Measuring the Role of Attorney Quality in Patenting

It stands to reason that better attorneys are better at turning patent applications into patents. Theoretically, better arguments about overcoming prior art, for example, will be more likely to lead to granted claims. But what about the quality of inventions? Maybe better patent attorneys just get better patent applications, so of course they have better success rates.

Measuring this is hard, but Gaétan de Rassenfosse (Ecole Polytechnique Fédérale de Lausanne) and four co-authors from University of Melbourne and Swinburne University of Technology think they have found the answer. Examining 1.2 million granted and refused patent applications in the US, Europe (EPO), China, Japan, and South Korea, they think they have the answer. They have posted a draft on SSRN, and the abstract is here:

Failure to obtain a patent weakens the market position and production chain of enterprises in patent-intensive technology domains. For such enterprises, finding ways to maximise the chance to obtain patent protection is a business imperative. Using information from patent applications filed in at least two of the five largest patent offices in the world between 2000 and 2006, we find that the ability to obtain patent protection depends not only on the quality of the invention but also on the quality of the patent attorney. In some cases, the latter is surprisingly more important than the former. We also find that having a high-quality patent attorney increases the chance of getting a patent in less codified technology areas such as software and ICT.

They use a clever approach with their multi-country methodology to separate attorney quality from invention quality. By estimating grant rates across countries for the same inventions as well as for the same attorneys, they are able to estimate the marginal value added by the invention versus the attorney. For example, if different attorneys have differing results in two countries with the same invention, then attorney quality is likely at play. However, if the same attorney has differing results in two countries with the same invention, then invention quality is more likely at issue. Of course, this doesn't work with a couple of patents, but with more than one million patent applications, the estimates likely trend toward a reasonable measure of each type of quality unaffected by the other.

Using this index of quality, they then estimate the effects of attorney and invention quality. They find that, as expected, invention quality matters. But they also find that attorney quality matters--sometimes a lot. More interesting, they find that attorney quality matters more where there is more wiggle room (my term, not theirs), such as in software (as opposed to chemistry). In other words, they find empirical evidence to support the intuition that attorneys who can mold claims to avoid rejections are more likely to wind up with issued patents.

Now, the benefit isn't unbounded. Because grant rates are really high (like 85%), the marginal benefit is unlikely to be huge. One marginal estimate they make is that moving from the 10th percentile to the 90th percentile in quality increases the grant probability by 13 percentage points (e.g, from 79% to 92%). What this means is that invention quality is very important, because even the least successful attorneys are successful most of the time. Of course, this is a potential criticism, because if everything is granted, then how can we measure quality based on grant rates? The paper addresses this, arguing that there is a lot of variability, even within the same patent family. They also test on other measures of patent quality and find similar results.

The authors also make other interesting findings: external counsel increase grant rates, attorney quality doesn't seem to have an effect on foreign v. local probabilities, and attorney quality is of less importance in PCT applications. There is a lot more to the paper - including effects in different offices, on different technologies and other great information. I found this to be a really interesting and useful read.

Patents and the Administrative State

When Justice Gorsuch was confirmed to the Supreme Court, many commentators, well, commented that he was wary of administrative overreach. But it turns out he was really active in patent cases, writing opinions in all the patent cases he saw last term. Who knew he was so interested in patents? He does have some IP chops; his opinion in Meshworks remains one of my favorite copyright cases, not the least of which because it validates a legal argument I made about virtual reality copyright some 25 years ago. I was able to cite that case in a recent book chapter on the same subject.

But it turns out that his interest in patents may be one and the same as his concern about the administrative state. We suspected as much with Oil States, but what about the others? To answer this, Daniel Kim and Jonathan Stroud (both of Unified Patents) have an article forthcoming in the Chicago-Kent Journal of Intellectual Property called Administrative Oversight: Justice Gorsuch’s Patent Opinions, the PTAB, and Antagonism Toward the Administrative State. A draft is posted on SSRN, and the abstract is here:

In his first term, Justice Neil Gorsuch has made a surprisingly forceful impact on, of all things, patent law—and even more unlikely, the United States Patent and Trademark Office’s adjudicatory arm, the Patent Trial and Appeal Board. Was there any way to predict, from his 10th Circuit opinions below, that he would author opinions in all three patent cases in his first term? Was this attention the result of deeply submerged but long-felt opinions on patent law, or rather a result of his sharp distrust of administrative overreach? We analyze 10th Circuit and Supreme Court opinions authored by Justice Gorsuch, and conclude his unforeseen interest springs from his desire to limit agency power rather than from any particular concern with patents. Still, his opinions—intentionally or by happenstance—will reverberate through our patent law for years.

This article is straightforward and illuminating. It begins with the justice's background and some comments on his writing style. It then examines his Tenth Circuit opinions in IP and tribal immunity (there are really not that many, which the authors attribute to the backwater location of the 10th Circuit devoid of any innovation, which I'm sure the folks in Denver will be happy to hear).

What's interesting about the article is that its analysis of the cases is not about IP outcomes, but about methods and the administrative state. Returning to Meshwerks, for example, the authors focus primarily on how it traces the history and purpose of IP rather than the important holding that realistic renditions of physical objects lack creativity.

This analysis bears fruit, though, because they show how these same methods and concerns about the administrative state drive Gorsuch's patent opinions, including those where he is dissenting or breaking from other conservative justices.

I found this article an interesting and insightful read, and I thought it was especially well done given the authors' own admission that they do not agree with Justice Gorsuch's judicial perspective. In other words, this wasn't a fan piece, but instead really useful commentary about how judicial philosophy and concerns about the administrative state may be brought to bear on the IP system in unexpected ways.

What impact do government grants have on small tech firms?

Most academic writing on direct government spending as an innovation policy tool focuses on how this mechanism compares with other policies rather than on the policy choices within the "direct spending" box. For example, in Beyond the Patents–Prizes Debate, Daniel Hemel and I considered a single category of "government grants—a category that includes direct spending on government research laboratories and grants to nongovernment researchers"—with a focus on the similarities among these direct spending mechanisms, and what makes them all different from the other tools in our four-box framework (R&D tax incentives, patents, and inducement prizes).

But we noted that there is variation within each policy box, and that in practice the boxes form a spectrum rather than discrete choices. And it is certainly worth diving within each of the four boxes of our framework from Beyond to dissect these policy tools. There is of course an extensive literature already on optimizing within the "patent" mechanism, but legal innovation scholars pay far less attention to the other boxes, including grants.

Even if one focuses on the most typical grants to academic scientists, there is some interesting research on the effect of different ways of awarding this funding, such as this paper by Azoulay et al. on NIH vs. HHMI grants. But the federal government also provides many other types of direct finding: in 2013, almost one-quarter of federal R&D expenditures went to for-profit firms. How does the theory behind this substantial expenditure of taxpayer funding differ from that for academic research, and what impact does it have in practice?

A recent study from Aleksandar Giga, Andrea Belz, Richard Terrile, and Fernando Zapatero at USC and NASA's Jet Propulsion Lab at Caltech provides some data on the Small Business Innovation Research (SBIR) program as administered by NASA. They find that compared with firms that do not receive these grants, "microfirms" (1-5 employees) with SBIR grants are twice as likely to produce patents and generate twice as many patents. They argue that this is unlikely to be due to a selection effect. They also find that the program does not show the same effect for larger firms, and they suggest that the size limitations for the program should be reconsidered.

Giga et al.'s work focuses on just one corner of the extensive field of direct government science funding, but I hope legal scholars will incorporate empirical work like this to provide a richer understanding of this type of innovation policy.

Equitable Servitudes and Post-Sale Restrictions

I have continued to find the issue of post-sale restrictions vexing. On the one hand, I think that there are sound economic reasons for them. On the other hand, I really don't like them, especially when they limit what should otherwise be reasonable and free activities.

The Supreme Court's recent cases in this area have made it more difficult to enforce such restrictions, but they have done so in a way that leaves open the possibility that some restrictions might apply while also not giving much guidance about when.

A recent article takes this on. Tim Scott (King & Spalding) has published The Availability of Post-Sale Contractual Restrictions in the Wake of Impression Products, Inc. v. Lexmark, 581 U.S. 1523 (2017) in Les Nouvelle. It is available on SSRN as well, and the abstract is below. I write about this article in part because the abstract is uninspiring when compared to the high quality analysis in the article. Don't be fooled.

In Impression Products, Inc. v. Lexmark International Inc., 581 U.S. ___, 137 S. Ct. 1523 (2017), the United States Supreme Court reaffirmed the patent exhaustion rule; i.e., patent rights are exhausted upon the first sale of the patented item such that the patentee has no rights to impose any post-sale conditions or limitations on the use of the product, at least under the patent laws. Id. at 1529. In doing so, the Court left open the question of whether such conditions or limitations could be imposed as a matter of contract law. Thus, the “restrictions in Lexmark’s contracts with its customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.” Id. at 1531 (emphasis added). In summarizing its decision in Quanta Computer, Inc. v. LG Electronics, Inc., 533 U.S. 617 (2008) ruling that the sale of computer components exhausted the plaintiffs patent rights in those components, the Court noted that it reached that conclusion “without so much as mentioning the lawfulness of the contract.” Lexmark, 137 S. Ct. at 1533. And it later summarized its holding by stating that “whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law.” Id. (emphasis added).

This is my kind of article: it's short, it gets right to business, and it is thorough despite its brevity. The article introduces the cases, discusses contract v. property rights, discusses equitable servitudes, surveys the literature on equitable servitudes on personal property (including pros and cons), proposes alternatives to equitable servitudes (and points to critiques), and then discusses how the alternatives might have applied to Lexmark's activities in Impression Products.

Not bad for eight journal pages. This is recommended reading for anyone who wants a quick background on the state of post-sale restrictions.

Mike Andrews on Historical Patent Data

Mike Andrews is a postdoc at NBER, and I recently came across his PhD dissertation, Fuel of Interest and Fire of Genius: Essays on the Economic History of Innovation. He presents some interesting new results from historical patent records:

I already described the work in chapter 1 in my post on the NBER Summer Institute; in short, he compares U.S. counties that received new colleges in the period 1839-1954 with finalist sites that were not chosen for plausibly exogenous reasons. He finds that counties that received a college had 33% more patents per year, mostly due to increases in population rather than the colleges' graduates and faculty.

Chapter 2 looks at the effect of statewide alcohol bans on counties that previously set their own alcohol policies. Statewide prohibition reduced patents by 15% per year in previously wet counties relative to previously dry counties, and there is a larger decline for men than for women. Andrews suggests this decline is due to a disruption of information social interactions in saloons.

Chapter 3 matches 1870–1940 patents with census data and finds that patentees are consistently more likely to be older, white, male, and living in a state other than the one in which they were born. Establishment of a historically black college increased representation of black inventors, but the effect largely disappears after controlling for a county's black population, suggesting it is driven by concentration rather than the college itself. Extension of the franchise to women did not seem to increase the representation of women among inventors.

Finally, chapter 4 compares patent historical datasets. For those considering historical work with patent data, this is probably a good place to start. One should always be cautious about generalizing from the innovation institutions of a century ago to the ones that exist today—e.g., the effect of universities on the patent system has changed significantly in the past few decades—but it is still interesting to understand how patents worked in a particular historical context.

Do Patent Laws Affect the Location of R&D?

One of the common complaints about weakening patent protection is that it causes reduced R&D in the country with weakened protection. I've always been skeptical of this claim in the modern era, because one can develop anywhere and import into a location with better protection. As a result, one would expect that patent protection is unrelated to R&D offshoring.

In a draft article called Offshoring Patent Law, Gregory Day (Georgia Business) and Steven Udick (Skiermont Derby LLP) consider this question. Their article is forthcoming in the Washington Law Review and a draft is on SSRN. Here is the abstract:

Legislators and industry leaders claim that patent strength in the United States has declined, causing firms to innovate in foreign countries. However, scholarship has largely dismissed the theory that foreign patents have any effect on where firms invent, considering that patent law is bound by strict territorial limitations (as a result, one cannot strengthen their patent protection by innovating abroad). In essence, then, industry leaders are deeply divided from scholarship about whether innovative firms seek out jurisdictions offering stronger patent rights, affecting the rate of innovation.

To resolve this puzzle, we offer a novel theory of patent rights — which we empirically test — to dispel the positions taken by both scholarship and industry leaders. Since technology is generally developed in one country, the innovation process exposes the typical inventor to infringement claims only in that jurisdiction. In turn, we demonstrate that inventors have powerful, counterintuitive incentives to develop technology where patent rights are weaker and enforcement is cheaper. Given that it typically costs more to defend a patent infringement claim in the United States than to lose one in another country (the cost to litigate a patent in the United States averages around $3.5 million and royalty awards have surpassed $2.5 billion), our empirical research contributes to the theoretical understanding of patent rights by shedding new light on the important, yet largely dismissed, dimension of where innovation takes place.

We received invaluable support from international research organizations and patent attorneys working for top-tier law firms. Notably, the Global IP Project, which is a multinational research group spearheaded by the leading global intellectual property (“IP”) law firm, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, as well as Darts-ip, an international organization dedicated to the study of global IP litigation, provided proprietary data, enabling us to explore whether firms optimize value by placing research and innovation in countries with “better” patent laws. To verify our models, we interviewed notable patent attorneys practicing in the United States, Europe, and Asia.

The primary takeaway from their approach is that not only might the strength of the laws matter, but also the costs of defense. To tell this story, they use Marvell as an example, but that was actually a rare case where the R&D and sales process itself constituted infringement to trigger worldwide sales. I would expect that companies can usually design in the U.S., send designs overseas (see Microsoft v. AT&T), and ship from there. Thus, the more important complaint is that patent enforcement causes manufacturing to move offshore, not R&D.

That said, the article performs a regression on R&D and several variables that might affect R&D like tax rates and human capital density, and finds that costs of defense and damages awards are negatively correlated with R&D, while strength of enforcement is positively correlated. This is all reasonable enough, but I'm concerned that the empirical model is incomplete. Though the word "cost" appears dozens of times in the article, not once is it mentioned with respect to the cost of R&D. Might the reason R&D gets offshored be that it's cheaper? And could cheaper R&D also correlate with lower enforcement of IP? My guess is yes, based on the studies I've read over the years. I would have liked to have seen some analysis and discussion of this point.

While I think this is an interesting paper, I think that the model is underdeveloped in two ways. The first is the focus on costs in only half of the equation. The second is the neglect of trade secret enforcement. Unlike patent law, trade secret laws can affect R&D in the country in which the R&D takes place because the developer can lose value without ever selling into that country. Studies by Lippoldt and Schultz and also by Png demonstrate this pretty well.

For those interested in this topic, I recommend this article, and I recommend a contrast with Bilir, Patent Laws, Product Life-Cycle Lengths, and Multinational Activity, in the American Economic Review. Bilir develops a similar model, but bases it on location of companies (which covers some of the manufacturing issues), and considers the life-cycle of R&D (long term v. short term protection) as well as trade secrets. Bilir does not directly consider costs of defense, so it would be interesting to see how that notion from this new article would overlay onto Bilir.

Language Barriers and Machine Translation

One of the more expensive parts of acquiring global patent protection is having a patent application translated into the relevant language for local patent offices. This is typically viewed simply as an administrative cost of the patent system, though my survey of how scientists use patents suggested that these translation costs may improve access to information about foreign inventions. As I wrote then, "[t]he idea that patents might be improving access to existing knowledge through mandatory translations and free accessibility is a very different disclosure benefit from the one generally touted for the patent system and seems worthy of further study." E.g., if researchers at a U.S. firm publish their results only in English but seek patent protection in the United States and Japan, then Japanese researchers who don't speak English would be able to read about the work in the Japanese patent.

I've also been interested in the proliferation of machine translation tools for patents—which can make patents even more accessible, but which also might limit this comparative advantage of patents over scientific publications if machine translation of journal articles becomes commonplace.

I don't know of much data on the actual economic impact of any of these translation tools, so I was intrigued to spot a new empirical study about the benefits of machine translation for international trade: Does Machine Translation Affect International Trade? Evidence from a Large Digital Platform. Three researchers from MIT and Washington University, Erik Brynjolfsson, Xiang Hui, and Meng Liu, found that the introduction of eBay Machine Translation increased international trade on the platform by 17.5%. They conclude: "Our results provide causal evidence that language barriers significantly hinder trade and that AI has already begun to improve economic efficiency in at least one domain."

Of course, this trade benefit of machine translation is different from the effect on patent disclosure, but the study made me wonder if a similar methodology could be applied by the hosts of patent translation tools (e.g., WIPO, EPO, SIPO) to study the increase in access to patent documents from different countries. Such a study could be a nice complement to survey-based work about how researchers in different countries access information about foreign work, and how machine translation fits into this picture. I'm not currently planning any of this work myself, but if the topic interests you, feel free to email—it seems like a fruitful area for a number of studies, and I'd love to share more thoughts and advice.

Valuing Wikimedia Commons Images

Several years ago, both Lisa and I wrote about Heald, et al.'s study that attempted to value public domain photographs as used on Wikipedia. While I liked the study a lot, two of my chief critiques were small sample size and unclear value of hits on Wikipedia pages.

A new paper extends their study, and provides even more evidence of the extensive use of Wikimedia Commons photos. In What is the Commons Worth? Estimating the Value of Wikimedia Imagery by Observing Downstream Use, Kris Erickson (University of Leeds), Felix Rodriguez Perez (Independent), and Jesus Rodriguez Perez (University of Glasgow), have attempted to generalize the findings from the prior study. The paper is published in an ACM conference proceeding, but is available without a paywall on SSRN. The abstract is here:

The Wikimedia Commons (WC) is a peer-produced repository of freely licensed images, videos, sounds and interactive media, containing more than 45 million files. This paper attempts to quantify the societal value of the WC by tracking the downstream use of images found on the platform. We take a random sample of 10,000 images from WC and apply an automated reverse-image search to each, recording when and where they are used ‘in the wild’. We detect 54,758 downstream uses of the initial sample and we characterize these at the level of generic and country-code top-level domains (TLDs). We analyze the impact of specific variables on the odds that an image is used. The random sampling technique enables us to estimate overall value of all images contained on the platform. Drawing on the method employed by Heald et al (2015), we find a potential contribution of USD $28.9 billion from downstream use of Wikimedia Commons images over the lifetime of the project.

In one fell swoop, the authors have answered my two concerns. The random sample is much larger, and their search went far beyond Wikipedia, to commercial and non-commercial uses. It turns out that the images were used a whopping 5.4 times each on average, which is a lot of usage when extrapolated to the millions of images in the Commons.

As with the prior study, estimating the value is a bit back of the envelope. Assuming that every commercial (and non-commercial) user would have paid the Getty Images fee is a big assumption, as many might have substituted to homegrown photos or maybe no photo at all. The authors note that this is a big assumption. Another issue is that not every item in the commons is within copyright, and my have been findable by other means.

That said, I do not think the assumption detracts from the value of the Wikimedia Commons for two reasons. First, they report Getty having revenues of nearly $1 billion per year, so finding $28 billion value over the lifetime of the WC is perhaps not far-fetched. Second, even if people would not pay the full amount, they might have been willing to pay less than the Getty fee (which also includes some public domain items). In the absence of WC, the differences between what they would have paid and what they get (either nothing or homegrown or search costs) is deadweight loss.

I frankly had no idea that Wikimedia Commons was used so much, but I'm glad that there's competition in the stock photo market. I'll finally note that the discussion about which images get used is an interesting one. It turns out-just like Netflix, Facebook, and Twitter-the stuff that gets curated for you is the stuff you wind up seeing and using.

Aman Gebru: Compelling Disclosure of Traditional Knowledge in Patents

Aman Gebru, visiting assistant professor at Cardozo Law, has a new article forthcoming in Denver Law Review about patenting traditional knowledge. Aman is on the teaching market this year in the patents and intellectual property field, but his research and teaching deal with other areas as well like contracts and international law. His proposal, if adopted, could be good for the public and some communities, but might make big pharma a bit angry.

Questioning Design Patent Bar Restrictions

Every once in a while an article comes along that makes you realize all the things that you just don't realize. Of course, someone else realizes these things, which makes you realize all the things you should be realizing but didn't. But this is what scholarship is about, I think - spreading knowledge. The latest such article for me is The Design Patent Bar: An Occupational Licensing Failure, by Chris Buccafusco and Jeanne Curtis (both of Cardozo Law). A draft is posted on SSRN, and the abstract is here:

Although any attorney can represent clients with complex property, tax, or administrative issues, only a certain class of attorneys can assist with obtaining and challenging patents before the U.S. Patent & Trademark Office (PTO). Only those who are members of the PTO’s patent bar can prosecute patents, and eligibility for the patent bar is only available to people with substantial scientific or engineering credentials. However much sense the eligibility rules make for utility patents—those based on novel scientific or technical inventions—they are completely irrational when applied to design patents—those based on ornamental or aesthetic industrial designs. Yet the PTO applies its eligibility rules to both kinds of patents. While chemical engineers can prosecute both utility patents and design patents (and in any field), industrial designers cannot even prosecute design patents. This Article applies contemporary research in the law and economics of occupational licensing to demonstrate how the PTO’s application of eligibility rules to design patents harms the patent system by increasing the costs of obtaining and challenging design patents. Moreover, we argue that the PTO’s rules produce a substantial disparate impact on women’s access to a lucrative part of the legal profession. By limiting design patent prosecution jobs to those with science and engineering credentials, the majority of whom are men, the PTO’s rules disadvantage women attorneys. We conclude by offering two proposals for addressing the harms caused by the current system.

It never occurred to me to think about the qualifications required for prosecuting design patents. The observation that a different set of skills goes into such work is a good one; it makes no sense that a chemistry grad can prosecute design patents but an industrial design grad cannot. There are plenty of outstanding trademark lawyers who could probably do this work, despite not having a science or engineering degree.

I like that this paper takes the issue beyond this simple observation (which could really be a blog post or op-ed), and applies some occupational licensing concepts to the issue. Furthermore, I like that the paper makes some testable assertions that can drive future scholarship, such as whether these rules have a disparate impact on women. I am skeptical about the negative impact on design patents, but I think that's testable as well.

The paper concludes with some relatively mild suggestions on how to open up the field a little bit. I think they should be considered, but I'm happy to hear from folks who disagree.

USPTO Director Iancu Proposes Revised 101 Guidance

In remarks at the annual IPO meeting today, USPTO Director Andrei Iancu said "the USPTO cannot wait" for "uncertain" legislation on patentable subject matter and is "contemplating revised guidance" to help examiners apply this doctrine. Few are likely to object to his general goal of "increased clarity," but the USPTO should be sure that any new guidance is consistent with precedent from the Supreme Court and Federal Circuit.

As most readers of this blog are well aware, the Supreme Court's recent patentable-subject-matter cases—Bilski (2010), Mayo (2012), Myriad (2013), and Alice (2014)—have made it far easier to invalidate patent claims that fall under the "implicit exception" to § 101 for "laws of nature, natural phenomena, and abstract ideas." Since Alice, the Federal Circuit has held patents challenged on patentable-subject-matter grounds to be invalid in over 90% of appeals, and the court has struggled to provide clear guidance on the contours of the doctrine. Proponents of this shift call it a necessary tool in the fight against "patent trolls"; critics claim it creates needless uncertainty in patent rights and makes it too difficult to patent important innovations in areas such as medical diagnostics. In June, Rep. Thomas Massie (R-KY) introduced the Restoring America’s Leadership in Innovation Act of 2018, which would amend § 101 to largely undo these changes—following a joint proposal of the American Intellectual Property Law Association (AIPLA) and Intellectual Property Owners Association (IPO)—but Govtrack gives it a 2% chance of being enacted and Patently-O says 0%.

In the absence of legislation, can the USPTO step in? In his IPO speech today, Director Iancu decries "recent § 101 case law" for "mush[ing]" patentable subject matter with the other patentability criteria under §§ 102, 103, and 112, and he proposes new guidance for patent examiners because this mushing "must end." The problem is that the USPTO cannot overrule recent § 101 case law. It does not have rulemaking authority over substantive patent law criteria, so it must follow Federal Circuit and Supreme Court guidance on this doctrine, mushy though it might be.

No Fair Use for Mu(sic)

It's an open secret that musicians will sometimes borrow portions of music or lyrics from prior works. But how much borrowing is too much? One would think that this is the province of fair use, but it turns out not to be the case - at least not in those cases that reach a decision.  Edward Lee (Chicago-Kent) has gathered up the music infringement cases and shown that fair use (other than parody) is almost never a defense - not just that defendants lose, but that they don't even raise it most of the time. His article Fair Use Avoidance in Music Cases is forthcoming in the Boston College Law Review, and a draft is available on SSRN. Here's the abstract:

This Article provides the first empirical study of fair use in cases involving musical works. The major finding of the study is surprising: despite the relatively high number of music cases decided under the 1976 Copyright Act, no decisions have recognized non-parody fair use of a musical work to create another musical work, except for a 2017 decision involving the copying of a narration that itself contained no music (and therefore might not even constitute a musical work). Thus far, no decision has held that copying musical notes or elements is fair use. Moreover, very few music cases have even considered fair use. This Article attempts to explain this fair use avoidance and to evaluate its costs and benefits. Whether the lack of a clear precedent recognizing music fair use has harmed the creation of music is inconclusive. A potential problem of “copyright clutter” may arise, however, from the buildup of copyrights to older, unutilized, and underutilized musical works. This copyright clutter may subject short combinations of notes contained in older songs to copyright assertions, particularly after the U.S. Supreme Court’s rejection of laches as a defense to copyright infringement. Such a prospect of copyright clutter makes the need for a clear fair use precedent for musical works more pressing.

The results here are pretty interesting, as I discuss below.

Erie and Intellectual Property Law

When it comes to choice of law, U.S. federal courts hearing intellectual property law claims generally do one of two things. They either construct and apply the federal IP statutes (Title 18, Title 35, Title 17, and Title 15, respectively), remaining as faithful to Congress' meaning as possible; or they construct and apply state law claims brought under supplemental (or diversity) jurisdiction, remaining as faithful as possible to the meaning of the relevant state statutes and state judicial decisions. In the former case, they apply federal law; in the latter case, they apply the law of the state in which they sit.

Simple, right? Or maybe not.

This Friday, University of Akron School of Law is hosting a conference called Erie At Eighty: Choice of Law Across the Disciplines, exploring the implications of the Erie doctrine across a variety of fields, from civil procedure to constitutional law to evidence to remedies. I will be moderating a special panel: Erie in Intellectual Property Law.  Joe Miller (Georgia) will present his paper, "Our IP Federalism: Thoughts on Erie at Eighty"; Sharon Sandeen (Mitchell-Hamline) will present her paper, "The Erie/Sears-Compco Squeeze: Erie's Effects on Unfair Competition and Trade Secret Law”; and Shubha Ghosh (Syracuse) will present his paper "Jurisdiction Stripping and the Federal Circuit: A Path for Unlocking State Law Claims from Patent."

Other IP scholars in attendance include Bryan Frye (Kentucky), whose paper The Ballad of Harry James Tompkins provides a riveting, surprising, and (I think) convincing re-telling of the Erie story, and Megan LaBelle (Catholic University of America), whose paper discusses the crucial issue of whether the Erie line of cases directs federal courts sitting in diversity to apply state privilege law. All papers will be published in the Akron Law Review.

If you have written a paper that touches on the Erie doctrine's implications for intellectual property, I would really appreciate it if you would send it to me: chrdy@uakron.edu or cahrdy@gmail.com I will link to them in a subsequent post in order provide a resource for future research. Thank you!

Bargaining Power and the Hypothetical Negotiation

As I detail in my Boston University Law Review article, (Un)Reasonable Royalties, one of the big problems with using the hypothetical negotiation for calculating damages  (aside from the fact that it strains economic rationality and also has no basis in the legal history of reasonable royalties) is differences in bargaining power. The more explicit problem is when litigants try to use their bargaining power to argue that the patent owner would have agreed to a lower hypothetical rate. More implicitly, bargaining power can affect royalty rates in pre-existing (that is, comparable) licenses. This gives rise to competing claims in top 14 law reviews about whether royalty damages are spiraling up or down based on the trend of comparable licensing terms.

For what it's worth, my article dodges the spiral question, but suggests that existing licenses only be used if they can be directly tied to the value of the patented technology (and thus settlements should never be used). Patent damages experts who have read my article uniformly hate that part of it, because preexisting licenses (including settlements) are sometimes their best or even only granular source of data.

But much of this is theory. What about the data?  Gaurav Kankanhalli (Cornell Management - finance) and Alan Kwan (U. Hong Kong) have posted An Empirical Analysis of Bargaining Power in Licensing Contract Terms to SSRN. Here is the abstract:

This paper studies a new, large sample of intellectual property licensing agreements, sourced from filings by public corporations, under the lens of a surplus-bargaining framework. This framework motivates several new empirical findings on the determinants of royalty rates. We find that licensors command premium royalty rates for exclusivity (particularly in competitive industries), and for exchange of know-how. Licensors with differentiated technology and high market power charge higher royalty rates, while larger-than-rival licensees pay lower rates. Finally, using this framework, we study how the nature of disclosure by public firms affects transaction value. Firms transact at lower royalty rates when they redact contracts, preserving pricing power for future negotiations. This suggests that practitioners modeling fair value in transfer pricing and litigation contexts based on publicly-known comparables are over-estimating royalties, potentially impacting substantial cumulative transaction value.

The paper uses SEC reported licenses (more on that below), but one clever twist is that they obtained redacted terms via FOIA requests, so they could both expand their dataset and also see what types of terms are missing. They model the following transactions. Every firm has the most they are willing to pay, and the least they are willing to accept. If those two overlap, then the parties will agree to some price in the middle that splits the surplus.  Where that price is set is based on bargaining power. The authors then hypothesize what types of characteristics will affect that price, and most of them are borne out.

They focus on several kinds of bargaining power contract characteristics, firm specific characteristics, technology characteristics and license characteristics. I'm not sure I would call all of these bargaining power, as they do. I think some relate more to the value of the thing being licensed. Technically this will affect the division of surplus, but it's not really the type of bargaining power I think about. So long as the effect on license value is clear, however, the results are helpful for use in patent cases regardless of the technical designation.

So, for example, universities, non-profits, and individuals receive lower rates because they  have no credible BATNA for self-commercialization. They argue that this sheds light on conventional wisdom that individuals produce less valuable inventions. Further, firms in weaker financial condition do worse, and firms with more pricing power among their rivals do better.

On the other hand, licenses including know-how or exclusivity receive higher royalties, while amendments typically lead to lower royalties (presumably due to underperformance). I don't consider this to be bargaining power, but rather added value. That said, the authors test exclusivity and find that that highly competitive industries have higher royalties for exclusivity than non-competitive industries, which implies a mix of both bargaining power and value in competition.

The authors do look at technological value and find, unsurprisingly, that substitutability leads to lower rates.

The paper points to one interesting combination, though: territorial restrictions. Contracts with territorial restrictions have higher rates. You would think they have lower rates because the license covers less. But the contrary implication here is that a territorial restriction is imposed where the owner has the leverage to impose it, and that means a higher rate. That could be due to value or bargaining power, I suppose. I wonder, though, how many expert reports say that a royalty rate should be greater because the comparable license only covered a territory. Any readers who want to chime in would be appreciated.

There is a definite selection effect here, though, which further implies that use of preexisting licenses gathered via SEC filings be treated carefully. First, the authors note that there is a selection effect in the redactions. They find that not only are lower rates redacted, but that these redactions are driven by non-exclusive licenses, because firms want to hide their lowest willingness to sell (reservation) price. This finding is as valuable as the rest, in my opinion. It means, as the authors note, that any reliance on reported licenses may be over-weighting. It also means, in terms of my own views, that the hypothetical negotiation is not a useful way to calculate damages, because the value of the patent shouldn't change based on who is buying and selling. A second selection effect is not within the data, but what is not in the data: these are only material licenses. If the licenses are not material, they will not be reported. Those licenses are likely to be smaller, whether due to patent value or bargaining power.

This is a really interesting and useful paper, and worth a look.

Boundary Maintenance on Twitter

Last Saturday was cut-down day in the NFL, when rosters are shaved from 90 players down to 53. For the first time, I decided to follow the action for my team by spending time (too much time, really - the kids were monopolizing the TV with video games) watching a Twitter list solely dedicated to reporters and commentators discussing my team.

I've never used Twitter this way, but from an academic point of view I'm glad I did, because I witnessed first-hand the full microcosm of Twitter journalism. First, there were the reporters, who were all jockeying to be the first to report someone was cut (and confirm it with "sources."). Then, there were the aggregators, sites with a lot of writers devoted to team analysis and discussion, but who on this day were simply tracking all of cuts/trades/etc. Ironically, the aggregators were better sources of info than the reporters' own sites, because the reporters didn't publish a full list until later in the day, along with an article that they were too busy to write because they were gathering facts.

Then there were the professional commentators - journalists and semi-professional social media types who have been doing this a long time or have some experience in the sport, but who were not gathering facts. They mostly commented on transactions. Both the reporters and commentators answered fan questions. And then...there were the fans, commenting on the transactions, commenting on the reporters, commenting on the commentators, etc. This is where it got interesting.

Apparently experienced commentators don't like it when fans tell them they're wrong. They like to make clear that either a) they have been doing this a long time, or b) they have a lot of experience in the league, and therefore their opinion should not be questioned. Indeed, in one case a commentator's statement seemed so ridiculous that the "new reporter" in town made fun of it, and all the other reporters circled the wagons to say that the new guy shouldn't be questioning the other men and women on the beat, all of whom had once held his job but left for better jobs. Youch! It turns out the statement was, in fact, both wrong and ridiculous (and proven so the next morning).

This type of boundary maintenance is not new, but it is the first time I've seen it so clearly, explicitly, and unrelentingly (there is some in legal academia, which I'll discuss below). This is a blog about scholarly works, so I point you to an interesting article called The Tension between Professional Control and Open Participation:Journalism and its Boundaries, by Seth Lewis, now a professor in the communications department at the University of Oregon. The article is published in Information, Communication & Society. It is behind a paywall, so a prepublication draft is here. Here is the abstract:

Amid growing difficulties for professionals generally, media workers in particular are negotiating the increasingly contested boundary space between producers and users in the digital environment. This article, based on a review of the academic literature, explores that larger tension transforming the creative industries by extrapolating from the case of journalism – namely, the ongoing tension between professional control and open participation in the news process. Firstly, the sociology of professions, with its emphasis on boundary maintenance, is used to examine journalism as boundary work, profession, and ideology – each contributing to the formation of journalism's professional logic of control over content. Secondly, by considering the affordances and cultures of digital technologies, the article articulates open participation and its ideology. Thirdly, and against this backdrop of ideological incompatibility, a review of empirical literature finds that journalists have struggled to reconcile this key tension, caught in the professional impulse toward one-way publishing control even as media become a multi-way network. Yet, emerging research also suggests the possibility of a hybrid logic of adaptability and openness – an ethic of participation – emerging to resolve this tension going forward. The article concludes by pointing to innovations in analytical frameworks and research methods that may shed new light on the producer–user tension in journalism.

The article includes a fascinating literature review on the sociology of journalism, and focuses on what it means to be a journalist in a world when your readers participate with you.

Bringing it back to IP for a moment (and legal academia more generally), I certainly see some of this among bloggers and tweeters. I see very little of it as a producer of content, presumably because I am always right. 😀 But I know that as a consumer I bleed into the boundaries of others, both in legal academia and elsewhere. I can't help myself - my law school classmates surely remember me as a gunner.

Many of my producer colleagues (mostly women, surprise surprise) see it much worse. Practicing lawyers tell them they don't know what they are talking about. Some may be making valid points, some not. Some are nice about it, while others are not. I'm speaking mostly of good faith boundary issues here, not trolling or harassment, which is a different animal in my mind.

I guess the real question is what to do about it. If you are in an "open" area, boundaries will get pushed. Some people welcome this, and some despise it. Some are challenged more fairly than others. I suspect that people have different ways of managing their boundaries, and it depends heavily on who and how folks are commenting. Some may ignore it, some may swat back about relative expertise, some engage with everyone, some disengage selectively or entirely, going so far as block and mute. I suspect it's a mix.

In any event, I don't have any policy prescriptions here. I know so little about it that I have no clue what the right answer is. I just thought I would make explicit what is usually implicit, point out an interesting article about it, and suggest that readers be mindful of boundaries and Diff'rent Strokes - what might be right for you, may not be right for some.