Who’s Afraid of Section 1498?: Government Patent Use as Versatile Policy Tool

Guest post by Christopher Morten & Charles Duan

Chris Morten (@cmorten2) is the Clinical Teaching Fellow and Supervising Attorney in NYU’s Technology Law and Policy Clinic. Charles Duan (@Charles_Duan) is Director of Technology and Innovation Policy at the R Street Institute.

From vaccines to ventilators to diagnostic tests, technology has dominated response strategies to the ongoing COVID-19 pandemic. Where technology leads, patent law and policy follow. Recently, some attention has turned to federal government patent use under 28 U.S.C. § 1498. Jamie Love of KEI has called on the federal government to explore use of section 1498 in its response to COVID-19, to reduce prices, expand supplies, and ensure widespread, equitable access to patented technologies. (We have, too.) There is a long line of scholarship, including Amy Kapczynski and Aaron Kesselheim, Hannah Brennan et al., Dennis Crouch, Daniel Cahoy, and others discussing the relevance of section 1498 in a variety of contexts.

Yet others have encouraged the government to “tread lightly” and described use of section 1498 as a “nuclear option”—potent but dangerous—because it can be used to make massive interventions in the market for patented products—e.g., by issuing compulsory licenses to patents on high-priced brand-name drugs, “breaking” patent monopolies and accelerating the entry of numerous generic competitors. One recent example: a few years ago, Gilead’s high prices on hepatitis C drugs exacerbated a different public health crisis and prompted a chorus of voices, including Senator Bernie Sanders and the New York Times editorial board, to call on the federal government to exercise its section 1498 power to “break” Gilead’s patents in just this way, which might have saved tens of billions of dollars in public spending. (The federal government did not do so.)

Irrespective of the merits of 1498 as a general matter, in the context of a crisis such as the COVID-19 pandemic we see real value in bold, “nuclear option” use of section 1498 to save billions on high-priced prescription drugs and maximize their availability. But that is not the only way section 1498 can be used. It can also be used in modest, incremental, unexceptional ways—it can be as much as a scalpel or a Swiss Army knife as a nuclear weapon, and some of its virtues in this regard have gone underappreciated.

Accordingly, we highlight four particularly valuable features of government patent use under section 1498 in a crisis like the present one: (1) speed, (2) flexibility, (3) ex post determination of the appropriate compensation, and (4) determination of that compensation by an impartial adjudicator. In particular, we compare section 1498 with an alternative policy tool, patent buyouts, which can also expand public access to patented technologies, and identify several reasons why section 1498 may be the preferable tool.

Gugliuzza & Lichtman on the Timing of Patent Litigation

Are patent cases being litigated too quickly or too slowly? Two recently posted articles tackle this problem from different angles:

Paul Gugliuzza's Quick Decisions in Patent Cases argues that patent litigation is "notoriously expensive and time consuming," but that there is a beneficial trend toward quicker decisions through practices such as pleadings-stage dismissals on patent eligibility grounds, post-grant revocation at the PTO, and heightened pleading requirements. These changes have been controversial, and Gugliuzza discusses ways each development might be further improved in terms of the overall tradeoff between accuracy and cost. But overall, Gugliuzza argues that the benefits of faster litigation resolution probably outweigh the downsides.

On the other hand, Doug Lichtman's Patient Patents begins with the provocative claim that "a large number of patent cases are today being litigated too quickly." His basic argument is straightforward: Delay is most costly in cases that potentially involve injunctions, but post-eBay, many patent plaintiffs are denied injunctive relief. In these cases, "delay takes a day for which the accused infringer would have been paying a court-ordered ongoing royalty and transforms it into a day for which the accused infringer will instead pay court-ordered backward-looking damages." Thus, these cases "are the ideal candidates for which to consider tailored, accuracy-enhancing litigation delay." This is not to say that delay is costless; perhaps most importantly, as Lichtman acknowledges, it "increases the duration of patent uncertainty." His point is simply that the optimal balance has been shifted by the increased prevalence of damages over injunctions.

Although these two articles might initially seem contradictory, they are really focused on different aspects of the cost-benefit analysis of litigation timing. Indeed, Gugliuzza notes and does not dispute Licthman's argument, but contends that it does not affect the majority of cases because "nearly seventy-five percent of successful patentees still obtain permanent injunctions, and that figure increases to eighty percent when PAEs are excluded." I think both are worth a read.

A Comprehensive Study of Trade Secret Damages

Elizabeth Rowe (Florida) has shared a draft of "Unpacking Trade Secret Damages" on SSRN. The paper is an ambitious one, examining all of the federal trade secret verdicts she could find (which she believes is a reasonably complete set based on her methods) that issued between 2000 and 2014. The abstract is:

This study is the first to conduct an in-depth empirical analysis of damages in trade secret cases in the U.S. From an original data set of cases in federal courts from 2000 to 2014, I assess the damages awarded on trade secret claims. In addition, a wide range of other variables are incorporated into the analysis, including those related to background court and jurisdiction information, the kinds of trade secrets at issue, background details about the parties, the related causes of action included with claims of trade secret misappropriation, and details about the damages awarded.

Analysis of this data and the relationship between and among the variables yields insightful observations and answers fundamental questions about the patterns and the nature of damages in trade secret misappropriation cases. For instance, I find average trade secret damage awards comparable to those in patent cases and much larger than trademark cases, very positive overall outcomes for plaintiffs, and higher damages on business information than other types of trade secrets. The results make significant contributions in providing deeper context and understanding for trade secret litigation and IP litigation generally, especially now that we enter a new era of trade secret litigation in federal courts under the Defend Trade Secrets Act of 2016.

I think this study has a lot to offer. Although it doesn't include state court cases, it provides a detailed look at trade secret cases in the first part of this century. Of course, the verdicts, which were about 6% of all trade secret cases filed, are subject to the same selection effects as any other verdict analysis - there is a whole array of cases (more than 2000 of them in the federal system alone) that never made it this far, and we don't know what the tried cases tells us about the shorter-lived cases.

The study offers a lot of details: amounts of awards, states with the highest awards, states with the most litigation, judge v. jury, attorneys' fees, punitive damages, the effect of NDAs on damages, etc. It goes a step further and offers information about the types of information at issue, and even the types of information that garner different sizes of awards. It's really useful information, and I recommend this study to anyone interested in the state of trade secret litigation today.

There are, however, a couple ways I think the information could have been presented differently. First, the study has some percentile information which was great, but most of it focuses on averages. This is a concern because the data is highly skewed; one nearly billion dollar verdict drives much of the relevant totals. Thus, it is difficult to get a real sense for how the verdicts look and there is no standard deviation reported.

Of course, the median award according to the paper is zero, so reporting medians is a problem. I particularly liked the percentile table and discussion, and I wonder whether a 25/50/75 presentation would work. Speaking of zero dollar awards, though, I thought the paper could be improved by clarifying what is calculated in the average. Is it the average of all verdicts? All verdicts where the plaintiff wins? All non-zero verdicts? Related to this, I thought that clearly disaggregating defendant verdicts would be helpful. The paper reports how many plaintiffs won, but this is not reflected in either the median or average award data (that I can tell - only total cases are reported). At one point the paper discusses the average verdict for defendants (more than $800,000) which is confusing since defendants shouldn't win any damages. Are these part of the averages? Are they calculated as a negative value? If these are fee awards, they should be reported separately, I would think.

Though I would like more data resolution, I should note that this really is just a presentation issue. The hard part is done, and the data is clearly available to slice and dice in a variety of ways, and I look forward to further reporting of it.

Brennan, Kapczynski, Monahan & Rizvi: Leveraging Government Patent Use for Health

The federal government can and should use its power to buy generic medicines at a fraction of their current price, according to Hannah Brennan, Amy Kapczynski, Christine H. Monahan, and Zain Rizvi in their new article, A Prescription for Excessive Drug Pricing: Leveraging Government Patent Use for Health. They note that 28 U.S.C. § 1498 allows the federal government to use patents without license as long as it pays "reasonable and entire compensation for such use." This provision "is regularly used by the government in other sectors, including defense," and was relied on "numerous times to procure cheaper generic drugs in the 1960s," and should "once again be used to increase access to life-saving medicines." The article is chock-full of interesting details and is a recommended read even for those who disagree with their ultimate policy conclusions.

The authors discuss how § 1498 has been used recently to acquire patented inventions ranging from electronic passports to genetically mutated mice, and how the Defense Department used § 1498 to buy generic antibiotics from Italian firms before Italy started issuing patents on drugs. They synthesize the § 1498 caselaw and note that it is not a replication of the patent damages award; e.g., lost profits are strongly disfavored, and the cases show concern with "excessive compensation" to the patent owner. Adjustments to § 1498 royalties have been made based on risks and expenses incurred by the patentee in developing and creating a market for the products, and to account for "reasonable" profits, so the authors advocate awarding pharmaceutical patentees their risk-adjusted R&D costs plus average industry returns (perhaps a 10-30% bounty). This approach to calculating patent royalties is similar in many ways to that advocated by Ted Sichelman for all patent cases, as discussed on this blog in June.

Bernard Chao on Horizontal Innovation and Interface Patents

Bernard Chao has posted an interesting new paper, Horizontal Innovation and Interface Patents (forthcoming in the Wisconsin Law Review), on inventions whose value comes merely from compatibility rather than improvements on existing technology. And I'm grateful to him for writing an abstract that concisely summarizes the point of the article:

Scholars understandably devote a great deal of effort to studying how well patent law works to incentive the most important inventions. After all, these inventions form the foundation of our new technological age. But very little time is spent focusing on the other end of the spectrum, inventions that are no better than what the public already has. At first blush, studying such “horizontal” innovation seems pointless. But this inquiry actually reveals much about how patents can be used in unintended, and arguably, anticompetitive ways.

This issue has roots in one unintuitive aspect of patent law. Despite the law’s goal of promoting innovation, patents can be obtained on inventions that are no better than existing technology. Such patents might appear worthless, but companies regularly obtain these patents to cover interfaces. That is because interface patents actually derive value from two distinct characteristics. First, they can have “innovation value” that is based on how much better the patented interface is than prior technology. Second, interface patents can also have “compatibility value.” In other words, the patented technology is often needed to make products operate (i.e. compatible) with a particular interface. In practical terms, this means that an interface patent that is not innovative can still give a company the ability to foreclose competition.

This undesirable result is a consequence of how patent law has structured its remedies. Under current law, recoveries implicitly include both innovation and compatibility values. This Article argues that the law should change its remedies to exclude the latter kind of recovery. This proposal has two benefits. It would eliminate wasteful patents on horizontal technology. Second, and more importantly, the value of all interface patents would be better aligned with the goals of the patent system. To achieve these outcomes, this Article proposes changes to the standards for awarding injunctions, lost profits and reasonable royalties.

The article covers examples ranging from razor/handle interfaces to Apple's patented Lightning interface, so it is a fun read. And it also illustrates what seems like an increasing trend in patent scholarship, in which authors turn to remedies as the optimal policy tool for effecting their desired changes.

Ted Sichelman: Purging Patent Law of 'Private Law' Remedies

Do current patent law remedies efficiently promote innovation? In his article Purging Patent Law of ‘Private Law’ Remedies, Professor Ted Sichelman (University of San Diego School of Law) argues that patent law’s reliance on tort, contract, and property law models is conceptually flawed and proposes a regulatory model of patent law remedies that would optimize innovation. Professor Sichelman discusses the universally accepted goal of patent law, identifies deficiencies in existing remedy models, and suggests that patent law will more efficiently promote innovation by eradicating the private law moorings from patent law.

Sarah R.W. Rajec: Tailoring Remedies To Spur Innovation

Will we ever find a perfect remedial scheme in patent law? Ever since the dawn of the patent system, our law has sought to tailor the patent system so that it optimally balances its grants of exclusive monopoly power with the incentives it provides to prospective inventors. In Tailoring Remedies To Spur Innovation, Sarah R. Wasserman Rajec, a Visiting Associate Professor at GW, has written a thought-provoking draft paper in which she seeks to move us one step closer to that ideal balance. Incorporating useful insights from the economics and antitrust literatures, she argues that the law surrounding permanent injunctions in patent suits can be better adapted to promote innovative ends.

Katherine Strandburg: Patent Fair Use 2.0

In 2000, Dean Maureen O'Rourke (BU Law) published Toward a Doctrine of Patent Fair Use in the Columbia Law Review, in which she argued that patent law, like copyright, should have a fair use doctrine. The idea hasn't caught on in the past decade, but Professor Katherine Strandburg (NYU Law) has now updated the idea in Patent Fair Use 2.0.

Peter Lee: Accession and Patent Remedies

We often refer to patents as "property," so can traditional property remedies teach us something about appropriate remedies in patent infringement cases? This is what Professor Peter Lee (UC Davis) argues in his forthcoming article, The Accession Insight and Patent Infringement Remedies, which I had the opportunity to hear him discuss last month at Fordham Law. (Full disclosure: I edited Lee's Patent Law and the Two Cultures and am already a fan of his writing style.)

Lee considers the doctrine of accession, which governs the "mistaken improvement" of property. In a canonical accession case, Wetherbee v. Green (Mich. 1871), Wetherbee chopped down $25 worth of trees under a faulty license and made $700 worth of barrel hoops. The Michigan Supreme Court held that as long as Wetherbee was acting in good faith, title to the wood would transfer and he would only need to compensate the true owners for their $25 loss, rather than giving them the $700 barrel hoops.

So what happens, Lee asks, if Wetherbee's fictitious great-great-granddaughter patents a revolutionary new battery and begins commercializing it, only to be sued for infringing a patent covering an older battery design? What if she is unable to negotiate a reasonable licensing agreement?

Dmitry Karshtedt: Samsung-Stanford Symposium on Patent Remedies

This is a guest post by Dmitry Karshtedt, a 3L at Stanford with a Ph.D. in chemistry. Karshtedt is the Stanford Law Review Senior Symposium Editor, and his legal scholarship is available on SSRN.

The inaugural Samsung-Stanford Symposium on Patent Remedies took place on February 18, 2011, at Stanford Law School. The panels featured both law professors and students who won the Samsung-Stanford prizes on the basis of their proposals. Links to videos of the panels and PDFs of the papers are included below.

The first panel, moderated by Professor Robin Feldman of U.C. Hastings College of the Law, was focused on injunctions. Janet Freilich, a 2L from Harvard, kicked off the discussion and presented a nuisance framework that judges could use to determine when to issue injunctions, supplementing the four-part test endorsed in eBay v. MercExchange. Professor Christopher Cotropia, from the University of Richmond, then presented an empirical paper that showed that the Federal Circuit’s Kyocera case did not have the expected effect of reducing the number of filings by patent owners to prevent the importation of infringing goods through the International Trade Commission. Professor Ted Sichelman, from the University of San Diego, argued that patent remedies must be based on harm to the public caused by diminished incentives to innovate due to infringement, rather than on injury to individual patent owners. Professor Peter Lee of U.C. Davis then proposed a rule, based on the law of accession in the real property context, holding that infringement suits against owners of improvement patents should result in damages rather than injunctions. Finally, Professor John Golden of University of Texas discussed the compliance of patent injunctions with the Federal Rules of Civil Procedure.

The second panel, moderated by Brian Love, a teaching fellow at Stanford Law, focused on patentee overcompensation and apportionment. In the first paper, Professor Amy Landers of McGeorge demonstrated that the history of the Patent Act supported apportionment based on the novel contribution of the patentee over the prior art. Professor Bernard Chao of the University of Denver then argued that more reasonable damage awards will be reached if courts, as they may, allow accused infringement to implead other infringers for contribution. Using the example of the iPhone, 3L Ravi Mohan of Santa Clara argued that the use of apportionment is unavoidable for complex technologies. Finally, Dmitry Karshtedt, a 3L at Stanford, highlighted a panel split in the Federal Circuit involving differing treatment of proven acts of direct infringement in figuring indirect infringement damages.

The third panel, moderated by Professor Colleen Chien of Santa Clara, showcased empirical papers on patent damages. Damon Andrews, a 3L at the University of Iowa, argued that the goal of much of patent litigation is to extract settlements from defendants. Professor Michael Mazzeo of Northwestern University, in a paper co-authored by Jonathan Hillel of Skadden Arps and Samantha Zyontz of George Mason University School of Law, showed that patent damages are not as extravagant as commonly perceived. Rhonda Sadler, a 3L at Mercer Law School, suggested approaches to simplifying jury instructions based on evidence of lack of understanding of current jury charges in patent cases. Professor Christopher Seaman of Chicago-Kent College of Law, completed the panel by demonstrating the effects of opinions of counsel on cases dealing with various issues in patent law such as willful infringement.

The fourth and final panel dealt with structured calculation of reasonable royalties, and was moderated by the Honorable Ronald Whyte of the Northern District of California. Professor Thomas Cotter of the University of Minnesota discussed four principles that should guide courts in calculating reasonable royalties—faithfulness to substantive law, focus on compensation sufficient to make the patentee whole, increased damages only when this is needed for optimal deterrence, and basis of damages on licenses that parties would have actually entered into but for the infringement. The second paper was given Kanav Hasija, a Master in Intellectual Property at the University of New Hampshire School of Law and co-authored by Paul Tanpitukpongse, a 3L at UNH, and discussed a game theory approach to calculating reasonable royalties. Stanford LLMs Tony Lai and Samuel Windley co-authored the third paper, presented by Samuel, which involves courts encouraging patent litigants to negotiate actual royalty agreements and using such negotiations as the basis for reasonable royalties. The conference ended with Stanford’s Mark Lemley, who explained how courts should approach the issue of ongoing royalties in cases where injunctions are not granted and the losing defendant continues to infringe.