Thomas F. Cotter—An Economic Analysis of Patent Law’s Inequitable Conduct Doctrine

Does the inequitable conduct doctrine induce an optimal level of disclosure by patentees? In his article An Economic Analysis of Patent Law’s Inequitable Conduct Doctrine, 53 Ariz. L. Rev. 735 (2011), Professor Thomas F. Cotter (Briggs and Morgan Professor of Law, University of Minnesota Law School) suggests that despite reforms post-Therasense, the inequitable conduct doctrine lacks the requisite clarity to encourage efficient disclosure and may consequently induce risk-averse agents to overdisclose.

The law of inequitable conduct is used as a means of preventing (or at least deterring) patent owners from committing fraud on the USPTO. Referred to as the “atomic bomb” of patent litigation, a finding of inequitable conduct may result in the unenforceability of an otherwise valid patent. Perhaps the most puzzling aspect of the current doctrine is the absence of a definitive characterization of its reach. The Federal Circuit has expanded the doctrine’s reach beyond outright fraudulent misrepresentations and omissions; yet, the key elements of “intent” and “materiality” have been inconsistently defined.

In his article, Professor Cotter uses economic perspectives to model the variables a rational applicant would consider when determining how much to disclose to the USPTO. He suggests that a socially optimal inequitable conduct doctrine would induce an applicant to disclose relevant information when (1) it is more economically efficient to disclose information than for the examiner to make the discovery independently, and (2) the social benefit outweighs the social cost. His economic analysis further illustrates the difficulties in properly defining the variables in the disclosure decision-making process and illuminates the limitations the doctrine faces in optimizing disclosure. Because it may not be practical (or even feasible in some instances) to estimate relevant factors and the lack of understanding of (or failure to precisely define) the necessary variables, the inequitable conduct doctrine can only provide an approximate representation of ideal conditions.

A recent post discussed Professor Tun-Jen Chiang’s (George Mason University Law School) forthcoming article arguing that the inequitable conduct doctrine’s incentives to disclose are “upside down,” resulting in excessive deterrence for minor errors and inadequate deterrence for the most severe fraud. Professor Chiang proposes that proper ex ante deterrence requires restitution and punitive damages. Ideally, the inequitable conduct doctrine would be viewed as a lever for encouraging the optimal disclosure of information. However, the absence of a clear framework and the existence of uncertainty in doctrinal concepts (both before and after Therasense) prevent the highest level of efficiency. In fact, misconceptions of the doctrine led to the Leahy-Smith America Invents Act creating a supplemental examination that almost assuredly increases the likelihood (at least initially) of dishonesty and concealing information from the PTO. As the Courts and Congress seek to improve and discover the optimal framework for the inequitable conduct doctrine, perhaps Cotter’s models and Chiang’s proposals may be intertwined to ensure risk-averse patentees no longer inefficiently overdisclose and applicants with invalid patents find no benefit from defrauding the USPTO.

Drafted by Derik Sanders (dtsanders@smu.edu), a 2014 Juris Doctor Candidate at SMU Dedman School of Law and research assistant to Professor Sarah Tran.