Tun-Jen Chiang: The Upside Down Inequitable Conduct Defense

Is the doctrine of inequitable conduct adequately tailored to deter patent fraud? In The Upside Down Inequitable Conduct Defense (forthcoming Northwestern University Law Review), Professor Tun-Jen Chiang argues that the inequitable conduct defense is improperly tailored because it creates too much deterrence for minor errors while providing inadequate deterrence for serious patent fraud. This inequity gives rise to three implications: (1) patentees have upside-down incentives to engage in dishonest conduct; (2) the variability of the penalty produces upside-down incentives for accused infringers in litigation; and (3) reform should focus more on adjusting the remedy for inequitable conduct, and less on the standard for attaching liability.

Patentees have an upside-down incentive to engage in dishonest conduct when cases with the highest culpability have the weakest punishment and deterrence. Take for instance an inventor who becomes aware of a book that negates the novelty of her invention. The inventor can disclose the book and have her application rejected, or hide the book and receive a patent. By not disclosing the known reference, the patentee can profit off the ‘bad’ patent until an accused infringer finds the book and invalidates the patent. Even if this happens, the patentee was able to profit off a patent which was never valid in the first place. Conversely, the fear of a patent being declared unenforceable, even for trivial errors, creates over-deterrence and inefficiently high levels of precaution taking. Consequently, the Patent Office (PTO) is burdened with submissions that are only tangentially related to an invention. This creates waste for both the government and the inventor.

In response to the burdens created by over-deterrence and the perceived lack of dishonest patentees, the doctrine of inequitable conduct has been scaled back. But this view is potentially misguided. To combat the burdens created by over-deterrence Chiang argues that the litigation selection effect creates an illusion that patentee dishonesty is rare. The litigation selection effect suggests that once an accused infringer finds invalidating prior art, there is little incentive to pursue an inequitable conduct charge. But accused infringers that cannot find an invalidating reference will rely on inequitable conduct even if their claim is marginal. As a result, courts are often inundated with trivial inequitable conduct defenses. Litigating the weak claims while bypassing the strong claims has led to the impression that patentee dishonesty is uncommon. This gives the false notion that inequitable conduct is unnecessarily burdensome; which in turn, has led to the narrowing of the doctrine.

To properly address patentee dishonesty, Chiang analyzes the effects of varying the liability standard of inequitable conduct. As his analysis shows, even if the liability standard is lowered, highly culpable patentees still have little incentive for honest disclosure. Even certain liability for committing fraud brings no deterrence when the penalty for dishonest disclosure merely invalidates an already ‘bad' patent. Instead, proper ex ante deterrence for patent fraud requires restitution and punitive damages. Disgorgement of profits would put the patentee back in the position they held before the patent issued. Punitive damages for fraudulent activity would incentivize upfront disclosure and encourage the accused infringer to bring suit even after invalidity can be proven.

The Upside Down Inequitable Conduct Defense offers a fresh take on the divisive issue of inequitable conduct. In defense of his assertion, Chiang touches on an interesting topic that should be further explored: that the penalty for inequitable conduct will fall on innocent assignees. Certainly assignees of the patent will fight inequitable conduct charges to avoid unenforceability, but the inequitable conduct was likely caused by a patent practitioner. Importantly, others have pointed out that “the law surrounding the ability of patent attorneys to intervene where they are subject of inequitable conduct claims is entirely unpredictable.” Ian McFarland, Comment, In the Wake of Therasense & Nisus Corp., How Can Patent Attorneys Defend Themselves Against Allegations of Inequitable Conduct?, 78 Tenn. L. Rev. 487, 515 (2011). How is deterrence affected when patent attorneys are unable to defend themselves at trial? Is the threat of malpractice and reputation harm sufficient deterrents to prevent patent fraud, or should the PTO step in and take control of inequitable conduct proceedings, allowing culpable parties fair representation?

Posted by Bryan Parrish (bparrish@smu.edu), a registered patent agent, research assistant to Sarah Tran, and a 2014 Juris Doctor candidate at SMU Dedman School of Law.