Kiesling & Silberg on Incentives for Rooftop Solar

I've written about innovation policy experimentation and about incentives beyond IP, so I was interested in a new working paper posted by Lynne Kiesling and Mark Silberg, Regulation, Innovation, and Experimentation: The Case of Residential Rooftop Solar. They are not lawyers, but their description of incentives for the development and commercialization of rooftop solar will be of interest to legal scholars of innovation, as it underscores that the role of the state is far more complex than simply providing IP incentives. (Indeed, the paper never mentions IP.)

These incentives include a 30% federal tax credit (set to expire at the end of 2016), as well as many state-level incentives, such as volumentrically reduced subsidies to benefit first movers, net metering policies requiring credits to consumers who produce excess energy, and financial regulations that allow third-party financing to help consumers avoid upfront capital expenses. As they note, "the details matter," and "[n]ot all renewable portfolio standards are equal." This paper seems to nicely encapsulate many of those details.

Rachel Sachs & Becky Eisenberg on Incentives for Diagnostic Tests

I highly recommend two recently posted articles on declining innovation incentives for diagnostic tests, particularly due to changes in patentable subject matter doctrine. In Innovation Law and Policy: Preserving the Future of Personalized Medicine, Rachel Sachs (Petrie-Flom Fellow at Harvard Law) examines the intersection of IP with FDA regulation and health law, joining a growing body of scholarship that seeks to contextualize IP in a broader economic context. Here is the abstract:

Personalized medicine is the future of health care, and as such incentives for innovation in personalized technologies have rightly received attention from judges, policymakers, and legal scholars. Yet their attention too often focuses on only one area of law, to the exclusion of other areas that may have an equal or greater effect on real-world conditions. And because patent law, FDA regulation, and health law work together to affect incentives for innovation, they must be considered jointly. This Article will examine these systems together in the area of diagnostic tests, an aspect of personalized medicine which has seen recent developments in all three systems. Over the last five years, the FDA, Congress, Federal Circuit, and Supreme Court have dealt three separate blows to incentives for innovation in diagnostic tests: they have made it more expensive to develop diagnostics, made it more difficult to obtain and enforce patents on them, and reduced the amount innovators can expect to recoup in the market. Each of these changes may have had a marginal effect on its own, but when considered together, the system has likely gone too far in disincentivizing desperately needed innovation in diagnostic technologies. Fortunately, just as each legal system has contributed to the problem, each system can also be used to solve it. This Article suggests specific legal interventions that can be used to restore an appropriate balance in incentives to innovate in diagnostic technologies.

Diagnostics Need Not Apply is a new essay by Rebecca Eisenberg (UMich Law) that was nicely summed up by Nicholson Price: "let's just admit it - diagnostic tests are unpatentable."

Diagnostic testing helps caregivers and patients understand a patient’s condition, predict future outcomes, select appropriate treatments, and determine whether treatment is working. Improvements in diagnostic testing are essential to bring about the long-heralded promise of personalized medicine. Yet it seems increasingly clear that most important advances in this type of medical technology lie outside the boundaries of patent-eligible subject matter.

The clarity of this conclusion has been obscured by ambiguity in the recent decisions of the Supreme Court concerning patent eligibility. Since its 2010 decision in Bilski v. Kappos, the Court has followed a discipline of limiting judicial exclusions from the statutory categories of patentable subject matter to a finite list repeatedly articulated in the Court’s own prior decisions for “laws of nature, physical phenomena, and abstract ideas,” while declining to embrace other judicial exclusions that were never expressed in Supreme Court opinions. The result has been a series of decisions that, while upending a quarter century of lower court decisions and administrative practice, purport to be a straightforward application of ordinary principles of stare decisis. As the implications of these decisions are worked out, the Court’s robust understanding of the exclusions for laws of nature and abstract ideas seems to leave little room for patent protection for diagnostics.

This essay reviews recent decisions on patent-eligibility from the Supreme Court and the Federal Circuit to demonstrate the obstacles to patenting diagnostic methods under emerging law. Although the courts have used different analytical approaches in recent cases, the bottom line is consistent: diagnostic applications are not patent eligible. I then consider what the absence of patents might mean for the future of innovation in diagnostic testing.

As I have written, I think changes to patentable subject matter doctrine are an important problem for medical innovation, and that policymakers should think seriously about whether additional non-patent innovation incentives are needed in this area.

The Latest on Biosimilars: The Federal Circuit Holds that the "Patent Dance" Is Optional

In a previous post, I discussed a district court decision holding that the process for resolving patent disputes under the Biologics Price Competition and Innovation Act (BPCIA) is optional. That post contains extensive background on the BPCIA and its purpose of providing an abbreviated pathway for “biosimilar” drugs to get to market and compete with their branded analogs, resulting in lower prices for consumers. The bottom line is that, under the BPCIA, makers of biosimilar products can rely on the clinical trial data developed for the branded (or “reference”) product in order to accelerate FDA approval. Nevertheless, the BPCIA provides 12 years of data exclusivity to the manufacturer of the reference product. And beyond that period, even if the biosimilar garners FDA approval, the brand owner can try to continue to keep it out of the market by asserting claims of patent infringement. The BPCIA provides for a procedure involving pre-suit information exchange between the brand and biosimilar makers—the so-called “patent dance”—that is intended to apprise the brand of the biosimilar’s manufacturing process and narrow down the number of patents to be be asserted. But the district court, and now the Federal Circuit on appeal, have held that the biosimilar can lawfully refuse to participate in the patent dance.

Several Empirical Studies on Injunctions Post-eBay

Chris Seaman recently released a draft of his new paper, Permanent Injunctions in Patent Litigation After eBay: An Empirical Study. In the paper, he present the results of his empirical study of contested permanent injunction decisions in district courts for a 7½ year period following eBay (May 2006 to December 2013). This post follows up my previous posts on Seaman's WIPIP presentation and on Ryan Holte's paper assessing the effects of eBay. Kirti Gupta and Jay Kesan also just released their own study on eBay's impact.

Heidi Williams on Measuring the Effect of Patent Strength on Innovation

When I was in law school, I was surprised (and fascinated) to learn how little scholars actually know about how patent laws affect innovation. My article Patent Experimentalism explains why this is such a hard empirical question, summarizes a lot of the empirical work that has been done, and analyzes the institutional design options (including policy randomization) to help make more empirical progress. Two of my favorites among the empirical pieces I discuss are by MIT economics professor Heidi Williams—one on IP-like contractual restrictions on human genes (summarized previously on this blog), and one on the skew in cancer drug R&D toward late-stage cancer patients (with Eric Budish and Ben Roin). In June, Williams posted a new paper that reflects on the challenges of measuring the relationship between patent strength and research investments, summarizes these two studies, and discusses directions for future research.

Although "a literal interpretation of the current set of available empirical evidence . . . would be that the patent system generates little social value," Williams explains that "drawing such a conclusion would be premature." The "dearth of empirical evidence" stems from two problems: measuring specific research investments, and "finding any variation (much less 'clean' or quasi-experimental variation) in patent protection." Her recent papers "identified and took advantage of new sources of variation in the effective intellectual property protection provided to different inventions." If you aren't familiar with those two papers, this piece contains a great summary.

Looking for similar kinds of variation seems like a promising avenue for future research, although Williams cautions against jumping quickly from her work to broad conclusions for patent policy. For example, while her work on contractual restrictions on human genes led to persistent decreases in follow-on research and commercial product development, her preliminary results from a follow-on project with Bhaven Sampat suggest that "on average gene patents have had no effect on follow-on innovation." As Williams notes, the U.S. Supreme Court has been concerned about the effects of patents on follow-on research in its recent forays into patentable subject matter, and perhaps further empirical work along these lines will help inform this muddled area of doctrine.

Greg Mandel et al. on the Plagiarism Fallacy in IP

Greg Mandel (Temple Law) has done some interesting empirical work on public perceptions of IP. In his latest work, Intellectual Property Law's Plagiarism Fallacy, he has collaborated with two psychologists, Anne Fast and Kristina Olson (University of Washington), on three new studies. They conclude that debates over whether IP should serve incentive or natural rights objectives are "orthogonal" to the most common perception about IP, which is that its function is to prevent plagiarism. They argue that this "plagiarism fallacy . . . . helps explain pervasive illegal infringing activity on the Internet" as stemming from a failure to understand what IP is rather than indifference toward IP rights.

Roger Ford: The Patent Spiral

I blogged two years ago about a terrific article by Roger Ford (now at UNH Law), and he has done it again: I enjoyed reading The Patent Spiral, forthcoming in the University of Pennsylvania Law Review. Here is the abstract:

Examination—the process of reviewing a patent application and deciding whether to grant the requested patent—improves patent quality in two ways. It acts as a substantive screen, filtering out meritless applications and improving meritorious ones. It also acts as a costly screen, discouraging applicants from seeking low-value patents. Yet despite these dual roles, the patent system has a substantial quality problem: it is both too easy to get a patent (because examiners grant invalid patents that should be filtered out by a substantive screen) and too cheap to do so (because examiners grant low-value nuisance patents that should be filtered out by a costly screen).

This article argues that these flaws in patent screening are both worse, and better, than has been recognized. They are worse because the flaws are not static; they are dynamic, interacting to reinforce each other. This interaction leads to a vicious cycle of more and more patents that should never have been granted. When patents are too easily obtained, that undermines the costly screen, because even a plainly invalid patent has a nuisance value greater than its cost. And when patents are too cheaply obtained, that undermines the substantive screen, because there will be more patent applications, and the examination system cannot scale indefinitely without sacrificing accuracy. The result is a cycle of more and more applications, being screened less and less accurately, to give more and more low-quality patents. And although it is hard to test directly if the quality of patent examination is falling, there is evidence suggesting that this cycle is affecting the patent system.

At the same time, things are better because this cycle may be surprisingly easy to solve. The cycle gives policymakers substantial flexibility in designing patent reforms, because the effect of a reform on one piece of the cycle will propagate to the rest of the cycle. Reformers can concentrate on the easiest places to make reforms (like reforming the litigation system) instead of trying to do the impossible (like eliminating examination errors). Such reforms would not only have local effects, but could help make the entire patent system work better.

Ford provides a refreshingly clear explanation of the two distinct roles that patent examination theoretically plays, and of the feedback loop between them.

Brad Shapiro on the Cost of Strategic Entry Delay in Pharmaceuticals

Pharmaceutical companies sometimes engage in "product hopping," in which they attempt to move patients to a new product with longer patent protection before the generic version of an older drug becomes available. Product hopping was recently in the news with New York state's antitrust suit against Actavis for its decision to withdraw Namenda IR, its 2x/day Alzheimer's drug (with patent protection ending July 2015), to force patients to switch to Namenda XR, a 1x/day version (with patent protection until 2029). In an opinion by Judge Walker, the Second Circuit upheld a preliminary injunction barring withdrawal of Namenda IR prior to generic entry, concluding that the "hard switch crosses the line from persuasion to coercion and is anticompetitive."

The cost to consumers of product hopping that obstructs access to generic drugs is clear. But these marketing strategies raise another potential welfare loss that receives less attention: when a pharmaceutical company delays the introduction of a new drug version until just before patent protection on the old version is set to expire, that delay can harm consumers who prefer the new version. This later cost is the focus of a new empirical paper by Professor Brad Shapiro (Chicago Booth), Estimating the Cost of Strategic Entry Delay in Pharmaceuticals: The Case of Ambien CR.

Entangled Trade Secrets and Presumptive Misappropriation

Over at Prawfsblawg, Orly Lobel discusses the case of former Goldman Sachs programmer Sergey Aleynikov,who has had an up and down (more like down and up) experience dealing with criminal trade secret prosecutions. I think the case is worthy of discussion for a variety of reasons, but I will focus on how different viewpoints will color the facts of this case. Prof. Lobel describes this as a story of "secrecy hysteria," while I view this as a run of the mill "don't copy the source code" case.

I'll discuss my point of view briefly below, but I will admit my priors: I spent my career advising companies and employees in trade secrecy: how to protect them, how to exit without getting sued, and how to win lawsuits as plaintiffs and defendants. I probably represented plaintiffs and defendants with the same frequency, and -- of course -- my client was always right.

More facts after the jump. I should make clear that I've got no position on the criminal prosecutions; my views here are more about trade secrecy than whether the criminal laws should be used to protect them (or should have applied to this particular case). Prof. Lobel and I may well agree on the latter point.

Janet Freilich vs. Ted Sichelman on Patent Searching

Over at New Private Law Blog, Janet Freilich and Ted Sichelman are having a fun exchange about patent searches. Here's an excerpt from Freilich's original post:

Since there is no easy way to index or search through most patents, it is exceedingly difficult (if not impossible) to know if one is infringing a patent. In some industries, firms simply ignore patents, because it is less expensive to pay damages ex post than to do patent clearance searches ex ante. Larger numbers of patents exacerbate this problem. Christina Mulligan and Timothy Lee provide an excellent description of the problem of patent clearance searches in their article on Scaling the Patent System. One sentence in particular drives the problem home: “In software, for example, patent clearance by all firms would require many times more hours of legal research than all patent lawyers in the United States can bill in a year.”

Fiona Scott Morton & Carl Shapiro on the Alignment of Patent Rewards and Contributions

Fiona Scott Morton (Yale School of Management) and Carl Shapiro (Berkeley School of Business) have posted Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?, which has a nice summary of some recent developments related to patent assertion entities (PAEs) and standard-essential patents (SEPs), even for readers who will disagree with their ultimate conclusions.

Scott Morton and Shapiro argue that there is often a "divergence between the reward that a patent holder can obtain by asserting its patent and the social contribution" of the patent. They do not attempt to measure the social value from patents; rather, their argument is based on economic theory. PAEs can impose high litigation costs with little downside risk, especially when they assert low-quality patents for their nuisance value. And royalty stacking and patent hold-up (backed up by the threat of an injunction) can increase the reward to patentees beyond the patent's value, especially for products that comply with standards for which there are many SEPs.