Dow v. NOVA: Maybe Nautilus Does Matter

In June 2014, the Supreme Court held in Nautilus v. Biosig that the Federal Circuit's "insolubly ambiguous" test for indefiniteness was "more amorphous than the statutory definiteness requirement allows," and that the proper test is whether the claims "fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention." But is this actually a stricter test?

Jason Rantanen (Iowa Law) posted a nice essay this spring, Teva, Nautilus, and Change Without Change (forthcoming Stan. Tech. L. Rev.), arguing that in practice, the answer has been no: "The Federal Circuit continues to routinely reject indefiniteness challenges . . . . Indeed, with one exception, the Federal Circuit has not held a single claim indefiniteness under the Nautilus standard, and even that one exception would almost certainly have been indefinite [pre-Nautilus]." (Since then, the court also held the Teva v. Sandoz claims indefinite, but it had done the same pre-Nautilus.) Rantanen also noted that the Federal Circuit has failed to grapple with the meaning of Nautilus and has continued to rely on its pre-Nautilus cases when evaluating definiteness. In one case the court even reversed an decision that claims were indefinite for reconsideration after Nautilus—implying that the Nautilus standard might be less stringent! (I've noticed the Federal Circuit similarly undermine the Supreme Court's change to the law of obviousness in KSR.)

But the Federal Circuit's decision today in Dow Chemical Co. v. NOVA Chemicals Corp. carefully examines the change Nautilus has wrought. Dow's asserted claims cover an improved plastic with "a slope of strain hardening coefficient greater than or equal to 1.3," and NOVA argued that the patents fail to teach a person of ordinary skill how to measure the "slope of strain hardening." In a prior appeal (after a jury trial), the Federal Circuit had held the claims not indefinite under pre-Nautilus precedent. The district court then held a bench trial on supplemental damages, leading to the present appeal. In today's opinion by Judge Dyk, the Federal Circuit holds that Nautilus's change in law "provides an exception to the doctrine of law of the case or issue preclusion," and holds that the claims are indefinite under the new standard.

The Federal Circuit dismisses the hand-wringing over whether Nautilus really meant anything, stating that "there can be no serious question that Nautilus changed the law of indefiniteness." The court notes that "Nautilus emphasizes 'the definiteness requirement's public-notice function,'" and that "the patent and prosecution history must disclose a single known approach or establish that, where multiple known approaches exist, a person having ordinary skill in the art would know which approach to select. . . . Thus, contrary to our earlier approach, under Nautilus, '[t]he claims . . . must provide objective boundaries for those of skill in the art.'"

Examining the claims at issue, the court notes that the patents state that "FIG. 1 shows the various stages of the stress/strain curve used to calculate the slope of strain hardening," but the patents contain no figure showing the stress/strain curve. There were four ways to measure the slope, which could result in different results, but the patents provided no "guidance as to which method should be used or even whether the possible universe of methods is limited to these four methods." The claims thus fail the new test: "Before Nautilus, a claim was not indefinite if someone skilled in the art could arrive at a method and practice that method," but "this is no longer sufficient."

Evaluating Patent Markets

I've been interested in patent markets for some time. In addition to several articles studying NPE litigation, I've written two articles discussing secondary markets explicitly: Patent Portfolios as Securities and Licensing Acquired Patents.

Thus, I was very interested in Michael Burstein's (Cardozo) draft article on the subject, called Patent Markets: A Framework for Evaluation, which is now on SSRN and forthcoming in the Arizona State L.J.

What I like about the approach of this article is that it takes a step back from the question of whether certain types of parties create a market, and asks instead, is having a market at all a good thing?

Here is the abstract:

Patents have become financial assets, in both practice and theory. A nascent market for patents routinely produces headline-grabbing transactions in patent portfolios, and patent assertion entities frequently defend themselves as sources of liquidity essential for a patent market to function. Much of the discourse surrounding these developments assumes that a robust, liquid market for patents would improve the operation of the patent system. In this Essay, I challenge that assumption and systematically assess the cases for and against patent markets. I do so by taking seriously both the underlying innovation promotion goal of the patent system and the lessons of financial economics, and asking what might be the effects of a market for patents that looked roughly like other familiar markets for stocks, real estate, or secondhand goods.

I conclude that, like much in patent law, the effects of robust patent markets are likely to vary with specific technological and business contexts. When there is a close fit between patents and useful technologies, a patent market can support a market for technology that aids in connecting inventors with developers and sources of capital for commercialization. But when that fit breaks down, market pricing could favor litigation over commercialization. Similarly, a liquid patent market might help to allocate the risks of innovation and of patent infringement to the parties best able to bear it, but a kind of moral hazard familiar to the market for subprime mortgages could lead not to more innovation but to more patents, thereby increasing the overall risk in the system. This analysis suggests that we are having the wrong conversation about patent markets. Rather than assuming their utility and asking how to improve them, we should be undertaking empirical research to determine the circumstances in which they will or will not work and exercising caution in invoking the logic of markets in policy debates about the contours of the patent system.

Like other markets, they are good when they are good, and bad when they are bad. Burstein adds a lot of nuance throughout the article, focusing on arguments why markets may be good or not, but without making too many assumptions about any particular technology or patent owner type.

One thing I would add to the article is the importance of timing. Markets early might be better than markets later, even in the same technological contexts. The article would probably put this into the "business context" category, but I think the importance of diffusion, cumulative innovation, and path dependency merit a separate consideration.

In all events, I think the essay adds to the literature and may produce some testable hypotheses as well.

Some Reflections on Localism, Innovation, and Jim Bessen's New Book "Learning by Doing"

I highly recommend Jim Bessen's new book, Learning by Doing: The Real Connection Between Innovation, Wages and Wealth (2015), published by Yale University Press. I was lucky to present alongside Jim at Yale's first Beyond IP Conference, where he discussed his ideas about the importance of education and worker training for a successful innovation economy. As Bessen puts it in his book,

innovation can suffer from two distinct problems: markets can fail to provide strong incentives to invest in R&D, and they can fail to provide strong incentives for learning new skills. Underinvestment in R&D is not the only problem affecting innovation. It might not even be the most important problem. ... There is simply no justification for focusing innovation policy exclusively on remedying underinvestment in R&D, especially since most firms report that patents, which are supposed to correct this underinvestment, are relatively unimportant for obtaining profits on their innovations.

The takeaway is that protecting inventions with patents and copyrights can't be the sole function of an effective innovation policy. Governments need to focus on a much broader range of policies to "encourage broad-based learning of new technical skills, including vocational education, government procurement, employment law, trade secrecy, and patents."

At IP Scholars in Chicago this year, I'll be presenting my new paper Patent Nationally, Innovate Locally.  Like Bessen, I will talk about a broad range of innovation incentives that focus on research and technology commercialization, as well as public investments in STEM education, worker training, and public infrastructure. I'll argue, however, that when intellectual property rights are not the chosen mechanism, many of these incentives should come from sub-national governments like states and cities because they are the smallest jurisdictions that internalize the immediate economic impacts of public investments in innovation.*  While states cannot internalize the benefits of patent and copyright regimes that result in widespread disclosure of easily transferable information, they can internalize the benefits of innovation finance (direct expenditures of taxpayer revenues on innovation) especially when those expenditures go towards improving the education, skills, and knowledge-base of the local labor force.

Innovation finance (IF) is an important new frontier in IP law scholarship. Not only does innovation finance supplement federal IP rights by correcting market failures in technology commercialization and alleviating some of the inefficiencies created by patents and copyrights, it also takes into account Bessen's point: "markets can fail to provide strong incentives to invest in R&D, and they can fail to provide strong incentives for learning new skills." Both market failures are important, and the latter may be even more important than the former. But if we really want to focus on a broader range of policies like government procurement and support for public education to "encourage broad-based learning of new technical skills," as Bessen suggests, then we need to start looking at state and local governments.

To understand this point, take the example of a government prize for developing a better way to manufacture cars without using as many resources (e.g. 3D printing). If the federal government gives the prize, this makes some sense: assuming the prize hits its mark, national taxpayers will eventually benefit when the innovation is perfected and widely adopted, and the information on how to do it becomes public. But the impacts of the prize are going to be very different for different parts of the country. First off, the prize winner has to locate its research and operations somewhere. Presumably, it's going to choose a state like Michigan or Ohio with the resources, facilities, and human knowledge-base to do this kind of research and experimentation. The immediate benefits for local firms and residents are obvious: jobs, tax revenues, business for local companies. There is also a less perceptible but far more important benefit: easier access to new technical knowledge coming out of the experiments and inside information on emerging market developments. Plentiful research suggests that a lot of knowledge is hard to transfer and that effective exchange requires proximity, especially when science-based research and unfamiliar technology are involved. The implication for local officials seeking to boost the regional economy is clear: the more innovation that happens in your jurisdiction and the more residents who gain skills in an important new field, the better off your state or city will be. (This is the basis for innovation cluster theory and the idea that regions gain competitive advantages from localized knowledge exchange, originally discussed by UC Berkeley's AnnaLee Saxenian.)

Given that the immediate economic impacts of the 3D printing prize, including the tax revenues and most of the spillovers, are geographically localized to certain regions, do we really want federal policymakers designing these types of incentives, and do we really want taxpayers in states like Alaska and Arizona footing the bill? Or do we want significant input –  both political and financial – from the places in which the innovation is occurring? I think the answer is the latter. The benefits of decentralizing fiscal policy are numerous. I see at least two major benefits in this case: fairer shouldering of tax burdens, and more efficient innovation policies as a result of the better information and stronger incentives of local officials. Not only are they aware of the capabilities and needs of the local economy but they can act swiftly in response to local problems, liberated from the wrangling of "earmark politics" at the national level. The same principles apply to education and incentives for learning new skills – the second prong of Bessen's revitalized innovation policy. For example, would we expect national policymakers, who act in the national interest and are beholden to federal taxpayers, to supply the right amount of vocational training for future workers in the newly invented 3D printing automobile industry of my hypothetical? No: we would expect the main push for this kind of training to come from a state like Michigan with the right mix of interested workers and industry players.

In short, I suggest that innovation policy in the United States is not federal. It is bifurcated: the federal government protects exclusive rights in new inventions and original expression using patents and copyrights; states, cities and sub-national governments use innovation finance to capture the geographically localized economic benefits of innovation.

There are several responses to my argument. If innovation finance were all local, then wouldn't there be a major under-supply of research, especially for innovations without a clear market, like research into rare debilitating diseases or (until Elon Musk) space exploration? Wouldn't states compete with each other and end up spending way too much to attract firms into their jurisdictions? Aren't local politicians vulnerable to capture by local industries? I agree that all these risks exist. This is why I discuss a variety of instances where the federal government has an important role to play. Besides protecting copyrights and patents in new inventions, the federal government does a lot of direct financing for innovation too. This money goes towards education, basic research, and mission R&D (mainly in national defense) – all of which produce pervasive national spillovers as well as localized ones. On the flip side, the federal government also has a variety of means for controlling and coordinating the actions of sub-national governments in order to reduce corruption, wasted expenditures and "beggar thy neighbor" competition. Some of these preemptive forces come from discretionary judicial doctrines like the Dormant Commerce Clause (admittedly a weak source of limits on states); others are or perhaps should be statutory (the Patent Act??).

If you have comments or seek a draft of Patent Nationally, Innovate Locally, or my other working paper, Cluster Competition, which argues that the federal government is trying to "manage" state competition to grow innovation clusters through the America Competes Act's regional innovation program, please email me at: cahrdy@gmail.com or chrdy@law.upenn.edu


* The basic principle of fiscal decentralization is "the presumption that the provision of public services should be located at the lowest level of government encompassing, in a spatial sense, the relevant benefits and costs."