Steven Yelderman: Do Patent Challenges Increase Competition?

In his new paper, Do Patent Challenges Increase Competition, forthcoming in the University of Chicago Law Review, Stephen Yelderman tackles the perception, oft-stated by courts in antitrust cases, and "taken as a given" by many scholarly commentators, that courts should be wary of permitting settlement in lieu of a challenge to a patent's validity due to the potential benefits of invalidation for competition. This preference for litigation, Yelderman observes, is an exception to the general rule that settlement “should be facilitated at as early a stage of the litigation as possible.” (3, citing Fed. R. Civ. P. 16(c) advisory committee note to 1983 amendment).

Linking PTAB Proceedings to Litigation

We all know about patent litigation. We are learning about PTAB proceedings (Inter Partes Review and Covered Business Methods). But what do we know about both of them? The conventional wisdom is that just about every litigation now has a PTAB proceeding to go along with it. How about strategic PTAB filings untied to litigation?

At the recent WIP/IP conference, I heard no fewer than three people mention Kyle Bass. But not anyone else. And an industry exec at my table commented that there's no evidence Bass made money (or at least would continue to make money) because the market adjusts. So are strategic filings happening, and what do they look like?

Saurabh Vishnubhakat (Texas A&M), Arti Rai (Duke), and Jay Kesan (Illinois) try to get to the bottom of things in a paper forthcoming in the Berkeley Technology Law Journal. Here's the abstract:

The post-grant review proceedings set up at the U.S. Patent and Trademark Office’s Patent and Trial Appeal Board by the America Invents Act of 2011 have transformed the relationship between Article III patent litigation and the administrative state. Not surprisingly, such dramatic change has itself yielded additional litigation possibilities: Cuozzo Speed Technologies v. Lee, a case addressing divergence between the manner in which the PTAB and Article III courts construe patent claims, will soon be argued at the U.S. Supreme Court.

Of the three major new PTAB proceedings, two have proven to be popular as well as controversial: inter partes review and covered business method review. Yet scholarly analysis of litigant behavior in these proceedings has been limited thus far to descriptive data summaries or specific policy perspectives on these types of post-grant challenges, such as their impact on the well-rehearsed patent troll debate. In this article, we present what is to our knowledge the first comprehensive empirical and analytical study of how litigants use these inter partes review and covered business method review proceedings relative to Article III litigation.

A major normative argument for administrative ex post review is that it should be an efficient, accessible, and accurate substitute for Article III litigation over patent validity. We assess the substitution hypothesis, using individual patents as our general unit of analysis as well as investigating patent-petitioner pairs and similar details in greater depth. Our data indicate that the “standard model” of explicit substitution — wherein a district court defendant subsequently brings an administrative challenge to patent validity — occurs for the majority (70%) of petitioners who bring inter partes review challenges. An important implication of this effect is that the PTAB should use a claim construction standard that mirrors that of the district court, so that substituting administrative process for judicial process does not lead to substantively different outcomes.

Notably, however, standard substitution is not the only use of the PTAB: particularly in the area of inter partes reviews, we also see a surprising percentage of cases (about 30%) where the petitioner is not the target of a prior suit on the same patent. The frequency of these nonstandard petitioners, as well as their tendency to join the same petitions as an entity that has been sued, varies by technology. Our data on nonstandard petitioners provide some insight into the extent to which patent challengers are engaging in collective action to contest the validity of patents. Depending on the details of how nonstandard petitioning and collective action are being deployed, this activity could provide a social benefit or constitute a form of harassment.

 I hardly need a blog post after that! But I do have a couple comments. First, the authors do a good job of discussing the literature on whether the substitutive effect is efficient or harassing. Second, and related, there is some good data here on whether motions for stays are being granted in litigation (about half the time, or more depending on interpretation). Third, the "strategic" filing data is interesting, because some is not so strategic (litigation is "in the offing" as they authors note) but some comes out of nowhere.

In general, this is an interesting and helpful look at the new proceedings and a must read for someone who wants to understand the current litigation environment.

Justice Scalia's IP Legacy

One of the things I love about teaching and writing in intellectual property is that disputes often don't fall along traditional party lines. As I've written, while many conservatives prefer stronger IP rights, others view IP as unnecessary government interference in the market. I don't know whether Justice Scalia had a unified theory of IP; he called intellectual property one of the "blind sides" that he "always regretted," said that his hardest decision "would probably be a patent case," and noted in a symposium dedicated to his friend Howard Markey (the first Chief Judge of the Federal Circuit), "I don't know much about patent law." He also threw up his hands at the science in the Myriad case on gene patents in 2013. But he certainly wrote a lot of smart opinions that have made it to the IP casebooks, and liberals who favor a minimalist approach to IP grounded in free competition and consumer rights have lost a jurist who was often on their side.

By my count, Justice Scalia wrote nine patent-related opinions. His majority decision in MedImmune v. Genentech (2007) made it easier to challenge patents by holding that a patent licensee need not breach the license in order to file a declaratory judgment that the underlying patent is invalid or not infringed. He also wrote for the Court in Eli Lilly v. Medtronic (1990) and Merck v. Integra (2005), both of which provided a broad interpretation of the § 271(e)(1) safe harbor from infringement for generic drug companies engaged in pre-market activities.

To be sure, Scalia was not always on the side of patent minimalism. He joined Chief Justice Robert's eBay concurrence emphasizing the long tradition of injunctive relief in patent cases, and he joined the Chief's Actavis dissent, which would have given pharmaceutical patentees broad immunity from antitrust law for "reverse payment" settlements. He also may have switched his vote in Bilski to prevent a broader ruling against the patentability of business method.

But even if he favored treating valid patents as property, he seemed consistent in wanting to make sure that asserted patents were in fact valid rights. His most recent patent opinion was a dissent in Commil v. Cisco (2015), in which he argued that a defendant's good-faith belief that a patent is invalid should be a defense to induced infringement. Ronald Mann described the dissent as follows:

[The majority] spurs Justice Scalia to quips that are pointed even by the elevated standards of his stylistic panache. He starts with the basic point: "Infringing a patent means invading a patentee's exclusive right to practice his claimed invention. Only valid patents confer exclusivity—invalid patents do not. It follows, as night the day, that only valid patents can be infringed. To talk of infringing an invalid patent is to talk nonsense." To the Court's suggestion that he was conflating the distinct issues of validity and infringement, he retorts: "Saying that infringement cannot exist without a valid patent does not 'conflate the issues of infringement and validity' any more than saying that water cannot exist without oxygen 'conflates' water and oxygen."

Fed. Cir. Upholds Default of No International Patent Exhaustion in Lexmark

The Federal Circuit released its en banc decision in Lexmark v. Impression Products this morning, upholding the Mallinckrodt rule that patentees may place resale restrictions on their products and upholding the Jazz Photo rule that authorized foreign sales of U.S.-patented products do not exhaust the U.S. patent rights on those products. As regular Written Description readers know, I wrote an essay with Daniel Hemel before the Lexmark argument arguing that the briefing was ignoring the ways in which overturning Jazz Photo would harm foreign interests, and we thought these distributive tradeoffs were reflected in the Federal Circuit argument.

The Lexmark result is 10–2 and spans 129 pages, with Judge Taranto writing for the majority and Judge Dyk writing for himself and Judge Hughes in dissent (arguing for the government's presumptive exhaustion rule). None of the judges supported the argument of Impression and its amici that an authorized foreign sale should always exhaust U.S. patent rights.

Both opinions do discuss economic policy issues, and the majority cites Daniel's and my essay at p. 95 of the slip opinion as support for the statement that there is "no dispute that U.S.-patented medicines are often sold outside the United States at substantially lower prices than those charged here and, also, that the practice could be disrupted by the increased arbitrage opportunities that would come from deeming U.S. rights eliminated by a foreign sale made or authorized by the U.S. patentee." In addition to describing these problems with changing the rule, the opinion also notes that no one has presented evidence "that substantial problems have arisen with the clear rule of Jazz Photo."

More Cool Lab Experiments on Creativity by Bechtold, Buccafusco & Sprigman

As Chris Sprigman explained in a 2011 Jotwell post, laboratory experiments are largely missing from the legal academy, but they shouldn't be. Experiments can be used to test theories and tease apart effects that can't be measured in the real world. They can explode old hypotheses and generate new ones. Chris Sprigman and Chris Buccafusco and various coauthors have been among those remedying the dearth of experimental work in IP law; e.g., I've previously blogged about a clever study by the Chrises of how people price creative works. (For more on the benefits and drawbacks of work like this, and citations to many other studies, see my Patent Experimentalism article starting at p. 87.)

Most recently, Chris and Chris have teamed up with Stefan Bechtold for a new project, Innovation Heuristics: Experiments on Sequential Creativity in Intellectual Property, which presents results from four new experiments on cumulative innovation/creation that "suggest that creators do not consistently behave the way that economic analysis assumes." (This should not be surprising to those following the behavioral law and economics literature. Or to anyone who lives in the real world.) I briefly summarize their results below.

An Alternate History of the Web & Copyright Law

I've been enjoying Walter Isaacson's The Innovators, a history of computers and the Internet. As with any book related to innovation, I've been interested in the importance (or non-importance) of patents for different inventors, and in the key role of non-patent government incentives for innovation at different points of computing's history. But the rise of the Internet is of course interesting to IP scholars not only for the technical advance it represented, but also for the effect it had on the copyright markets. So I was particularly struck by a passage about how it all could have turned out differently. Isaacson described a meeting between Tim Berners-Lee, who created the World Wide Web while working at CERN, and Ted Nelson, an earlier hypertext innovator:

Twenty-five years earlier, Nelson had pioneered the concept of a hypertext network with his proposed Xanadu project. It was a pleasant meeting, but Nelson was annoyed that the Web lacked key elements of Xanadu. He believed that a hypertext network should have two-way links, which would require the approval of both the person creating the link and the person whose page was being linked to. Such a system would have the side benefit of enabling micropayments to content producers. "HTML is precisely what we were trying to prevent—ever-breaking links, links going outward only, quotes you can't follow to their origins, no version management, no rights management," Nelson later lamented.

Had Nelson's system of two-way links prevailed, it would have been possible to meter the use of links and allow small automatic payments to accrue to those who produced the content that was used. The entire business of publishing and journalism and blogging would have turned out differently. Producers of digital content could have been compensated in an easy, frictionless manner, permitting a variety of revenue models, including ones that did not depend on being beholden solely to advertisers. Instead the Web became a realm where aggregators could make more money than content producers. Journalists at both big media companies and little blogging sites had fewer options for getting paid. As Jason Lanier, the author of Who Owns the Future?, has argued, "The whole business of using advertising to fund communication on the Internet is inherently self-destructive. If you have universal backlinks, you have a basis for micropayments from somebody's information that's useful to somebody else." But a system of two-way links and micropayments would have required some central coordination and made it hard for the Web to spread wildly, so Berners-Lee resisted the idea.

Sean O'Connor: What happened to the "art" in "useful arts"?

The constitutional justification for patents and copyrights is "[t]o promote the Progress of Science and useful Arts." In the late eighteenth century, "science" included all knowledge, and "useful arts" referred to technological rather than liberal arts. In The Lost 'Art' of the Patent System, Professor Sean O'Connor argues that although the modern patent system retains some "art"-based terminology—prior art, person having ordinary skill in the art, state of the art—the traditional conception of "art" has largely been displaced by modern conceptions of technology or science. He laments the implications of these developments, such as the increase in "upstream patenting" and a prejudice against non-technological inventions, and he argues that we must "recover the lost 'art' of the patent system."

The primary doctrinal lever O'Connor points to for addressing this issue is the utility requirement. He argues that "its current diluted interpretation (anything that does anything likely has substantial utility) may stem from its separation from the underlying art," and that courts should recognize that utility is, in my co-blogger Michael Risch's words, "A Surprisingly Useful Requirement." It might seem unlikely that courts will revive utility from its current "diluted" form, but commentators probably thought the same thing about patentable subject matter ten years ago. In a 2014 talk at Stanford, Federal Circuit Judge Dyk noted: "Strangely, we don't generally ask whether a utility patent has the utility that is required by the patent statute," and he criticized the patent bar for being "too timid and too lacking in creativity" about raising novel arguments like this. I don't know that O'Connor's vision of utility is the one he had in mind, but there are some parallels between O'Connor's work and Judge Dyk's history-focused concurrence in Bilski (which was cited by the majority and Stevens's concurring opinion in Bilski, and by Justice Sotomayor's concurrence in Alice). Perhaps creative litigants attempting to breathe more life into utility will meet a more welcome reception at the Federal Circuit than they might expect.