dependency merit a separate consideration.

In all events, I think the essay adds to the literature and may produce some testable hypotheses as well.

Saturday, August 1, 2015

Some Reflections on Localism, Innovation, and Jim Bessen's New Book "Learning by Doing"

I highly recommend Jim Bessen's new book, Learning by Doing: The Real Connection Between Innovation, Wages and Wealth (2015), published by Yale University Press. I was lucky to present alongside Jim at Yale's first Beyond IP Conference, where he discussed his ideas about the importance of education and worker training for a successful innovation economy. As Bessen puts it in his book,
innovation can suffer from two distinct problems: markets can fail to provide strong incentives to invest in R&D, and they can fail to provide strong incentives for learning new skills. Underinvestment in R&D is not the only problem affecting innovation. It might not even be the most important problem. ... There is simply no justification for focusing innovation policy exclusively on remedying underinvestment in R&D, especially since most firms report that patents, which are supposed to correct this underinvestment, are relatively unimportant for obtaining profits on their innovations.
The takeaway is that protecting inventions with patents and copyrights can't be the sole function of an effective innovation policy. Governments need to focus on a much broader range of policies to "encourage broad-based learning of new technical skills, including vocational education, government procurement, employment law, trade secrecy, and patents."

At IP Scholars in Chicago this year, I'll be presenting my new paper Patent Nationally, Innovate Locally.  Like Bessen, I will talk about a broad range of innovation incentives that focus on research and technology commercialization, as well as public investments in STEM education, worker training, and public infrastructure. I'll argue, however, that when intellectual property rights are not the chosen mechanism, many of these incentives should come from sub-national governments like states and cities because they are the smallest jurisdictions that internalize the immediate economic impacts of public investments in innovation.*  While states cannot internalize the benefits of patent and copyright regimes that result in widespread disclosure of easily transferable information, they can internalize the benefits of innovation finance (direct expenditures of taxpayer revenues on innovation) especially when those expenditures go towards improving the education, skills, and knowledge-base of the local labor force.

Innovation finance (IF) is an important new frontier in IP law scholarship. Not only does innovation finance supplement federal IP rights by correcting market failures in technology commercialization and alleviating some of the inefficiencies created by patents and copyrights, it also takes into account Bessen's point: "markets can fail to provide strong incentives to invest in R&D, and they can fail to provide strong incentives for learning new skills." Both market failures are important, and the latter may be even more important than the former. But if we really want to focus on a broader range of policies like government procurement and support for public education to "encourage broad-based learning of new technical skills," as Bessen suggests, then we need to start looking at state and local governments.

To understand this point, take the example of a government prize for developing a better way to manufacture cars without using as many resources (e.g. 3D printing). If the federal government gives the prize, this makes some sense: assuming the prize hits its mark, national taxpayers will eventually benefit when the innovation is perfected and widely adopted, and the information on how to do it becomes public. But the impacts of the prize are going to be very different for different parts of the country. First off, the prize winner has to locate its research and operations somewhere. Presumably, it's going to choose a state like Michigan or Ohio with the resources, facilities, and human knowledge-base to do this kind of research and experimentation. The immediate benefits for local firms and residents are obvious: jobs, tax revenues, business for local companies. There is also a less perceptible but far more important benefit: easier access to new technical knowledge coming out of the experiments and inside information on emerging market developments. Plentiful research suggests that a lot of knowledge is hard to transfer and that effective exchange requires proximity, especially when science-based research and unfamiliar technology are involved. The implication for local officials seeking to boost the regional economy is clear: the more innovation that happens in your jurisdiction and the more residents who gain skills in an important new field, the better off your state or city will be. (This is the basis for innovation cluster theory and the idea that regions gain competitive advantages from localized knowledge exchange, originally discussed by UC Berkeley's AnnaLee Saxenian.)

Given that the immediate economic impacts of the 3D printing prize, including the tax revenues and most of the spillovers, are geographically localized to certain regions, do we really want federal policymakers designing these types of incentives, and do we really want taxpayers in states like Alaska and Arizona footing the bill? Or do we want significant input –  both political and financial – from the places in which the innovation is occurring? I think the answer is the latter. The benefits of decentralizing fiscal policy are numerous. I see at least two major benefits in this case: fairer shouldering of tax burdens, and more efficient innovation policies as a result of the better information and stronger incentives of local officials. Not only are they aware of the capabilities and needs of the local economy but they can act swiftly in response to local problems, liberated from the wrangling of "earmark politics" at the national level. The same principles apply to education and incentives for learning new skills – the second prong of Bessen's revitalized innovation policy. For example, would we expect national policymakers, who act in the national interest and are beholden to federal taxpayers, to supply the right amount of vocational training for future workers in the newly invented 3D printing automobile industry of my hypothetical? No: we would expect the main push for this kind of training to come from a state like Michigan with the right mix of interested workers and industry players.

In short, I suggest that innovation policy in the United States is not federal. It is bifurcated: the federal government protects exclusive rights in new inventions and original expression using patents and copyrights; states, cities and sub-national governments use innovation finance to capture the geographically localized economic benefits of innovation.

There are several responses to my argument. If innovation finance were all local, then wouldn't there be a major under-supply of research, especially for innovations without a clear market, like research into rare debilitating diseases or (until Elon Musk) space exploration? Wouldn't states compete with each other and end up spending way too much to attract firms into their jurisdictions? Aren't local politicians vulnerable to capture by local industries? I agree that all these risks exist. This is why I discuss a variety of instances where the federal government has an important role to play. Besides protecting copyrights and patents in new inventions, the federal government does a lot of direct financing for innovation too. This money goes towards education, basic research, and mission R&D (mainly in national defense) – all of which produce pervasive national spillovers as well as localized ones. On the flip side, the federal government also has a variety of means for controlling and coordinating the actions of sub-national governments in order to reduce corruption, wasted expenditures and "beggar thy neighbor" competition. Some of these preemptive forces come from discretionary judicial doctrines like the Dormant Commerce Clause (admittedly a weak source of limits on states); others are or perhaps should be statutory (the Patent Act??).

If you have comments or seek a draft of Patent Nationally, Innovate Locally, or my other working paper, Cluster Competition, which argues that the federal government is trying to "manage" state competition to grow innovation clusters through the America Competes Act's regional innovation program, please email me at: cahrdy@gmail.com or chrdy@law.upenn.edu


* The basic principle of fiscal decentralization is "the presumption that the provision of public services should be located at the lowest level of government encompassing, in a spatial sense, the relevant benefits and costs." 

Thursday, July 30, 2015

Kiesling & Silberg on Incentives for Rooftop Solar

I've written about innovation policy experimentation and about incentives beyond IP, so I was interested in a new working paper posted by Lynne Kiesling and Mark Silberg, Regulation, Innovation, and Experimentation: The Case of Residential Rooftop Solar. They are not lawyers, but their description of incentives for the development and commercialization of rooftop solar will be of interest to legal scholars of innovation, as it underscores that the role of the state is far more complex than simply providing IP incentives. (Indeed, the paper never mentions IP.)

These incentives include a 30% federal tax credit (set to expire at the end of 2016), as well as many state-level incentives, such as volumentrically reduced subsidies to benefit first movers, net metering policies requiring credits to consumers who produce excess energy, and financial regulations that allow third-party financing to help consumers avoid upfront capital expenses. As they note, "the details matter," and "[n]ot all renewable portfolio standards are equal." This paper seems to nicely encapsulate many of those details.

Monday, July 27, 2015

Rachel Sachs & Becky Eisenberg on Incentives for Diagnostic Tests

I highly recommend two recently posted articles on declining innovation incentives for diagnostic tests, particularly due to changes in patentable subject matter doctrine. In Innovation Law and Policy: Preserving the Future of Personalized Medicine, Rachel Sachs (Petrie-Flom Fellow at Harvard Law) examines the intersection of IP with FDA regulation and health law, joining a growing body of scholarship that seeks to contextualize IP in a broader economic context. Here is the abstract:
Personalized medicine is the future of health care, and as such incentives for innovation in personalized technologies have rightly received attention from judges, policymakers, and legal scholars. Yet their attention too often focuses on only one area of law, to the exclusion of other areas that may have an equal or greater effect on real-world conditions. And because patent law, FDA regulation, and health law work together to affect incentives for innovation, they must be considered jointly. This Article will examine these systems together in the area of diagnostic tests, an aspect of personalized medicine which has seen recent developments in all three systems. Over the last five years, the FDA, Congress, Federal Circuit, and Supreme Court have dealt three separate blows to incentives for innovation in diagnostic tests: they have made it more expensive to develop diagnostics, made it more difficult to obtain and enforce patents on them, and reduced the amount innovators can expect to recoup in the market. Each of these changes may have had a marginal effect on its own, but when considered together, the system has likely gone too far in disincentivizing desperately needed innovation in diagnostic technologies. Fortunately, just as each legal system has contributed to the problem, each system can also be used to solve it. This Article suggests specific legal interventions that can be used to restore an appropriate balance in incentives to innovate in diagnostic technologies.
Diagnostics Need Not Apply is a new essay by Rebecca Eisenberg (UMich Law) that was nicely summed up by Nicholson Price: "let's just admit it - diagnostic tests are unpatentable."
Diagnostic testing helps caregivers and patients understand a patient’s condition, predict future outcomes, select appropriate treatments, and determine whether treatment is working. Improvements in diagnostic testing are essential to bring about the long-heralded promise of personalized medicine. Yet it seems increasingly clear that most important advances in this type of medical technology lie outside the boundaries of patent-eligible subject matter.
The clarity of this conclusion has been obscured by ambiguity in the recent decisions of the Supreme Court concerning patent eligibility. Since its 2010 decision in Bilski v. Kappos, the Court has followed a discipline of limiting judicial exclusions from the statutory categories of patentable subject matter to a finite list repeatedly articulated in the Court’s own prior decisions for “laws of nature, physical phenomena, and abstract ideas,” while declining to embrace other judicial exclusions that were never expressed in Supreme Court opinions. The result has been a series of decisions that, while upending a quarter century of lower court decisions and administrative practice, purport to be a straightforward application of ordinary principles of stare decisis. As the implications of these decisions are worked out, the Court’s robust understanding of the exclusions for laws of nature and abstract ideas seems to leave little room for patent protection for diagnostics.
This essay reviews recent decisions on patent-eligibility from the Supreme Court and the Federal Circuit to demonstrate the obstacles to patenting diagnostic methods under emerging law. Although the courts have used different analytical approaches in recent cases, the bottom line is consistent: diagnostic applications are not patent eligible. I then consider what the absence of patents might mean for the future of innovation in diagnostic testing.
As I have written, I think changes to patentable subject matter doctrine are an important problem for medical innovation, and that policymakers should think seriously about whether additional non-patent innovation incentives are needed in this area.

Thursday, July 23, 2015

The Latest on Biosimilars: The Federal Circuit Holds that the "Patent Dance" Is Optional

In a previous post, I discussed a district court decision holding that the process for resolving patent disputes under the Biologics Price Competition and Innovation Act (BPCIA) is optional. That post contains extensive background on the BPCIA and its purpose of providing an abbreviated pathway for “biosimilar” drugs to get to market and compete with their branded analogs, resulting in lower prices for consumers. The bottom line is that, under the BPCIA, makers of biosimilar products can rely on the clinical trial data developed for the branded (or “reference”) product in order to accelerate FDA approval. Nevertheless, the BPCIA provides 12 years of data exclusivity to the manufacturer of the reference product. And beyond that period, even if the biosimilar garners FDA approval, the brand owner can try to continue to keep it out of the market by asserting claims of patent infringement. The BPCIA provides for a procedure involving pre-suit information exchange between the brand and biosimilar makers—the so-called “patent dance”—that is intended to apprise the brand of the biosimilar’s manufacturing process and narrow down the number of patents to be be asserted. But the district court, and now the Federal Circuit on appeal, have held that the biosimilar can lawfully refuse to participate in the patent dance.

Wednesday, July 22, 2015

Several Empirical Studies on Injunctions Post-eBay

Chris Seaman recently released a draft of his new paper, Permanent Injunctions in Patent Litigation After eBay: An Empirical Study. In the paper, he present the results of his empirical study of contested permanent injunction decisions in district courts for a 7½ year period following eBay (May 2006 to December 2013). This post follows up my previous posts on Seaman's WIPIP presentation and on Ryan Holte's paper assessing the effects of eBay. Kirti Gupta and Jay Kesan also just released their own study on eBay's impact.

Heidi Williams on Measuring the Effect of Patent Strength on Innovation

When I was in law school, I was surprised (and fascinated) to learn how little scholars actually know about how patent laws affect innovation. My article Patent Experimentalism explains why this is such a hard empirical question, summarizes a lot of the empirical work that has been done, and analyzes the institutional design options (including policy randomization) to help make more empirical progress. Two of my favorites among the empirical pieces I discuss are by MIT economics professor Heidi Williams—one on IP-like contractual restrictions on human genes (summarized previously on this blog), and one on the skew in cancer drug R&D toward late-stage cancer patients (with Eric Budish and Ben Roin). In June, Williams posted a new paper that reflects on the challenges of measuring the relationship between patent strength and research investments, summarizes these two studies, and discusses directions for future research.

Although "a literal interpretation of the current set of available empirical evidence . . . would be that the patent system generates little social value," Williams explains that "drawing such a conclusion would be premature." The "dearth of empirical evidence" stems from two problems: measuring specific research investments, and "finding any variation (much less 'clean' or quasi-experimental variation) in patent protection." Her recent papers "identified and took advantage of new sources of variation in the effective intellectual property protection provided to different inventions." If you aren't familiar with those two papers, this piece contains a great summary.

Looking for similar kinds of variation seems like a promising avenue for future research, although Williams cautions against jumping quickly from her work to broad conclusions for patent policy. For example, while her work on contractual restrictions on human genes led to persistent decreases in follow-on research and commercial product development, her preliminary results from a follow-on project with Bhaven Sampat suggest that "on average gene patents have had no effect on follow-on innovation." As Williams notes, the U.S. Supreme Court has been concerned about the effects of patents on follow-on research in its recent forays into patentable subject matter, and perhaps further empirical work along these lines will help inform this muddled area of doctrine.

Thursday, July 16, 2015

Greg Mandel et al. on the Plagiarism Fallacy in IP

Greg Mandel (Temple Law) has done some interesting empirical work on public perceptions of IP. In his latest work, Intellectual Property Law's Plagiarism Fallacy, he has collaborated with two psychologists, Anne Fast and Kristina Olson (University of Washington), on three new studies. They conclude that debates over whether IP should serve incentive or natural rights objectives are "orthogonal" to the most common perception about IP, which is that its function is to prevent plagiarism. They argue that this "plagiarism fallacy . . . . helps explain pervasive illegal infringing activity on the Internet" as stemming from a failure to understand what IP is rather than indifference toward IP rights.

Monday, July 13, 2015

Roger Ford: The Patent Spiral

I blogged two years ago about a terrific article by Roger Ford (now at UNH Law), and he has done it again: I enjoyed reading The Patent Spiral, forthcoming in the University of Pennsylvania Law Review. Here is the abstract:
Examination—the process of reviewing a patent application and deciding whether to grant the requested patent—improves patent quality in two ways. It acts as a substantive screen, filtering out meritless applications and improving meritorious ones. It also acts as a costly screen, discouraging applicants from seeking low-value patents. Yet despite these dual roles, the patent system has a substantial quality problem: it is both too easy to get a patent (because examiners grant invalid patents that should be filtered out by a substantive screen) and too cheap to do so (because examiners grant low-value nuisance patents that should be filtered out by a costly screen).
This article argues that these flaws in patent screening are both worse, and better, than has been recognized. They are worse because the flaws are not static; they are dynamic, interacting to reinforce each other. This interaction leads to a vicious cycle of more and more patents that should never have been granted. When patents are too easily obtained, that undermines the costly screen, because even a plainly invalid patent has a nuisance value greater than its cost. And when patents are too cheaply obtained, that undermines the substantive screen, because there will be more patent applications, and the examination system cannot scale indefinitely without sacrificing accuracy. The result is a cycle of more and more applications, being screened less and less accurately, to give more and more low-quality patents. And although it is hard to test directly if the quality of patent examination is falling, there is evidence suggesting that this cycle is affecting the patent system.
At the same time, things are better because this cycle may be surprisingly easy to solve. The cycle gives policymakers substantial flexibility in designing patent reforms, because the effect of a reform on one piece of the cycle will propagate to the rest of the cycle. Reformers can concentrate on the easiest places to make reforms (like reforming the litigation system) instead of trying to do the impossible (like eliminating examination errors). Such reforms would not only have local effects, but could help make the entire patent system work better.
Ford provides a refreshingly clear explanation of the two distinct roles that patent examination theoretically plays, and of the feedback loop between them.

Friday, July 10, 2015

Brad Shapiro on the Cost of Strategic Entry Delay in Pharmaceuticals

Pharmaceutical companies sometimes engage in "product hopping," in which they attempt to move patients to a new product with longer patent protection before the generic version of an older drug becomes available. Product hopping was recently in the news with New York state's antitrust suit against Actavis for its decision to withdraw Namenda IR, its 2x/day Alzheimer's drug (with patent protection ending July 2015), to force patients to switch to Namenda XR, a 1x/day version (with patent protection until 2029). In an opinion by Judge Walker, the Second Circuit upheld a preliminary injunction barring withdrawal of Namenda IR prior to generic entry, concluding that the "hard switch crosses the line from persuasion to coercion and is anticompetitive."

The cost to consumers of product hopping that obstructs access to generic drugs is clear. But these marketing strategies raise another potential welfare loss that receives less attention: when a pharmaceutical company delays the introduction of a new drug version until just before patent protection on the old version is set to expire, that delay can harm consumers who prefer the new version. This later cost is the focus of a new empirical paper by Professor Brad Shapiro (Chicago Booth), Estimating the Cost of Strategic Entry Delay in Pharmaceuticals: The Case of Ambien CR.

Monday, July 6, 2015

Entangled Trade Secrets and Presumptive Misappropriation

Over at Prawfsblawg, Orly Lobel discusses the case of former Goldman Sachs programmer Sergey Aleynikov,who has had an up and down (more like down and up) experience dealing with criminal trade secret prosecutions. I think the case is worthy of discussion for a variety of reasons, but I will focus on how different viewpoints will color the facts of this case. Prof. Lobel describes this as a story of "secrecy hysteria," while I view this as a run of the mill "don't copy the source code" case.

I'll discuss my point of view briefly below, but I will admit my priors: I spent my career advising companies and employees in trade secrecy: how to protect them, how to exit without getting sued, and how to win lawsuits as plaintiffs and defendants. I probably represented plaintiffs and defendants with the same frequency, and -- of course -- my client was always right.

More facts after the jump. I should make clear that I've got no position on the criminal prosecutions; my views here are more about trade secrecy than whether the criminal laws should be used to protect them (or should have applied to this particular case). Prof. Lobel and I may well agree on the latter point.

Friday, July 3, 2015

Janet Freilich vs. Ted Sichelman on Patent Searching

Over at New Private Law Blog, Janet Freilich and Ted Sichelman are having a fun exchange about patent searches. Here's an excerpt from Freilich's original post:
Since there is no easy way to index or search through most patents, it is exceedingly difficult (if not impossible) to know if one is infringing a patent. In some industries, firms simply ignore patents, because it is less expensive to pay damages ex post than to do patent clearance searches ex ante. Larger numbers of patents exacerbate this problem. Christina Mulligan and Timothy Lee provide an excellent description of the problem of patent clearance searches in their article on Scaling the Patent System. One sentence in particular drives the problem home: “In software, for example, patent clearance by all firms would require many times more hours of legal research than all patent lawyers in the United States can bill in a year.”

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 said...no. 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.