Saturday, November 28, 2015

Tim Holbrook on Induced Patent Infringement at the Supreme Court

Tim Holbrook (Emory Law) has a new article, The Supreme Court's Quiet Revolution in Induced Patent Infringement (forthcoming in the Notre Dame Law Review), arguing that with all the hand-wringing over Supreme Court patentable subject matter cases, scholars have missed the substantial changes the Court has wrought in induced patent infringement. Here is the abstract:
The Supreme Court over the last decade or so has reengaged with patent law. While much attention has been paid to the Court’s reworking of what constitutes patent eligible subject matter and enhancing tools to combat “patent trolls,” what many have missed is the Court’s reworking of the contours of active inducement of patent infringement under 35 U.S.C. § 271(b). The Court has taken the same number of § 271(b) cases as subject matter eligibility cases – four. Yet this reworking has not garnered much attention in the literature. This article offers the first comprehensive assessment of the Court’s efforts to define active inducement. In so doing, it identifies the surprising significance of the Court’s most recent case, Commil USA, LLC v. Cisco Systems, Inc., where the Court held that a good faith belief on the part of the accused inducer cannot negate the mental state required for inducement – the intent to induce acts of infringement. In so doing, the Court moved away from its policy of encouraging challenges to patent validity as articulated in Lear, Inc. v. Adkins and its progeny. This step away from Lear is significant and surprising, particularly where critiques of the patent system suggest there are too many invalid patents creating issues for competition. This article critiques these aspects of Commil and then addresses lingering, unanswered questions. In particular, this article suggests that a good faith belief that the induced acts are not infringing, which remains as a defense, should only act as a shield against past damages and not against prospective relief such as injunctions or ongoing royalties. The courts so far have failed to appreciate this important temporal dynamic.
The four cases he's talking about are Grokster, Global-Tech, Limelight, and Commil. (You might say, "Wait, Grokster is a copyright case!" But Holbrook explains the substantial impact it had on patent law.) I think the article is worth a read, and that the concluding point on damages is quite interesting.

Tuesday, November 24, 2015

Decoding the Patent Venue Statute

Last Friday, Colleen Chien and I published an op-ed in the Washington Post arguing that the courts and/or Congress should take a hard look at venue provisions. It was a fun and challenging project, because we worked hard to delineate where we agreed and where we disagreed. One area where we weren't sure if we disagreed or not was whether the 2011 amendment to the general venue provisions should affect patent venue.

This is a thorny statutory interpretation issue, and because we didn't have space to discuss it in the op-ed (nor did we agree on all the details), I thought I would lay out my view of the issues here. My views don't speak for Colleen. Further, while my views fall on one side, they do so based solely on statutory interpretation. I don't have a horse in the policy race other than to say that it's important, it's complicated, and it should be considered.

Here is my tracing of the history:

Thursday, November 19, 2015

Defending a Federal Trade Secrets Law

This last week, 42 professors sent a letter to Congress opposing the Defend Trade Secrets Act. This same week, James Pooley, a well-known attorney and former Deputy Director General of WIPO, released a draft of The Myth of the Trade Secret Troll: Why We Need a Federal Civil Claim for Trade Secret Misappropriation, forthcoming in the George Mason Law Review.

Jim Pooley is the author of a treatise on trade secrets, and I respect him greatly. He has forgotten more about trade secrets than most people will ever know, and it should be no surprise that this support of the DTSA is the most well-reasoned that I've seen. He considers each of the studies one by one and and addresses their concerns: that the UTSA is not that uniform, that the seizure provision is narrow, that global trade secret risks require federal jurisdiction, and that state trade secret laws will not be preempted.

The paper is worth a read. It is likely to be persuasive to those who are on board. It might sway those that are undecided.

I'm right in the middle on this one. I signed on the professor's letter, but barely. I think the latest version of the proposed law is much improved from before, but I have concerns about inevitable disclosure and the seizure rules.

Here is my take on four of the primary defenses of/needs for the new act:

It's a cyber world that needs federal procedures: A big part of the push for a federal law is that it opens up federal courts to trade secret cases and thus better procedures. While I understand this, I wonder whether the argument proves too much. If the concern is about foreign actors acting over the network, then federal courts will have diversity jurisdiction, and all the procedural hurdles melt away. Further, if it's about procedure, then a simple solution would be to allow filing of trade secret actions in federal court. Furthermore, the procedural advantages are not a panacea; sometimes state court judges are more accessible and move faster than federal judges. Pooley argues the opposite, but my own, admittedly more limited, experience is that it depends on the judge, not the forum. Furthermore, the procedures are improved in a federal system, but it was only in 2014 that out of district subpoenas could issue in the local district court, and one must still file motions in the remote district to enforce them.

The UTSA is not really that uniform: This is true. Indeed, I wrote an empirical essay and book chapter showing that courts routinely fail to cite other state court Uniform Trade Secrets Act decisions. But it is not clear that the non-uniformities, either in statute or in practice, are of the type that will affect important outcomes when there is a real trade secret misappropriation. I've yet to hear of a case where the venue's peculiar trade secret laws made a difference to the types of "global cyber-espionage" type misappropriation that Pooley is concerned with.

Seizures rules are narrow, and they are narrower than they were in prior drafts: In my studies, injunctions were the types of decisions least likely to result in citation to UTSA cases, as opposed to "general" injunction law. This seems to favor the need for a specialized procedure. That said, I've yet to hear a convincing reason why TRO practice is insufficient or why they must be in federal court. I've represented clients on both sides of seizures, and I've seen how court papers can be manipulated to get desired results. This is not to say that we shouldn't have ex parte seizures; just that the case for a specialized procedure is not clear. I've yet to hear of a case with a real misappropriation of the "global cyber-espionage" type where a TRO was refused and the bad guys got away. I also think that the seizure laws are not quite as narrow as they could be - there is still plenty of room for abuse.

The proposed act is neutral on inevitable disclosure: The paper makes a good point: inevitable disclosure is not substantive trade secret law, but instead how courts apply "threatened" misappropriation injunctions. This is true, but it doesn't answer the concern. Some states have a stronger policy of employee mobility than others, and thus require more evidence of a threat. The concern with a federal law is that precedent in one circuit (or district court) will be applied in other district courts. That state trade secret law is not preempted is no answer, because the supremacy clause will dictate how federal law applies. State trademark laws aren't preempted either, and we don't see those applied very often-and never to allow more use by the defendant, only less. Thus, the standard for what constitutes a "threat" could be weakened, and that concerns those who view employee mobility important for competition policy. While I agree with Pooley on the doctrine, I don't think the doctrinal view is enough to persuade that this is not a concern.

So, where does that leave us? Quite frankly, I don't know. I think that the case for a federal trade secret law is not that strong. There are benefits to such a law, but I'm not convinced they are so great that we should supplant 150 years of state regulation of trade secrets. On the other hand, I don't think the case for keeping state trade secret laws is that great either. I like the federalist experiment argument, but there are a whole lot of states that have rules that I don't like (such as the inevitable disclosure doctrine). In my view, no one has made the case that one system is better than the other.

What I do think would be helpful - to me, at least - would be to hear the horror stories of trade secret misappropriation where current law and procedure failed, and the misappropriator got away because we did not have this law. I bet there are some such stories, but I haven't heard one yet.

Wednesday, November 18, 2015

McCarthy & Roumiantseva on Federal Circuit Exclusive Trademark Jurisdiction: "We Think Not"

Even though the Federal Circuit is often called "the patent court," it hears appeals in a wide variety of areas. Statistics on caseload by origin are available here; note that patent appeals have ballooned to 62% of the docket in FY2015 from 29% in FY2006.

A number of commentators have proposed "fixing" the Federal Circuit by adjusting its jurisdiction; for example, Paul Gugliuzza's creative suggestion has been discussed on this blog. One proposal has been to give the court exclusive jurisdiction over trademark cases. Tom McCarthy and Dina Roumiantseva think it is time to squelch any enthusiasm for this idea:
With some regularity over the years, a proposal is made to change the Lanham Act so that appeals in all Lanham Act trademark and false advertising cases from district courts across the United States will be diverted from the regional circuit courts of appeal to the Court of Appeals for the Federal Circuit. We think it is time to discuss this proposal head on and hopefully to convince the reader that this diversion is not a good idea and should never be implemented. Advocates of this proposal claim that trademark law would benefit from the consistency that a single appeals court could provide and that the Federal Circuit has exceptional expertise in trademark law. We believe, however, that trademark law does not suffer from the kind of circuit conflict that led to the channeling of all patent appeals to the Federal Circuit in 1982. Moreover, our review of case law suggests that some regional circuits have a comparable or greater experience with trademark law. We argue that no change in the present system of trademark appeals is needed.
Given the benefits of policy diversity and the lack of a compelling argument for centralizing trademark appeals, I tend to agree. Their full essay, Divert All Trademark Appeals to the Federal Circuit? We Think Not, is on SSRN.

Will there ever be changes to the Federal Circuit's jurisdiction? Given the lack of consensus on whether the current jurisdiction creates problems and if so, how best to fix it in a way that is both sound and politically palatable, I don't foresee any imminent changes.

Thursday, November 12, 2015

Erika Lietzan on the Myths of Data Exclusivity

Erika Lietzan joined the Missouri Law faculty last fall after a distinguished career practicing FDA law, which included making partner at Covington & Burling and serving as Assistant General Counsel for PhRMA (the pharmaceutical lobbying organization). She thus has a wealth of knowledge about the intricacies of pharmaceutical patents and FDA approval, and scholars and reporters interested in the details of pharma news (like the Daraprim controversy) could learn a lot by contacting her.

Lietzan recently posted The Myths of Data Exclusivity. The data exclusivity period for a drug is the period during which the FDA won't allow a generic to rely on the drug's clinical trial data for approval—typically 5 years for new non-biological drugs and 12 years for biological drugs. Data exclusivity was most recently in the news as the "final sticking point" in the TPP negotiations.

Data exclusivity is typically viewed as a patent-like benefit for innovative firms that provides a market-based reward by allowing firms to charge supracompetitive prices. But Lietzan attempts to reframe data exclusivity as not a benefit for pioneer pharmaceutical firms, but rather "a period of time during which all firms are subject to the same rules governing market entry." She explains:
In 1984 [with the Hatch-Waxman Act], pioneers with non-biological drugs approved after 1962 lost something; their right to perpetual exclusive use of their research became a right to only five years of exclusive use. And in 2010 [with the Biosimilars Act], pioneers with licensed biological drugs lost something; their perpetual exclusive right was shortened to twelve years. This reframing identifies the primary beneficiary of the choice made by policymakers as follow-on applicants rather than pioneers.

Thursday, October 29, 2015

Understanding the Role of Patents for Small Smartphone Companies

When I think of smartphones and smartphone patents, I think of the big battles and players: Apple v. Samsung, Motorola v. Microsoft, NTP v. RIM, Nokia, Ericsson, Google, Sony, and other mega-companies. But what about small smartphone companies? Do they have patents? And, if so, how do those patents affect important issues like fundraising and litigation?

Joel R. Reidenberg, N. Cameron Russell, Maxim Price & Anand Mohan (Fordham Law School and Fordham CLIP) answer some of these questions in their article, Patents and Small Participants in the Smartphone Industry (18 Stan. Tech. L. Rev. 375 (2015)). Here is the abstract:
For intellectual property law and policy, the impact that patent rights may have on the ability of small companies to compete in the smartphone market is a critically important issue for continued robust innovation. Open and competitive markets provide vitality for the development of smartphone technologies. Nevertheless, the impact of patent rights on the smartphone industry is an unexplored area of empirical research. Thus, this Article seeks to show how patent rights affect the ability of small participants to enter, compete, and exit smartphone markets. The study collected and used comprehensive empirical data on patent grants, venture funding, mergers and acquisitions, initial public offerings, patent litigation, and marketing research data. This Article shows empirically that small participants succeed in the market when they have a low and specific critical mass of patents and that this success exceeds the general norms in the startup world. Surprisingly, the analysis demonstrates that the level of financing and market success do not increase with larger patent portfolios. Lastly, despite the controversies over patent trolls, this Article demonstrates that patent litigation, whether from operating companies or NPEs, does not appear to be a significant concern for small players and does not appear to pose barriers to entry. The Article concludes by arguing that patent rights are providing incentives for innovation among small industry players and that contrary to some expectations, patent rights support competitiveness in the smartphone industry for small market players.
This is an interesting article - my comments after the jump.

Tuesday, October 20, 2015

How Often are DMCA Takedown Notices Wrong?

A couple weeks ago, I blogged about Lenz v. Universal Music and wondered how often "bad" DMCA notices are actually sent. My theory was one of availability and salience - we talk about the few nutty requests, but largely ignore the millions of real takedown requests. I wrote:
How important is this case in the scheme of things? On the one hand, it seems really important - it's really unfair (pardon the pun) to takedown fair use works. But how often does it happen? Once in a while? A thousand times a month? Ten thousand? It seems like often, because these are the takedowns we tend to hear about; blogs and press releases abound. However, I've never seen an actual number discerned from data (though the data is available).
While there are some older studies on smaller data sets, no one has attempted to tease out the millions of notices that come in each moth now (like 50 million requests per month!). It turns out, though, that someone has attempted a comprehensive study through 2012. Daniel Seng (Assoc. Prof. at NUS/JSD student at Stanford) downloaded Google's transparency data and performed cross-checks with Chilling Effects data to give us 'Who Watches the Watchmen?' An Empirical Analysis of Errors in DMCA Takedown Notices:
Under the Digital Millennium Copyright Act (DMCA) takedown system, to request for the takedown of infringing content, content providers and agents issuing takedown notice are required to identify the infringed work and the infringing material, and attest to the accuracy of such information and their authority to act on behalf of the copyright owner. Online service providers are required to evaluate such notices for their effectiveness and compliance before successfully acting on them. To this end, Google and Twitter as service providers are claiming very different successful takedown rates. There is also anecdotal evidence that many of these successful takedowns are "abusive" as they do not contain legitimate complaints of copyright or erroneously target legitimate content sites. This paper seeks to answer these questions by systematically examining the issue of errors in takedown notices. By parsing each individual notice in the dataset of half a million takedown notices and more than fifty million takedown requests served on Google up to 2012, this paper identifies the various types of errors made by content providers and their agents when issuing takedown notices, and the various notices which were erroneously responded to by Google. The paper finds in that up to 8.4% of all successfully-processed requests in the dataset had "technical" errors, and that additionally, at least 1.4% of all successfully-processed requests had some "substantive" errors. As all these errors are avoidable at little or no cost, this paper proposes changes to the DMCA that would improve the takedown system. By strengthening the attestation requirements of notices, subjecting notice senders to penalties for submitting notices with unambiguously substantive errors and clarifying the responsibilities of service providers in response to non-compliant notices, the takedown system will remain a fast, efficient and nuanced system that balances the diverse interests of content providers, service providers and the Internet community at large.
I think this is a really interesting and useful paper, and the literature review is also well worth a read. I think the takeaways, though, depend on your priors. Some thoughts on the paper after the jump.

Monday, October 12, 2015

The Banality of the TPP

I've now skimmed through the leaked IP Chapter of the final TPP agreement, and I've read some commentary on it. I'm not sure what to make of it, but at the moment I'm trying to decide if there's anything to make of it. As I read it, almost all of the provisions are an exportation of US law to the agreeing countries - for good or bad. But as a US scholar, that has me thinking, "meh" - at least as to the content of it. I'm not aware of any consensus that the way these other countries were doing things is so much better than our way. Or so much worse, for that matter. I understand concerns that the TPP represents the U.S. getting other countries to agree to its view of the world in exchange for whatever other benefit those countries think they will be getting, but that's not what this post is about. Instead, this post is about whether the TPP is creating some new law. (Disclaimer: I haven't looked at the pharma/biologics sections in detail. I know that these sections, in particular, might create issues in other countries in a way they don't currently experience).

But the hand-wringing I've read in content reviews seems odd. Many complain that copyright term will increase from life + 50 to life +70. I think that's no big deal - forever + 20 isn't that much  longer than forever. This doesn't mean I agree that the duration is a good thing; I don't. Life + 50 is already too long. I just think that if this is what you have to complain about, then there's not so much to complain about.

Other analysis is similar. The EFF points out the shocking clause that breaking digital locks may be punished even if there is no copyright infringement. The italics are theirs, as if this is some new thing. But it turns out that's been the law in the US since the DMCA was passed more than 15 years ago. Similarly, another website complains that devices used to break digital locks may be forfeited and destroyed. Shocking again! Except that this, too, has long been a potential remedy under the law in the U.S.

Don't get me wrong. People who like US law as is will be pleased with the TPP. People who don't like US law as it is will not be pleased with the TPP. But regardless of which camp one is in, I am not convinced that the world will be a significantly better or worse place because of the IP provisions of the TPP.

So, where does this leave us? The TPP has real problems, but they aren't substantive -- at least not newly substantive:

1. The secret negotiation process was not great. But I'm a cynic and think the outcome would have been the same.

2. The TPP locks in US law as it is, so dreams of orphan works and reduced IP protections are gone. But I'm a cynic and think that we are locked in anyway.

3. The TPP exports US law to other countries, extending its hegemony. I'm not convinced that this will change things one way or the other. But I'm a cynic, so time will tell. In the meantime, I don't think anyone's prediction will be accurate.

4. This is long and dense, and there may be parts that will change U.S. law in some way that isn't being discussed now. And I'm a cynic, so I'm sure there are.

Thursday, October 8, 2015

Policy Issues in Lexmark Argument on International Patent Exhaustion

Last Friday, the Federal Circuit heard en banc argument on whether it should adopt a U.S. rule of international patent exhaustion in Lexmark v. Impression Products. This case has important distributive implications for foreign consumers, as Daniel Hemel and I describe in our new essay, Trade and Tradeoffs: The Case of International Patent Exhaustion (forthcoming in the Columbia Law Review Sidebar).

In a Patently-O post last week, we asked whether the Federal Circuit would recognize the U.S.–foreign tradeoff at stake. And the answer appears to be yes. Tony Dutra summed up the argument for Bloomberg (subscription required): Policy Focus in Fed. Cir. Patent Exhaustion Review. Here's an excerpt of his analysis:
Most members of the court appeared prepared to distinguish patent law because there is no Patent Act statutory equivalent to the Copyright Act's provision. However, the discussion turned more to policy questions as the 90-minute argument proceeded. Some judges essentially said that the harm to the copyright holder in Kirtsaeng—books priced more cheaply overseas and imported for less than the U.S. price—was minimal compared to the harm to, for example, AIDS patients in Africa, unless patentees can engage in drug price discrimination.
You can listen to the oral argument yourself here. (Bill Vobach also maintains a helpful key to judge voices.) The most extensive discussion of the issue of AIDS drugs starts at 1:16:02. Barbara Fiacco, arguing for BIO as amicus, discusses the importance of a no-exhaustion rule for allowing regional pricing and preventing arbitrage at 1:05:21.

Thursday, October 1, 2015

How Does the Economy Affect Patent Litigation?

When I was in practice, the conventional wisdom was that litigation (of all kinds) grew during recessions, because people were less optimistic and willing to let slights go, and instead fought over every dollar. Alan Marco (Chief Economist, PTO), Shawn Miller (Stanford Law Fellow), and Ted Sichelman (San Diego) have attempted to tackle this question with respect to patent litigation. They examine litigation rates from 1970-2009 in conjunction with a variety of macroeconomic factors.

Their paper is coming out in the Journal of Empirical Legal Studies, but a draft is on SSRN. The abstract follows:

Recent studies estimate that the economic impact of U.S. patent litigation may be as large as $80 billion per year and that the overall rate of U.S. patent litigation has been growing rapidly over the past twenty years. And yet, the relationship of the macroeconomy to patent litigation rates has never been studied in any rigorous fashion. This lacuna is notable given that there are two opposing theories among lawyers regarding the effect of economic downturns on patent litigation. One camp argues for a substitution theory, holding that patent litigation should increase in a downturn because potential plaintiffs have a greater incentive to exploit patent assets relative to other investments. The other camp posits a capital constraint theory that holds that the decrease in cash flow and available capital disincentivizes litigation. Analyzing quarterly patent infringement suit filing data from 1971-2009 using a time-series vector autoregression (VAR) model, we show that economic downturns have significantly affected patent litigation rates. (To aid other researchers in testing and extending our analyses, we have made our entire dataset available online.) Importantly, we find that these effects have changed over time. In particular, patent litigation has become more dependent on credit availability in a downturn. We hypothesize that such changes resulted from an increase in use of contingent-fee attorneys by patent plaintiffs and the rise of non-practicing entities (NPEs), which unlike most operating companies, generally fund their lawsuits directly from outside capital sources. Over roughly the last twenty years, we find that macroeconomic conditions have affected patent litigation in contrasting ways. Decreases in GDP (particularly economy-wide investment) are correlated with significant increases in patent litigation and countercyclical economic trends. On the other hand, increases in T-bill and real interest rates as well as increases in economy-wide financial risk are generally correlated with significant decreases in patent suits, leading to procyclical trends. Thus, the specific nature of a downturn predicts whether patent litigation rates will tend to rise or fall.
The authors also have a guest post at Patently-O discussing their findings.

I don't have too much to add to their analysis; the notion that a credit crunch will reduce litigation makes a lot of sense.

My two primary additional comments are as follows:

1. There is a lot more to the findings and the authors' analysis than presented in the Patently-O post. For example, there was a shift as litigation changed from competitor to licensor-based claims. The full paper is worth a read.

2. I am not fully convinced what this tells us about the period from 2010-2014. The authors hint that economic growth during that time correlates with a drop in litigation, but the drop in litigation was only in latter 2014 (and reversed itself in early 2015, as they note). This is further complicated by the change in how we count litigation after the America Invents Act requirement that each defendant be joined in a separate case. I think a lot more work (and creative thought) needs to be done to meld the pre- and post-AIA data into a coherent data set.

[UPDATE: I've been corrected - patent litigation by defendant count apparently decreased more than I let on (see, e.g. here) if you exclude false marking claims. This tempers some of my skepticism, though I would still like to see the post AIA data combined with pre-AIA data]

Wednesday, September 30, 2015

Trade and Tradeoffs: The Case of International Patent Exhaustion

When I read all the briefs for Lexmark v. Impression Products—the en banc Federal Circuit case on patent exhaustion that will be argued Friday—it seemed like there were pieces missing, including related to an article Daniel Hemel and I are working on. So we've written and posted a short Essay about the case, Trade and Tradeoffs: The Case of International Patent Exhaustion. If ten pages is too long, we also have an even shorter guest post up at Patently-O today, Will the Federal Circuit Recognize the U.S.–Foreign Tradeoff in Friday’s Lexmark Argument? Comments welcome!

Sunday, September 27, 2015

Supreme Court To Consider 12 Patent Petitions Monday

So far, there are zero patent cases (or other IP cases) on the Supreme Court's docket this Term. But tomorrow is the first conference since the Court's summer break, also known as the "Long Conference," at which they will consider twelve petitions in Federal Circuit patent cases. Only one of the twelve involves patentable subject matter, and I don't think the chances of the Court taking it are high. What other issues have been teed up?

The only one of the twelve to make SCOTUSblog's Petitions We're Watching page is W.L. Gore v. Bard, but I'm not sure why they're watching. The longstanding dispute over the Gore-Tex patent has now turned to an effort to overturn the longstanding rule that patent licenses may be either express or implied, but the arguments don't seem particularly compelling.

Perhaps somewhat more worth watching is Life Technologies v. Promega, which involves extraterritorial application of U.S. patent laws in a case where LifeTech was found to have actively induced its own foreign subsidiary. The case has strong advocates (Carter Phillips for Life Technologies and Seth Waxman for Promega), and the petition is supported by amici Agilent Technologies and Professor Tim Holbrook, and by a dissent below from Chief Judge Prost.

There are two petitions related to whether the recent Supreme Court § 285 decisions (Octane Fitness and Highmark) also changed the standard for willful infringement under § 284: Halo v. Pulse and Stryker v. Zimmer. As Jason Rantanen noted at Patently-O, Judge Taranto's concurrence from the denial of rehearing en banc in Halo explained that this is not the right case, but that some § 284 issues could warrant en banc review in a future case. I think the Supreme Court might give the Federal Circuit time to work this out.

I/P Engine v. AOL questions whether the Federal Circuit's de facto standard of review in obviousness cases (including implementation of KSR's "common sense" approach) is insufficiently deferential to factual findings. The Federal Circuit's obviousness holding knocked out a $30 million jury verdict (over a dissent by Judge Chen), and the petition is supported by the Boston Patent Law Association and i4i. But this doesn't look like a winner to me: obviousness is a mixed question of fact and law; the Federal Circuit has always articulated what seems like the right standard of review; and it's hard to say the Federal Circuit has vigorously embraced KSR (see, e.g., the end of this post).

None of these seem like must-takes, but we'll see! Grant decisions will likely be released later in the week.

Thursday, September 24, 2015

The Difficulty of Measuring the Impact of Patent Law on Innovation

I'm teaching an international and comparative patent law seminar this fall, and I had my students read pages 80–84 of my Patent Experimentalism article to give them a sense of the difficulty evaluating any country's change in patent policy. For example, although there is often a correlation between increased patent protection and increased R&D spending, it could be that the R&D causes the patent changes (such as through lobbying by R&D-intensive industries), rather than vice versa. There is also the problem that patent law has transjurisdictional effects: increasing patent protection in one country will have little effect if firms were already innovating for the global market, meaning that studies of a patent law change will tend to understate the policy's impact.

It is thus interesting that some studies have found significant effects from increasing a country's patent protection. One example I quote is Shih-tse Lo's Strengthening Intellectual Property Rights: Experience from the 1986 Taiwanese Patent Reforms (non-paywalled draft here). In 1986, Taiwan extended the scope of patent protection and improved patent performance. Lo argues that this change was plausibly exogenous (i.e., externally driven) because they were caused by pressure from the United States rather than domestic lobbying, and he concludes that the strengthening of patent protection caused an increase in R&D intensity in Taiwan.

One of my students, Tai-Jan Huang, made a terrific observation about Lo's paper, which he has given me permission to share: "My first intuition when I see the finding of the article is that the increase of R&D expenses may have something to do with the tax credits for R&D expenses rather than stronger patent protection." He noted that in 1984, Taiwan introduced an R&D tax credit through Article 34-1 of the Investment Incentives Act, which he translated from here:
If the reported R&D expenses by manufacturing industry exceeds the annual highest spending on R&D in the last five years, 20% of the exceeding expenses could be used for tax credit for income tax. The total tax credit used could not exceed the 50% of annual income tax, but the unused tax credit could defer to next five years.
Additional revisions were made in 1987, related to a tax credit for corporations that invest in technology companies, which might indirectly lead to an increase in R&D spending by tech companies. As I've argued (along with Daniel Hemel) in Beyond the Patents–Prizes Debate, R&D tax credits are a very important innovation incentive, and Lo doesn't seem to have accounted for these changes in the tax code. Yet another addition to the depressingly long list of reasons it is hard to measure the impact of patent laws on innovation!

Friday, September 18, 2015

The Availability Heuristic and IP

I'm reading (or more accurately, listening to) Thinking, Fast and Slow, by Daniel Kahneman. The book is an outstanding survey of the psychological literature on how we form judgments and take shortcuts in our mental thinking. The number of studies of highly trained statisticians who make basic statistical errors in everyday tasks is remarkable.

The book is a must read, I think, for scholars of all types. Not only does it provide a variety of food for thought on how to thing about forming judgments from research, the informal book style allows Kahneman to take a meta-view in which he can describe problems of reproducible results and intractable debates in his own field (which, not surprisingly, ring true in IP research as well).

I'll have a couple of posts on this topic in the coming weeks, but the first relates to the availability heuristic. This mental shortcut usually manifests itself by giving greater weight, importance, or perceived frequency to events that are more "available" to the memory - that are more easily conjured by the mind. You usually see this trotted out in debates about the relative safety of air versus car travel (people remember big plane crashes, but way more people die in car accidents. I've also seen this raised in gun control debates, as more children die in swimming pools than accidental gunshots (especially if you consider the denominator number of pools v. number of guns). But pools are a silent killer. (Note that I make no statement on regulation - perhaps pools are underregulated; insurance companies seem to act as if they are).

Thursday, September 10, 2015

More Evidence on Patent Citations and Measuring Value

For years, researchers have used patent citations as a way to measure various aspects of the innovative ecosystem. They have been linked to value, information diffusion, and technological importance, among other things. Most studies find that more "forward citations" - that is, the more future patents that cite back to a patent - means more of all these things: more value, more diffusion, and more importance.

But forward citations are not without their warts. For example, both my longitudinal study of highly litigious NPEs and random patent litigants and Allison, Lemley & Scwhartz's cross-sectional study of all patent cases filed in 2008-2009 found that forward citations had no statistically significant impact on patent validity determinations. Additionally, Abrams, et al., found that actual licensing revenue followed an inverted "U" shape with respect to forward citations (Lisa writes about that paper here). That is, revenue grew as citations grew, but after a peak, revenues began to fall as forward citations grew even larger. This implies that the types of things we can measure with forward citations may be limited by just how many there are, and also by the particular thing we are trying to measure.

This is why it was so great to see a new NBER paper in my SSRN feed yesterday (it's not totally new - for those who can't get NBER papers, a draft was available about a year ago). The paper, by Petra Moser (NYU), Joerg Ohmstedt (Booz & Co.) & Paul W. Rhode (UNC) is called Patent Citations and the Size of the Inventive Step - Evidence from Hybrid Corn. The abstract follows: 
Patents are the main source of data on innovation, but there are persistent concerns that patents may be a noisy and biased measure. An important challenge arises from unobservable variation in the size of the inventive step that is covered by a patent. The count of later patents that cite a patent as relevant prior art – so called forward citations – have become the standard measure to control for such variation. Citations may, however, also be a noisy and biased measure for the size of the inventive step. To address this issue, this paper examines field trial data for patented improvements in hybrid corn. Field trials report objective measures for improvements in hybrid corn, which we use to quantify the size of the inventive step. These data show a robust correlation between citations and improvements in yields, as the bottom line measure for improvements in hybrid corn. This correlation is robust to alternative measures for improvements in hybrid corn, and a broad range of other tests. We also investigate the process, by which patents generate citations. This analysis reveals that hybrids that serve as an input for genetically-related follow-on inventions are more likely to receive self-citations (by the same firm), which suggests that self-citations are a good predictor for follow-on invention.
I love this study because it ties something not only measurable, but objective, to the forward citations. This is something that can't really be done with litigation and licensing studies, both of which have a variety selection effects that limit the random (shall we say, objective) nature of them. More on this after the jump.