09 September 2009

The Case For Patent Law Reform

Is patent law broken? How should it be fixed?

An empirically oriented new book on the subject, "Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk," by James Bessen and Michael J. Meurer (Princeton Univ. Press, 2008), looks at the issue and is reviewed in the link.

Bessen and Meurer's central thesis [is] that patents fail to "work as property." By this, the authors mean that patents, a type of "intellectual property" that protect rights in intangibles, fare badly when compared with private property systems that protect tangibles (such as land) -with deleterious economic consequences.

Specifically, the contemporary patent system fails to provide adequate notice of the legal rights patents confer, so that patent owners and potential infringers alike often cannot readily ascertain who owns what rights - a degree of legal uncertainty Bessen and Meurer argue would be intolerable in a system of tangible property rights. This "notice failure" (the inability to provide predictable property rights) undermines the economic utility of patents and therefore the effectiveness of the US patent system (pp.53-54). . . .

Bessen and Meurer criticize the PTO for allowing vague patent claims to issue, which are subsequently enforced by the courts (pp.57-58). They are also critical of the
practice of filing so-called "continuation" patent claims, which allow inventors to "hide" modifications to pending (and even published) applications and thus to delay public awareness of exactly what inventors claim as their property right - a practice that has grown seven-fold since 1984 (pp.62-63). Bessen and Meurer fault the Federal Circuit for failing to develop workable guidelines to assist lower courts in interpreting the meaning and scope of patent claims and for
employing a de novo standard of review for claim interpretation on appeal.
These practices prevent a definitive ruling on the meaning of patent claim language until a late stage in litigation, thus prolonging uncertainty as to what the relevant legal rights at issue are. The Federal Circuit and many district courts
also are to blame, the authors contend, for unduly expanding patent owners'
rights by increasingly interpreting abstract patent claims very broadly, particularly in the areas of software and "business-method" patents (pp.64-68). . . .

[T]he most important conclusion presented is that the benefits of patent ownership vary dramatically between industries. Indeed, the authors conclude that since the 1990s it is only in the chemical and pharmaceutical industries that the benefits of patent ownership clearly outweigh the costs (p. 140). For most other industries, particularly high-tech and computer and software companies, patents act as a disincentive to innovation (p. 141-46). . . .

Chapter 7 evaluates potential alternative explanations for the decline of the patent system, such as increasing business-tobusiness litigiousness, the rise of patent "trolls" - who enforce patents but do not manufacture or commercialize any products - or the supposed decline in patent examination quality in the PTO. Bessen and Meurer conclude that patent notice decline is the strongest explanation that comports with the empirical evidence. . . . And Chapter 9 focuses on the specific - and acute - notice problems associated with abstract software and business methods patents. . . .

The final two chapters of the book advocate for numerous reforms to both patent law and institutions . . . These reforms include: strengthening the "nonobviousness" requirement for patentability (p.236); instituting a deferential standard of review in the Federal Circuit to patent claim interpretations made by the PTO (during the application process) and the federal district courts (during patent litigation)(p.237); creating specialized trial-level patent courts (p.238); requiring patent
applicants to draft clearer patent claims and permitting the PTO to issue opinion letters on patent claim interpretation (pp.230-240); mandating early publication of patent applications and eliminating expansive post-application amendments (pp.242-243); creating special burdens for the patentability of most software and business-methods patents (pp.243-247); increasing the fees for required renewals of issued patents (p.247); and strengthening certain defenses to patent infringement lawsuits
(pp.248-25 1).

This agenda is having an impact.

The U.S. Supreme Court is well on the way in recent years to narrowing the scope of patentability generally, both through a stricter interpretation of obviousness in patent law, and a narrowing of the sorts of software and business method patents that can be secured. It has also opened the door to the notion that injunctions are not always available.

But, as is often the case, the factual argument about what is happening is stronger than the reform proposals. In my view, more radical reform is necessary.

The Case Against Ideas As Property

Legal rights that protect the economic interests of people who create valuable ideas are appropriate and even necessary. But, property rules don't fit the bill. A set of liability rules, drawing upon the law of restitution (also known as unjust enrichment), would work better. The intellectual property system needs to move from a property rights paradigm to an unjust enrichment paradigm.

In almost all cases, the presumptive remedy, as is the case in most unjust enrichment cases, should be compensatory damages in the form of money damages that reflect the monetary gain of the infringer and an additional amount representing the cost of enforcing those rights, in the form of reasonable attorneys' fees and costs. In cases of ongoing violations, a court imposed royalty is a suitable sanction.

Injunctive relief, punitive penalties, and criminal sanctions, which make sense in the property rights paradigm do not make sense in an unjust enrichment setting. The harm is not in making a worthwhile product with a new idea, but in failing to afford the true creator a fair share of the profits. Penalties under the current regime, like statutory damages and criminal penalties are often grossly disproportionate to either the gain realized by the violator.

The gist of the "patent troll" concern is that one can be a snake in the grass, ignoring the losses taken on investments made by others with your ideas that fail, while cashing in on profits made by successful ideas that have been developed on the assumption that the person using the idea had clear title to that idea. While property rule work in "ex ante" negotiations, they aren't fair when someone emerges as an unanticipated holdout who can prevent an enterprise from going forward, that holdout can demand far more in returns than would have been negotiated for if the patent owner had been know early on the in development process.

Depriving the public of a valuable product created using a good idea until a newly emerged creator of an idea that went into the end result can work out ownership arrangements is not a constructive response to the situation. Rather than mitigating damages, this harms all involved, including the person making the claim, whose potential pot of recovery is reduced if an injunction is granted. It also harms the public. For example, even if a flu vaccine is a blatant violation of a patent, reducing the amount that can be produced with an injunction makes far less sense than assigning most or all of the profits from the flu vaccine to the patent owner. If a proven way to cure a disease is out there, the public should not be deprived of it while the creators of the cure fight over shares of the profits.

The unjust enrichment analysis should look first, at what profits were actually earned from the venture, and second, what share of those profits the person with the idea could reasonable have expected to secure if his claims had been made known, the parties had negotiated in good faith, and an agreement that would not have prevented a venture from moving forward at all had been reached, before the venture got started.

In the case of a conceptually unified and simple invention, like a new medical drug, a large share of the net profits would have gone to the inventor, since drug manufacturing and marketing has become standardized and commodified.

In contrast, in the case of a complex invention that relies upon multiple separate innovations of different people, something typical in the high tech industry, the share of the inventors collectively would have been shared, unequally, with the least replaceable and most necessary ideas receiving the highest share of the profits, and the ideas that are secondary to the venture (e.g. allowing a product to have a less important feature, or solving a problem that could also be solved in other ways) a smaller share of the profits.

Similarly, assigning punitive penalties and criminal sanctions in the vast majority of situations where there is knowledge of a potential claim, but that claim is disputed for some reason and has not been finally adjudicated, is problematic. Normally, we don't assign punitive or criminal sanctions in disputable disagreements over business arrangements between commercial actors.

Famous cases involving patents claims related to established blockbuster products like the Blackberry, Microsoft Word and Windows Vista, illustrate the trouble with allowing patent injunctions and a property rights like price negotiation long after the profitability of these products has been established and they have gained widespread usage of critical systems by end users.

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