Archives For patent reform

This blog post summarizes the findings of a paper published in Volume 21 of the Federalist Society Review. The paper was co-authored by Dirk Auer, Geoffrey A. Manne, Julian Morris, & Kristian Stout. It uses the analytical framework of law and economics to discuss recent patent law reforms in the US, and their negative ramifications for inventors. The full paper can be found on the Federalist Society’s website, here.

Property rights are a pillar of the free market. As Harold Demsetz famously argued, they spur specialization, investment and competition throughout the economy. And the same holds true for intellectual property rights (IPRs). 

However, despite the many social benefits that have been attributed to intellectual property protection, the past decades have witnessed the birth and growth of an powerful intellectual movement seeking to reduce the legal protections offered to inventors by patent law.

These critics argue that excessive patent protection is holding back western economies. For instance, they posit that the owners of the standard essential patents (“SEPs”) are charging their commercial partners too much for the rights to use their patents (this is referred to as patent holdup and royalty stacking). Furthermore, they argue that so-called patent trolls (“patent-assertion entities” or “PAEs”) are deterring innovation by small startups by employing “extortionate” litigation tactics.

Unfortunately, this movement has led to a deterioration of appropriate remedies in patent disputes.

The many benefits of patent protection

While patents likely play an important role in providing inventors with incentives to innovate, their role in enabling the commercialization of ideas is probably even more important.

By creating a system of clearly defined property rights, patents empower market players to coordinate their efforts in order to collectively produce innovations. In other words, patents greatly reduce the cost of concluding mutually-advantageous deals, whereby firms specialize in various aspects of the innovation process. Critically, these deals occur in the shadow of patent litigation and injunctive relief. The threat of these ensures that all parties have an incentive to take a seat at the negotiating table.

This is arguably nowhere more apparent than in the standardization space. Many of the most high-profile modern technologies are the fruit of large-scale collaboration coordinated through standards developing organizations (SDOs). These include technologies such as Wi-Fi, 3G, 4G, 5G, Blu-Ray, USB-C, and Thunderbolt 3. The coordination necessary to produce technologies of this sort is hard to imagine without some form of enforceable property right in the resulting inventions.

The shift away from injunctive relief

Of the many recent reforms to patent law, the most significant has arguably been a significant limitation of patent holders’ availability to obtain permanent injunctions. This is particularly true in the case of so-called standard essential patents (SEPs). 

However, intellectual property laws are meaningless without the ability to enforce them and remedy breaches. And injunctions are almost certainly the most powerful, and important, of these remedies.

The significance of injunctions is perhaps best understood by highlighting the weakness of damages awards when applied to intangible assets. Indeed, it is often difficult to establish the appropriate size of an award of damages when intangible property—such as invention and innovation in the case of patents—is the core property being protected. This is because these assets are almost always highly idiosyncratic. By blocking all infringing uses of an invention, injunctions thus prevent courts from having to act as price regulators. In doing so, they also ensure that innovators are adequately rewarded for their technological contributions.

Unfortunately, the Supreme Court’s 2006 ruling in eBay Inc. v. MercExchange, LLC significantly narrowed the circumstances under which patent holders could obtain permanent injunctions. This predictably led lower courts to grant fewer permanent injunctions in patent litigation suits. 

But while critics of injunctions had hoped that reducing their availability would spur innovation, empirical evidence suggests that this has not been the case so far. 

Other reforms

And injunctions are not the only area of patent law that have witnessed a gradual shift against the interests of patent holders. Much of the same could be said about damages awards, revised fee shifting standards, and the introduction of Inter Partes Review.

Critically, the intellectual movement to soften patent protection has also had ramifications outside of the judicial sphere. It is notably behind several legislative reforms, particularly the America Invents Act. Moreover, it has led numerous private parties – most notably Standard Developing Organizations (SDOs) – to adopt stances that have advanced the interests of technology implementers at the expense of inventors.

For instance, one of the most noteworthy reforms has been IEEE’s sweeping reforms to its IP policy, in 2015. The new rules notably prevented SEP holders from seeking permanent injunctions against so-called “willing licensees”. They also mandated that royalties pertaining to SEPs should be based upon the value of the smallest saleable component that practices the patented technology. Both of these measures ultimately sought to tilt the bargaining range in license negotiations in favor of implementers.

Concluding remarks

The developments discussed in this article might seem like small details, but they are part of a wider trend whereby U.S. patent law is becoming increasingly inhospitable for inventors. This is particularly true when it comes to the enforcement of SEPs by means of injunction.

While the short-term effect of these various reforms has yet to be quantified, there is a real risk that, by decreasing the value of patents and increasing transaction costs, these changes may ultimately limit the diffusion of innovations and harm incentives to invent.

This likely explains why some legislators have recently put forward bills that seek to reinforce the U.S. patent system (here and here).

Despite these initiatives, the fact remains that there is today a strong undercurrent pushing for weaker or less certain patent protection. If left unchecked, this threatens to undermine the utility of patents in facilitating the efficient allocation of resources for innovation and its commercialization. Policymakers should thus pay careful attention to the changes this trend may bring about and move swiftly to recalibrate the patent system where needed in order to better protect the property rights of inventors and yield more innovation overall.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]


The ongoing pandemic has been an opportunity to explore different aspects of the human condition. For myself, I have learned that, despite a deep commitment to philosophical (neo- or classical-) liberalism, at heart I am pragmatic. I would prefer a society that optimizes for more individual liberty, but I am emphatically not someone who would even entertain the idea of using crises to advance my agenda when it is not clearly in service to amelioration of immediate problems.

Sadly, I have also learned that there are those who are not similarly pragmatic, and are willing to advance their ideological agenda come hell or high water. In this regard, I was disappointed yesterday to see the Gurry IP/COVID Letter passing around Twitter calling for widespread, worldwide interference with the property rights of IPR holders. 

The letter calls for a scattershot set of “remedies” to the crisis that would open access to copyright- and patent-protected inventions and content, including (among other things): 

  • voluntary licensing and non-enforcement of IP;
  • abrogation of IPR by WIPO members using the  “flexibility” in the international IP regime; 
  • the removal of geographical restrictions on IP licenses;
  • forcing patents into COVID-19 patent pools; and 
  • the implementation of compulsory licensing. 

And, unlike many prior efforts to push the envelope on weakening IP protections, the Gurry Letter also calls for measures that would weaken trade secrets and expose confidential business information in order to “achieve universal and equitable access to COVID-19 medicines and medical technologies as soon as reasonably possible.”

Notably, nothing in the letter suggests that any of these measures should be regarded as temporary.

We all want treatments for infection, vaccines for prevention, and ample supply of personal protective equipment as soon as possible, but if all the demands in this letter were met, it would do little to increase the supply of any of these things in the short term, while undermining incentives to develop new treatments, vaccines and better preventative tools in the long run. 

Fundamentally, the letter  reflects a willingness to use the COVID-19 pandemic to pursue an agenda that lacks merit and would be dismissed in the normal course of affairs. 

What is most certainly the case is that we need more innovation now, and we need it faster. There is no reason to believe that mandating open source status or forcing compulsory licensing on the firms doing that work will encourage that work to proceed with all due haste—and every indication that the opposite is the case. 

Where there are short term shortages of certain products that might be produced in much larger quantities by relaxing IP, companies are responding by doing just that—voluntarily. But this is fundamentally different from the imposition of unlimited compulsory licenses.

Further, private actors have displayed an impressive willingness to provide free or low cost access to technologies and content—without government coercion. The following is a short list of some of the content and inventions that have been opened up:

Culture, Fitness & Entertainment

  • HBO Will Stream 500 Hours of Free Programming, Including Full Seasons of ‘Veep,’ ‘The Sopranos,’ ‘Silicon Valley’”
  • Dozens (or more) of artists, both famous and lesser known, are releasing free back catalog performances or are taking part in free live streaming sessions on social media platforms. Notably, viewers are often welcome to donate or “pay what they” want to help support these artists (more on this below).
  • The NBA, NFL, and NHL are offering free access to their back catalogue of games.
  • A large array of music production software can now be used free on extended trials for 3 months (or completely free and unlimited in some cases). 
  • CBS All Access expanded its free trial period.
  • Neil Gaiman and Harper Collins granted permission to Levar Burton to livestream readings from their catalogs.
  • Disney is releasing movies early onto its (paid) Disney+ services.
  • Gold’s Gym is providing free access to its app-based workouts.
  • The Met is streaming free recordings of its Live in HD series.
  • The Seattle Symphony is offering free access to some of its recorded performances.
  • The UK National Theater is streaming some of its most popular plays for free.
  • Andrew Lloyd Weber is streaming his shows online for free.

Science, News & Education

  • Scholastica released free content intended to help educate students stuck at home while sheltering-in-place. 
  • Nearly 100 academic journals, societies, institutes, and companies signed a commitment to make research and data on COVID-19 freely available, at least for the duration of the outbreak.
  • The Atlantic lifted paywall restrictions on access to its COVID-19-related content.
  • The New England Journal of Medicine is allowing free access to COVID-19-related resources.
  • The Lancet allows free access to research it publishes on COVID-19.
  • All material published by theBMJ on the coronavirus outbreak is freely available.
  • The AAAS-published Science allows free access to its coronavirus research and commentary.
  • Elsevier gave full access to its content on its COVID-19 Information Center for PubMed Central and other public health databases.
  • The American Economic Association announced open access to all of its journals until the end of June.
  • JSTOR expanded free access to some of its scholarship.

Medicine & Technology

  • The Global Center for Medical Design is developing license-free PPE designs that can be quickly implemented by manufacturers.
  • Medtronic published “design specifications for the Puritan Bennett 560 (PB560) to allow innovators, inventors, start-ups, and academic institutions to leverage their own expertise and resources to evaluate options for rapid ventilator manufacturing.” It additionally provided software licenses for this technology.
  • AbbVie announced it won’t enforce its patent rights for Kaletra—a drug that may provide treatment for COVID-19 infections. Israel had earlier indicated it would impose compulsory licenses for the drug, but AbbVie is allowing use worldwide. The company, moreover, had donated supplies of the drug to China earlier in the year when the outbreak first became apparent.
  • Google is working with health researchers to provide anonymized and aggregated user location data. 
  • Cisco has extended free licenses and expanded usage counts at no extra charge for three of its security technologies to help strained IT teams and partners ready themselves and their clients for remote work.”
  • Microsoft is offering free subscriptions to its Teams product for six months.
  • Zoom expanded its free access and other limitations for educational institutions around the world.

Incentivize innovation, now more than ever

In addition to undermining the short-term incentives to draw more research resources into the fight against COVID-19, using this crisis to weaken the IP regime will cause long-term damage to the economies of the world. We still will need creators making new cultural products and researchers developing new medicines and technologies; weakening the IP regime will undermine the delicate set of incentives that cultural and scientific production depends upon. 

Any clear-eyed assessment of the broader course of the pandemic and the response to it gives lie to the notion that IP rights are oppressive or counterproductive. It is the pharmaceutical industry—hated as they may be in some quarters—that will be able to marshall the resources and expertise to develop treatments and vaccines. And it is artists and educators producing cultural content who (theoretically) depend on the licensing revenues of their creations for survival. 

In fact, one of the things that the pandemic has exposed is the fragility of artists’ livelihoods and the callousness with which they are often treated. Shortly after the lockdowns began in the US, the well-established rock musician David Crosby said in an interview that, if he could not tour this year, he would face tremendous financial hardship. 

As unfortunate as that may be for Crosby, a world-famous musician, imagine how much harder it is for struggling musicians who can hardly hope to achieve a fraction of Crosby’s success for their own tours, let alone for licensing. If David Crosby cannot manage well for a few months on the revenue from his popular catalog, what hope do small artists have?

Indeed, the flood of unable-to-tour artists who are currently offering “donate what you can” streaming performances are a symptom of the destructive assault on IPR exemplified in the letter. For decades, these artists have been told that they can only legitimately make money through touring. Although the potential to actually make a living while touring is possibly out of reach for many or most artists,  those that had been scraping by have now been brought to the brink of ruin as the ability to tour is taken away. 

There are certainly ways the various IP regimes can be improved (like, for instance, figuring out how to help creators make a living from their creations), but now is not the time to implement wishlist changes to an otherwise broadly successful rights regime. 

And, critically, there is a massive difference between achieving wider distribution of intellectual property voluntarily as opposed to through government fiat. When done voluntarily the IP owner determines the contours and extent of “open sourcing” so she can tailor increased access to her own needs (including the need to eat and pay rent). In some cases this may mean providing unlimited, completely free access, but in other cases—where the particular inventor or creator has a different set of needs and priorities—it may be something less than completely open access. When a rightsholder opts to “open source” her property voluntarily, she still retains the right to govern future use (i.e. once the pandemic is over) and is able to plan for reductions in revenue and how to manage future return on investment. 

Our lawmakers can consider if a particular situation arises where a particular piece of property is required for the public good, should the need arise. Otherwise, as responsible individuals, we should restrain ourselves from trying to capitalize on the current crisis to ram through our policy preferences. 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Daniel Takash,(Regulatory policy fellow at the Niskanen Center. He is the manager of Niskanen’s Captured Economy Project, https://capturedeconomy.com, and you can follow him @danieltakash or @capturedecon).]

The pharmaceutical industry should be one of the most well-regarded industries in America. It helps bring drugs to market that improve, and often save, people’s lives. Yet last year a Gallup poll found that of 25 major industries, the pharmaceutical industry was the most unpopular– trailing behind fossil fuels, lawyers, and even the federal government. The opioid crisis dominated the headlines for the past few years, but the high price of drugs is a top-of-mind issue that generates significant animosity toward the pharmaceutical industry. The effects of high drug prices are felt not just at every trip to the pharmacy, but also by those who are priced out of life-saving treatments. Many Americans simply can’t afford what their doctors prescribe. The pharmaceutical industry helps save lives, but it’s also been credibly accused of anticompetitive behavior–not just from generics, but even other brand manufacturers.

These extraordinary times are an opportunity to right the ship. AbbVie, roundly criticized for building a patent thicket around Humira, has donated its patent rights to a promising COVID-19 treatment. This is to be celebrated– yet pharma’s bad reputation is defined by its worst behaviors and the frequent apologetics for overusing the patent system. Hopefully corporate social responsibility will prevail, and such abuses will cease in the future.

The most effective long-term treatment for COVID-19 will be a vaccine. We also need drugs to treat those afflicted with COVID-19 to improve recovery and lower mortality rates for those that get sick before a vaccine is developed and widely available. This requires rapid drug development through effective public-private partnerships to bring these treatments to market.

Without a doubt, these solutions will come from the pharmaceutical industry. Increased funding for the National Institutes for Health, nonprofit research institutions, and private pharmaceutical researchers are likely needed to help accelerate the development of these treatments. But we must be careful to ensure whatever necessary upfront public support is given to these entities results in a fair trade-off for Americans. The U.S. taxpayer is one of the largest investors in early to mid-stage drug research, and we need to make sure that we are a good investor.

Basic research into the costs of drug development, especially when taxpayer subsidies are involved, is a necessary start. This is a feature of the We PAID Act, introduced by Senators Rick Scott (R-FL) and Chris Van Hollen (D-MD), which requires the Department of Health and Human Services to enter into a contract with the National Academy of Medicine to figure the reasonable price of drugs developed with taxpayer support. This reasonable price would include a suitable reward to the private companies that did the important work of finishing drug development and gaining FDA approval. This is important, as setting a price too low would reduce investments in indispensable research and development. But this must be balanced with the risk of using patents to charge prices above and beyond those necessary to finance research, development, and commercialization.

A little sunshine can go a long way. We should trust that pharmaceutical companies will develop a vaccine and treatments or coronavirus, but we must also verify these are affordable and accessible through public scrutiny. Take the drug manufacturer Gilead Science’s about-face on its application for orphan drug status on the possible COVID-19 treatment remdesivir. Remedesivir, developed in part with public funds and already covered by three Gilead patents, technically satisfied the definition of “orphan drug,” as COVID-19 (at the time of the application) afflicted fewer than 200,000 patents. In a pandemic that could infect tens of millions of Americans, this designation is obviously absurd, and public outcry led to Gilead to ask the FDA to rescind the application. Gilead claimed it sought the designation to speed up FDA review, and that might be true. Regardless, public attention meant that the FDA will give Gilead’s drug Remdesivir expedited review without Gilead needing a designation that looks unfair to the American people.

The success of this isolated effort is absolutely worth celebrating. But we need more research to better comprehend the pharmaceutical industry’s needs, and this is just what the study provisions of We PAID would provide.

There is indeed some existing research on this front. For example,the Pharmaceutical Researchers and Manufacturers of America (PhRMA) estimates it costs an average of $2.6 billion to bring a new drug to market, and research from the Journal of the American Medical Association finds this average to be closer to $1.3 billion, with the median cost of development to be $985 million.

But a thorough analysis provided under We PAID is the best way for us to fully understand just how much support the pharmaceutical industry needs, and just how successful it has been thus far. The NIH, one of the major sources of publicly funded research, invests about $41.7 billion annually in medical research. We need to better understand how these efforts link up, and how the torch is passed from public to private efforts.

Patents are essential to the functioning of the pharmaceutical industry by incentivizing drug development through temporary periods of exclusivity. But it is equally essential, in light of the considerable investment already made by taxpayers in drug research and development, to make sure we understand the effects of these incentives and calibrate them to balance the interests of patients and pharmaceutical companies. Most drugs require research funding from both public and private sources as well as patent protection. And the U.S. is one of the biggest investors of drug research worldwide (even compared to drug companies), yet Americans pay the highest prices in the world. Are these prices justified, and can we improve patent policy to bring these costs down without harming innovation?

Beyond a thorough analysis of drug pricing, what makes We PAID one of the most promising solutions to the problem of excessively high drug prices are the accountability mechanisms included. The bill, if made law, would establish a Drug Access and Affordability Committee. The Committee would use the methodology from the joint HHS and NAM study to determine a reasonable price for affected drugs (around 20 percent of drugs currently on the market, if the bill were law today). Any companies that price drugs granted exclusivity by a patent above the reasonable price would lose their exclusivity.

This may seem like a price control at first blush, but it isn’t–for two reasons. First, this only applies to drugs developed with taxpayer dollars, which any COVID-19 treatments or cures almost certainly would be considering the $785 million spent by the NIH since 2002 researching coronaviruses. It’s an accountability mechanism that would ensure the government is getting its money’s worth. This tool is akin to ensuring that a government contractor is not charging more than would be reasonable, lest it loses its contract.

Second, it is even less stringent than pulling a contract with a private firm overcharging the government for the services provided. Why? Losing a patent does not mean losing the ability to make a drug, or any other patented invention for that matter.This basic fact is often lost in the patent debate, but it cannot be stressed enough.

If patents functioned as licenses, then every patent expiration would mean another product going off the market. In reality, that means that any other firm can compete and use the patented design. Even if a firm violated the price regulations included in the bill and lost its patent, it could continue manufacturing the drug. And so could any other firm, bringing down prices for all consumers by opening up market competition.

The We PAID Act could be a dramatic change for the drug industry, and because of that many in Congress may want to first debate the particulars of the bill. This is fine, assuming  this promising legislation isn’t watered down beyond recognition. But any objections to the Drug Affordability and Access Committee and reasonable pricing regulations aren’t an excuse to not, at a bare minimum, pass the study included in the bill as part of future coronavirus packages, if not sooner. It is an inexpensive way to get good information in a single, reputable source that would allow us to shape good policy.

Good information is needed for good policy. When the government lays the groundwork for future innovations by financing research and development, it can be compared to a venture capitalist providing the financing necessary for an innovative product or service. But just like in the private sector, the government should know what it’s getting for its (read: taxpayers’) money and make recipients of such funding accountable to investors.

The COVID-19 outbreak will be the most pressing issue for the foreseeable future, but determining how pharmaceuticals developed with public research are priced is necessary in good times and bad. The final prices for these important drugs might be fair, but the public will never know without a trusted source examining this information. Trust, but verify. The pharmaceutical industry’s efforts in fighting the COVID-19 pandemic might be the first step to improving Americans’ relationship with the industry. But we need good information to make that happen. Americans need to know when they are being treated fairly, and that policymakers are able to protect them when they are treated unfairly. The government needs to become a better-informed investor, and that won’t happen without something like the We PAID Act.

Last week the Senate Judiciary Committee held a hearing, Intellectual Property and the Price of Prescription Drugs: Balancing Innovation and Competition, that explored whether changes to the pharmaceutical patent process could help lower drug prices.  The committee’s goal was to evaluate various legislative proposals that might facilitate the entry of cheaper generic drugs, while also recognizing that strong patent rights for branded drugs are essential to incentivize drug innovation.  As Committee Chairman Lindsey Graham explained:

One thing you don’t want to do is kill the goose who laid the golden egg, which is pharmaceutical development. But you also don’t want to have a system that extends unnecessarily beyond the ability to get your money back and make a profit, a patent system that drives up costs for the average consumer.

Several proposals that were discussed at the hearing have the potential to encourage competition in the pharmaceutical industry and help rein in drug prices. Below, I discuss these proposals, plus a few additional reforms. I also point out some of the language in the current draft proposals that goes a bit too far and threatens the ability of drug makers to remain innovative.  

1. Prevent brand drug makers from blocking generic companies’ access to drug samples. Some brand drug makers have attempted to delay generic entry by restricting generics’ access to the drug samples necessary to conduct FDA-required bioequivalence studies.  Some brand drug manufacturers have limited the ability of pharmacies or wholesalers to sell samples to generic companies or abused the REMS (Risk Evaluation Mitigation Strategy) program to refuse samples to generics under the auspices of REMS safety requirements.  The Creating and Restoring Equal Access To Equivalent Samples (CREATES) Act of 2019 would allow potential generic competitors to bring an action in federal court for both injunctive relief and damages when brand companies block access to drug samples.  It also gives the FDA discretion to approve alternative REMS safety protocols for generic competitors that have been denied samples under the brand companies’ REMS protocol.  Although the vast majority of brand drug companies do not engage in the delay tactics addressed by CREATES, the Act would prevent the handful that do from thwarting generic competition.  Increased generic competition should, in turn, reduce drug prices.

2. Restrict abuses of FDA Citizen Petitions.  The citizen petition process was created as a way for individuals and community groups to flag legitimate concerns about drugs awaiting FDA approval.  However, critics claim that the process has been misused by some brand drug makers who file petitions about specific generic drugs in the hopes of delaying their approval and market entry.  Although FDA has indicated that citizens petitions rarely delay the approval of generic drugs, there have been a few drug makers, such as Shire ViroPharma, that have clearly abused the process and put unnecessary strain on FDA resources. The Stop The Overuse of Petitions and Get Affordable Medicines to Enter Soon (STOP GAMES) Act is intended to prevent such abuses.  The Act reinforces the FDA and FTC’s ability to crack down on petitions meant to lengthen the approval process of a generic competitor, which should deter abuses of the system that can occasionally delay generic entry.  However, lawmakers should make sure that adopted legislation doesn’t limit the ability of stakeholders (including drug makers that often know more about the safety of drugs than ordinary citizens) to raise serious concerns with the FDA. 

3. Curtail Anticompetitive Pay-for-Delay Settlements.  The Hatch-Waxman Act incentivizes generic companies to challenge brand drug patents by granting the first successful generic challenger a period of marketing exclusivity. Like all litigation, many of these patent challenges result in settlements instead of trials.  The FTC and some courts have concluded that these settlements can be anticompetitive when the brand companies agree to pay the generic challenger in exchange for the generic company agreeing to forestall the launch of their lower-priced drug. Settlements that result in a cash payment are a red flag for anti-competitive behavior, so pay-for-delay settlements have evolved to involve other forms of consideration instead.  As a result, the Preserve Access to Affordable Generics and Biosimilars Act aims to make an exchange of anything of value presumptively anticompetitive if the terms include a delay in research, development, manufacturing, or marketing of a generic drug. Deterring obvious pay-for-delay settlements will prevent delays to generic entry, making cheaper drugs available as quickly as possible to patients. 

However, the Act’s rigid presumption that an exchange of anything of value is presumptively anticompetitive may also prevent legitimate settlements that ultimately benefit consumers.  Brand drug makers should be allowed to compensate generic challengers to eliminate litigation risk and escape litigation expenses, and many settlements result in the generic drug coming to market before the expiration of the brand patent and possibly earlier than if there was prolonged litigation between the generic and brand company.  A rigid presumption of anticompetitive behavior will deter these settlements, thereby increasing expenses for all parties that choose to litigate and possibly dissuading generics from bringing patent challenges in the first place.  Indeed, the U.S. Supreme Court has declined to define these settlements as per se anticompetitive, and the FTC’s most recent agreement involving such settlements exempts several forms of exchanges of value.  Any adopted legislation should follow the FTC’s lead and recognize that some exchanges of value are pro-consumer and pro-competitive.

4. Restore the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers.  I have previously discussed how an unbalanced inter partes review (IPR) process for challenging patents threatens to stifle drug innovation.  Moreover, current law allows generic challengers to file duplicative claims in both federal court and through the IPR process.  And because IPR proceedings do not have a standing requirement, the process has been exploited  by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company by filing an IPR challenge in hopes of crashing the stock and profiting from the bet. The added expense to drug makers of defending both duplicative claims and claims against challengers that are exploiting the system increases litigation costs, which may be passed on to consumers in the form of higher prices. 

The Hatch-Waxman Integrity Act (HWIA) is designed to return the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers. It requires generic challengers to choose between either Hatch-Waxman litigation (which saves considerable costs by allowing generics to rely on the brand company’s safety and efficacy studies for FDA approval) or an IPR proceeding (which is faster and provides certain pro-challenger provisions). The HWIA would also eliminate the ability of hedge funds and similar entities to file IPR claims while shorting the stock.  By reducing duplicative litigation and the exploitation of the IPR process, the HWIA will reduce costs and strengthen innovation incentives for drug makers.  This will ensure that patent owners achieve clarity on the validity of their patents, which will spur new drug innovation and make sure that consumers continue to have access to life-improving drugs.

5. Curb illegal product hopping and patent thickets.  Two drug maker tactics currently garnering a lot of attention are so-called “product hopping” and “patent thickets.”  At its worst, product hopping involves brand drug makers making minor changes to a drug nearing the end of its patent so that they gets a new patent on the slightly-tweaked drug, and then withdrawing the original drug from the market so that patients shift to the newly patented drug and pharmacists can’t substitute a generic version of the original drug.  Similarly, at their worst, patent thickets involve brand drug makers obtaining a web of patents on a single drug to extend the life of their exclusivity and make it too costly for other drug makers to challenge all of the patents associated with a drug.  The proposed Affordable Prescriptions for Patients Act of 2019 is meant to stop these abuses of the patent system, which would facilitate generic entry and help to lower drug prices.

However, the Act goes too far by also capturing many legitimate activities in its definitions. For example, the bill defines as anticompetitive product-hopping the selling of any improved version of a drug during a window which extends to a year after the launch of the first generic competitor.  Presently, to acquire a patent and FDA approval, the improved version of the drug must be different and innovative enough from the original drug, yet the Act would prevent the drug maker from selling such a product without satisfying a demanding three-pronged test before the FTC or a district court.  Similarly, the Act defines as anticompetitive patent thickets any new patents filed on a drug in the same general family as the original patent, and this presumption can only be rebutted by providing extensive evidence and satisfying demanding standards to the FTC or a district court.  As a result, the Act deters innovation activity that is at all related to an initial patent and, in doing so, ignores the fact that most important drug innovation is incremental innovation based on previous inventions.  Thus, the proposal should be redrafted to capture truly anticompetitive product hopping and patent thicket activity, while exempting behavior this is critical for drug innovation. 

Reforms that close loopholes in the current patent process should facilitate competition in the pharmaceutical industry and help to lower drug prices.  However, lawmakers need to be sure that they don’t restrict patent rights to the extent that they deter innovation because a significant body of research predicts that patients’ health outcomes will suffer as a result.

Last week, Senator Orrin Hatch, Senator Thom Tillis, and Representative Bill Flores introduced the Hatch-Waxman Integrity Act of 2018 (HWIA) in both the Senate and the House of Representatives.  If enacted, the HWIA would help to ensure that the unbalanced inter partes review (IPR) process does not stifle innovation in the drug industry and jeopardize patients’ access to life-improving drugs.

Created under the America Invents Act of 2012, IPR is a new administrative pathway for challenging patents. It was, in large part, created to fix the problem of patent trolls in the IT industry; the trolls allegedly used questionable or “low quality” patents to extort profits from innovating companies.  IPR created an expedited pathway to challenge patents of dubious quality, thus making it easier for IT companies to invalidate low quality patents.

However, IPR is available for patents in any industry, not just the IT industry.  In the market for drugs, IPR offers an alternative to the litigation pathway that Congress created over three decades ago in the Hatch-Waxman Act. Although IPR seemingly fixed a problem that threatened innovation in the IT industry, it created a new problem that directly threatened innovation in the drug industry. I’ve previously published an article explaining why IPR jeopardizes drug innovation and consumers’ access to life-improving drugs. With Hatch-Waxman, Congress sought to achieve a delicate balance between stimulating innovation from brand drug companies, who hold patents, and facilitating market entry from generic drug companies, who challenge the patents.  However, IPR disrupts this balance as critical differences between IPR proceedings and Hatch-Waxman litigation clearly tilt the balance in the patent challengers’ favor. In fact, IPR has produced noticeably anti-patent results; patents are twice as likely to be found invalid in IPR challenges as they are in Hatch-Waxman litigation.

The Patent Trial and Appeal Board (PTAB) applies a lower standard of proof for invalidity in IPR proceedings than do federal courts in Hatch-Waxman proceedings. In federal court, patents are presumed valid and challengers must prove each patent claim invalid by “clear and convincing evidence.” In IPR proceedings, no such presumption of validity applies and challengers must only prove patent claims invalid by the “preponderance of the evidence.”

Moreover, whereas patent challengers in district court must establish sufficient Article III standing, IPR proceedings do not have a standing requirement.  This has given rise to “reverse patent trolling,” in which entities that are not litigation targets, or even participants in the same industry, threaten to file an IPR petition challenging the validity of a patent unless the patent holder agrees to specific pre-filing settlement demands.  The lack of a standing requirement has also led to the  exploitation of the IPR process by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company by filing an IPR challenge in hopes of crashing the stock and profiting from the bet.

Finally, patent owners are often forced into duplicative litigation in both IPR proceedings and federal court litigation, leading to persistent uncertainty about the validity of their patents.  Many patent challengers that are unsuccessful in invalidating a patent in district court may pursue subsequent IPR proceedings challenging the same patent, essentially giving patent challengers “two bites at the apple.”  And if the challenger prevails in the IPR proceedings (which is easier to do given the lower standard of proof), the PTAB’s decision to invalidate a patent can often “undo” a prior district court decision.  Further, although both district court judgments and PTAB decisions are appealable to the Federal Circuit, the court applies a more deferential standard of review to PTAB decisions, increasing the likelihood that they will be upheld compared to the district court decision.

The pro-challenger bias in IPR creates significant uncertainty for patent rights in the drug industry.  As an example, just last week patent claims for drugs generating $6.5 billion for drug company Sanofi were invalidated in an IPR proceeding.  Uncertain patent rights will lead to less innovation because drug companies will not spend the billions of dollars it typically costs to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them.   And, if IPR causes drug innovation to decline, a significant body of research predicts that patients’ health outcomes will suffer as a result.

The HWIA, which applies only to the drug industry, is designed to return the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers. It eliminates challengers’ ability to file duplicative claims in both federal court and through the IPR process. Instead, they must choose between either Hatch-Waxman litigation (which saves considerable costs by allowing generics to rely on the brand company’s safety and efficacy studies for FDA approval) and IPR (which is faster and provides certain pro-challenger provisions). In addition to eliminating generic challengers’ “second bite of the apple,” the HWIA would also eliminate the ability of hedge funds and similar entities to file IPR claims while shorting the stock.

Thus, if enacted, the HWIA would create incentives that reestablish Hatch-Waxman litigation as the standard pathway for generic challenges to brand patents.  Yet, it would preserve IPR proceedings as an option when speed of resolution is a primary concern.  Ultimately, it will restore balance to the drug industry to safeguard competition, innovation, and patients’ access to life-improving drugs.

On November 27, the U.S. Supreme Court will turn once again to patent law, hearing cases addressing the constitutionality of Patent Trial and Appeal Board (PTAB) “inter partes” review (Oil States Energy v. Greene), and whether PTAB must issue a final written decision as to every claim challenged by the petitioner in an inter partes review (SAS Institute v. Matal).

As the Justices peruse the bench memos and amicus curiae briefs concerning these cases, their minds will, of course, be focused on legal questions of statutory and constitutional interpretation.  Lurking in the background of these and other patent cases, however, is an overarching economic policy issue – have recent statutory changes and case law interpretations weakened U.S. patent protection in a manner that seriously threatens future American economic growth and innovation?  In a recent Heritage Foundation Legal Memorandum, I responded in the affirmative to this question, and argued that significant statutory reforms are needed to restore the American patent system to a position of global leadership that is key to U.S. economic prosperity.  (Among other things, I noted severe constitutional problems raised by PTAB’s actions, and urged that Congress consider passing legislation to reform PTAB, if the Supreme Court upholds the constitutionality of inter partes review.)

A timely opinion article published yesterday in the Wall Street Journal emphasizes that the decline in American patent protection also has profound negative consequences for American international economic competitiveness.  Journalist David Kline, author of the commentary (“Fear American Complacency, Not China”), succinctly contrasts unfortunate U.S. patent policy developments with the recent strengthening of the Chinese patent system (a matter of high priority to the Chinese Government):

China’s entrepreneurs have been fueled by reforms in recent years that strengthened intellectual property rights—ironic for a country long accused of stealing trade secrets and ignoring IP protections. Today Chinese companies are filing for more patents than American ones. The patent application and examination process has been streamlined, and China has established specialized intellectual property courts and tribunals to adjudicate lawsuits and issue injunctions against infringers. “IP infringers will pay a heavy price,” President Xi Jinping warned this summer. . . .

In the U.S., by contrast, a series of legislative actions and Supreme Court rulings have weakened patent rights, especially for startups. A new way of challenging patents called “inter partes review” results in at least one patent claim being thrown out in roughly 80% of cases, according to an analysis by Adam Mossoff, a law professor at George Mason University. Unsurprisingly, many of these cases were brought by defendants facing patent infringement lawsuits in federal court.

This does not bode well for America’s global competitiveness. The U.S. used to rank first among nations in the strength of its intellectual property rights. But the 2017 edition of the Global IP Index places the U.S. 10th—tied with Hungary.

The Supreme Court may not be able to take judicial notice of this policy reality (although strong purely legal arguments would support a holding that PTAB inter partes review is unconstitutional), but Congress certainly can take legislative notice of it.  Let us hope that Congress acts decisively to strengthen the American patent system – in the interests of a strong, innovative, and internationally competitive American economy.

In her distinguished tenure as a Commissioner and as Acting Chairman of the FTC, Maureen Ohlhausen has done an outstanding job in explaining the tie between robust patent protection and economic growth and innovation (see, for example, her Harvard Journal of Law and Technology article, here).  Her latest public pronouncement on this topic, an October 13 speech entitled “Strong Patent Rights, Strong Economy,” also makes a highly valuable contribution to the patent policy debate.  Ohlhausen’s speech centers on two key points:  “First, strong patent rights are crucial to economic success.  And, second, economically grounded analysis will reveal the right path through thickets of IP [intellectual property] skepticism.”  Ohlhausen concludes with a reaffirmation of the importance of having the United States lead by example on the world stage in defending strong patent rights:

Patents have been at the heart of US innovation since the founding of our country, and respect for patent rights is fundamental to advance innovation.  The United States is more technologically innovative than any other country in the world.  This reality reflects, in part, the property rights that the United States government grants to inventors.  Still, foreign counterparts take or allow the taking of American proprietary technologies without due payment.  For example, emerging competition regimes view “unfairly high royalties” as illegal under antitrust law.  The FTC’s recent policy work offers an important counterweight to this approach, illustrating the important role that patents play in promoting innovation and benefiting consumers.     

In closing, while we may live in an age of patent skepticism, there is hope. Criticism of IP rights frequently does not hold up upon closer examination. Rather, empirical research favors the close tie between strong IP rights and R&D.  This is not to say that changes to the patent system are always unwarranted.  Rather, the key to addressing the U.S. patent system lies in incremental adjustment where necessary based on a firm empirical foundation.  The U.S. economy stands as a shining reminder of everything that American innovation policy has achieved – and intellectual property rights, and patents, are the important cornerstones of those achievements.

Ohlhausen’s remarks are, as always, thoughtful and well worth studying.

On August 14, the Federalist Society’s Regulatory Transparency Project released a report detailing the harm imposed on innovation and property rights by the Patent Trial and Appeals Board, a Patent and Trademark Office patent review agency created by the infelicitously-named “America Invents Act” of 2011.  As the report’s abstract explains:

Patents are property rights secured to inventors of new products or services, such as the software and other high-tech innovations in our laptops and smart phones, the life-saving medicines prescribed by our doctors, and the new mechanical designs that make batteries more efficient and airplane engines more powerful. Many Americans first learn in school about the great inventors who revolutionized our lives with their patented innovations, such as Thomas Edison (the light bulb and record player), Alexander Graham Bell (the telephone), Nikola Tesla (electrical systems), the Wright brothers (airplanes), Charles Goodyear (cured rubber), Enrico Fermi (nuclear power), and Samuel Morse (the telegraph). These inventors and tens of thousands of others had the fruits of their inventive labors secured to them by patents, and these vital property rights have driven America’s innovation economy for over 225 years. For this reason, the United States has long been viewed as having the “gold standard” patent system throughout the world.

In 2011, Congress passed a new law, called the America Invents Act (AIA), that made significant changes to the U.S. patent system. Among its many changes, the AIA created a new administrative tribunal for invalidating “bad patents” (patents mistakenly issued because the claimed inventions were not actually new or because they suffer from other defects that create problems for companies in the innovation economy). This administrative tribunal is called the Patent Trial & Appeal Board (PTAB). The PTAB is composed of “administrative patent judges” appointed by the Director of the United States Patent & Trademark Office (USPTO). The PTAB administrative judges are supposed to be experts in both technology and patent law. They hold administrative hearings in response to petitions that challenge patents as defective. If they agree with the challenger, they cancel the patent by declaring it “invalid.” Anyone in the world willing to pay a filing fee can file a petition to invalidate any patent.

As many people are aware, administrative agencies can become a source of costs and harms that far outweigh the harms they were created to address. This is exactly what has happened with the PTAB. This administrative tribunal has become a prime example of regulatory overreach

Congress created the PTAB in 2011 in response to concerns about the quality of patents being granted to inventors by the USPTO. Legitimate patents promote both inventive activity and the commercial development of inventions into real-world innovation used by regular people the world over. But “bad patents” clog the intricate gears of the innovation economy, deterring real innovators and creating unnecessary costs for companies by enabling needless and wasteful litigation. The creation of the PTAB was well intended: it was supposed to remove bad patents from the innovation economy. But the PTAB has ended up imposing tremendous and unnecessary costs and creating destructive uncertainty for the innovation economy.

In its procedures and its decisions, the PTAB has become an example of an administrative tribunal run amok. It does not provide basic legal procedures to patent owners that all other property owners receive in court. When called upon to redress these concerns, the courts have instead granted the PTAB the same broad deference they have given to other administrative agencies. Thus, these problems have gone uncorrected and unchecked. Without providing basic procedural protections to all patent owners, the PTAB has gone too far with its charge of eliminating bad patents. It is now invalidating patents in a willy-nilly fashion. One example among many is that, in early 2017, the PTAB invalidated a patent on a new MRI machine because it believed this new medical device was an “abstract idea” (and thus unpatentable).

The problems in the PTAB’s operations have become so serious that a former federal appellate chief judge has referred to PTAB administrative judges as “patent death squads.” This metaphor has proven apt, even if rhetorically exaggerated. Created to remove only bad patents clogging the innovation economy, the PTAB has itself begun to clog innovation — killing large numbers of patents and casting a pall of uncertainty over every patent that might become valuable and thus a target of a PTAB petition to invalidate it.

The U.S. innovation economy has thrived because inventors know they can devote years of productive labor and resources into developing their inventions for the marketplace, secure in the knowledge that their patents provide a solid foundation for commercialization. Pharmaceutical companies depend on their patents to recoup billions of dollars in research and development of new drugs. Venture capitalists invest in startups on the basis of these vital property rights in new products and services, as viewers of Shark Tank see every week.

The PTAB now looms over all of these inventive and commercial activities, threatening to cancel a valuable patent at any moment and without rhyme or reason. In addition to the lost investments in the invalidated patents themselves, this creates uncertainty for inventors and investors, undermining the foundations of the U.S. innovation economy.

This paper explains how the PTAB has become a prime example of regulatory overreach. The PTAB administrative tribunal is creating unnecessary costs for inventors and companies, and thus it is harming the innovation economy far beyond the harm of the bad patents it was created to remedy. First, we describe the U.S. patent system and how it secures property rights in technological innovation. Second, we describe Congress’s creation of the PTAB in 2011 and the six different administrative proceedings the PTAB uses for reviewing and canceling patents. Third, we detail the various ways that the PTAB is now causing real harm, through both its procedures and its substantive decisions, and thus threatening innovation.

The PTAB has created fundamental uncertainty about the status of all patent rights in inventions. The result is that the PTAB undermines the market value of patents and frustrates the role that these property rights serve in the investment in and commercial development of the new technological products and services that make many aspects of our modern lives seem like miracles.

In June 2017, the U.S. Supreme Court agreed to review the Oil States Energy case, raising the question of whether PTAB patent review “violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.”  A Supreme Court finding of unconstitutionality would be ideal.  But in the event the Court leaves PTAB patent review intact, legislation to curb the worst excesses of PTAB – such as the bipartisan “STRONGER Patent Act of 2017” – merits serious consideration.  Stay tuned – I will have more to say in detail about potential patent law reforms, including the reining in of PTAB, in the near future.

On October 6, 2016, the U.S. Federal Trade Commission (FTC) issued Patent Assertion Entity Activity: An FTC Study (PAE Study), its much-anticipated report on patent assertion entity (PAE) activity.  The PAE Study defined PAEs as follows:

Patent assertion entities (PAEs) are businesses that acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers.  PAEs monetize their patents primarily through licensing negotiations with alleged infringers, infringement litigation, or both. In other words, PAEs do not rely on producing, manufacturing, or selling goods.  When negotiating, a PAE’s objective is to enter into a royalty-bearing or lump-sum license.  When litigating, to generate any revenue, a PAE must either settle with the defendant or ultimately prevail in litigation and obtain relief from the court.

The FTC was mindful of the costs that would be imposed on PAEs, required by compulsory process to respond to the agency’s requests for information.  Accordingly, the FTC obtained information from only 22 PAEs, 18 of which it called “Litigation PAEs” (which “typically sued potential licensees and settled shortly afterward by entering into license agreements with defendants covering small portfolios,” usually yielding total royalties of under $300,000) and 4 of which it dubbed “Portfolio PAEs” (which typically negotiated multimillion dollars licenses covering large portfolios of patents and raised their capital through institutional investors or manufacturing firms).

Furthermore, the FTC’s research was narrowly targeted, not broad-based.  The agency explained that “[o]f all the patents held by PAEs in the FTC’s study, 88% fell under the Computers & Communications or Other Electrical & Electronic technology categories, and more than 75% of the Study PAEs’ overall holdings were software-related patents.”  Consistent with the nature of this sample, the FTC concentrated primarily on a case study of PAE activity in the wireless chipset sector.  The case study revealed that PAEs were more likely to assert their patents through litigation than were wireless manufacturers, and that “30% of Portfolio PAE wireless patent licenses and nearly 90% of Litigation PAE wireless patent licenses resulted from litigation, while only 1% of Wireless Manufacturer wireless patent licenses resulted from litigation.”  But perhaps more striking than what the FTC found was what it did not uncover.  Due to data limitations, “[t]he FTC . . . [did not] attempt[] to determine if the royalties received by Study PAEs were higher or lower than those that the original assignees of the licensed patents could have earned.”  In addition, the case study did “not report how much revenue PAEs shared with others, including independent inventors, or the costs of assertion activity.”

Curiously, the PAE Study also leaped to certain conclusions regarding PAE settlements based on questionable assumptions and without considering legitimate potential incentives for such settlements.  Thus, for example, the FTC found it particularly significant that 77% of litigation PAE settlements were for less than $300,000.  Why?  Because $300,000 was a “de facto benchmark” for nuisance litigation settlements, merely based on one American Intellectual Property Law Association study that claimed defending a non-practicing entity patent lawsuit through the end of discovery costs between $300,000 and $2.5 million, depending on the amount in controversy.  In light of that one study, the FTC surmised “that discovery costs, and not the technological value of the patent, may set the benchmark for settlement value in Litigation PAE cases.”  Thus, according to the FTC, “the behavior of Litigation PAEs is consistent with nuisance litigation.”  As noted patent lawyer Gene Quinn has pointed out, however, the FTC ignored the alternative eminently logical possibility that many settlements for less than $300,000 merely represented reasonable valuations of the patent rights at issue.  Quinn pithily stated:

[T]he reality is the FTC doesn’t know enough about the industry to understand that $300,000 is an arbitrary line in the sand that holds no relevance in the real world. For the very same reason that they said the term “patent troll” is unhelpful (i.e., because it inappropriately discriminates against rights owners without understanding the business model and practices), so too is $300,000 equally unhelpful. Without any understanding or appreciation of the value of the core innovation subject to the license there is no way to know whether a license is being offered for nuisance value or whether it is being offered at full, fair and appropriate value to compensate the patent owner for the infringement they had to chase down in litigation.

I thought the FTC was charged with ensuring fair business practices? It seems what they are doing is radically discriminating against incremental innovations valued at less than $300,000 and actually encouraging patent owners to charge more for their licenses than they are worth so they don’t get labeled a nuisance. Talk about perverse incentives! The FTC should stick to areas where they have subject matter competence and leave these patent issues to the experts.     

In sum, the FTC found that in one particular specialized industry sector featuring a certain  category of patents (software patents), PAEs tended to sue more than manufacturers before agreeing to licensing terms – hardly a surprising finding or a sign of a problem.  (To the contrary, the existence of “substantial” PAE litigation that led to licenses might be a sign that PAEs were acting as efficient intermediaries representing the interests and effectively vindicating the rights of small patentees.)  The FTC was not, however, able to comment on the relative levels of royalties, the extent to which PAE revenues were distributed to inventors, or the costs of PAE litigation (as opposed to any other sort of litigation).  Additionally, the FTC made certain assumptions about certain PAE litigation settlements that ignored reasonable alternative explanations for the behavior that was observed.  Accordingly, the reasonable observer would conclude from this that the agency was (to say the least) in no position to make any sort of policy recommendations, given the absence of any hard evidence of PAE abuses or excessive waste from litigation.

Unfortunately, the reasonable observer would be mistaken.  The FTC recommended reforms to: (1) address discovery burden and “cost asymmetries” (the notion that PAEs are less subject to costly counterclaims because they are not producers) in PAE litigation; (2) provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits; (3) streamline multiple cases brought against defendants on the same theories of infringement; and (4) provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.

Without getting into the merits of these individual suggestions (and without in any way denigrating the hard work and dedication of the highly talented FTC staffers who drafted the PAE Study), it is sufficient to note that they bear no logical relationship to the factual findings of the report.  The recommendations, which closely echo certain elements of various “patent reform” legislative proposals that have been floated in recent years, could have been advanced before any data had been gathered – with a saving to the companies that had to respond.  In short, the recommendations are classic pre-baked “solutions” to problems that have long been hypothesized.  Advancing such recommendations based on discrete information regarding a small skewed sample of PAEs – without obtaining crucial information on the direct costs and benefits of the PAE transactions being observed, or the incentive effects of PAE activity – is at odds with the FTC’s proud tradition of empirical research.  Unfortunately, Devin Hartline of the Antonin Scalia Law School proved prescient when commenting last April on the possible problems with the PAE Report, based on what was known about it prior to its release (and based on the preliminary thoughts of noted economists and law professors):

While the FTC study may generate interesting information about a handful of firms, it won’t tell us much about how PAEs affect competition and innovation in general.  The study is simply not designed to do this.  It instead is a fact-finding mission, the results of which could guide future missions.  Such empirical research can be valuable, but it’s very important to recognize the limited utility of the information being collected.  And it’s crucial not to draw policy conclusions from it.  Unfortunately, if the comments of some of the Commissioners and supporters of the study are any indication, many critics have already made up their minds about the net effects of PAEs, and they will likely use the study to perpetuate the biased anti-patent fervor that has captured so much attention in recent years.

To the extent patent reform is warranted, it should be considered carefully in a measured fashion, with full consideration given to the costs, benefits, and potential unintended consequences of suggested changes to the patent system and to litigation procedures.  As John Malcolm and I explained in a 2015 Heritage Foundation Legal Backgrounder which explored the relative merits of individual proposed reforms:

Before deciding to take action, Congress should weigh the particular merits of individual reform proposals carefully and meticulously, taking into account their possible harmful effects as well as their intended benefits. Precipitous, unreflective action on legislation is unwarranted, and caution should be the byword, especially since the effects of 2011 legislative changes and recent Supreme Court decisions have not yet been fully absorbed. Taking time is key to avoiding the serious and costly errors that too often are the fruit of omnibus legislative efforts.

Notably, this Legal Backgrounder also noted potential beneficial aspects of PAE activity that were not reflected in the PAE Study:

[E]ven entities whose business model relies on purchasing patents and licensing them or suing those who refuse to enter into licensing agreements and infringe those patents can serve a useful—even a vital—purpose. Some infringers may be large companies that infringe the patents of smaller companies or individual inventors, banking on the fact that such a small-time inventor will be less likely to file a lawsuit against a well-financed entity. Patent aggregators, often backed by well-heeled investors, help to level the playing field and can prevent such abuses.

More important, patent aggregators facilitate an efficient division of labor between inventors and those who wish to use those inventions for the betterment of their fellow man, allowing inventors to spend their time doing what they do best: inventing. Patent aggregators can expand access to patent pools that allow third parties to deal with one vendor instead of many, provide much-needed capital to inventors, and lead to a variety of licensing and sublicensing agreements that create and reflect a valuable and vibrant marketplace for patent holders and provide the kinds of incentives that spur innovation. They can also aggregate patents for litigation purposes, purchasing patents and licensing them in bundles.

This has at least two advantages: It can reduce the transaction costs for licensing multiple patents, and it can help to outsource and centralize patent litigation for multiple patent holders, thereby decreasing the costs associated with such litigation. In the copyright space, the American Society of Composers, Authors, and Publishers (ASCAP) plays a similar role.

All of this is to say that there can be good patent assertion entities that seek licensing agreements and file claims to enforce legitimate patents and bad patent assertion entities that purchase broad and vague patents and make absurd demands to extort license payments or settlements. The proper way to address patent trolls, therefore, is by using the same means and methods that would likely work against ambulance chasers or other bad actors who exist in other areas of the law, such as medical malpractice, securities fraud, and product liability—individuals who gin up or grossly exaggerate alleged injuries and then make unreasonable demands to extort settlements up to and including filing frivolous lawsuits.

In conclusion, the FTC would be well advised to avoid putting forth patent reform recommendations based on the findings of the PAE Study.  At the very least, it should explicitly weigh the implications of other research, which explores PAE-related efficiencies and considers all the ramifications of procedural and patent law changes, before seeking to advance any “PAE reform” recommendations.

It’s not quite so simple to spur innovation. Just ask the EU as it resorts to levying punitive retroactive taxes on productive American companies in order to ostensibly level the playing field (among other things) for struggling European startups. Thus it’s truly confusing when groups go on a wholesale offensive against patent rights — one of the cornerstones of American law that has contributed a great deal toward our unparalleled success as an innovative economy.

Take EFF, for instance. The advocacy organization has recently been peddling sample state legislation it calls the “Reclaim Invention Act,” which it claims is targeted at reining in so-called “patent trolls.” Leaving aside potential ulterior motives (like making it impossible to get software patents at all), I am left wondering what EFF actually hopes to achieve.

“Troll” is a scary sounding word, but what exactly is wrapped up in EFF’s definition? According to EFF’s proposed legislation, a “patent assertion entity” (the polite term for “patent troll”) is any entity that primarily derives its income through the licensing of patents – as opposed to actually producing the invention for public consumption. But this is just wrong. As Zorina Khan has noted, the basic premise upon which patent law was constructed in the U.S. was never predicated upon whether an invention would actually be produced:

The primary concern was access to the new information, and the ability of other inventors to benefit from the discovery either through licensing, inventing around the idea, or at expiration of the patent grant. The emphasis was certainly not on the production of goods; in fact, anyone who had previously commercialized an invention lost the right of exclusion vested in patents. The decision about how or whether the patent should be exploited remained completely within the discretion of the patentee, in the same way that the owner of physical property is allowed to determine its use or nonuse.

Patents are property. As with other forms of property, patent holders are free to transfer them to whomever they wish, and are free to license them as they see fit. The mere act of exercising property rights simply cannot be the basis for punitive treatment by the state. And, like it or not, licensing inventions or selling the property rights to an invention is very often how inventors are compensated for their work. Whether one likes the Patent Act in particular or not is irrelevant; as long as we have patents, these are fundamental economic and legal facts.

Further, the view implicit in EFF’s legislative proposal completely ignores the fact that the people or companies that may excel at inventing things (the province of scientists, for example) may not be so skilled at commercializing things (the province of entrepreneurs). Moreover, inventions can be enormously expensive to commercialize. In such cases, it could very well be the most economically efficient result to allow some third party with the requisite expertise or the means to build it, to purchase and manage the rights to the patent, and to allow them to arrange for production of the invention through licensing agreements. Intermediaries are nothing new in society, and, despite popular epithets about “middlemen,” they actually provide a necessary function with respect to mobilizing capital and enabling production.

Granted, some companies will exhibit actual “troll” behavior, but the question is not whether some actors are bad, but whether the whole system overall optimizes innovation and otherwise contributes to greater social welfare. Licensing patents in itself is a benign practice, so long as the companies that manage the patents are not abusive. And, of course, among the entities that engage in patent licensing, one would assume that universities would be the most unobjectionable of all parties.

Thus, it’s extremely disappointing that EFF would choose to single out universities as aiders and abettors of “trolls” — and in so doing recommend punitive treatment. And what EFF recommends is shockingly draconian. It doesn’t suggest that there should be heightened review in IPR proceedings, or that there should be fee shifting or other case-by-case sanctions doled out for unwise partnership decisions. No, according to the model legislation, universities would be outright cut off from government financial aid or other state funding, and any technology transfers would be void, unless they:

determine whether a patent is the most effective way to bring a new invention to a broad user base before filing for a patent that covers that invention[;] … prioritize technology transfer that develops its inventions and scales their potential user base[;] … endeavor to nurture startups that will create new jobs, products, and services[;] … endeavor to assign and license patents only to entities that require such licenses for active commercialization efforts or further research and development[;] … foster agreements and relationships that include the sharing of know-how and practical experience to maximize the value of the assignment or license of the corresponding patents; and … prioritize the public interest in all patent transactions.

Never mind the fact that recent cases like Alice Corp., Octane Fitness, and Highmark — as well as the new inter partes review process — seem to be putting effective downward pressure on frivolous suits (as well as, potentially, non-frivolous suits, for that matter); apparently EFF thinks that putting the screws to universities is what’s needed to finally overcome the (disputed) problems of excessive patent litigation.

Perhaps reflecting that even EFF itself knows that its model legislation is more of a publicity stunt than a serious proposal, most of what it recommends is either so ill-defined as to be useless (e.g., “prioritize public interest in all patent transactions?” What does that even mean?) or is completely mixed up.

For instance, the entire point of a university technology transfer office is that educational institutions and university researchers are not themselves in a position to adequately commercialize inventions. Questions of how large a user base a given invention can reach, or how best to scale products, grow markets, or create jobs are best left to entrepreneurs and business people. The very reason a technology transfer office would license or sell its patents to a third party is to discover these efficiencies.

And if a university engages in a transfer that, upon closer scrutiny, runs afoul of this rather fuzzy bit of legislation, any such transfers will be deemed void. Which means that universities will either have to expend enormous resources to find willing partners, or will spend millions on lawsuits and contract restitution damages. Enacting these feel-good  mandates into state law is at best useless, and most likely a tool for crusading plaintiff’s attorneys to use to harass universities.

Universities: Don’t you dare commercialize that invention!

As I noted above, it’s really surprising that groups like EFF are going after universities, as their educational mission and general devotion to improving social welfare should make them the darlings of social justice crusaders. However, as public institutions with budgets and tax statuses dependent on political will, universities are both unable to route around organizational challenges (like losing student aid or preferred tax status) and are probably unwilling to engage in wholesale PR defensive warfare for fear of offending a necessary political constituency. Thus, universities are very juicy targets — particularly when they engage in “dirty” commercial activities of any sort, no matter how attenuated.

And lest you think that universities wouldn’t actually be harassed (other than in the abstract by the likes of EFF) over patents, it turns out that it’s happening even now, even without EFF’s proposed law.

For the last five years Princeton University has been locked in a lawsuit with some residents of Princeton, New Jersey who have embarked upon a transparently self-interested play to divert university funds to their own pockets. Their weapon of choice? A challenge to Princeton’s tax-exempt status based on the fact that the school licenses and sells its patented inventions.

The plaintiffs’ core argument in Fields v. Princeton is that the University should be  a taxpaying entity because it occasionally generates patent licensing revenues from a small fraction of the research that its faculty conducts in University buildings.

The Princeton case is problematic for a variety of reasons, one of which deserves special attention because it runs squarely up against a laudable federal law that is intended to promote research, development, and patent commercialization.

In the early 1980s Congress passed the Bayh-Dole Act, which made it possible for universities to retain ownership over discoveries made in campus labs. The aim of the law was to encourage essential basic research that had historically been underdeveloped. Previously, the rights to any such federally-funded discoveries automatically became the property of the federal government, which, not surprisingly, put a damper on universities’ incentives to innovate.

When universities collaborate with industry — a major aim of Bayh-Dole — innovation is encouraged, breakthroughs occur, and society as a whole is better off. About a quarter of the top drugs approved since 1981 came from university research, as did many life-changing products we now take for granted, like Google, web browsers, email, cochlear implants and major components of cell phones. Since the passage of the Act, a boom in commercialized patents has yielded billions of dollars of economic activity.

Under the Act innovators are also rewarded: Qualifying institutions like Princeton are required to share royalties with the researchers who make these crucial discoveries. The University has no choice in the matter; to refuse to share the revenues would constitute a violation of the terms of federal research funding. But the Fields suit ignores this reality an,d in much the same way as EFF’s proposed legislation, will force a stark choice upon Princeton University: engage with industry, increase social utility and face lawsuits, or keep your head down and your inventions to yourself.

A Hobson’s Choice

Thus, things like the Fields suit and EFF’s proposed legislation are worse than costly distractions for universities; they are major disincentives to the commercialization of university inventions. This may not be the intended consequence of these actions, but it is an entirely predictable one.

Faced with legislation that punishes them for being insufficiently entrepreneurial and suits that attack them for bothering to commercialize at all, universities will have to make a hobson’s choice: commercialize the small fraction of research that might yield licensing revenues and potentially face massive legal liability, or simply decide to forego commercialization (and much basic research) altogether.

The risk here, obviously, is that research institutions will choose the latter in order to guard against the significant organizational costs that could result from a change in their tax status or a thicket of lawsuits that emerge from voided technology transfers (let alone the risk of losing student aid money).

But this is not what we want as a society. We want the optimal level of invention, innovation, and commercialization. What anti-patent extremists and short-sighted state governments may obtain for us instead, however, is a status quo much like Europe where the legal and regulatory systems perpetually keep innovation on a low simmer.

About a month ago, I was asked by some friends about the shift from the first-to-invent patent system to a first-to-file patent system in the America Invents Act of 2011 (AIA). I was involved briefly in the policy debates in the spring of 2011 leading up to the enactment of the AIA, and so this query prompted me to share a short essay I wrote in May 2011 on this issue. In this essay, I summarized my historical scholarship I had published up to that point in law journals on the legal definition and protection of patents in the Founding Era and in the early American Republic. I concluded that a shift to a first-to-file patent system contradicted both the constitutional text and the early judicial interpretations of the patent statutes that secured patent rights to first inventors.

This legal issue will likely reach the courts one day. A constitutional challenge a couple years ago was rightly dismissed as not being justiciable, but there may yet be an appropriate case in which an inventor is denied a patent given that he or she lost the race to file first in the Patent Office. So, after sharing my essay with my friends, I thought it valuable to post it again on the Internet, because the website on which it was first published (www.noonHR1249.com) slipped into digital oblivion long ago.

I was asked to write this essay in May 2011 by the U.S. Business & Industry Council (USBIC)[1] The USBIC requested my scholarly analysis of the first-to-file provision of the AIA, which was being debated as H.R. 1249 on Capitol Hill at the time, because I had been publishing articles in law journals on the legal definition and protection of patents as property rights in the Founding Era and in the early American Republic (see here and here for two examples). In my essay, I identified the relevant text in the Constitution, which authorizes Congress to secure an exclusive right to “Inventors” in their “Discoveries” (Article 1, Section 8, Clause 8). Based on my academic research, I summarized in my essay the historical Supreme Court and lower federal court decisions, which secured patents to inventors according to the same policy justifications used in common-law cases to justify property rights to first possessors of land. Thus, I concluded that the first-to-file provision in the American Invents Act was unconstitutional, based on well-recognized arguments concerning textual analysis of the Constitution and inferences from original public meaning as reflected in the historical judicial record.

There’s more to my essay, though, than just the substantive legal argument. It also provides an insight into the nature of the legal academic debates going back many years, because at the time Professor Mark Lemley of Stanford Law School compared me to an “Obama-birther” and he called this constitutional and legal argument “fringe science.” Given concerns expressed last year in an open letter co-authored by Professor Lemley and others about inappropriate rhetoric used by academics, among other issues (see here for a news report on this letter), it bears noting for the record that this is a concern that goes back many years.

Here’s the basic story: My essay was published by the USBIC in May 2011 and I was invited to speak in congressional staffer briefings and in other venues in Capitol Hill against the AIA on this issue. At this time, I was the only legal academic writing and speaking on Capitol Hill on this issue in the AIA. In late May, the 21st Century Coalition for Patent Reform, which supported enactment of the AIA, distributed on Capitol Hill a response that it had solicited from Professor Lemley. I no longer possess this response statement that was sent out via email by the 21st Century Coalition, but I do have the response I was asked to write on June 1, 2011 in which I explicitly refer to Professor Lemley’s argument against the first-to-invent position. In response to a law professors’ letter to Congress defending the first-to-file provision in the AIA that was circulated on an IP professors listserv (IPProfs), I sent out on IPProfs on June 11 a draft letter to Congress, calling for signatures from other law professors in support of my argument first presented in my essay (the final version is here). The next day, on June 12, Professor Lemley wrote on Facebook that my constitutional and legal argument made me the same as an “Obama-birther.”[2] Although he didn’t refer directly to me, it was clear that it was directed at me given that this posting by Lemley followed the day after my email to all IP professors asking them to join my letter to Congress, and I also was the only law professor actively writing on this issue and speaking on it on Capitol Hill up until then.

The following year, in a New York Times article on the court challenge to the first-to-file provision, Professor Lemley further characterized this constitutional argument as “the legal equivalent of fringe science.”

Before the spring of 2011, my writings on legal doctrine and policy were published only in law journals, and I had never participated in a policy debate over patent legislation. In my academic articles before this time, I had critiqued Professor Lemley’s incorrect historical claims about whether U.S. patents were considered monopolies or property rights, and they reflected a purely academic tone that one should expect in a law journal article (see here). Before spring 2011, I had never addressed Professor Lemley, nor had he addressed me, about the AIA, other legislation or court cases.

Professor Lemley’s “Obama-birther” attack on me was surprising, and when I replied in the comments to his Facebook post solely on the substantive merits of the issue of policy versus law, Professor Lemley defended his accusation against me. (This is evidenced in the screen shot.)[2] At the time, I was still a relatively junior academic, and this was an object lesson about what a senior academic at a top-five-ranked law school considers acceptable in addressing a much-more junior academic with whom he disagrees. This remark in 2011 was not an outlier either, as Professor Lemley has used similar rhetoric in the ensuing years in addressing academics with whom he disagrees; for instance, a couple years ago, Professor Lemley publicly referred to an academic conference that I and other patent scholars participated in as a “Tea Party convention.”

Of course, legal and constitutional disputes consist of opposing arguments. In court cases and legislative debates, there are colorable legal and policy arguments on both sides of a dispute. Few issues are so irrational that they are not even cognizable as having a supporting argument, such as astrology and conspiracy theories like the birthers or 9-11 truthers. So, I will simply let my essay speak for itself as to whether it makes me the same as an “Obama-birther” and if my argument represents “fringe science.”

More important, if or when a good case arises in which an inventor can rightly claim an identifiable and specific harm as a result of the statutory change created by the AIA, I hope my essay will be of some value.

[1] Full disclosure: The U.S. Business & Industry Council paid me for my time in writing the essay, which I disclosed in the essay itself. Unfortunately, as recently reported by IAM Magazine, other legal academics are not always so forthcoming about their financial and legal connections to companies when publicly commenting on court cases or advocating for enactment of legislation.

[2] This is a link to a screen shot I took last year only because the Facebook post by Professor Lemley recently disappeared after I only quoted the language from it about a month ago when I shared on Facebook my essay with my friends and colleagues.

UPDATE on June 7: I added some more supporting links and some additional information after this was initially published on June 6, 2016.

The U.S. Supreme Court’s unanimous June 13 decision (per Chief Justice John Roberts) in Halo Electronics v. Pulse Electronics, overturning the Federal Circuit’s convoluted Seagate test for enhanced damages, is good news for patent holders.  By reducing the incentives for intentional patent infringement (due to the near impossibility of obtaining punitive damages relief under Seagate), Halo Electronics helps enhance the effectiveness of patent enforcement, thereby promoting a more robust patent system.

The complexity and unwieldiness of the Seagate test is readily apparent from this description:

35 U.S.C. § 284 provides simply that “the court may increase the damages up to three times the amount found or assessed.” Nevertheless, in In re Seagate Technology, LLC, 497 F.3d 1360 (2007) (en banc) the Federal Circuit erected a two-part barrier for patentees to clear before a district court could exercise its enhancement discretion under the statute. First, a patent owner must “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted an infringement of a valid patent.” This first part of the test is not met if the infringer, during infringement proceedings, raises a substantial question as to the validity or non-infringement of the patent, regardless of whether the infringer’s prior conduct was egregious. Second, the patentee must demonstrate that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” On appeal, the Federal Circuit would review the first step of the test—objective recklessness—de novo; the second part—subjective knowledge—for substantial evidence; and the ultimate decision—whether to award enhanced damages—for abuse of discretion.

In short, under Seagate, even if (1) the patentee presented substantial evidence that the infringer intentionally infringed its patent (under the second part of the test), and (2) the infringer’s prior conduct was egregious, the infringer could avoid enhanced damages merely by raising a “substantial question” as to the validity or non-infringement of the patent.  Because in most cases mere “questions” as to validity or non-infringement could readily be ginned up ex post, intentional infringers, including truly “bad actors,” could largely ignore the risk of being assessed anything more than actual damages.

Moreover, the Seagate test should be viewed in light of other major policy changes that have diminished the value of patents, such as the near impossibility of obtaining permanent injunctive relief for patent infringement following the Supreme Court’s 2006 eBay decision (see, for example, here), plus the recent downward trend in patent damage awards (see, for example, here) and increasingly common administrative patent invalidations (see, for example, here).  All told, these developments have incentivized parties to “go ahead and produce,” without regard to the patents they might be infringing, in the knowledge that, at worst, they might at some future time be held liable for something akin to the reasonable royalties they should have agreed to pay in the first place.

Chief Justice Roberts’ opinion for the Court in Halo Electronics in effect reinstates the longstanding historical understandings that in patent infringement cases:  (1) district court judges enjoy broad discretion to assess enhanced damages “for egregious infringement behavior”; and (2) the standard “preponderance of the evidence” standard of civil litigation (rather than the far more exacting “clear and convincing evidence” standard of proof) applies to enhanced damages determinations.  In so doing, it puts potential infringers on notice that exemplary damages for egregious infringing actions cannot be avoided after the fact by manufactured theories (“questions”) of possible patent invalidity or non-applicability of a patent’s claims to the conduct in question.  This in turn should raise the expected costs of intentional patent infringement, thereby increasing the incentive for technology implementers to negotiate ex ante with patent holders over license terms.  To the extent this incentive change results in a higher incidence of licensing ex ante, a lower incidence of costly infringement litigation, and higher returns to patentees, economic welfare should tend to rise.

Halo Electronics’ “halo effect” should not, of course, be oversold.  The meaning of “egregious infringement behavior” will have to be hashed out in federal litigation, and it is unclear to what extent federal district courts may show a greater inclination to assess enhanced damages.   Furthermore, recent legislative and regulatory policy changes and uncertainties (including rising “anti-patent” sentiments in the Executive Branch, see, for example, here) continue to constrain incentives to patent, to the detriment of economic welfare.  Nevertheless, while perhaps less than “heavenly” in its impact, the Halo Electronics decision should have some effect in summoning up “the better angels of technology implementers’ nature” (paraphrasing Abraham Lincoln, a firm believer in a robust patent system) and causing them to better respect the property rights imbedded in the patented innovations on which they rely.