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Dated: July 28, 2006 THIS DRAFT WAS PREPARED FOR THE INTELLECTUAL PROPERTY SCHOLARS CONFERENCE, 2006. WE WILL PLACE A POST-CONFERENCE DRAFT ON SSRN IN THE NEAR FUTURE. PLEASE SEND COMMENTS TO firstname.lastname@example.org
* Matthew Sag is an Assistant Professor at De Paul University College of Law. Kurt Rohde is an Associate at McDonnell Boehnen Hulbert & Berghoff LLP in Chicago. The authors wish to thank Timothy Holbrook, Tonja Jacobi and Kristen Osenga for their insightful comments. This article solely reflects the opinions of the authors does not represent the views of McDonnell Boehnen Hulbert & Berghoff LLP or its clients.
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PATENT REFORM AND DIFFERENTIAL IMPACT
ABSTRACT This paper presents a new method of analyzing patent reform proposals through the use of Differential Impact analysis. We argue that reform proposals which differentially impact ‘bad’ patents over ‘good’ patents should be favored over those proposals which do not. The strong form of the Differential Impact test is that a reform must reduce the incentives for obtaining or asserting bad patents without reducing those same incentives for good patents. The weak version of the differential impact test simply requires that a reform reduce the incentives for obtaining or asserting bad patents more than it reduces those same incentives for good patents.
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PATENT REFORM AND DIFFERENTIAL IMPACT
TABLE OF CONTENTS INTRODUCTION ........................................................................................................................................... 5 PART I. THE NEED FOR A PRIORITIZING TOOL.......................................................................... 9 A. The Problem With Patents ................................................................................................................. 9 B. Reform Proposals ...............................................................................................................................11 1. Examination Reform ........................................................................................................................11 2. Doctrinal reform................................................................................................................................13 3. Litigation Reforms.............................................................................................................................13 C. A Differential Impact on Bad Patents.............................................................................................15 1. What are Bad Patents? .......................................................................................................................15 2. What is Differential Impact? .............................................................................................................16 PART II THE ORIGIN AND SURVIVAL OF BAD PATENTS.................................................18 A. Patent Examination............................................................................................................................18 B. The Persistence of Bad Patents ...........................................................................................................21 1. Weak Incentives to challenge ......................................................................................................21 2. Challenger Focused Model ..........................................................................................................22 C. Implications of the Challenger Focused Model ................................................................................26 1. The Limited Relevance of the Probability of Success ...................................................................26 2. High Litigation Costs Insulate Bad Patents from Challenge .......................................................26 3. The Uncertainties of Patent Litigation Insulate Bad Patents from Challenge...........................28 4. Information Asymmetries Insulate Bad Patents from Challenge ................................................31 5. Challenges to Bad Patents are Likely to be an Undersupplied Public Good.............................32 6. Enhanced Damages and Injunctions have a Chilling Effect on Patent Challenges .................33 D. The Limits of Challenger Focused Model .........................................................................................34 E. An Assertion Focused Model ...............................................................................................................35 PART III. APPLYING THE DIFFERENTIAL IMPACT TEST .................................................39 A. Examination reform...........................................................................................................................39 B. Doctrinal reform ................................................................................................................................41 1. Raising the Threshold of Non-Obviousness .................................................................................41 2. Narrowing the Scope of Willful Infringement ..............................................................................42 3. Eliminating the Clear and Convincing Evidence Standard ..........................................................43 4. Curtailing the Availability of Injunctions for Patent Infringement .............................................43 C. Litigation reform ................................................................................................................................44 1. Fee-Shifting and Bounty Hunter Proposals ..............................................................................44 2. Facilitating Collective Action ......................................................................................................45 3. Post Grant Review ........................................................................................................................46 PART IV. MULTISTAGE POST GRANT REVIEW .........................................................................48 A. Differential Impact and Post Grant Review ..................................................................................48 B. A Variable Presumption of Validity ................................................................................................49 C. Multi-stage Post Grant Review ........................................................................................................51 1. Stage One .......................................................................................................................................51 2. Stage Two .......................................................................................................................................53 3. The Balance of MPGR .................................................................................................................53 D. Claim Construction and Post Grant Review ..................................................................................53 E. Disputed Features of post grant review ..........................................................................................56 1. Issues of Format, Scope and Discovery ....................................................................................56 2. Window of Opportunity ..............................................................................................................57
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.......................................................58 CONCLUSION .........60 4 of 60 ......58 F..................................................................... Amendment of Claims During Post Grant Review .................SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 3............................................................................................ The Implications of Differential Impact for Post Grant Review ...............
Deputy Commissioner of the U.2 INTRODUCTION Patent reform is on the national agenda because of a widespread perception that changes in the standards of patentability.S.1. and yet efforts in Congress to implement patent reform legislation have repeatedly failed.com. 8 The Problem With Patents.”9 and that “the nation’s patent system is a Responding to the Federal Circuit’s decision in In re Lee. Los Angeles Times. vague or already widely used. there is a pressing need to restore the balance between the rights of patent holders and the broader social good of encouraging innovation.3d 1338.theonion. 1 “Microsoft Patents Ones. Note: This Headline is Patented.4 Even obvious beneficiaries of the patent system. Times (Feb. Patent Reform.” – THE ONION. David Streitfeld. 2 Available at http://www. 8. sec. IBM calls for patent reform. March 29.S. patent system to a point of crisis.S. 2003) at 1. the increasing importance of the information economy and the sheer volume of applications before the United States Patent and Trademark Office have combined to bring the U.6 In addition to patents that should never have been issued.A.39187609. 4 See. Brendon Chase. patent system is profoundly flawed. such as IBM which receives more U. Patents than any other company. March 25. Const. 8. 1 5 of 60 . December 4. 5 IBM. strongly support calls for patent reform. in the Supreme Court. Patent sanity is pending.com/ibm/publicaffairs/gp/patentreform. These companies fear that. Constitution.zdnet. 277 F.3 declining patent quality and overly broad patent rights are reducing incentives to invest in manufacturing. Kepplinger. infra.ibm. hostage to the patent trolls” Financial Times. available at http://www. L.g. business leaders and government officials have all expressed concerns that too many patents are issued for “inventions” that are obvious. 7. patent system.7 The technology sector’s calls for reform have begun to resonate in the media. Zeroes. research and development.S. See also.S.00. 2005 7 See Part I. The Onion is a satirical newspaper.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 “We can’t reject something just because it’s stupid. See. 1998. by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.htm). Cir. Microsoft. March 16. attempts by patent holders to extend their rights to devices and services that bare little or no relationship to their initial patent application are equally problematic because the scope of issued patents is hopelessly unclear. Editorials from several major papers decry that “there’s something rotten in the U. 1345 (Fed. I. 2006. Art. “Get it now from Ebay.S.S. 2002). Technology heavyweights including Intel.” – Esther M." U. 3 The United States Constitution provides Congress with the power "To promote the Progress of Science and useful Arts. The Wall Street Journal. Patent & Trademark Office.”8 “the U.5 Bad patents and costly litigation lie at the heart of the crisis of confidence in the patent system. and Oracle argue that although the patent system is the foundation for the United States' global leadership position in technological development. rather than encouraging the “progress of science and the useful arts” as required by the U.pdf . 2006.au/news/0.39023165. Academics. cl. 6 See e. ZDNet Australia.C. 11 April 2005 (available at http://www.com/content/node/29130.
Engaging Facts and Policy: A Multi-Institutional Approach to Patent System Reform. L. Allocating Power over Fact-Finding in the Patent System. Ill. John R. available at http://patentlaw.html. Chairman of the House Subcommittee on Courts. John R.. November 1. 2005 Sunday. Rev. L. See also. As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform.. Obvious to Whom? Evaluating Inventions from the Perspective of PHOSITA. F. L.J. MercExchange. 17 See.14 In addition to these cases. Indep.. Joseph Farrell & Robert P. L. proposed a bipartisan reform bill that would have dramatically changed the patent landscape. Ink.It is Over. 17 Berkeley Tech.J. December 4. THE ECONOMIST. Inc. 19 Berkeley Tech L. 109th Cong.. a case that calls into question the Federal Circuit’s jurisprudence in relation to obviousness. Rev. of Am. 1281 (U. 727 (2002). Thomas. 45 B. 667 (2004).S. The Federal Circuit has exclusive jurisdiction over appeals arising under federal patent law. patent system.J. 2006) 14 Merck KGaA v. the Court has recently granted certiorari in KRS International. 126 S. Teleflex. 19 Berkeley Tech L. Ltd. Statement of Representative Howard Berman (D-CA). 5096) introduced earlier this year. LEXIS 4893 (2006) (Writ of certiorari dismissed as improvidently granted. LEXIS 4912 (U.16 However.11 the limits of patentable subject matter. Ct.S. 1837 (2006). Law Review Database for the term “patent” within 5 words of the term “reform” yields over 700 hits. Ct. and Intellectual Property. Joseph Scott Miller. available at http://www. 11 eBay Inc..gov/list/speech/ca28_berman/Patent_Quality. 2005. (2004). and independent inventors. 907 (2004). Rebecca S. Rai.19 The Federal Trade Commission (FTC)20 and the National Academy of Sciences (NAS)21 Patent sanity is pending.) 13 Ill. the Internet. 2005. Kesan.15 In 2005 Congressional Representatives Lamar Smith and Howard Berman. 55 (2003). Monopolies of the Mind.C. 535 U. e. 305. 61 (2006). Merges. TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY (October 2003).g. L. Rev. restricting that search to the last 5 years yields over 400 hits. granted). 577 (1999). e.J. (2005). H.R.R.ftc. 2006) (cert. 126 S.17 Undeterred. 885 (2004). v.typepad.gov/os/2003/10/innovationrpt.18 Regrettably. 103 Colum.S. 193 (U.S. 826. by Representative Lamar Smith. Arti K..J.S. Metabolite Labs.J. 2004. 2001 U. Holdings v. 2006..com/business/displayStory. 18 The bill was introduced on April 5.S. 19 Berkeley Tech. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties. L. (available at http://www. L. v. The Case for Registering Patents and the Law and Economics of Present Patent-Obtaining Rules.C. See. 2006 U. 55 Emory L.S. 829 (2002). 2005. The Boston Herald July 24. 19 An unrestricted search of the LexisNexis U. The Responsibility of the Rulemaker: Comparative Approaches to Patent Administration Reform. 16 Patent Reform Act of 2005. v. Eisenberg. the pharmaceutical industry. Representative Smith has again proposed significant changes to the U.html). 17 Berkeley Tech L. Vornado Air Circulation Sys. Merges. PATENTLY O BLOG.”10 The Supreme Court has recently heard cases on the scope of patent injunctions. 1035 (2003).com/patent/2005/12/patent_reform_2. Robert P. Inc. Dennis Crouch. 12 Lab. Jay P. Arti K.economist. See. this legislation also seems destined to be shelved because of looming mid-term elections in November. Jay P. 2795. 2005) 15 KSR Int'l Co. 2006 U. Holmes Group. Los Angeles Times.S. L. Scott Kieff. 545 U.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 mess. available at http://www. Patent Reform 2005 -. U. Thomas. Inc. that bill was shelved at the end of 2005 because of time restrictions and the failure of the House Judiciary Committee to negotiate a consensus between technology interests. Introduced June 8. Gallo. December 8. Patent System Has Run Aground.12 the status of patent rights in antitrust proceedings13 and the application of the experimental use doctrine in clinical trials. this time under the rubric of the Patents Depend on Quality Act 2006. Why ‘Bad’ Patents Survive in the market and How Should We Change?—The Private and Social Costs of Patents.pdf [hereinafter FTC 9 10 6 of 60 .house. Kesan and Andres A. (“the PDQ Act”) (H.g. Incentives to Challenge and Defend Patents: Why Litigation won’t Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. Rai. Integra Lifesciences I.S.J.S. 20 FEDERAL TRADE COMMISSION. Inc. patent system should be reformed.J. 19 Berkeley Tech. 14 Berkeley Tech. These days it seems that everyone has an idea as to how the U.. Tool Works Inc. Carrots and Sticks to Create a Better Patent System.cfm?Story_id=3376181&no_na_tran=1. See Statement on the Patents Depend on Quality Act of 2006.S. 763 (2002).L.. v. Building a Better Bounty: LitigationStage Rewards for Defeating Patents. Corp.
7 of 60 .. The structure of the article is as follows. or too easy to enforce – an assumption which is. Part II examines the origin of bad patents and applies two different economic models to explaining their persistence. and structural reform of patent litigation.23 However. In other words. there may in fact be too many reform proposals currently on the table. 21 NAS REPORT. we believe that the highest priority should be given to those reforms that are likely to raise the cost of obtaining or enforcing a bad patent more than it raises the cost of a good patent. In contrast. we argue a more complete definition focuses on the manner in which patents are used. To analyze which reforms are most likely to have a differential impact on bad patents. The failure of the legislative reform efforts underscores the importance of prioritizing the most important elements of patent reform – those with Differential Impact. as the failure of the Patent Reform Act of 2005 and the likely failure of the PDQ Act demonstrate. Part I begins with an introduction to the problems created by bad patents and a brief survey of the major changes to the patent system currently being proposed. Part II explains the phenomenon of bad patents in terms of both the apparently low REPORT] (An analysis of the interaction of competition and patent law offering ten recommendations for patent system reform.). we believe that the highest priority should be given to those reforms that have a Differential Impact: i. Rather than simply defining bad patents as patents that should not have been issued. we must tailor patent reform to address the problems related to bad patents without unduly prejudicing the interests of the holders of good patents. changes to substantive patent law doctrines. rather than attempting to strengthen or weaken the exclusive rights of patent holders across the board. Consequently. Part I also introduces the differential impact test for evaluating patent reform proposals. supra note 8 (The National Academy of Sciences report on the U. there have at least 15 days of Congressional hearings devoted to patent reform. What is missing from the patent reform debate is a rational methodology by which Congress can prioritize its reform agenda – this article addresses that gap by proposing a test of Differential Impact for patent reform. The differential impact test we propose is simply that patent reform should be targeted to address the problems related to bad patents without unduly prejudicing of good patents.S. those reforms that are likely to raise the cost of obtaining or enforcing a bad patent more than they raises the cost obtaining or enforcing a good patent. as discussed in detail in Part II of this article. unproven. as yet.B. 22 [cite] 23 See Part I.e. the second model focuses on a patent holder’s incentive to assert a patent. patent system was released shortly after the FTC Report and contained seven key recommendations for reforming the patent system that closely parallel the FTC’s suggestions.). Many of the current reform proposals proceed from the assumption that patents are either too easy to get. The first model focuses on a potential infringer’s incentives to challenge a bad patent. infra.22 and there is an extensive law review literature proposing reforms to the way patents are examined.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 have both issued comprehensive reports on the subject in the last few years. it is first necessary to understand why the patent office issues bad patents and how bad patents continue to survive in the market place. If the patent system is to continue to fulfill its constitutional function of promoting rather than hindering innovation. A functionalist definition of bad patents reserves the term for patents that are asserted to cover a product or activity that no reasonable fact finder could find it covered. rather than attempting to strengthen or weaken the exclusive rights of patent holders across the board. we do know with some certainty that bad patents are too easy to get and too easy to enforce.
and (iii) bringing questions of claim construction into post grant review such that both sides of the bad patent phenomenon can be addressed. These proposals are all designed to ensure that post grant review provides a low cost way to challenge bad patents. The conclusion of this analysis is that the differential impact test strongly supports the adoption of some kind of system of post grant review of patent validity. but also how it can be applied to building a better model for post grant review than those currently on the table. Part III then assesses the major patent reform proposals against the test of differential impact in light of the economic models developed in the previous section. uncertain. Furthermore. The differential impact test supports the adoption of post grant review to enhance the incentives of private actors to oppose bad patents. we propose (i) adopting a variable presumption of validity depending on the level of review that a patent has been subject to. In short. A well designed system of post grant review will not impose a significant burden on good patent holders because those few good patents that are occasionally subject to review are unlikely to be found invalid. expensive and time-consuming nature of patent litigation. (ii) implementing a multiple stage system of post grant review with two distinct stages in order to balance the goal of greater scrutiny for bad patents with the need to minimize potential harassment of good patents. Post grant review can have a differential impact on bad patents by significantly lowering the cost of challenging the bad patents. post grant review will actually benefit good patents by reducing uncertainty and information asymmetries relating to patent quality. Part IV explains how the differential impact test not only supports the idea of post grant review in general. Looking at post grant review through the lens of differential impact leads us to propose a very different kind of system to that embodied in current legislative and other proposals. 8 of 60 .SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 quality of patent examination and the complex. but does not undermine the value of good patents.
368.26 the Hair Comb-over Patent. eBay v MercXchange oral argument.S. 28.596 (issued Dec. or are asserted well beyond their legitimate scope.27 and the Peanut Butter & Jelly Sandwich patent. the monopoly cost of the patent holder’s rights and her incentive to invest in innovation are two sides of the same coin.257. Wednesday. or is it a fishing technique?” p. in which a user positioned on a standard swing suspended by two chains from a substantially horizontal tree branch induces side to side motion by pulling alternately on one chain and then the other. Patent No. 27 U. See e.25 a Method for Exercising Your Cat (with a laser pointer).”).S. is the troll the scary thing under the bridge. We also note that in spite of its widespread use. Popular and academic discussion of patent trolls is commonly linked to questions of patent quality. The reforms addressed in this paper do not begin to address that problem.447 (issued Oct. 6. The key argument against patent trolls is not that their assertions are invalid. 29 The term ‘bad patents’ is defined more exactly in Section I-A. We are not aware of any evidence that patent trolls are more likely to have or assert bad patents than practicing entities. The Problem With Patents Historically patents were intended to reward research and innovation. THE NEED FOR A PRIORITIZING TOOL A. 2001) (patent for cutting or styling hair using scissors or combs in both hands).227 (issued April 9.29 The danger of bad patents is that they undermine the incentive function of the patent system. infra. Justice Kennedy “Well. 22. 6.30 As the NAS notes in its 2004 report. 28 U.036 (issued Aug. Patent No. patent system now creates numerous perverse effects that undermine that central mission. but rather that they are in a position to negotiate licensing fees that are grossly out of alignment with their contribution to the alleged infringer’s product or service.S.637.com/crazy. 6.html. 1999) (“a sealed crustless sandwich”). 2002) (“A method of swing[ing] on a swing is disclosed. “what else has the patent office been doing?” The real damage to the effectiveness of the patent system is done by ‘bad patents’ – patents which either should never have been granted. 24 9 of 60 . the system creates the wrong incentives if all the advantages of a patent monopoly are in fact available to those who merely industriously create or collect patents.g. 5. However.24 the Beerbrella. For many other examples see http://www. The patent monopoly imposes costs on third parties who must either license patents or incur costs to avoid infringing them. however. the U.S.248 (issued July 10. If a baseball player could get a home run from hitting a foul ball. in its modern incarnation. “patents on trivial innovations may confer market power or allow firms to use legal resources aggressively as a competitive weapon without consumer U. 2003) (“a small umbrella which may be removably attached to a beverage container in order to shade the beverage container from the direct rays of the sun” ). as opposed to those who invest (directly or indirectly) in innovation. but they are typically of little consequence except to prompt the question. 2006. there would not be much incentive to try to hit the ball into the field. Patent No. 21. Patent No.7 lines 4 – 6.freepatentsonline. Where patents are properly granted and properly asserted.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 PART I. 30 Bad patents should not be confused with so-called patent trolls. Patent No. 25 U.S. March 29. Some of the more trivial illustrations of the perversity of the modern patent system include patents such as the Tarzan Swing Method. but the issues are in fact severable. the exact definition of the term disputed.443.004. 6.S.28 These patents are silly. 1995) (“A method for inducing cats to exercise consists of directing a beam of invisible light produced by a hand-held laser apparatus onto the floor … then moving the laser so as to cause the bright pattern of light to move in an irregular way fascinating to cats”). except in so far as a particular troll is relying on a bad patent. 26 U.
The remedy for willful infringement is based on 35 U. LAW ASSOC. 2005) (patent holder did not create a reasonable apprehension of suit through a letter stating that the patent holder would enforce its patent rights and that the opposing party appeared to infringe on the patent). Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. v. Cir. Carla does not infringe it.3d 1337.33 (3) without such a letter. Dana Corp. a friendly patent lawyer.S.C. LAW ASSOC. 2004). She is also suspicious because the idea of this electronic shopping cart technology has been in common use for so long that it does not seem like something she would equate with patented technology. prices as high as $40..000. § 285 ("the court in exceptional cases may award reasonable attorney fees to the prevailing party").”31 Bad patents divert scarce research and development dollars from engineering to lawyering. Carla receives a letter from a patent licensing firm. However. she either STEPHEN A. § 102 (Novelty). The aggressive tactics of the holders of bad patents increase the cost for good patent holders in signaling that their claims of infringement must be taken seriously. The letter states that the firm is willing to negotiate a license.C.000 are not uncommon in areas such as New York City. MERRILL et al. The availability of robust patent protection acts as a significant stimulus to investment in research and development and innovation. whether good or bad. 379 F. § 284 ("the court may increase the damages up to three times the amount found or assessed") and 35 U. 36 AM. Carla can get an opinion letter that says the patent is invalid and that even if was valid. Carla asks Jane. Consider the hypothetical example of Carla.S.. it would probably cost her around $800. for some help. when aggressive patent holders can extract substantial license fees simply through leveraging the overwhelming costs and delays involved in challenging a patent. Just before the critical holiday retail season.36 (6) given that the patent is likely flawed. 31 10 of 60 . most obviously because it was “anticipated” by an earlier invention that the patent office examiner was not aware of. 32 35 U.000.32 (2) for $30.35 (5) even if Carla could persuade a court to hear her case. Supp. Jane offers several pieces of information and advice: (1) the patent should probably never have been issued for a number of reasons. concerning a particular aspect of internet-based shopping cart checkout technology.34 (4) Carla probably can’t go to court to have the patent declared invalid because she lacks standing for declaratory judgment. INTELLECTUAL PROP. A PATENT SYSTEM FOR THE 21ST CENTURY 95 (Nat’l Acads. Although the average cost of a patent opinion from a mid-sized firm is $23. Deere & Co. Carla could submit it to the patent office for an administrative process known as reexamination – but if she does.. REPORT OF THE ECONOMIC SURVEY 108 (2005).. 2d 645 (D. Carla is suspicious of the validity of the patent because the claimed invention seems too broad and abstract to be assertable. Co.000 to invalidate the patent (give or take a few hundred thousand).C.. 383 F. Del. INTELLECTUAL PROP. based on the firm’s asserted patent rights. After reviewing the letter and the patent. 33 AM. REPORT OF THE ECONOMIC SURVEY 102 (2005). but it is also bad for those companies that have invested in innovation and rely on the patent system to protect that investment. the incentives to get a good patent are reduced and the overall burden of the patent system on society is increased. Press 2004) [hereinafter NAS REPORT]. The firm offers the license for an annual fee of $50. Carla may be liable for triple damages and attorney’s fees for the entire period since she received the letter if she is later found to infringe the patent. 35 Vermeer Mfg.S. 1342 (Fed.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 benefit. Armed with these suspicions. 34 See. A proliferation of unmeritorious allegations of patent infringement and subsequent litigation is clearly bad for defendants. they also divert patent licensing revenue from the holders of good patents. a small internet retailer.997.
See. the actual assertion of bad patents is probably more corrosive to public confidence in the patent system. Examination Reform The first group of reform proposals relates to the process by which patents are examined and ultimately issued by the patent office. See generally UNITED STATES PATENT AND TRADEMARK OFFICE. § 302 and inter partes reexamination under 35 U. well before the technology they effectively claimed to own was invented. This is the real perversity of the current patent system: rational actors will license patents they strongly suspect are either invalid. infra. Patent No. See also. 37 11 of 60 . Prodigy Communs. 967 (2004). 10. if she incorrectly loses in the PTO. Part III.000.S. 2002).com/article. 42 See. Public misgivings as to the integrity of the patent system are undoubtedly fueled by absurd patents such as the Tarzan Swing Method and the Method of Exercising a Cat.42 The cornucopia of reform proposals can be dived into three main groups. § 311. and proposals to reform the structure and procedures of patent litigation. they were still able to cause significant financial harm before they were formally rejected. she won’t be able to make the same arguments again in any later court proceeding.37 or worse still. 4. The BT hyperlink patent provides a good example.htm (last visited __).gov/web/offices/dcom/olia/reports/reexam_report. 35 U.40 BT’s U.S. In 2002. because all the alternatives are worse. supra notes 2 and 6. BT’s infringement claims were dismissed on summary judgment. 2002 . Merges. this sub-section briefly reviews some of the major reforms under consideration. 39 See. These proposals are later evaluated in relation to the Differential Impact test.uspto. § 303(a). 4. 38 The Patent Act provides that any issue raised by a challenger during reexamination cannot be revisited in a later trial involving that challenger. 41 British Telecomms.newscientist. examination reform.C. 19 Berkeley Tech. B. 943. telecommunications giant British Telecom (“BT”) attempted to assert patent rights over the creation hyperlinks on the internet. http://www. substantive doctrinal changes. 1.41 While the bad patent assertions by BT were eventually removed from the market place.S. PLC v. regardless of the likely invalidity of the patent.873. The Act also provides for Commissioner ordered reexaminations under 35 U. 40 See Kurt Kleiner. 1989). U. NEW SCIENTIST. Jane cheerfully suggests that Carla should consider paying the $50.662 (issued Oct. One of the many striking things about BT’s claims was that this patent was initially filed in 1976. or simply do not apply to them. Corp.38 In the end. 217 F. Joseph Farrell & Robert P.Y. claiming those actions facilitated the infringement of the patent by providing ISP subscribers with access to the internet. Supp. 317. BT claimed that this patent read on the technology used in internet hyperlinks. with the judge holding that no reasonable jury could have found that the scope of the patent’s claims covered internet hyperlinks. describes a system where multiple users can access data on a central computer by using remote terminals. Reform Proposals Congress has recently been invited to consider a wide range of tonics to cure what ails the patent system. Patent No.S.. Report to Congress on Inter Partes Reexamination. 2d 399. February 11.C.ns?id=dn1905.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 won’t be able to participate meaningfully in that reexamination process. eventually issued in 1989. BT contacted various Internet Service Providers and demanded license fees for the ISP’s actions. Given one of widely perceived problems with the patent The Patent Act provides for both ex parte reexaminations under 35 U.S.C. than the mere existence of silly patents.C.N. available at http://www.S. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help.J. BT in Court to Enforce Hyperlink Patent.662. 401 (S.39 However. When eventually challenged in federal court.873.D. L.
Moore. accelerated examination applicants must file electronically.com/abstract=898840. § 8 (2005). Changes to Practice for the Examination of Claims in Patent Applications. and Applications Containing Patentably Indistinct Claims. H.R. explain the relationship of the prior art to the invention on a claim by claim basis. H. 46 See. Notice of proposed rulemaking (Jan.pdf. § 3 (2005).45 and changing the rules relating to Information Disclosure Statements to encourage patent applicants to give the patent office the most relevant information related to their inventions in the early stages of the review process. [2006 ref] 49 Patent Reform Act of 2005. Third.49 If passed in its current form.” Id. Noveck. 05/06-18 Available at SSRN: http://ssrn. Reg.R. Indeed. First. limit the patent to three independent claims and no more than 20 claims in total. 2795. submit all prior art that is closest to their invention.gov/web/offices/com/sol/notices/71fr38808.gov/web/offices/com/sol/notices/71fr61. making them easier to evaluate. Mark A.uspto. (Available at http://www.46 The patent office has also recently proposed a new “accelerated examination” procedure that would offer a final decision on patentability within 12 months to applicants who meet restrictive criteria. 3. identify all the limitations in the claims that are disclosed in the submitted references (with accurate citations to the references). (Available at http://www.L. Reg. Accelerated examination applicants must also agree to have an interview with the patent examiner.) 45 See.43 streamlining the examination process by requiring applicants to designate representative claims for initial examination.50 Most patent applications are already published after 18 months under the 71 Fed. 2006). 48 Patent Reform Act of 2005. and litigate” and give “the public a clearer understanding of what is patented.47 In addition to changes initiated by the patent office. Changes to Practice for Petitions in Patent Applications To Make Special and for Accelerated Examination (26 June 2006) (Available at http://www. See also. 2006). The patent office hopes that the proposed change will “improve the quality of issued patents. "Peer to Patent: Collective Intelligence and Intellectual Property Reform" (April 25. Under the proposed rules.gov/web/offices/com/sol/notices/71fr48. the simple solution appears to be to improve the quality of examination thus removing bad patents at the source. 109th Cong. 71 Fed.uspto. 2795. 36323. 61. Requests for Continued Examination Practice.pdf) 47 71 Fed. NYLS Legal Studies Research Paper No.)If recently proposed rule changes are adopted. [2006 ref] 43 12 of 60 .gov/web/offices/com/sol/notices/71fr36323. Changes To Information Disclosure Statement Requirements and Other Related Matters. 48.44 launching an online peer review pilot project that seeks to ensure that patent examiners will have improved access to all available prior art during the patent examination process. Rev.pdf. Lemley and Kimberly A.uspto. Reg.”48 Second. (Available at http://www. 109th Cong. 2795.” Id. or evidence presented could not have been previously submitted. 109th Cong. 2006). argument.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 system is that too many suspect patents are issued. Notice of proposed rule making (Jan. proposing significant changes such as limiting the applicant’s right to file continuations. the PDQ Act proposes three significant changes to patent office procedure. Beth Simone. 84 B. Reg. 3. the Act provides for Pre-grant opposition. the patent office itself has taken up the cause of examination reform. Proposed Changes to Practice for Continuing Applications. 63 (2004).) . enforce. (10 July 2006). H.pdf. Ending Abuse of Patent Continuations. they will be able to submit that prior art 6 months after the patent is first published. § 7 (2005).U.R. conduct prior art searches. applicants who wish to file any kind of continuation application will have to support that filing with “a showing as to why the amendment. [2006 ref] 50 Patent Reform Act of 2005. the PDQ Act will the current law to allow third parties to submit references to the examiner during prosecution of a patent application.uspto. the PDQ Act would change the uniquely American “first inventor” rule to the international standard of “first inventor to file. 36323. Third parties who are concerned that a piece of relevant prior art has been overlooked by the applicant will no longer have to wait for the patent to issue. the PDQ Act provides for the mandatory publication of patent applications. (__) 44 71 Fed.
Meurer. supra note 8. see generally.C.53 (3) lowering the burden of proof on patent alleged infringers from the daunting “clear and convincing evidence” test to a more rational “preponderance of the evidence” test. supra note 8. 57 John R. Strandburg. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. FTC REPORT. ILL. 2001 U. 55 See.52 (2) narrowing the scope of willful infringement. the NAS and the academic community have all suggested numerous doctrinal reforms for patent law. Rev. 58 Id. 53 See. Doctrinal reform The FTC. Litigation Reforms In addition to changes to patent office procedure and substantive patent doctrines discussed above. For example. L. FTC REPORT. Michael J. FTC REPORT.. supra note 11.g. L. REV.. John Thomas proposes encouraging third parties to assist the patent office in its search for invalidating prior art by rewarding them with a bounty for any relevant prior art that reads on the purported invention. 81 (2004). at 13 (Recommendation 3 . ILL.. 305.55 These proposals are assessed in light of the differential impact test in Part III of this article.56 Under the Thomas proposal. at 117 (Recommendation 6).. supra note 11. L. 59 Joseph Scott Miller.g. e. at 11 (Recommendation 2 .58 As an alternative. Another significant area not addressed here is the scope of the experimental use defense. 44. See. Thomas. Controlling Opportunistic and Anti-Competitive Intellectual Property Litigation.g. Thomas.54 and (4) curtailing the availability of injunctions for patent infringement. NAS REPORT. NAS REPORT. See Id. Katherine J.Enact Legislation to Specify that Challenges to the Validity of a Patent Are To Be Determined Based on a “Preponderance of the Evidence”). 2001 U. 54 See. e. there is a considerable array of reform proposals on the table ranging from providing incentives for third party patent bounty hunters. the significant change contemplated by the PDQ Act would be to make publication mandatory. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties.J. 342 (2001). 667 (2004) Miller argues that the Thomas proposal occurs too early in the process and that third parties would be unable to determine whether the technology represented in the application is commercially valuable. 51 52 13 of 60 . Again.g. REV. 511 (2003). 305. L. e. B. the patent office would publish the patent application and invite the public to submit prior art before the patent is issued. REV.57 If application claims are rejected based on these third party submissions of prior art. Congress is also being asked to consider major changes to the entire structure through which patent disputes are litigated. L.59 Miller suggests that third parties should receive a bounty in situations where the “court Id. at 704. supra note 11 (Recommendation 9). Significant proposals include: (1) raising the threshold of non-obviousness. What Does The Public Get?: Experimental Use And The Patent Bargain. e. the submitting party would receive a bounty determined by the patent office and paid by the applicant. facilitating collective action by alleged infringers.Tighten Certain Legal Standards Used to Evaluate Whether A Patent Is “Obvious”). to creating an administrative review system for determining patent validity as an alternative to district court litigation. Joseph Miller advocates a litigation stage bounty. 56 John R. at 20 (Recommendation 2 . 3. 509.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 current regime. 19 BERKELEY TECH.51 2.Reinvigorate the nonobviousness standard). Bounties and Fee-Shifting: The three bounty/fee-shifting proposals reviewed below illustrate the diversity of recommendations on the Congressional table. Wis. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties. 342 (2001).
63 Shapiro further suggests that the antitrust authorities should make it easier for potential infringers to collectively defend their rights by “making it clear that cooperative efforts to challenge patents will generally not be considered illegal collusion. 19 Berkeley Tech. and encourage defendants to challenge bad patents. This would provide incentives to challenge only those patents likely to be commercially valuable.”64 Mandatory Joinder: Edward Hsieh proposes facilitating cooperation among alleged infringers by allowing for the mandatory joinder of all potential defendants and thus consolidating all defendants in a single action. FTC REPORT. reduce overall litigation costs. Rev. Patent System Reform: Economic Analysis and Critique. NAS REPORT. at 707.] 61 Jay P. 683 (2004). and prosecuting its patent application. e. even when such efforts involve horizontal rivals who are seeking to pay less for a technological input. the NAS and a wide array of commentators have urged Congress to authorize the patent office to administer a system post grant review of patent validity (post grant review). 1017 (2004). at 711-712. He argues that mandatory joinder would lower the individual defendant’s costs of litigation. However. 63 See Carl Shapiro. 19 Berkeley Tech. Post grant review would supplement the current third party and inter-partes reexamination systems Id. 787. or license. Lemley and Carl Shapiro. prevent patentees from suing smaller companies first. 62 Cooperative Patent Challenges: Carl Shapiro has suggested that one solution to the problem of bad patents is to make it easier for government agencies with an interest in consumer welfare such as the FTC. L.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 voids a patent claim on a ground that the patentee could have prevented by diligently and candidly researching. Id. 64 See Carl Shapiro. Miller would seek to overcome the problems he identifies in the Thomas proposal by tying the amount of the bounty awarded to the patent holder’s past profits. 17 BERKELEY TECH. 62 Id. L. [Miller’s bounty system would thus incorporate challenges to best mode. 763. 1017 (2004). pro-defendant. Patent System Reform: Economic Analysis and Critique.. but distinct proposal. Mark A.J. at 795. L. supra note 8 (Recommendation 3). Carrots and Sticks to Create a Better Patent System. Patent holders who choose not to conduct thorough prior art searches either during prosecution or before attempting to enforce their patents would expose them selves to increased litigation costs if their claims prove to be invalid. 60 14 of 60 .g. 795 (2002). punishing the patent holder in those cases where reasonable and diligent research would have suggested that the patent claims were invalid changes the patent holder’s incentives at the time of prosecution. Probabilistic Patents. 65 Mandatory Joinder: An Indirect Method For Improving Patent Quality 77 S.61 Ordinarily a patent holder has very little incentive to diligently research the prior art or to submit only those claims that are likely to survive litigation stage review. see also. Kesan proposes a one-way.J. or public interest advocacy groups such as The Electronic Frontier Foundation and the Public Patent Foundation to challenge the validity of suspect patents. L. 19 JOURNAL OF ECONOMIC PERSPECTIVES 75 (Spring 2005).”60 Jay Kesan offers a related. enablement.65 Post Grant Review: The FTC. Kesan. and possibly inequitable conduct by the patent applicant before the PTO. 66 See. Cal.J. drafting.66 The Patent Reform Act of 2005 and the PDQ Act both adopt variations of the post grant review model. supra note 11 (Recommendation 1). fee-shifting system in which the patent holder pays the costs of litigation if at least some of the patent claims are invalidated on the basis of prior art which was reasonably discoverable by the patentee during prosecution.
68 35 U.S. 943.J. 943. § 103 (Non-obviousness) and § 112 (written description.J. Katharine M. Allison & Mark A. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help.U. 71 See e. it is not uncommon for a patent to be found to be invalid on the basis of 67 Joseph Farrell & Robert P. (Defining bad patents as “patents that do not meet the statutory requirements of novelty and nonobviousness.67 The Patent Act provides that any issue raised by a challenger during reexamination cannot be revisited in a later trial involving that challenger. What are Bad Patents? For all the discussion of falling patent quality and opportunistic litigation. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. what is differential impact? 1. 2005). 905. This estoppel effect makes reexamination extremely risky unless a potential infringer is already engaged in federal court litigation. enablement and best mode).C. We argue that the highest priority for patent reform should be reserved for those measures that will have a differential impact on bad patents.) 70 151 CONG. (Noting that the broad consensus among patent experts is that these risks of reexamination are too great. Merges.” 72 Primarily. not the claim level but the authors of this study treat cases with split rulings on claim validity as two separate patents.) Jay Kesan offers a more helpful definition.”) See also. Ann. what is it about a patent that makes it bad. Joseph Farrell & Robert P. L. Lamar Smith a system of post grant review will “provide meaningful. (Defining bad patents as “patents that are likely to be invalidated if subjected to litigation or an administrative challenge.71 Patents can fail to meet the standards of patentability despite being issued by the PTO. he uses the term as follows: “a patent is “bad” if it should not have been granted by the Patent Office after a reasonable search and review of the relevant prior art. Rev. L. REC. 26 AIPLA Q. This article addresses that need by proposing that Congress should apply the Differential Impact test to determine which reforms are most pressing. 966 table 2 (2004) (only 392 ex parte reexamination requests in 2003). 19 Berkeley Tech.” The term is often used loosely to denote patents that should not have been issued. 205-206 (1998) (Reporting that. 865.72 Currently. Am. post grant review would drastically reduce the cost of challenging bad patents and therefore help private parties fill the gaps left by an incomplete examination process. 35 U. Note. 185. Too Little. Merges. § 102 (Novelty). and second. Edward Hsieh. L. Surv. or Just Right? A Goldilocks Approach to Patent Reexamination Reform. For example. Cal. Congress faces a dizzying array of options when it comes to overhauling the patent system. This raises two questions: first. 19 BERKELEY TECH. but what is lacking from the patent reform debate so far is a framework for prioritizing these reforms.”70 C. Mandatory Joinder: An Indirect Method for Improving Patent Quality.C.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 which are rarely used because of their prejudicial estoppel effects. 317 69 See. This analysis is at the patent level. 77 S. 73 John R.73 Are all these patents “bad”? Defining bad patents solely with reference to standards of patentability is problematic. 15 of 60 .Y. In the words of Rep. The challenger has no opportunity to litigate any argument or prior art evidence used in reexamination should the patent office make a mistake. Zandy. L. only 54% of final validity decisions found the patent valid.g. low-cost alternatives to litigation for challenging the patent validity.69 According to its proponents. in a sample of 300 cases. June 8. 683 (2004). 61 N.S. A Differential Impact on Bad Patents As the previous sub-section demonstrates. E1160 (daily ed.J. Empirical Evidence on the Validity of Litigated Patents.68 This means that any potential infringer who tries to invalidate a patent through reexamination must be willing to risk that the patent office will decide in its favor. there appears to be no agreed upon definition of what makes a patent “bad. Lemley. 967 (2004). Too Much.). roughly half of all litigated patent claims are found invalid by the courts for reasons such as anticipation or obviousness.
on the basis of present knowledge. 77 Fritz Machlup. v. the uncertain nature of claim construction makes predicting the ultimate validity of any patent claim a speculative art at best.. Inc. J. 85th Cong. properly cataloged in the collection of a German University Library qualified as anticipating prior art. confers a net benefit or a net loss upon society… If we did not have a patent system. These are the patents that undermine the incentive rationale of the patent system. We are empirically uncertain about far too many things to know whether See e. to recommend abolishing it. Even a technically valid patent can become a bad patent if it is asserted beyond its legitimate scope. 2006 U.3d 1303.).. The reason for adopting this functionalist definition of bad patents is that we are less about whether a patent turns out to be technically valid. The second element of bad patents relates to patent scope. What is Differential Impact? In his seminal 1958 review of the economic literature relating to the patent system. 76 On this theory. it would be irresponsible. and Copyrights of the Senate Comm on the Judiciary. J. Cir. to recommend instituting one. An Economic Review of the Patent System.75 For these reasons we believe that it would be over-inclusive to define bad patents as those patents that should not have been issued given the wisdom of hindsight.76 A patent that should not have been issued and a patent that was validly issued by is now the subject of hyper-assertion both result in the patent holder claiming legal rights she does not in fact possess. it was the broad assertion of rights by BT that made the hyperlink patent a bad patent. Clearly.3d 1448. dissenting) (Describing the process of claim construction as mayhem. see also Phillips v.g. Cybor Corp. and more about whether it is used as the basis for an assertion of rights that is objectively lacking in merit. on the basis of present knowledge of its economic consequences. 415 F. could possibly state with certainty that the patent system. LLC. In sum. As an alternative defining bad patents as invalid patents. 79 (1958). 74 16 of 60 .. dissenting).S. Study No 15.74 Similarly. In re Hall 781 F. economist Fritz Machlup concluded that: No economist. 2005) (Mayer. 2006) (Mayer. Trademarks. dissenting) (Noting that almost 40% of all district court claim constructions appealed to the Federal Circuit since Markman I were reversed). as it now operates. 898-899 (Fed. FAS Techs.. App. 1330 (Fed.. Lava Trading. Cir.) 75 See. v. the term bad patent should be reserved for patents that are asserted (by implication or otherwise) to cover a product or activity that no reasonable fact finder (in possession of all the relevant facts) could find it covered. J. 138 F. but rather that there is substantial conflicting evidence as to the magnitudes of those costs and benefits.. AWH Corp. part of the definition of bad patents must encompass patents that a reasonably diligent applicant would have known failed to meet the statutory requirements of patentability. however.2d 897.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 prior art that the applicant could not reasonably be expected to have known about. 77 Machlup was not suggesting that there is no evidence as to whether the patent system has costs or benefits. Cir. LEXIS 9708 (Fed. Sonic Trading Mgmt. Subcomm on Patents. But since we have had a patent system for a long time. the patent did not become “bad” until BT argued for a claim construction that was unsupported by the actual invention. 2. 1986) (Holding that a single copy of a doctoral thesis. But this invalidity in not the only way that patents go bad. it would be irresponsible. 1998) (Rader. on the basis of our present knowledge. we propose a functionalist definition of bad patents that focuses more clearly on those patents which are likely to distort the allocation of resources. 2d Sess. 1476 (Fed. The BT Hyperlink patent may well have been properly granted. Cir.
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expanding or contracting scope or availability of patent rights will be beneficial.78 The interesting question is what we should do in the face of this uncertainty. Machlup himself saw no reason why uncertainty should lead to policy paralysis; he argued that regardless of the global uncertainty in relation to the patent system: the student of the economics … need not disqualify himself as a judge of proposed changes in the existing system. ... a team of well-trained economic researchers and analysts should be able to obtain enough information to reach competent conclusions on questions of patent reform.79 One of the most pressing problems in the patent system today is not that patents in general are too easy to obtain or too easy to enforce; rather it is that bad patents are too easy to obtain and enforce. The solution to this problem is not to simply make all patents less valuable. Rather, the solution is to try and reform the system so that bad patents are more easily weeded out without undue prejudice to good patents. Ideally, any change to the current patent system must benefit companies that have invested in innovation and use valid patents to protect that investment; it certainly should not harm them. In order to achieve this, we argue that the reform proposals garnering congressional attention should be uniformly assessed against a test of differential impact. The strong form of this test is that a reform must reduce the incentives for obtaining or asserting bad patents without reducing those same incentives for good patents. The weak version of the differential impact test simply requires that a reform reduce the incentives for obtaining or asserting bad patents more than it reduces those same incentives for good patents. The Differential Impact test is necessary because of the empirical uncertainty as to the optimum scope of patent rights and because of the need for a more targeted legislative proposal that might have a better chance of being passed by Congress. There are many reform proposals that might make sense if we were rebuilding the patent system from the ground up; but, if we are pursuing less radical change, we must keep in mind the expectations of those individuals and corporations who have already invested in the current system. In Part I of this article we provided an overview of some of the more prominent patent reform proposals. The objective of article is to evaluate those proposals against the test of Differential Impact, but in order to make that possible, it is first necessary to understand why the patent office issues invalid and uncertain patents and how bad patents continue to survive in the market place. Accordingly, the next Part explores the origin and survival of bad patents.
See, Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 Colum. L. Rev. 839 Fritz Machlup, An Economic Review of the Patent System, Subcomm on Patents, Trademarks, and Copyrights of the Senate Comm on the Judiciary, Study No 15, 85th Cong, 2d Sess. 79 (1958).
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THE ORIGIN AND SURVIVAL OF BAD PATENTS
The phenomenon of bad patents stems from both the apparent low quality of patent examination and the complex, uncertain, expensive and time-consuming nature of patent litigation. It is important to understand the relationship between these two factors. If only an insignificant number of patents were improperly issued, it would not matter very much that patent litigation was so expensive. In this scenario, only good patents would be issued and so the burden of expensive patent litigation would fall largely on infringers with a real case to answer. Similarly, if challenging invalid patents was simple, quick and cheap, it would not matter if there were vast numbers of improperly issued patents. In this alternative scenario, alleged infringers would be able to quickly ascertain the likely merits of the patent holder’s claim by attempting to invalidate the patent. Knowing that alleged infringers will routinely test the quality of their patents, patent holders would have a strong incentive to only make defensible claims of infringement. In contrast the forgoing scenarios, the problems with the current patent system arise because too many potentially bad patents issue and because it is too costly for alleged infringers to challenge or test their validity.80 Accordingly, the problem of bad patents can not understood in one dimensional terms, it emerges from the interaction of the features of both patent examination and patent litigation. A. Patent Examination Bad patents emerge from the patent office due to a combination of limited resources and distorted incentives. Almost any patent lawyer will agree that the U.S. patent system is currently overburdened: there are too many patent applications and not enough examiners to ensure that the merits of each and every patent are properly assessed. In the 2005 fiscal year, the PTO received over 380,000 new patent applications and issued more than 152,000 patents.81 Each one of those issued patents spent an average of two to three years in prosecution.82 Yet during that time, the average patent was probably only examined for as little as 18 hours and at most 41.5 hours.83 The PTO currently has 4,200 patent examiners, but plans to hire to hire 1,000 patent examiners a year for the next several years to augment its current staff. 84 Even so, given the growth in the volume of applications over the last two decades and the likely turnover of examiners at the
80 Patents are potentially rather than categorically “bad” at the time they are issued because how they will actually be used is not predetermined. 81 These figures relate to utility, plant, and reissue patent applications; U.S. PATENT AND TRADEMARK OFFICE, USPTO PERFORMANCE AND ACCOUNTABILITY REPORT FOR FISCAL YEAR 2005 18, (2005), available at http://www.uspto.gov/web/offices/com/annual/2005. 82 Id. at 6 (“pendency — the amount of time a patent application is waiting before a patent is issued — now averages more than two years. In more complex art areas, such as data-processing technologies, average pendency stands at more than three years.”); see also, Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Nw. U. L. REV. 1495, 1500 (2001). 83 Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Nw. U. L. REV. 1495, 1500 (2001) Lemley cites various estimates of the amount of time spent examining the average patent ranging from 18 to as low as 8 hours. These estimates may be out of date. The average initial decision for a digital camera patent takes about 24 hours, to actually finalize the claims and approve the patent issues presumably takes several additional hours. See Kevin Maney, “Patent Applications So Abundant That Examiners Can't Catch Up”, USA TODAY, September 21, 2005. We can calculate the upper bound of examination time by dividing the number of hours worked by examiners by the number of patents issued every year. Assuming 4200 examiners each allocate 1500 hours a year to examination yields 6.3 million hours of examination. Dividing this by the 152,000 patents issued in 2005 yields 41.5 hours per patent. 84 Kevin Maney, Examiners Can’t Keep Up With Patent Applications, USA TODAY, at http://www.usatoday.com/tech/columnist/kevinmaney/2005-09-20-patent-office_x.htm (comments of John Doll, Commissioner for Patents, USPTO).
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PTO,85 the office will struggle to keep pace with increasing demands for examination if no other changes are made to the system. The mismatch between patent applications and examination resources has resulted in considerable delays in the time it takes the patent office to issue a patent.86 The patent office currently faces a backlog as high as 885,000 applications, many of which have not even been assigned to an examiner yet.87 According to its 2005 annual report, the PTO estimates the average time it takes to get a patent to be about 29 months although the figure is much higher in certain fields such as software and business method patents.88 However, the agency reports that unless reforms are implemented or the agency’s budget is expanded the current backlog will increase to up to five years.89 As the PTO struggles with the availability of examination resources, it must also face the recent extension of patentable subject matter into new fields. In the past 25 years, legal and technological changes have combined to radically extend the application of the patent system to new areas, including software, business methods and genomics.90 These new frontiers of patentability have increased the strain on the PTO in two ways. First, increasingly permissive rules on patentable subject matter have led to a deluge of patent applications in those fields.91 Second, new subject matter patents are more difficult for the patent office to examine because they can not simply turn to previously published patents to begin the search for prior art. In response to vigorous criticism of its treatment of new subject matter, the PTO instituted new policies in 2000 and 2001 designed to improve patent quality in some areas.92 However, the impact of the PTO’s new policies has been thus far difficult to judge. In addition, the patent office has been affected by “technology creep,”93 old classifications such as electrical, chemical and mechanical inventions have been displaced by far more complex fields like semiconductors, biotechnology and, nanotechnology. All of which require far more specialized expertise.
85 Patent examiners, on average, spend only three to five years with the PTO before leaving the Office. This means that within a four year period, the equivalent of the entire current staff of examiners at the PTO will have left. This points to both a continuing problem of staffing levels and also a problem with retention of experienced examiners. See, Randy Barrett, Report: Patent Office Should Become Federal Corporation, NATIONAL JOURNAL’S TECHNOLOGY DAILY, Aug. 24 2005, available at http://www.govexec.com/dailyfed/0805/082405td1.htm. 86 The patent office allegedly told an applicant for a business method patent that its recently filed application might take as long as 14 years to be examined. See, http://www.patentlyo.com/patent/2006/06/pto_first_offic.html. 87 Tricia Bishop, 43.5-month patent process not moving fast enough, The Baltimore Sun, April 30, 2006. (The increase has led to a backlog of 885,000 applications and the fear that some patents, despite the time frame, are being granted without proper review.)Victor Godinez, Patent system under scrutiny BlackBerry case highlights complaints, backlog of applications THE DALLAS MORNING NEWS March 26, 2006 (The agency has a backlog of nearly 600,000 patent applications, and the stack is growing.) 88 Tricia Bishop, 43.5-month patent process not moving fast enough, The Baltimore Sun, April 30, 2006. (It takes an average of more than three years - 43.5 months, to be exact - for the government to process a software patent application.) 89 See, John W. Schoen, U.S. patent office swamped by backlog, Without more funding, wait time could top 5 years, MSNBC, April 27, 2004. (Available at http://www.msnbc.msn.com/id/4788834/)(quoting Jon W. Dudas.) 90 See, e.g., U.S. Patent No. 5,193,056 (issued March 9, 1993) (first business method patent, ruled patentable subject matter in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. Jul. 23, 1998)). 91 Jennifer A. Albert & Emerson V. Briggs, III, Strategies of Tech Business Include Utility Patents, Nat'l L.J., Jan. 29, 2001, at B23 (reporting that "the PTO has been inundated with patent applications during the past two years and can barely keep up. It is generally understood that this increase in filings results from an influx of computer, software, and Internetbased applications in the wake of the Federal Circuit's holding in State Street.") 92 NAS REPORT, supra note 8, at 55-56. 93 John W. Schoen, U.S. patent office swamped by backlog, Without more funding, wait time could top 5 years, MSNBC, April 27, 2004. (Available at http://www.msnbc.msn.com/id/4788834/)
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L. To amend title 35. 35 USC 101. Some examples of errors include the issuance of a claim having anticipatory prior art under 35 USC 102. and final determinations of.J. James. 35 USC 112) and judicially created doctrines. continuations-in-part. “the USPTO eventually issued patents on between 85 percent and 97 percent of the applications filed between 1993 and 1998…. 94 20 of 60 . 99Id. of 4. the federal courts. much higher.com/patent/2006/03/does_the_wall_s. See H. (introduced 6/8/2005). Clarke. 435. 17 BERKELEY TECH. U.S. 1.. and the European Patent Offices. Address at 2005 AIPLA Meeting (2005). Valuable Patents.101 although many believe that number to be much. While this is may be in line with standard assumptions about the selection of disputes for litigation. ultimately. 96 See. Quillen and O. This is “20 to 30 percent higher than official estimates [by the PTO].uspto.R. Valuable Patents. continuation-in-part.95 and (iii) continuation. Continuing Patent Applications and Performance of the U. SYMPOSIUM: PATENT SYSTEM REFORM: The Responsibility of the Rulemaker: Comparative Approaches to Patent Administration Reform. supra note 11. 103 Legislation has even been proposed to this end.”) 95 John R. and divisional applications.103 In contrast. 26 AIPLA Q. Allison & Mark A. 733 (2001) (“Courts do not fine the USPTO upon invalidating a patent. 435. 8 J. at 217. Arguably. Japan. (2005). Sponsor: Rep Sensenbrenner.J. and for other purposes. and. Allison et al.” 100 Whatever the reasons for the PTO’s high rate of allowance might be. The error rate is the ratio of patents issued with errors to the total number of patents issued. the fact that persistent applicants are almost always successful does not indicate a high threshold of quality control. a study by Quillen and Webster (adopted by the NAS) found that. 92 GEO. An error is defined as at least one claim within the randomly selected allowed application under quality review that would be held invalid in a court of law. Empirical Evidence on the Validity of Litigated Patents. the PTO’s internal culture and organization predispose examiners to granting patents too easily.) 102 John R.99 However. 92 GEO. Patent Office. 185..97 This is compared with a 67% approval rate in Europe and 64% in Japan. John R. Jr. the difference with patents is that they have previously been subject to a review process before entering the pool for selection. & TRADEMARK OFF.g.2791. 100 C. PAT.J. See also R. patent applications. and divisional applications can be used to wear down an Examiner until at least some claims issue.html (60% approval rate). 11 FED.S. consumers. PERFORMANCE AND ACCOUNTABILITY REPORT FOR FISCAL YEAR 2002 18. with respect to patent fees.2%. Lemley. L. 205-206 (1998) (only 54% of the patents were found valid in a population of 300 final validity decisions).J. which have ranged between 60 percent and 70 percent for 20 years.typepad. 456-57 (2004). if the application were to issue as a patent without the required correction. 335-49 (2003).pdf (Showing an official “error rate. even the PTO acknowledges that its error rate is around 5%.gov/web/offices/com/annual/2002/1-58. Webster.J.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Even taking into account its limited resources. Other errors include lack of compliance of the claim to the other statutory requirements (e. the examiners who allowed the case are not disciplined for their oversight. B. Factors that might contribute to a culture of permissive patent issuance include: (i) patent examiners face no penalties for issuing ultimately bad patents. L. 727. The imperfect nature of patent examination is widely acknowledged. 101 U..S. Allison et al.in particular. accounting for continuations.94 (ii) patent examiners are only rewarded for initial response to. the patentee's competitors. Patent lawyers and a number of academics have called for better funding for the PTO to improve patent examination. available at http://patentlaw. CIR.102 The important policy question that flows from this is whether it is worth spending money to make patent examination any better. Continuity Law and its Impact on the Comparative Patenting Rates of the U. 463 (2004).96 The FTC reports that the PTO’s approval rate might be as high as 98%. (75% approval rate).. United States Code. nor must the USPTO award damages to affected members of the public to compensate for an improvidently granted patent. http://www.S. 1-21 (2001). PATENT AND TRADEMARK OFFICE. USPTO Director Jon Dudas. 98 Id. the PTO has been criticized for simply being too willing to grant patents.98 The PTO argues that the true figure is more like a 75% approval rate or even a 60% rate. F. SOC'Y 335. or relevant prior art under 35 USC 103 that would render the allowed claim obvious. 97 See FTC REPORT. The costs of failing to acquire information are simply shifted to other actors . Thomas.” based on internal quality assurance measures. somewhat like John R.
Critical responses to Lemley’s “rational ignorance” theory include Shubha Ghosh & Jay Kesan. alleged infringers have weak incentives to challenge bad patents and second. at 1532.” Id. the models DR. 40 HOUS. an alleged infringer will choose whether to (1) pay the license fees the patent holder demands.. Lemley. L. See also. Merges. REV. patent holders have strong incentives to over-claim their rights. 19 BERKELEY TECH. or will be used in circumstances that don't crucially rely on the determination of validity. and attempt to deal with the problem ex post. or even licensing. and just as importantly. negotiation. 1495. 943. The delay. Weak Incentives to challenge Faced with the threat of litigation from the holder of a questionable patent. 92 GEO. 435 (2004).).J. This need not mean that it is bad if the USPTO issues a lot of invalid patents. Rational Ignorance at the Patent Office. 107 See. What Do Patents Purchase? In Search of Optimal Ignorance in the Patent Office.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Dr.ingrimayne. examination. John R. uncertainty and expense of patent litigation is central to the problem of bad patents for two reasons: first. Rational Ignorance (2002) at http://www.105 As Mark Lemley explains: Society ought to resign itself to the fact that bad patents will issue. F. but his main contention is that the primary reform goal should be “to strengthen the validity inquiry made by the trial courts. and enforcement should be evaluated as a whole. see also.106 Although the “rational ignorance” theory of patent examination is attractive. Id. Valuable Patents. This result is admittedly counterintuitive. 1. In fact. L. if the patent is asserted in litigation. money spent improving the PTO examination procedures will largely be wasted on examining the ninety-five percent of patents that will either never be used. Allison et al. (2) challenge the validity or application of the patent. see also. B. Because of this. Strangelove. based on a novel by Peter George. 106 Mark A. the entire system of application.) 105 Mark A. 104 21 of 60 . or (3) simply exit the market. 95 Nw. The Case for Registering Patents and the Law and Economics of Present Patent-Obtaining Rules. at 1523-25. challenge. as explained in more detail in the next section. It depends crucially on the fact that very few patents are ever the subject of litigation.g. Joseph Farrell & Robert P.104 a few commentators have suggested giving up worrying about the issuance of bad patents and learning to love a system of quick-and-dirty examination at the PTO – the theory being that poor quality patents will either be ignored by the market or dealt with through litigation. 45 B. L. 1497 (2001). licensing. U. not examined). Rather.html. STRANGELOVE OR: HOW I LEARNED TO STOP WORRYING AND LOVE THE BOMB (1964) (Directed by Stanley Kubrick. e. Rev 55 (2003) (Arguing that patent applications should be registered. 95 Nw. but not the product market). Robert Schenk.” Lemley clearly recognizes that some examination related reforms are worth pursuing. SYMPOSIUM: IDEAS INTO ACTION: IMPLEMENTING REFORM OF THE PATENT SYSTEM: Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. REV. L. 1495. 946 (2004) (“it would be a disgrace for a system to enforce a lot of improper patents. L.J. issuance. 108 Exiting the market may mean that the alleged infringer abandons a line of business altogether or designs around the patent (thus exiting the patent market. There are a number of reasons to suspect that bad patents are not effectively dealt with by market and judicial forces. 1219 (2004).107 its advantages may be overstated. Rev.com/econ/LogicOfChoice/RatIgnorance. L. 1510-11 (2001). Lemley. not the validity of the patent holder’ claims. much like the rational ignorance theory of voting (from which its name is apparently derived). Rational Ignorance at the Patent Office. U.C. Scott Kieff.108 One of the central problems with the current patent system is that there are many circumstances in which these choices will be dictated by the cost of litigation. The Persistence of Bad Patents Several structural features of patent litigation combine to shield bad patents from the scrutiny of the market.
Mandatory Joinder: An Indirect Method for Improving Patent Quality. 22 of 60 . = Cost of any damages as a result of losing a challenge to the patent. LE05-004. Both Farrell & Merges and Kesan & Gallo have developed formal models to determine whether litigation will adequately deal with the problem of bad patents. 667 (2004) (proposing a regime of litigation-stage bounties to encourage defendants to challenge patent validity). REV. = Cost of legal challenge. Why “Bad” Patents Survive in the Market and How Should We Change? – The Private and Social Costs of Patents. ECON. Utility Functions: UWin ULose ULicense 109 = π–L–I = π – L – I – CL – CP – P = π – CL – I See. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. L. We present here our own version of the challenger focused model which illustrates why alleged infringers will pay license fees rather than challenge bad patents in a significant number of cases. Variable Definitions: π CL CP L I P α = Profit to the potential infringer over the lifetime of the product (excluding any costs relating to the patent) = Cost of license payments. 19 J. 683 (2004) (proposing a mandatory joinder solution). (2005) (exploring the suboptimal incentives of private parties to challenge patents in courts and considering potential reforms). e. 2005).. ignoring or challenging a patent holder’s assertion that some aspect of her business infringes on the patent holder’s rights. = Additional penalty cost of license payments after challenging the patent and losing. Joseph Farrell and Robert P. Gallo. L. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. challenge the patent. Mark A. the validity of the asserted patent becomes less and less relevant to the alleged infringer’s decision to challenge. at 21 (Illinois Law and Economics Working Paper Series. PERSP. L.J.g. 19 BERKELEY TECH. Lemley & Carl Shapiro. Merges. available at http://ssrn. CAL. Challenger Focused Model The model described in this section looks at the world from the perspective of a potential infringer who has received some indication that a patent holder believes she is infringing and has demanded a royalty payment accordingly. 77 S. = Cost of gathering information related to patent validity. The alleged infringer must decide whether to take a license. 943 (2004) (litigation is an poor substitute for adequate patent examination and calling for greater funding for the Patent Office to improve patent review at the application stage). or exit the field.com/abstract=688005.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 discussed in this section demonstrate that as the cost of litigation increases. Working Paper No. Probabilistic Patents. Jay P.J. cf. Kesan & Andres A.109 Their models are developed from the point of view of a potential defendant who is faced with the choice of either licensing. = Probability that the alleged infringer would be able to successfully challenge the patent. 2. 19 BERKELEY TECH. Edward Hsieh. Joseph Scott Miller.
On the other hand. they can use the threat of retaliatory litigation to avoid paying licensing fees for activity that infringes on the patent rights of another party (defensive). Comparative Statics This yields useful comparative statics. they can use the threat of exclusion to extract licensing fees (extractive). i. α → 1. an alleged infringer will challenge the patent if her utility from doing so exceeds her utility from simply accepting the license demands of the patent holder: i. take a license. or exit the field based on which is least costly or most profitable. Comparative statics 23 of 60 . if UChallenge> 0 and ULicense> 0. 110 Comparative statics is a modeling technique used in economics and political science. if UChallenge > ULicense. then the alleged infringer will simply exit the field. exclusive patent holders charge royalties that no potential infringer could afford to pay. Challenge if: UChallenge > ULicense This inequality can be expanded as follows: α (UWin) + (1– α) (ULose) > π – CL – I α (π – L – I) + (1– α) (π – L – I – CL – CP – P) > π – CL – I Expanding and restating in terms of L yields: L < αCL + (1-α) (CP + P) (equation 1) In words. i. These diverse applications can be accounted for in the model by simply treating all patent holders as being like extractive. if both challenging the patent or accepting the license would drive the alleged infringer out of business. the alleged infringer of a potentially bad patent will decide whether to challenge the patent. Generally. However. The challenger focused model holds that an alleged infringer will challenge the patent holder by contesting either the validity or the applicability of the patent where her utility from doing so exceeds her utility of simply accepting the license demands of the patent holder.e.110 First. defensive patent holders charge royalties denominated in the royalties they don’t pay for other people’s patents.e. or they can pursue a combination of these uses. the model shows that an alleged infringer will challenge the patent holder if the cost of litigation (L) is less than the probability of winning (α) times the cost of the license plus the probability of losing (1-α) multiplied by the penalties associated with an unsuccessful challenge to the patent such as increased royalty rates and enhanced damages for willful infringement (CP + P). Similarly. the alleged infringer will challenge if litigation costs are less than the cost of licensing.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 UExit UChallenge = 0 = α (UWin) + (1– α) (ULose) When faced with the scenario above. In effect.e. extractive patent holders would prefer to get some direct revenue from their licensing targets and so will price their royalties such that at least some potential infringers can afford to pay them. but acknowledging that exclusive and defensive patent holders charge different kinds of prices. as the probability of winning approaches total certainty. There are a number of different ways in which patent holders can obtain value from an individual patent or from a portfolio of patents: they can use patents to exclude competitors from certain markets and thus charge higher prices (exclusive).
is the formal study of how the equilibrium or optimal values of the variables in a model are affected by changes in the values of other parameters in the model. Intell. 1191 (2003). Prop.) 24 of 60 . (citing Robert S. The relationship between licensing costs and litigation costs is complicated. and the Complex Mathematics of Patent Pricing.000 to $3 million dollars per suit or $500.).J. 113 See. Valuation of Patent Licenses 12 Tex.org/papers/W9731. Non-Cooperative Games. It is difficult to estimate what the average patent license demand is. Currier. as successfully challenging the patent becomes more likely.. See also F. However. INTELLECTUAL PROP. Russell Denton and Paul J. royalty rates are directly tied to the profits of the alleged infringer. Random Walks. in The New Role of Intellectual Property in Commercial Transactions 39 (Melvin Simensky & Lanning G. 1175. 635 PLI/Pat 465.000 per claim at issue per side. available at http://papers. CL = f(π). (May 2003). Rev.114 It is not surprising that parties in high stakes cases would spend more than those in lower stakes cases. litigating an individual patent case is likely to cost around $650. Technologies and Portfolios: Rules of Thumb. Valuing Patents. expenditure on patent litigation only follows this assumption within a certain range of cases – those where the stakes are high. the cost of discovery alone approaches $350. See also Ted Hagelin. Heald.5 million for a higher value patent. As a general matter one would expect parties to invest more in litigation as the stakes of a given dispute increase. Anecdotal experience suggests that outside of the $1 million to $25 million range. L.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Challenge if: L < CL as α → 1 (Comparative Static 1) This makes sense intuitively. 112 F. Bronwyn H. Parr & Gordon V.nber. 111 See. Russell L. Russell Denton and Paul J. Quantitative Methods of Valuing Intellectual Property. 55 Rutgers L. But in actual fact.000 for a low valued patent and up to $4. Patent quality via Post-grant Opposition. Random Walks. Rev. 1994).pdf (Estimating legal costs of patent litigation ranging between $500. Heald.) 114 AM. Rev. Bryer eds. 1191 (2003). LAW ASSOC. COMPARATIVE STATICS ANALYSIS IN ECONOMICS (2000). costs average $3M for discovery and $4.S. the costs of an unsuccessful challenge become less important. Non-Cooperative Games.000.111 Under this method. Probably the most plausible method of valuing intellectual property is to view it in terms of the present value of the future stream of economic benefits that can be derived from its ownership. 1175. Heald. In practice patent license fees are frequently determined by seemingly arbitrary rules of thumb such as the “25 Percent Rule” or reference to past industry practices. REPORT OF THE ECONOMIC SURVEY 22 (2005) (For a patent valued at less than $1M over its life. 423. See also. 1191 (2003). Smith. 55 Rutgers L. Prospects for Improving U.112 Each of these methods is something of a “guesstimate”113 but it seems fair to assume that methods of valuation that were not a function of the alleged infringer’s potential profit would be displaced in the market by those that were. i.25M for discovery and $2M for complete litigation. Bramson. An interesting result from Comparative Static 1 is that the alleged infringer’s potential profit appears to have disappeared from the equation. Although the cost of a patent license and the potential profit of the alleged infringer are closely tied. P. the alleged infringer’s potential profit is still significant as determinant of CL. 471 (2001). Non-Cooperative Games. Kevin M. patent litigation costs tend to stick at the lower and upper bounds respectively. Russell Denton and Paul J. See. F. but it is significant to note that litigation costs are probably not sensitive to the amount in dispute (which is at least indirectly related to the alleged infringer’s potential profit) below the $1 million dollar mark. 55 Rutgers L... 424 (2004). For those patents which exceed $25M in value.e. but not very high. Hall et al. For patents valued between $1M and $25M. and the Complex Mathematics of Patent Pricing.11. and the Complex Mathematics of Patent Pricing.. Random Walks. the average costs rise to $1. but anecdotal evidence suggests that it is significantly less than the minimum threshold costs of patent litigation. litigation costs are only weakly related to potential profit. This is particularly significant at the lower boundary because it means that although licensing costs will be directly related to the alleged infringer’s profit potential. 1175. According to a recent survey conducted by the American Intellectual Property Law Association.5M for litigation.
We suggest that the vast majority of potential infringers will be litigation costs will exceed licensing costs for the vast majority of potential infringers (represented by the shaded area on the left-hand side of the density function). but the evidence shows that they are not. "How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes" . For example.000. Recall the first comparative AIPLA. 30 – 34.115 assuming that her profit is a mere $1 million and that a 5% royalty is customary in her industry. The sticky nature of litigation costs at the lower boundary means that the majority of patent holder assertions will result in licensing costs that are far less than the lower boundary of litigation. as illustrated in Figure 2. the authors also find that a further seven to eight percent of cases are disposed of through summary judgment.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 litigation costs will not. Jay Kesan and Gwendolyn Ball find that between seven and four percent of cases end with a final judgment in one form or other.com/abstract=808347. a potential infringer contemplating challenging the validity of a patent has to expect that her litigation costs will amount to at least around $500. Gwendolyn G. Kesan and Ball find that the average duration of cases that terminated through a trial was just under two-and-a-half years but that cases from the same year that terminated through a successful summary judgment ended only about two months sooner on average.117 This indicates that the high cost of patent litigation is not merely a factor in those rare cases that make it all the way to a final judgment. Figure 1 depicts a density function of the distribution of potential patent cases in relation to the difference between litigation costs and licensing costs (CL – L). she has to weigh that $500. 117 Id. LE05-027 Available at SSRN: http://ssrn. Kesan. it also affects those cases in which the defendant is able to win on summary judgment. examining patent cases filed in 1997. the probability that an alleged infringer will challenge any given patent assertion is effectively zero in a large number of cases. 115 116 25 of 60 . p. The fact that only a small proportion of patent cases actually end in a trial on the merits should not make us any more comfortable with the high cost of patent litigation. In their recent empirical study of the resolution of patent cases. at 61.000. Figure 1 0 CL – L Because the majority of patent holder assertions will result in licensing costs that are far less than the lower boundary of litigation. U Illinois Law & Economics Research Paper No.116 However. For example. and Ball. The high cost of patent litigation might be less concerning if those cases that ended in summary judgment were considerably cheaper.000 litigation bill against a license demand of only $50. Jay P..
and (6) enhanced damages and injunctions have a chilling effect on patent challenges. Figure 2 maps the predicted outcomes for a continuum of π given the distribution assumptions in Figure 1. To begin with. Implications of the Challenger Focused Model The Challenger Focused Model has at least six significant implications with respect to the survival of bad patents. there is a very small transition window in between where the probability of success is relevant to the alleged infringer’s determination. Patent holders are in the driving seat in this regard because they get to determine what license fees they will demand. it makes sense to challenge their patent in court almost regardless of the probability of success (depending on the salience of penalties for challenging unsuccessful. as the probability of success approaches 1. Figure 2 Probability of Challenge 1 0 π The result depicted in Figure 2 reflects anecdotal experience: at low levels of profit challenge is unlikely. 2.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 static which indicated that. C. Furthermore. These implications are: (1) the probability of successfully challenging the patent holder is only a significant determinant of whether an alleged infringer will challenge in a limited range of cases. (5) challenges to bad patents are likely to be an undersupplied public good. Strategic patent holders can also effect the alleged infringer’s decision to challenge by raising the costs of challenging by seeking a temporary injunction and/or 26 of 60 . (2) high litigation costs insulate bad patents from challenge. if the cost of licensing is lower than the minimum threshold of litigation. and they do so in full knowledge of the litigation costs faced by alleged infringers. an alleged infringer would challenge if litigation costs were less than licensing costs. (4) information asymmetries insulate bad patents from challenge. High Litigation Costs Insulate Bad Patents from Challenge Bad patents can remain unchallenged as long as the royalties demanded are less than the minimum threshold of litigation. The Limited Relevance of the Probability of Success The probability of successfully challenging the patent holder in court is only a significant determinant of whether an alleged infringer will challenge in a limited range of cases. (3) the uncertainties of patent litigation insulate bad patents from challenge. it never makes sense to challenge. at high levels of profit. discussed below). 1. challenge is very likely. if the patent holder’s royalty demands are high enough.
000.). Research In Motion.118 The costs of litigation can not be measured purely in terms of lawyer’s fees. 125 Id. INTELLECTUAL PROP. Lanjouw & Josh Lerner.121 In addition. LAW ASSOC. Meurer. Patenting in the Shadow of Competitors. 223. L. 95 Nw.) 119 Troy Wolverton. uses event study methodology to examine the reactions of firm stock prices to court decisions in patent cases. 239 (1994).com.L.thestreet. In most cases. the cost of discovery alone approaches $350. 123 Mark A. REV. Rational Ignorance at the Patent Office. the Canadian company at the center of the recent Blackberry litigation was described as “critically distracted” by the protracted litigation. the average costs rise to $1. MercExchange. He found pharmaceutical companies experienced sharp drops in market value after key patents were held noninfringed or invalid. 1.C.S. For example.000 for a low valued patent and up to $4. & ECON. & Econ. For patents valued between $1M and $25M. 471 (1995). eBay Inc.123 It is difficult to precisely measure the costs of patent litigation. 35 J. serious patent litigation distracts key personal from their core responsibilities. REV. 126 AM. 120 Sanjai Bhagat et al. 127 The effectiveness of post grant review in this regard is discussed in Part __. Eli Lilly lost nearly 30% of its stock market value.5 million for a higher value patent. costs average $3M for discovery and $4. U. 463. 1502 (2001). U. For those patents which exceed $25M in value.S. REV. the American Intellectual Property Law Association Economic Survey places the average cost of patent litigation at around $650. particularly those firms with limited product diversity. 2006. 2006) (Holding that the well-established principles of equity that require a plaintiff seeking a permanent injunction to satisfy a four-factor test before a court may grant such relief apply with equal force to disputes arising under the Patent Act.126 As long as the minimum threshold of litigation costs remains high.. 230-231. TheStreet. June 29. 573.122 The extraordinary length of time it takes to invalidate a patent through litigation – 8. bad patent holders will be able to avoid challenge by simply pitching the license demands below the cost of litigation.25M for discovery and $2M for complete litigation.L. 221.120 and sometimes much more. Lemley. 124 Mark A. 27 of 60 . infra. 121 James Bessen and Michael J. Still on the Ropes.119 Patent litigation can also have a negative effect on relations with outside investors. http://www. In one case. the total direct cost of patent litigation in the U. 38 J. Any patent reform that reduced the minimum threshold of litigation costs would greatly decrease the ability of patent holders to do this. 1837 (U. 575-76 (2001).”) 122 See Jean O. Tilting the Table? The Predatory Use of Preliminary Injunctions. see also Lerner. ECON.. Lemley. L. 126 S. 10 (2005) (“Glynn Lunney Jr. but according to one rough estimate. v.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 establishing a reputation for demanding extravagant license fees at the conclusion of fully litigated cases. either in terms of the stock price for publicly traded companies or the availability of future rounds of venture capital financing in smaller companies. 9 LEWIS & CLARK L. every year exceeds $2 billion.L. 1495. Lessons For Patent Policy From Empirical Research On Patent Litigation.125 As noted above.6 years). L.html?cm_ven=GOOGLEN&cm_cat=FREE& cm_ite=NA. the lingering cloud of patent litigation can be especially harmful to small firms. Ct.. Rational Ignorance at the Patent Office.124 This figure excludes money actually paid by way of settlement or final judgment. The Costs of Inefficient Bargaining and Financial Distress: Evidence from Corporate Lawsuits.127 118 The Supreme Court’s decision in eBay may allow district courts to take this into account when assessing the equities of granting an injunction to patent holder. REPORT OF THE ECONOMIC SURVEY 22 (2005) (For a patent valued at less than $1M over its life.com/_googlen/tech/gamesandgadgets/10294275. FIN. 44 J. RIM's Up. 1520 (2001) (finding that the average time from issuance to a final litigated decision on validity is 8. 1495. 95 Nw.6 years on average – exacerbates this problem considerably. The mere public announcement of a patent law suit can depress the defendant’s stock price on average 2 to 3%.5M for litigation.
Although eBay lost on the merits in federal court.S. but anecdotal reports from judges and patent lawyers indicate that patent litigation is a particularly uncertain form of legal action. In the context of a patent claim. 2003). The Uncertainties of Patent Litigation Insulate Bad Patents from Challenge As the eBay case illustrates. AWH. 415 F. affirmed in part. at http://www. 2005). LLC v. eBay Annual Report For FY 2005. 28.htm#103. v. uncertain. 129 See.131 The Uncertainty of Claim Construction Although there are many causes of uncertainty in patent litigation.L. there will often be disagreements between plaintiffs and defendants as to the precise meaning of the patent claims. However. in March 2005.3d 1303.” “or. Cir. 2005) 131 See.com/articles/04/04/wo_kline042804. A number of factors combine to the result that the alleged infringer’s probability of winning and the probability that the patent is valid are not the same thing. 401 F. even seemingly straightforward words such as “a. 275 F. reversed in part. MercExchange.133 the court wrestled with the question of whether the term “baffles” should be given its ordinary meaning as a “means for obstructing. 132 35 U. and in May 2005. eBay.technologyreview. Inc. once a bad patent issues it is much easier to convince the PTO of its error than it is to defend an allegation of infringement at a jury trial. e. however the nature of patent litigation is such that very few can ever be sure as a predictive matter that they will successfully challenge a particular patent. TECH..” and “when” become the subject of contested argument.130 The challenger focused model addresses the potential infringer’s probability of successfully challenging a patent as opposed to the validity of the asserted patent per se. 133 Phillips v.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 3. Claim construction is the critical stage of patent litigation where the court decides what the words describing the patent holder’s rights actually mean. eBay.sec. LLC v. the PTO issued an initial ruling rejecting all of the claims contained in the MercExchange multiple database searching. REV.C.D. Kline..gov/Archives/edgar/data/1065088/000095013406003678/f17187e10vk.. impeding.128 it was far more successful in inter partes reexamination in the patent office. the PTO issued an initial ruling rejecting all of the claims contained in the MercExchange electronic consignment systems patent. 401 F. Va. Cir. eBay. In the recent Federal Circuit decision in Phillips v.asp (describing patent litigation as complex. All litigation is uncertain to some extent.129 These were all patents that eBay had been found to have infringed in its jury trial in the Eastern District of Virginia. 112 (2000). 1310 (Fed. 2005) 128 28 of 60 . Every patent includes “one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant regards as her invention.” “to.”132 Theses claims define the boundaries of the patent holder’s rights with respect to the invention. 1330 (Fed. The alleged infringer’s probability of successfully challenging the patent is not directly linked to validity because of the uncertain nature of patent litigation and the considerable risks of judicial error. Inc.g. Cir. L. Patent Litigation: The Sport of Kings. but reversed the district court’s order granting summary judgment in eBay’s favor regarding the auction patent. MercExchange. 2d 695 (E. because language is ambiguous and the path of technology is unpredictable.. and expensive). Douglas J. In January 2005. the PTO issued an initial ruling rejecting all of the claims contained in MercExchange’s online auctions patent. Apr. the claim construction process is probably the most significant. available at http://www. As a normative matter. 2004.. Inc. or checking the flow of something” or whether it should be read restrictively based on the patent’s written description to exclude structures that extend at a 90 degree angle from the walls. Supp..3d 1323.C. AWH Corp. 130 Note that the Federal Circuit also invalidated all claims asserted against eBay and its subsidiaries arising out of the multiple database search patent. MercExchange. most patent challengers are confident that they should win.3d 1323 (Fed.
140 Graver Tank & Manufacturing Co.S. Pa. 137 Christian A. and April 30. 134 29 of 60 . 672 (2004). at 607. & Tech. 1998. Kimberly A. 1998) (en banc) (Rader.135 Indeed. Moore. 152 U. Chu. 2-3 (2001) ("In the absence of a route for expedited appeal of claim construction. Westview Instruments.”140 The doctrine of equivalents is intended to protect the patent holder from “unscrupulous copyists” who would otherwise evade their rights by making minimal modifications to the patented product or process. 339 U. a Markman hearing should give parties a firm understanding of what subject matter is covered by the patent at issue. v. Westview Instruments. Are District Court Judges Equipped to Resolve Patent Cases?.. 138 F. Inc. Federal Circuit reversal of Markman hearings has become so routine that many judges and attorneys to wonder why they bother with claim construction hearings at all.g. see also. J.S.L. Empirical Analysis of the Federal Circuit's Claim Construction Trends. 1105 (2004). J. 1. 52 F. L.3d 1420. the Federal Circuit modified the district court judge’s claim interpretation in 44% of the cases and reversed it in 30% of cases. J.. the Supreme Court determined that claim construction was a question of law. Cir.. the effect of Markman has been to significantly increase the Federal Circuit’s discretion in reviewing claim construction. R.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Before 1996. 126 F. claim construction was regarded as a question of fact. At least one district court judge has expressed the view that: the only thing that really is predictable in this area of the law is that we district judges will likely get it wrong. 1104 (2001). Under the doctrine of equivalents a court will extend the scope of the patent holder’s rights beyond the literal language of the patent claims to cover an infringing product or process that is unsubstantially different139 or “performs substantially the same function in substantially the same way to obtain the same result. 138 See. the Federal Circuit has not settled on a consistent methodology for claim construction. Inc. Christian Chu finds that for cases involving claim construction and filed between January 1.137 Ostensibly. 391 (1996). 339 U. 15 Harv. 135 See e. Devon Indus. In reality the scope of the patent is unclear at every stage. from issuance through litigation and appeal.").136 Confirming this pessimism.141 In reality the doe probably does more to protect patent holders from the incompetence of their attorneys than anything else. parties must proceed through the decision making and litigation process with often erroneous claim and scope interpretations. & TECH. Rev. See also Markman v. 2-3 (2001) ("District court judges improperly construe patent claim terms in 33% of the cases appealed to the Federal Circuit. leading to significant doctrinal instability and confusion at the lower courts. O'Malley. 1997). 1995) (en banc). dissenting) (almost 40% of all claim constructions reversed in whole or in part since Markman I).. In essence. 16 BERKELEY TECH.3d 1448. however. Res. Cybor Corp. Kimberly A. 370. 139 Sage Prods. the significant chance that any claim interpretation made by a district court judge will be overturned or revised on appeal dilutes the effectiveness of the Markman process.138 Claim construction is also rendered uncertain for potential infringers by the by the doctrine of equivalents. 517 U."). 2000. 605 (1950) 141 Graver Tank. Panel Discussion: Claim Construction from the Perspective of the District Judge 54 Case W. Unfortunately. Unfortunately. Polk Wagner & Lee Petherbridge. Are District Court Judges Equipped to Resolve Patent Cases?.16 (Fed. v.3d 967.L. 1423 (Fed.S.. 15 HARV. v. or at least that the Federal Circuit will say that we got it wrong. Inc. 1.J. district courts are forced to proceed with lengthy and expensive patent litigation based on their frequently erroneous claim construction.. 134 By making claim construction a question of law. Cir. Moore. 1075. FAS Techs. 671. The Supreme Court argues that the inherent ambiguity of language and the unpredictable path of technological Markman v. Westview Instruments. 979 (Fed. Cir. 1476 n. Is the Federal Circuit Succeeding? An Empirical Assessment of Judicial Performance. Linde Air Products Co. in Markman v. 136 Honorable Kathleen M. L.
.”144 The doctrine neutralizes the expansive effect of the doctrine of equivalents with respect to claims that have been narrowed during the course of patent prosecution. 732 (2002).143 As Josh Sarnoff explains. 722. Shoketsu Kinzoku Kogyo Kabushiki Co.) 146 Id...149 In theory a defendant could Festo Corp.” Festo Corp. See. an equivalent to a particular element of an invention. The scope of a patent is not limited to its literal terms but instead embraces all equivalents to the claims described. a defendant seeking to invalidate a patent must do more than cast significant doubt on the patent’s validity.. Chesterton Co. 1429 (Fed. and its value to inventors could be destroyed by simple acts of copying.. Shoketsu Kinzoku Kogyo Kabushiki Co. 147 See. broader claim was nothing more than an equivalent. Joshua D. 882 (Fed. 535 U. L. In addition the uncertainty may lead to wasteful litigation between competitors."). New England Braiding Co.) 143 The Court acknowledges that “the doctrine of equivalents renders the scope of patents less certain.”146 Although the doctrine of prosecution history estoppel might in some senses be described as an antidote to the expansive effect of the doctrine of equivalents. she must prove by “clear and convincing evidence” that the patent is invalid. If patents were always interpreted by their literal terms.147 Although the current Patent Act clearly establishes that an issued patent carries a presumption of validity. 144 Id.. or is not. Sarnoff."). 535 U. For this reason. v. . v.S. the presumption of prosecution history estoppel only applies to amendments made for a “substantial reason related to patentability. 148 35 U. AMF Bowling.. literalism.148 it is only by virtue of case law that this presumption has been elevated to the high standard of “clear and convincing evidence. suits that a rule of literalism might avoid.145 however. The Presumption of Validity A second significant cause of uncertainty in patent litigation is the Federal Circuit’s interpretation of the presumption of validity. may conserve judicial resources but is not necessarily the most efficient rule. shall be presumed valid independently of the validity of other claims . v. It may be difficult to determine what is. 127 F.. or they may invest by mistake in competing products that the patent secures. 19 Berkeley Tech. 149 See infra __. 282 (2000) (providing in relevant part that. it is particularly hard to defend as a matter of principle.to a less-constrained question of similarity. v. 731-732 (2002) (The language in the patent claims may not capture every nuance of the invention or describe with complete precision the range of its novelty. 1997) (Invalidity must be established by facts supported by clear and convincing evidence. The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity. it is by no means an antidote to the uncertainty and confusion that equivalents adds to the already uncertain arena of claim interpretation. they may be deterred from engaging in legitimate manufactures outside its limits. If competitors cannot be certain about a patent's extent. Kegel Company.S. 970 F. Cir. the clearest rule of patent interpretation.g. 1992) ("The presumption acts as a procedural device which places the burden of going forward with evidence and the ultimate burden of persuasion of invalidity at trial on the alleged infringer. this prosecution history estops him from later arguing that the subject matter covered by the original.3d 1420. see also.W. what the Court does not seem to take account of is the ways in which the doe itself exacerbates the ambiguity of claim language.).2d 878. Inc. Inc. 142 30 of 60 . According to the Federal Circuit.S. their value would be greatly diminished.S. Abolishing the Doctrine of Equivalents and Claiming the Future After Festo. Each claim of a patent .. v.C.” This heightened standard of proof might make sense if patents were subject to a more rigorous system of examination.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 innovation require some flexibility be extended to patent holders in the form of the doe.142 However. e. Cir. 722. Unimportant and insubstantial substitutes for certain elements could defeat the patent. 535 U. 722.J 1157 (2004) (arguing for the abolition of the doctrine of equivalents). 727 (2002) (When the patentee responds to the rejection by narrowing her claims. "A patent shall be presumed valid. the modern doctrine of equivalents extends a patent's scope beyond questions of identity “whether the product or process is an embodiment of the claimed category .. Shoketsu Kinzoku Kogyo Kabushiki Co. A. 145 Festo Corp. but given the very limited nature of patent examination at the patent office.
and/or she could gather information on her own through public and private sources. She knows things such as the amount of effort that was made to research the prior art before the patent was filed. When an alleged infringer receives a threat letter. [example. the alleged infringer may have a well founded objective belief that a patent is invalid. Moore. but she can never be very sure of what the patent claims will be taken to mean or how much evidence will be required to overcome the clear and convincing evidence standard. something that shows that the supposed invention had already been described in a printed publication well before the patent owner’s claimed invention date – she must still ask herself whether this evidence will meet the gold standard of “clear and convincing.150 Given that juries in patent cases are comprised of lay people who are unfamiliar with both the relevant law and the relevant technology. All of these activities may change her evaluation of how likely she is to successfully challenge the patent holder. Information Asymmetries Insulate Bad Patents from Challenge Information asymmetries insulate bad patents from challenge by deterring alleged infringers from challenging bad patents because of the extra informational costs they impose. the strength of the patent in light of the known prior art.) 150 151 31 of 60 . but the practicality of doing so is another matter entirely. Furthermore.151 The Effect of Uncertainty The uncertainty of patent litigation is significant because it reduces the alleged infringer’s expectation of successfully challenging a bad patent. Even if the alleged infringer possesses what she believes to be “killer” prior art – e. This uncertainty clearly disadvantages risk averse parties and it also makes patent holder threats to pursue litigation more credible because almost no assertion of rights by a patent holder is too far-fetched. Judges. 365. but only by increasing the alleged infringer’s information costs.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 simply factor the vagaries of the claim construction process and the clear and convincing evidence standard into her estimation of her probability of winning. blackberry/ebay] See Kimberly A. (Concluding that juries are significantly pro-patentee in suits for infringement. some information asymmetries can only be overcome through discovery. 4. her success in extracting license fees from other targets. at least at the early stages. 368 (2000). 99 MICH. and the prosecution history – including any narrowed claims. Put simply. These information asymmetries are such that. the patent owner generally has much greater knowledge of the validity and scope of her patent. REV. it is hard to confident ex ante whether the most convincing evidence in the world will actually prove to be “clear and convincing” in a court room setting. An essential problem with bad patents is differentiating them from good patents. she can hire engineers to research the technology. L. she may have very little information upon which to assess its merits. a weak lawsuit may be difficult to distinguish from a strong lawsuit. Juries and Patent Cases: An Empirical Peek Inside the Black Box. which means spending several hundred thousand dollars on litigation.g.” It is entirely possible that a reasonably competent patent examiner would find that the prior art anticipated the invention but that a jury faced with the same evidence would be unconvinced. In contrast. This intuition is borne out in studies of jury decisions in patent cases which indicate that patent owners are significantly more likely to win at jury trials than otherwise. An alleged infringer can do a number of things investigate the quality of a patent that is threatened against her: she can hire lawyer to research the patent.
Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. Cir. 1999). 155 Joseph Farrell & Robert P. she can actually impose a higher cost on those competitors if the appearance of settlement increases their perception of the validity of the patent. in return for beneficial terms..159 Joseph Miller highlights a different example160 of the incentive-to-settle using the Amazon “one-click” patent case against BarnesAndNoble. v. 305. 1228 (W. Inc. 667 (2004).. L. the Supreme Court’s Blonder-Tongue decision152 creates an ironic public good problem for any individual who seeks to challenge the validity of a patent. 160 Joseph Scott Miller.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 5.. ILL. As part of the settlement.153 This suggests that unless alleged infringers can find some method of coordinating. not just to the benefit of the challenging party). Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. 1991 / Jan. some alleged infringers may use the threat of patent litigation as an opportunity to raise their rivals costs by settling patent disputes early at a discount. Phillips agreed to help Hyatt extract royalties from other competitors in the field. 943 (2004). each party actually has an incentive to settle the litigation through licensing. Merges. 333. Merges.156 If two parties are involved in patent litigation. 239 F. 19 BERKELEY TECH. 943. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents.J. at 15. Supp. An alleged infringer who settles cheaply can not only avoid sharing her victory with competitors. L. 313.com. 153 Joseph Scott Miller. 667. 157 Later licensees will typically pay greater licensing fees than those who were early-to-the-table. she maintains some chance of enforcing the patent against future defendants. including all her competitors.J. L. 73 F. L. if she wins she must share the benefits of her labor with the whole world. but Phillips Corporation chose to settle the dispute early. 1992. 19 BERKELEY TECH. 158 Joseph Farrell & Robert P. The patent holder’s incentive is obvious due to Blonder-Tongue: if she settles with the defendant. 667. 154 Joseph Scott Miller. 159 Philips Licenses Hyatt’s Microcomputer Patents. John R. Inc. reversed. Found. as long as the alleged infringer’s competitors are also subject to the same costs.com v. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. Wash. 668-673 (2004). 161 Amazon. 402 U. Dec. Barnesandnoble.154 A related problem is that in some markets. Univ. Many of the targeted competitors considered litigation. Although an alleged infringer must bear the whole burden of pursuing her claim of invalidity. Not quite so obvious is that the alleged infringer’s incentive to settle can be just as compelling. Thomas. Challenges to Bad Patents are Likely to be an Undersupplied Public Good As a several commentators have observed.S.155 Furthermore. even if her expectation of victory is high. 668-673 (2004) (“forced sharing undermines an alleged infringer’s reason for fighting the patent case to the finish – especially if the patent owner offers an attractive settlement”).J. and both realize that the invalidation challenge will be successful. 2001 U. L.J. 19 BERKELEY TECH. REV.3d 1343 (Fed.J. 156 Id. Some alleged infringers will be able to simple pass royalty costs through to the consumer. they will not supply the optimum level of resistance to the demands of patent owners.D. 2001).com. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties. of Ill. the alleged infringer’s utility from successfully challenging a patent may be overstated by the challenger focused model. 157 Farrell and Merges point to the case of Gilbert Hyatt’s negotiations with North American Philips Corporation as an example.161 The district court found the Amazon “one-click” patent not invalid and issued an injunction against Barnes and Noble’s use of it on their Blonder-Tongue Labs. 19 BERKELEY TECH. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents.158 Gilbert Hyatt was a non-manufacturing patent holder who sought royalties from manufacturers in the LCD industry. 970 n32 (2004). PATENT WORLD. 19 BERKELEY TECH. 350 (1971) (a finding of patent invalidity during litigation applies to all. L. 152 32 of 60 .
10 TEX. Tilting the Table? The Predatory Use of Preliminary Injunctions. v. 179.."). v. v. & ECON. L. but that even when they do it will almost certainly be in their interests to accept a settlement at some stage before a final judgment is entered.”169 the court now routinely issues preliminary injunctions170 in patent infringement cases. 1358. The Nonmanufacturing Patent Owner: Toward a Theory of Efficient Infringement. Joseph Scott Miller.J.S. Inc. 239 F. Cir. 165 See. 1993). Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents.168 Furthermore. The effect of a preliminary injunction has been described as “the financial equivalent of nuclear winter” because of the economic hardship and disruption it imposes on defendants. L. Jean O. 162 163 33 of 60 . However.”164 The combined effect of the public good nature of challenging a patent and the pass through problem means that not only will defendant’s have sub-optimal incentives to challenge a patent in the first place. 19 BERKELEY TECH.L. 170 The court’s authority with respect to preliminary injunctions is found in 35 U.J. 1983) (Imposing an affirmative duty on potential infringer with actual notice of patent holder’s rights to exercise due care to determine whether or not she is infringing those rights. ("[C]ourts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent. 86 Calif.com.. the Federal Circuit has tended to exacerbate these penalties through its increased willingness to order preliminary and final injunctions. 995 F.165 award enhanced damages for willful infringement.3d at 1347. 1389 (Fed. 575-76 (2001).2d 1380. 667.A. 168 Julie S. the Federal Circuit later vacated the preliminary injunction and concluded that Barnes and Noble had “mounted a substantial challenge to the validity of the patent in suit.171 In a 1983 case.166 and its greater flexibility in calculating patent damages in general. Lanjouw & Josh Lerner.C. 717 F. even if bad patents are initially challenged. Barnes and Noble settled the case. Morrison-Knudsen Co. 164 Joseph Scott Miller. we should not be confident that alleged infringer’s will pursue those challenges to completion. Despite the Federal Circuit’s recognition that a preliminary injunction is “a drastic and extraordinary remedy that is not to be routinely granted. PROP. 2 (2001). 169 Intel Corp. 667. 19 BERKELEY TECH. Comment.. 166 Underwater Devices Inc.102 (1998). 671-72 (2004). INTELL. L. Cir. 6.. The result left “Amazon’s patent intact as a barrier against one-click offerings from other e-tailers” and the “once embattled booksellers … thus aligned their interests behind the patent’s likely invalidity.163 Instead of accepting the certain invalidation of Amazon’s patent by the district court. 1.167 The possibility of a preliminary injunction can have a substantial chilling effect on a potential infringer’s willingness to pursue litigation.”162 While not formally deciding the invalidity of the patent.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 shopping website. 672 (2004). Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. Patent Damages. 1568 (Fed. § 283 (2005). Blair and Thomas F. Tech. the Federal Circuit remanded the decision back to the district court with what amounted to a step-by-step explanation of how and why the district court was to invalidate the patent. settlements and royalties negotiated in the shadow of an injunction are likely to be distorted where the patent only relates to a small component of some larger product (or service) but has the ability to holdup the entirety. ULSI Sys. 205 n.) 167 Roger D. 44 J. Smith International. L. Cotter Rethinking. Consequently. Rev. 573. Since its formation. Amazon.J.2d 1566. Enhanced Damages and Injunctions have a Chilling Effect on Patent Challenges The challenger focused model set forth in the previous section shows that the penalties associated with an unsuccessful challenge become increasingly significant as the probability of successfully challenging the patent falls. Turner.
available at http://www.179 [expand: are these opinions actually worth anything? ] Third. some alleged infringers settle cases they might otherwise pursue because of fear of attorneys fees and treble damages. According to Federal Circuit case law. Inc. 27. 59 SMU L Rev 123 (2006) (Discussing various disincentives to read patents and patent applications. Rev. 2002) (statement of Jordan Greenhall). v. Cir.L. 171 175 Underwater Devices Inc.ftc. 1983)..178 Second.) See also. 1996). Inc. Trade Comm'n Workshop 420-21 (Feb. when they cannot avoid learning about the existence of a patent.S. the Federal Circuit’s interpretation of “actual notice” is so liberal that it can be satisfied by a company’s in-house engineers or patent attorneys learning of the patent.2d 1266. Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy: Fed. Baker.3d 1409. 32 F. Possession in Patent Law. the court has further stated that “[t]he presumption of irreparable harm [now] acts as a procedural device which places the ultimate burden of production on the question of irreparable harm onto the alleged infringer. Cir. The cumulative effect of these factors is that the overall incentive for any given potential infringer to challenge a patent is often very weak. J. v. Rev.gov/opp/intellect/020227trans.C. a significant number of technology companies direct their personnel not to read patents. 718 F. 2007 (2005) (Arguing that the Federal Circuit’s development of the doctrine of willful infringement undermines the disclosure function of the patent system by deterring innovators from reading patents to protect themselves from treble damage awards in infringement suits. 757 F. 1994) citing Roper Corp. information asymmetries. First.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Hughes Tool Co. the application of treble damages and attorney’s fees is appropriate where an infringer had “actual notice of [the plaintiff's] patent rights” and failed “to exercise due care to determine whether or not [she was] infringing” upon those rights. In particular. v. 1985). Hughes Tool Co. 284 (2000). Tilting the Table? The Predatory Use of Preliminary Injunctions.176 However. 1556 (Fed. The challenger focused model predicts that an alleged infringer will challenge the patent holder if the cost of litigation is less than or equal to the probability of winning multiplied by the cost of the license plus the probability of losing multiplied by the penalties associated with an Jean O.177 The steroidal nature of willful infringement rule has three predictable consequences. Morrison-Knudsen Co. Cir.3d 1552.175 and will likely be reversed in the near future. D.172 the Federal Circuit held that an immediate irreparable harm to the patent holder should be presumed whenever the validity and continuing infringement of the patent had been established.. The Disclosure Function Of The Patent System (Or Lack Thereof) 118 Harv. Ltd. 172 Smith. Cir.173 Since then. uncertainty in litigation. 573. Inc. v. L. 718 F.. See also. 1272 (Fed.. The distorting effect of the threat of treble damages and attorney’s fees for willful infringement is widely recognized. Enhanced damages are provided for in 35 U.2d 1573. Inc. v. Litton Sys. & ECON. Cir. The Limits of Challenger Focused Model The challenger focused model illustrates that it is easy for bad patents to go unchallenged because of certain structural features of modern patent litigation. 1389 (Fed.) 176 179 34 of 60 . 44 J. 178 The Disclosure Function Of The Patent System (Or Lack Thereof) 118 Harv. 173 Smith International. Lanjouw & Josh Lerner. Cir. Timothy Holbrook. Stryker Corp.pdf. 177 See. 717 F.”174 This stance is inconsistent with the Supreme Court’s decision in eBay. the public good problem and enhanced the enhanced penalties of losing a court challenge deter alleged infringers from mounting a challenge to the validity of the patent holder’s rights. 174 Reebok Int’l. 96 F. even if the probability that the patent is invalid is very high.2d 1573 (Fed. high litigation costs.. 1983). Intermedics Orthopedics. 1581 (Fed. 2007 (2005). many companies will obtain noninfringement opinions in order to demonstrate their exercise of due care in avoiding infringement. L. 57576 (2001). 1414-16 (Fed. 1983).2d 1380..
Bad patents are those which are asserted to cover products or activities that no reasonable fact finder could find they did in fact cover – either because the patent was obviously invalid.180 As discussed in the previous section. including the relationship of the incentive to assert to 180 See infra __. Instead of focusing on the potential infringer’s incentive to challenge a patent. As a result. This may seem counter-intuitive. the less likely an alleged infringer will be to challenge. but in order to identify reform proposals that will reduce the value of bad patents without affecting the value of good patents we need a model that focuses on the patent holder’s incentive to assert bad patents rather than the alleged infringer’s incentive to challenge them. The same factors that insulate bad patents from challenge are also a significant component of the value of all patents – whether they are good or bad. Furthermore. Furthermore. this new model focuses on the patent holder’s incentive to assert her patent. If patent holders can keep their royalty demands at less than the cost of litigation. In the next section we present an assertion focused model. An Assertion Focused Model In this section we present a new model for analyzing patent reform proposals.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 unsuccessful challenge to the patent such as increased royalty rates and enhanced damages for willful infringement. but recall that the label “bad patent” is not synonymous with invalid patents. as it would be under a system of post grant review. the holders of good patents have almost as much to fear from a challenge to the validity of their patents as bad patent holders. even where the prospects of success are a significant factor in the alleged infringer’s decision making process. the higher litigation costs rise. If the minimum threshold for litigation is several hundred thousand dollars. E. As noted above. This is an important insight of the challenger focused model. in terms of the notation. Or. 35 of 60 . the most important factor determining whether an alleged infringer will challenge is the ratio of litigation costs to licensing costs. but it is also important to understand that the lack of relevance of the validity of the underlying patent applies equally to good patents as to bad patents. even the holders of good patents have a lot to lose from patent litigation. The challenger focused model is very useful for explaining why bad patents survive. Under the current system. If the minimum threshold for litigation was considerably less. Many good patents will turn out to be invalid once put to the test of litigation because of the vagaries of claim construction and other shifts in patent doctrine. the challenger focused model shows that the alleged infringer’s prospects of success are often not significant in deciding whether to challenge a patent. Much of the reform literature advocates reducing the structural disincentives to challenge bad patents without acknowledging the role these features play in protecting good patents. no matter how confident they are of winning. a certain percentage of valid good patents are likely to be incorrectly invalidated due to judicial error. when probability of success is very high. they are only indirectly related to the validity of the underlying patent because of the uncertainties of patent litigation and information asymmetries. keeping patent royalty demands below this amount is easy for the patent holder to do. Challenge if: L < αCL + (1-α) (CP + P) (equation 1) All other things being equal. alleged infringers are unlikely to challenge. it would be very difficult for the holders of bad patents to rely on licensee capitulation. or because the patent claims were obviously too narrow to support such assertion.
T) > (1 .k. Every assertion of right by the patent holder carries with it some possibility that the target will retaliate. the licensing revenue the patent holder will derive if the target accepts the license (π). and R is the cost of retaliation. the patent owner also faces a risk with each new potential licensee that their target will not only try to evade paying license fees. Accordingly. the probability that the target retaliates given she does not accept the license. a rational 181 γ is the reciprocal of α in the Challenger Focused Model. We begin with the proposition that a rational patent holder will assert her rights so long as the expected value of assertion is greater than the expected cost. Utility function: The patent holder’s utility in asserting her patent can be expressed in terms of the notation as follows: UAssert: γ(π . the probability that the target will accept a license (γ). this inequality will almost always be met. see supra note __. However. = Cost to patent holder to locate and engage potential licensees (a. The most obvious form of retaliation a target can inflict is to bring an action for declaratory judgment that the patent is both invalid and not infringed. = Probability of retaliation by adversarial target from the point of view of the patent holder. 36 of 60 . thus forcing the patent owner to either sue or implicitly acknowledge it is unable to enforce its claims.a. The possibility of retaliation is the cornerstone of this model.] When a patent holder sends an infringement notice to an alleged infringer. targets).γ) (equation 2) The most important implication of this model is that where targeting costs are low and the prospect of retaliation is small. and the probability and gravity of the target retaliating against the patent holder. but that they will also attempt to reduce or entirely eradicate the commercial value of the patent.γ)(T + δR) The patent holder will assert if UAssert > 0 γ(π . Other more subtle forms of retaliation include publicly defying the patent. she hopes that the target will agree to her demands without complaint.γ)(T + δR) Restating in terms of δR yields: Assert if: δR < (γπ – T)/(1 . = Cost to patent holder from retaliation efforts by the target.T) + (1 .181 = Gross profit to patent holder from licensing the patent.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 the quality of the underlying patent. Variable Definitions: γ π T R δ = Probability of target accepting a license. [δ is a conditional probability. The patent holder’s utility in asserting her patent is a function of the cost of finding a target (T). δ is the conditional probability of retaliation.
because uncertainty and information asymmetries have a leveling out effect. Thus a rational patent holder will have an incentive to broadly assert regardless of the low quality of the patent or the low probability that any one potential infringer will accept a license. Alternatively. the more likely it is that a target will opt to license.182 A target’s propensity to accept a license will also depend on how effectively they have been targeted. The more accurately the patent holder identifies her potential targets and the more effort she expends to make her threats of litigation credible. Once a few licensees have signed up. This reputation can be as much for litigiousness as for the quality of their patents. In fact. a target is likely to over-estimate the validity of bad patents and underestimate the validity of good patents. Furthermore.3 infra. However. even where the probability that a target will accept a license is low.C. or in terms of the model it will increase δ. the expected costs of retaliation 182 This is subject to the obvious caveat that the holders of bad patents must not seek license fees so low that they tip off the target that the patentees claims are unsupportable. So far. the more likely it is that the target will refuse to pay. It is difficult to conceive of reforms to the current system that reduce γ for bad patent holders without similarly affecting good patent holders. the more the patent holder demands from the target. as the Challenger Focused Model indicates.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 patent holder will broadly assert her patent. in terms of the notation. In an ideal world a target’s willingness to accept a license would depend on the nature of the patent assertion – they would reject the assertions of bad patents and seek to invalidate them through litigation.183 In the face of substantial information asymmetries. they increase the target’s willingness to accept a license from bad patent holders and reduce their willingness to accept a license from good patent holders. uncertainty and information asymmetries discourage alleged infringers from challenging patents. But what is significant is that. A target’s propensity to accept a license will depend in part on the cost of the license. 183 See Part III. 184 Id. if all patents look the same to an alleged infringer. γ = f(π. it is in her best interest to restrict any information about the quality of the patent. the assertion focused model treats good and bad patent holders the same. Note that the probability that a target will accept a license offer is not completely outside of the patent holder’s control. In other words. Both of these are factors within the patent holder’s control. The introduction of a system of post grant review will expose all patent holders to an increased threat of challenge. 37 of 60 .T). So. reforming it such that the expected value of retaliation faced by good patents starts to diverge form that of bad patents is more feasible. If the holder of a good patent knows the patent to be good.184 Although changing the patent system to have a differential impact on γ is unrealistic. their willingness to accept a license will be unrelated to the underlying quality of the patent. it is in her best interest to communicate this information to the target. the patent holder can expect γ to rise and δ to fall among new targets as word gets out that other licensees have signed up or the patent holder develops a market reputation. as long as the system is designed correctly. But the problem faced by good patent holders is that whatever steps they take to communicate the quality of their patent to the target will be imitated by bad patent holders. if the holder of a bad patent knows the patent to be bad. sophisticated patent holders will seek out those with the lowest probability of retaliation or the lowest ability to inflict significant retaliatory costs through protracted litigation and send them an “offer to negotiate a license” letters.
38 of 60 . In the final part of this paper we propose a Multistage Post Grant Review (“MPGR”) system.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 will fall far more heavily on bad patent holders than on good patent holders. In terms of the model. as opposed to seeking to identify every single improvidently granted patent. The primary recommendation is of the differential impact analysis explored in this paper is that Congress should prioritize the adoption of a system of post grant review because it is the reform with most potential to hinder bad patents without significantly effecting good patents.A infra (two stages of post grant review). In our view. Post grant review should increase the expected cost of retaliation for bad patents by providing a mechanism for getting to the merits of patent earlier in the dispute and more cheaply. In this way. RBad > RGood. post grant review provides a signal of patent quality for good patents that bad patent holders face great costs in imitating. The critical difference between MPGR and the numerous other post grant review proposals is that while MPGR is intended to provide a low cost method of reviewing patents. 185 186 Id. See Part IV. post grant review will be most effective if it operates as an alternative to litigation that seeks to weed out the most clearly improvidently granted patents.186 We also expect post grant review to impose higher costs on bad patents because good patents will actually be advantaged by post grant review. it is also designed to maximize the differential impact on bad patents. Post grant review will reduce uncertainty and information asymmetries relating to patent quality because patents that survive post grant review are more likely to be taken seriously in the market than ones that have never been tested. If this high threshold of invalidity is adhered to validly granted patents should not be at substantial risk.185 We expect post grant review to impose higher costs on bad patents because it allows patents to be reviewed for obvious errors at an early stage.
improving examination for the other 95% would largely be a waste of resources. raising the quality of examination would do as much harm to the potential holders of good patents as it would to holders of bad patents. To the extent that a reform proposal merely calls for the optimization of current resources. rather than attempting to strengthen or weaken the exclusive rights of patent holders across the board. 192 We are open to the possibility that increasing the cost of obtaining a patent might have a greater chilling effect on bad patents than good ones. The harder question is whether more resources should allocated to patent examination.187 are within PTO’s discretion to implement and do not require legislative action.” 191 Patent pendency is the time it takes the PTO to issue a patent once it the application is filed.B. L. (examination reform) Mark A. APPLYING THE DIFFERENTIAL IMPACT TEST This Part provides a brief review of some of the more prominent patent reform proposals and evaluates them against the test of differential impact. Rational Ignorance at the Patent Office. 1495. 95 Nw. online peer review and accelerated examination procedures.190 increasing patent filing fees or significantly increasing patent pendency. requiring applicants to designate representative claims for initial examination. Reforms such as limiting the applicant’s right to file continuations. by ending “fee diversion. The differential impact test we propose is simply that patent reform should be target to address the problems related to bad patents without unduly prejudicing of good patents. higher quality examination would advantage good patents over bad patents if the quality of a patent was ascertainable at the time the patent holder was making the decision to apply. 1497 (2001) (The PTO should be rationally ignorant of the objective validity of patents. because it is too costly for the PTO to discover those facts. U. adopting the international practice of awarding the patent to the first inventor See Part III. we believe that the highest priority should be given to those reforms that are likely to raise the cost of obtaining or enforcing a bad patent more than it raises the cost of a good patent.191 Assuming that we don’t want to divert the necessary funds away from health. Lemley. REV. In other words. The problem with simply throwing more money at patent examination is that it is unclear to what extent additional resources will reduce the assertion of bad patents. As such they are not the focus of this paper. Many of these proposals simply require the reallocation of resources within the PTO. First.A. Good and bad patentees are each likely to be deterred from filing applications as the cost rises and/or the pendency increases. A. 190 For example.) 189 Id. we consider it to be neutral in terms of our differential impact analysis. 187 188 39 of 60 . Examination reform As discussed in Part II. but this is by no means certain. We take no position on whether raising the quality of patent examination in general is justified. education and national security.189 Spending more money on patent examination requires either getting more money from Congress. 188 While improving examination for the small fraction of issued patents that are actually asserted would clearly be worthwhile.192 Additionally. a number of interesting proposals to reform patent examination have been made over the last few years. but we do observe that it is hard to justify from the perspective of the differential impact test because of the lack of focus on asserted bad patents. The examination reforms proposed under the PDQ Act are all justified under a differential impact analysis.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 PART III.
Those applicants were allowed to opt out of automatic publication. [2006 ref] 198 Patent Reform Act of 2005.S.C. 109th Cong. First-to-Invent System Has Provided No Advantage to Small Entities.J. 266 (2003). 427 (2002) (between 1983 and 2000. § 3 (2005). the significance of that reform was undermined by the broad exception for applicants who did not file their patent application in any foreign publishing country. The third examination reform proposed under the PDQ Act is mandatory publication of all patent applications after 18 months. Scott Kieff.S. 11 Tex. This reform may have a differential impact because third parties are likely to target patents that are both commercially relevant and may be easily invalidated by prior art. § 8 (2005). the mere fact that a third party has bothered to submit prior art sends a signal to the examiner that the patent is potentially significant and that she should devote more resources to ensure a thorough examination.196 The second examination reform proposed under the PDQ Act is Pre-grant opposition. 109th Cong.194 A first to file system is also advantageous because it would and harmonize U.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 to file an application is clearly a long overdue rationalization of the current system. 193 194 40 of 60 . 195 151 CONG. [2006 ref] But see F. The U. § 7 (2005). Mossinghoff.R. Rev 55 (2003). 84 J. [2006 ref] 199 35 U. 196 Gerald J. Pre-grant opposition is likely to filter out some bad patents before they are even issued and it should also ensure that the claims of patents that are issued are more carefully scrutinized. The Case for Registering Patents and the Law and Economics of Present Patent-Obtaining Rules. June 8. H. 45 B. 259. REC. First. H. 2795.S. In 1999. Furthermore. L. Mandatory publication would improve the patent system by reducing the possibility that third parties are taken by surprise by an issued patent.R. Scott Keiff (arguing that the increased incentive to file early in a first to file system may cause inventors to file premature and ultimately invalid patent applications. it has the option of negotiating a Patent Reform Act of 2005. 2005). 2795.198 Until relatively recently. Toshiko Takenaka. PAT. If a company is aware that a patent that reads on their business may issue in the near future.C. L. 122(b)(2)(B). Nonetheless. Second.S. it should be recognized that there is no significant downside to adopting a first to file system because the first to file is usually judged to be the first to invent in any event. E1160 (daily ed. the first to file won 1917 of the 2858 interference cases). This system was advantageous to patent applicants because it allowed them to hedge their bets by maintaining trade secret rights in the event that their application was ultimately unsuccessful. such a system would have to be monitored by the patent office to ensure that it was not abused to simply delay the issuance of valid patents in particular industries.193 One advantage of a first to file system is that it reduces uncertainty by prompting earlier disclosure of the invention to the public.197 Allowing third parties to submit references to the examiner during the prosecution of a patent application should improve the quality of decision making at the margins for two reasons. would remain secret until the day they were issued by the PTO. Prop.R. patent law with that of most foreign countries.)] F. H.199 The relevant provisions of the PDQ Act will effectively close this loophole and make 18 month publication the rule for all patent applications. patents filed in the U. 2795. Congress passed the American Inventors Protection Act which introduced the requirement to publish patent applications eighteen months after their earliest filing dates. See also. & TRADEMARK OFF. Intell. 197 Patent Reform Act of 2005. patent examiners will have access information that they may have overlooked.195 Such harmonization would consolidate the ownership of patent rights across national boundaries and allow for more streamlined examination internationally. The Best Patent Practice or Mere Compromise? A Review of the Current Draft of the Substantive Patent Law Treaty and a Proposal for a "First to Invent" Exception for Domestic Applicants. SOC'Y 425. However. 109th Cong. the overall impact of pre-grant opposition may be limited by its reliance on sophisticated third parties who are able to monitor the stream of patent applications as they are published and respond in a timely fashion. Finally.
Of the four main areas of doctrinal reform reviewed in Part II. But see. 1386 (Fed. 2006 U. 989.typepad. L. Tulane Public Law Research Paper No. Christopher Anthony.S.”) See also: http://patentlaw. LEXIS 4912 (2006) Question Presented: Whether the Federal Circuit erred in holding that a claimed invention cannot be held "obvious. In this sub-section we argue that while narrowing the scope of willful infringement is clearly advantageous in terms of differential impact. 7. No. Post-Grant Reviews in the U. and contrary to the goals of the patent system). 200 201 41 of 60 . v. (Law Prof brief). Note: This Headline is Patented. in the absence of some proven "'teaching. of Twenty-Four Intellectual Property Law Professors as Amici Curia in Support of Petitioner. 2003. TIMES. at 1.com/patent/ksramicus. but it also has the effect of sometimes preventing the patent office from “reject[ing] something just because it’s stupid. § 103. B. Doctrinal reform Differential impact analysis has some interesting implications for doctrinal reform. Raising the Threshold of Non-Obviousness The meaning and implementation of the non-obviousness standard has attracted a great deal of attention in the context of bad patents.pdf (arguing that Federal Circuit’s current approach to non-obviousness.. Feb. this only helps to the extent that surprise is really the problem. L. In re Zurko.205 The doctrinal arguments in favor of reforming the Federal Circuit’s approach may be persuasive. only one is strongly recommended under a differential impact analysis.pdf.S. Hall & Dietmar Harhoff. Patent System . is at odds with the statutory language.C. This does not necessarily mean that such reforms are ill-advised. lowering the burden of proof on patent challengers. 2001) (common sense.com/abstract=893965 (Finding that the Federal Circuit has not narrowed the suggestion test. inconsistent with Supreme Court precedent. own understanding or experience). 04-1350 (Katherine Strandburg et al). 204 See e. 19 BERKELEY TECH. but it is difficult to justify the reform on the basis of 35 U.”200 However. 103(a)." and thus unpatentable under 35 U. 1.S. sec. 2002) (general knowledge). Br. Patent Law Viewed Through an Evidentiary Lens: The 'Suggestion Test' as a Rule of Evidence (March 2006).a sometimes difficult standard to achieve practically. 202 This requirement is intended to prevent the examiner from indulging in hindsight. other reforms such as raising the threshold of non-obviousness. Cir.Design Choices and Expected Impact. 277 F. common sense or the examiner’s own understanding or experience unless that knowledge is “articulated and placed on the record” . Cir.204 The Supreme Court has recently granted certiorari in KSR v. but it does imply that they are probably not a legislative priority at this time. Teleflex. It is settled law that a patent should not be granted if “the subject matter [of the invention] as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art.”203 Whether or not the Supreme Court or the Federal Circuit should raise the current standards of patentability relating to obviousness (or patentable subject matter) is the subject of legitimate debate. Of course.S.J.) 205 KSR Int'l Co.com/patent/ksramicus. Bronwyn H. Inc. 999 (2004). 06-03 Available at SSRN: http://ssrn. http://patentlaw. Cotropia.typepad. the Federal Circuit does not allow a patent examiner to reject an application using general knowledge. suggestion or motivation' that would have led a person of ordinary skill in the art to combine the relevant prior art teachings in the manner claimed.C.3d 1379. 258 F. (See Lemley/Shapiro forthcoming paper).SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 license with the applicant early on and to potentially design around the patent.g. Teleflex to address the question of whether a finding of obviousness should require proof of some suggestion or motivation to combine prior art references. 1345 (Fed. several decisions of the Federal Circuit have combined to limit the capacity of the patent office to reject a patent on the grounds of obviousness.B.3d 1338.A. 203 David Streitfeld. 202 In re Lee.201 For example. and curtailing the availability of injunctions for patent infringement cannot be recommended on the basis of differential impact.
Furthermore. we believe that imposing a more rigorous standard in relation to non-obviousness (and patentable subject matter) would more closely link patent rights to activity that confers a benefit on society. “after having been found by a court to have infringed that patent. Also note that the court’s determination of an infringer’s willfulness shall be made without a jury.C.S. Lemley & Ragesh K. Labs. (Holding that actual notice for the purposes of willful infringement may be achieved without creating a case of actual controversy in terms of the declaratory judgment statute. differential impact only makes sense if we take the existing standards of patentability as given. Cotter. Cal. 1024-25 (N. 2d 1020. B. The Act narrows the permitted grounds for finding willful infringement to cases where the patent owner presents clear and convincing evidence that the infringer either intentionally copied the patented invention with knowledge that it was patented or that the infringer received written notice from the patentee alleging acts of infringement in a manner sufficient to give the infringer an objectively reasonable apprehension of suit on such patent. the PDQ Act will eliminate this “willfulness zone” and reduce the incentive for patent holders to make indiscriminate “offers to license” by narrowing the application of willful infringement. Inc.g. The reason for this differential impact is that good patent holders rely more on the strength of their patents to See. Thomas F. Supp.206 The essential problem with the willful infringement doctrine is that it allows a patent holder to carefully craft an “offer to license” letter which puts a potential infringer on notice for willful infringement but does not expose the patent judicial review. and (2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity. and yet imposes a low threshold for the notice required to trigger willful infringement on the other hand. Id. eliminating the willfulness zone would increase the probability of retaliation for bad patents but not for good patents. 276 F.210 In terms of the assertion focused model discussed in Part II. M5 Steel Mfg. Cir. v. If passed in its current form.”208 The effect of willful infringement doctrine is to increase the penalties for unsuccessful patent challenge. taking a broader view. they must possess a “reasonable apprehension of suit. Mark A. v.D. the zone of immunity between vague assertion and actions which create a reasonable apprehension of suit encourages patent owners to broadly and indiscriminately assert their rights. which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit. 1997). Advanced Tech.209 The Act also restricts when a patent holder can plead willful infringement such that no determination that an infringer has willfully infringed the patent can be made before issues of validity and infringement are determined by the court. Tangri. The reason for this is simply that changing the standards of patentability changes what constitutes a bad patent. as a policy analysis tool.J. Possession in Patent Law. However. Holbrook. This oddity arises because the Federal Circuit sets a high threshold for declaratory judgment on the one hand.” 209 Section 6.J.. L. Timothy R. SRI Int'l Inc. 1085 (2003). 210 Section 6.207 Before a potential infringer can file a motion for declaratory judgment pursuant to 28 U. the infringer engaged in conduct that was not colorably different from the conduct previously found to have infringed the patent. CIR. 291 (2004/2005). 208 O'Hagins. 127 F..” Id. 1470 (Fed. Inc. The PDQ Act also provides that damages for willful infringement may be awarded against a party if.. § 2201.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 the differential impact test set forth in this article. e.3d 1462. Inc. 207 See. Ending Patent Law's Willfulness Game. Narrowing the Scope of Willful Infringement The defects of the current doctrine of willful infringement have been thoroughly reviewed elsewhere. 206 42 of 60 . Holding that “actual controversy” requires both “(1) an explicit threat or other action by the patentee. 2003). 59 SMU L Rev 123 (2006). 14 FED. 2. and which resulted in a separate finding of infringement of the same patent. 18 BERKELEY TECH. An Economic Analysis of Enhanced Damages and Attorney's Fees for Willful Patent Infringement.
Note that the court also rejected any suggestion that a patent holder who did not practice the invention or was willing to license the on whether the ph was working the invention or willing to license 211 43 of 60 .com/abstract=869826 213 See e. U. 1495. (3) that. 214 See Part __. 1528 (“The presumption of validity has little if any basis in fact.. Instead. Curtailing the Availability of Injunctions for Patent Infringement In eBay v Mercexchange the Supreme Court rejected the Federal Circuit’s automatic imposition of an injunction for patent infringement and held that “well-established principles of equity require a plaintiff to satisfy a four-factor test before a court may grant relief in the form of a permanent injunction. 215 cite. one that would devalue both good and bad patents have a greater effect on bad ones. Mark. AMF Bowling.L.. Cir. and (4) that the public interest would not be disserved by a permanent injunction. Arguably. regardless of whether they are good or bad. Rational Ignorance at the Patent Office.3d 1420. the PDQ Act will slightly amplify the effect of the Supreme Court’s ruling in eBay. 10-13. Kegel Company. Examiners do not in fact spend long hours poring over a patent application or the prior art. Rev.”215 A plaintiff must demonstrate: (1) that it has suffered an irreparable injury. pp. considering the balance of hardships between the plaintiff and defendant. Lowering the burden of proof for challenging the validity of a patent would certainly decrease the potential extortion of bad patents. (2) that remedies available at law. 127 F.. 95 Nw. we do not recommend simply changing to the more common preponderance of the evidence test because lowering the standard of proof required to challenge patent validity will not have a significantly differential impact on bad patents. lowering the burden of proof with respect to invalidity may have a weakly differential impact – i. What to do About Bad Patents. Vol.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 dissuade the filing of declaratory judgment actions. As an alternative to changing the standard. infra. Eliminating the Clear and Convincing Evidence Standard The Federal Circuit has interpreted the Patent Act’s presumption of validity for issued patents to mean that a potential infringer seeking to invalidate a patent must prove by “clear and convincing evidence” that the patent is invalid. 28. such as monetary damages. FTC Report. Ending the “willfulness game” clearly meets the differential impact test.e. e. Mark A. are inadequate to compensate for that injury.g. The Act reaffirms the equitable nature of injunctions and provides that a courts must act “in accordance with the principles of equity” and may apply an injunction “on such See. it does not provide a strong basis for doctrinal reform.212 As such. Inc. Inc. v. However. a remedy in equity is warranted. Regulation. not the ambiguous wording of “offer to license” letters. and far less than either the lawyers or the triers of fact in infringement cases.g. Lemley. No. 3. 1997) (''Invalidity must be established by facts supported by clear and convincing evidence.g. reducing the threshold will decrease the value of all patents.211 This heightened burden of proof for those wishing to challenge a patent’s validity is intended to safeguard patent holders from frivolous and unsubstantiated attacks. Even if this is the case. we propose creating a variable presumption of validity that would have a significantly differential impact. A. the application of the clear and convincing evidence standard in relation to validity is difficult to reconcile with the realities of modern patent examination . the clear and convincing evidence standard is frequently considered a prime candidate for revision.”) See also. 4.213 Although we concede that the need for clear and convincing evidence of invalidity may have outlived its usefulness. e. 1429 (Fed.. but it would also devalue the patent portfolios of every good patent holder by making them more easily subject to unwarranted challenges. Winter 2005-2006 Available at SSRN: http://ssrn. Lemley. If passed in its current form. et al.'') 212 See. They spend very little time. They regularly miss the most relevant prior art.214 4.
216 217 44 of 60 . Litigation reform The Challenger focused model shows that the high cost of patent litigation insulates bad patents from effective challenge in many cases. if such penalties are more broadly applied.. Mercexchange. Both these measures should have a differential impact in that bad patents have a higher probability of triggering these costs. Brief Amici Curiae of 52 Intellectual Property Professors In Support Of Petitioners (January 26. then they should not trouble good patent holders too much.J. larger companies are unlikely to view the bounty payoff as a significant revenue stream. 17 BERKELEY TECH. 763. and Brief of Various Law & Economics Professors as Amici Curiae in Support of Respondent (March 10. but this particular reform is not a high priority in terms of differential impact. Kesan. the fee-shifting and bounty hunter proposals might be too aggressive in their attempt to enhance the incentives for challenging patents. S.S. The bounty hunter proposals are effectively penalties for improvident patent drafting. 796 (2002). Ct. Fee-Shifting and Bounty Hunter Proposals The fee-shifting and bounty hunter proposals outlined in Part II. Briefs 2006). Ct. Therefore.S.”216 Significantly. Penalizing improvident patent drafting should stimulate patent holders to improve patent quality at the application stage. while potentially having a differential impact on bad patents. The Assertion Focused Model shows the patent holder’s decision to assert is directly tied to the probability that their targets will retaliate. If these penalties are reserved for those patent holders who fail to look for and disclose even the most readily available prior art. Kesan acknowledges that his proposed fee shifting system creates disparities in effect according to the degree of risk aversion by patent holders and that imposes a heavier burden on poor companies which may not be able to bear the increased costs of prosecution or pre-litigation search actions.219 Furthermore. 1. Briefs 130 (U. they may substantially raise the legal costs of all patent prosecution in a way that discriminates more in relation to the budget constraints of the patentee than the quality of their patents. Jay P.B effectively raise the alleged infringer’s expected gains form challenging a patent and/or lower the patent holder’s expected gains from asserting her patent. Briefs 130 (U. However.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 terms as the court deems reasonable.218 In terms of the differential impact test. 05-130.S. eBay v. C. Both models predict that changes to the structure of patent litigation significant potential to affect the behavior of patent holders and potential infringers. their incentives to challenge will remain unchanged with respect to the current system.g. the resulting increased expenditure is not necessarily efficient given that the commercial value of the innovation will often be unknown at that time. but.S. e. But. Smaller niche firms may form solely for the purposes of submitting prior art in Section 8 Section 8 218 See. Carrots and Sticks to Create a Better Patent System. S. L.217 The arguments for and against granting injunctions in favor on non-practicing entities have been covered extensively in the legal literature and before the Supreme Court. 2006) 2005 U. 2006) (2005 U. There may well be good reasons to relax the Federal Circuit’s inflexible stance toward final injunctions. whereas the Kesan’s fee-shifting proposal constitutes a penalty for asserting an improvidently drafted patent. Briefs 2006)). the PDQ Act provides for an automatic stay of any injunction pending appeal if the defendant is able to show that stay would not result in irreparable harm to the owner of the patent and that the balance of hardships from the stay does not favor the owner of the patent. 219 However. No. it should be noted that the ability to obtain a final injunction adds significant negotiating leverage to both good and bad patents alike.
From the perspective of differential impact. Jay Kesan’s fee-shifting proposal is an important contribution. the problem with facilitating collective action is that there is nothing to suggest that potential infringers will act collusively to defeat bad patents more than they will act collusively to defeat good patents. Fee-shifting appears to have a differential impact because although all patent holders face slightly greater risks when they attempt to enforce their patents. while properly designed fee shifting should have a differential impact on discouraging patent holders from pursuing weak cases. 222 Id. 1943. As Herbert Kritzer notes. at 795. it should be noted that its actual effects in the patent context are somewhat speculative. Ordinarily a patent holder has very little incentive to diligently research the prior art or to submit only those claims that are likely to survive litigation stage review. First. Lawyer Fees and Lawyer Behavior in Litigation: What does the Empirical Literature Really Say? 80 TEXAS L.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 anticipation of bounty payouts. 2. Fee-shifting would attack this problem by effectively punishing the patent holder in those cases where reasonable and diligent research would have suggested that the patent claims were invalid. the magnitude of those risks are tied the quality of the underlying patent. Kritzer.222 In sum. The difference between the two proposals is that the first merely facilitates collective defense by potential infringers. This would be mitigated by the requirement of submission fees. there is surprisingly little agreement among theoreticians as to the effect of fee-shifting on litigation in general. The result is to reduce the frequency of low-merit claims. Fee shifting should have two important effects. it is conceivable that a study involving Florida medical malpractice litigation may be subject to entirely different idiosyncrasies than studies of federal patent litigation. the second is actually coercive. However. but still leaves open the possibility of continuing patent attacks by non-interested parties based solely on financial reward incentives.221 The few studies that have been performed have not been in the area of patent law and the findings may not be reliable in other contexts. Such a scenario inevitably leads to a low-quality of third party prior art submissions and thus an increase of costs across the board for all patent prosecution. their contribution is very much contingent on the exact details of their implementation. 1947-48 (2002) (“scholars have considered the impact of fee shifting on … [with] surprisingly little agreement”). Herbert M. Facilitating Collective Action Cooperative patent challenges and mandatory joinder are both aimed at solving collective action problems relating to patent litigation. For example. The risk of suffering an adverse award of costs should make at least some patent applicants consider performing a more through prior art search during prosecution and/or before attempting to enforce the patent. the prospect of fee shifting changes the patent holder’s incentives at the time of prosecution. 220 Second. at 1950 (Kritzer summarizes the findings of a study of the effect of fee-shifting in Florida medical malpractice cases as follows: fee-shifting “encourages some plaintiffs (those with strong cases) to pursue their claims while discouraging others (those with weak cases).”) 220 221 45 of 60 . REV. Id. the prospect of fee-shifting should also reduce the incentives of potential infringers to settle strong invalidation cases early. while we see some potential for the fee-shifting and bounty hunter proposals.
the simplified parameters of the challenger focused model probably capture the behavior of a majority of firms. the less likely an alleged infringer will be to challenge the validity of a patent. Recall that the main implication of the challenger focused model was that the higher litigation costs rise. The expected cost of 223 Some potential infringers may challenge in such a situation if they have a strong reputation interest in not being seen to be an easy target. However. no matter how sure one is that such a challenge would be successful. First. and (iii) post grant review will reduce uncertainty and information asymmetries relating to patent quality. The second is that good patent holders still face a significant chance of losing in federal court because of the uncertainties of litigation. However. post grant review will have a differential impact on bad patents by providing a low cost method of challenging prevents bad patent holders hiding behind the high cost of federal court litigation. In contrast. good patent holders should only face a very slight risk from post grant review because post grant review is only intended to weed out patents that clearly fail to satisfy the statutory grounds of patentability. post grant review still has a differential impact because the expected cost of that retaliation should be much lower for good patents than for bad ones. the risk of judicial error and fluctuations in patent law doctrine.000. the patent holder can expect to encounter serious opposition from potential infringers who believe that the patent has obvious defects. a patent holder can usually demand $50. For example. The first is that the high cost and delay full scale patent litigation is a significant detriment to both good and bad patent holders alike. (ii) post grant review will increase the expected cost of retaliation for asserting a bad patent without (significantly) increasing the expected cost of retaliation for asserting a good patent. When the cost of successful litigation is more the cost of licensing. post grant review will expose all patent holders to an increased threat of retaliation when they assert their patent rights. By substantially reducing the monetary cost of challenging a patent’s validity. Second. Nonetheless. A high minimum threshold of litigation gives bad patent holders the flexibility to demand licensing fees from multiple alleged infringers that are considerable but would not make it worthwhile for any one alleged infringer to challenge the patent.223 Post grant review is significant in this context because it lowers the minimum threshold of litigation down from hundreds of thousands of dollars to merely tens of thousands of dollars. post grant review will also have a differential impact on bad patents by increasing the expected cost of retaliation for asserting a bad patent without (significantly) increasing the expected cost of retaliation for asserting a good patent.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 3. Licensing demands that are pitched too low will immediately signal to potential infringers that the patent holder has very little confidence in her ability to enforce the patent. Post grant review is different to federal court litigation in this respect for two reasons. The challenger focused model also showed that in a large number of cases. having a high probability of successfully challenging a patent was not enough to ensure that challenge would in fact be made. 46 of 60 . but that would require demanding almost negligible royalty rates. In theory the holder of a bad patent could still attempt to play the same game under a post grant review regime. if post grant review allows a potential infringer to challenge the validity of the patent for a mere $25. Post Grant Review A well designed system of post grant review has enormous potential to discourage and devalue bad patents without undermining the value of good patents in three ways: (i) by providing a low cost method of challenging prevents bad patent holders hiding behind the high cost of federal court litigation.000 from 20 different alleged infringers and be fairly certain that none will challenge the patent’s validity in court. it does not appear to make sense to challenge a patent.
it also provides credible information to the market about good patents. Obtaining this information is costly because bad patent holders will go as far as possible to imitate good patent holders in terms of the royalties they demand and their apparent willingness to go to court. uncertainty and information asymmetries relating to patent quality have a leveling out effect. 47 of 60 .SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 retaliation in the form of post grant review should be much lower for good patents than for bad ones because good patents actually benefit from being subjected to the review process. As the challenger focused model indicates would-be patent challengers face significant information costs in assessing patent quality. Post grant review will have a differential impact on bad patents by reducing uncertainty and information asymmetries relating to patent quality. Furthermore. If post grant review functions as intended. it will also signal the merits of patents that are reviewed and not found invalid. Consequently. if the model for post grant review we propose is adopted. they increase the targets willingness to accept a license from bad patent holders and reduce their willingness to accept a license from good patent holders. it will not only expose patents that should never have been granted. Post grant review ameliorates this problem by providing a more credible signal of patent quality – patents that survive post grant review are more likely to be taken seriously in the market than ones that have never been tested. they will be entitled to a stronger presumption of validity in litigation. When a firm first receives some notification that it may be infringing another person’s patent rights it needs to form a view as to the both the merits of that allegation and the likelihood that the patent holder will pursue it. post grant review provides a signal of patent quality for good patents that bad patent holders face great costs in imitating. In this way. Not only does post grant review provide a way to screen out some bad patents. patents that survive post grant review will not only appear stronger. Finally.
such patents should merely be weakened by attaching a presumption of invalidity. Second. looking at post grant review through the lens of differential impact leads us to propose a very different kind of system to that currently embodied in the PDQ Act or those proposed by the FTC. the differential impact test supports the adoption of some kind of system of post grant review: post grant review can have a differential impact on bad patents by significantly lowering the cost of challenging the bad patents. MULTISTAGE POST GRANT REVIEW A. we propose a multiple stage system of post grant review.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 PART IV. In this Part we explain how the differential impact test not only supports the idea of post grant review in general. Differential Impact and Post Grant Review Under the differential impact test elaborated in this article. we believe that Post grant review can be used as an information forcing device that allows us to replace the current one-size-fits-all strong form of the presumption of validity with something that is both more rational and more nuanced. we have proposed that the current legislative push in relation to patent reform should be specifically targeted to address problems related to bad patents. The differential impact test supports the adoption of some kind of system of post grant review because an effective system of post grant review will create incentives to oppose bad patents without exposing all patents to significant additional cost. As discussed in the previous Part. (ii) patents that have been unsuccessfully challenged in post grant review would be entitled to strong presumption of validity. but also how it can be applied to building a better model for post grant review than those currently on the table. In short. In short. post grant review may be more effective than simply devoting more resources to patent examination across the board because it focuses attention on patents of commercial significance and takes advantage of the superior information of industry participants. The main benefit of post grant review should be that it allows potential infringers a low cost opportunity to correct what they believe to be obvious errors by the patent office. However. Patents that should never have been issued receive most of the attention in the bad patent debate. we propose bringing questions of claim construction into post grant review such that both sides of the bad patent phenomenon can be addressed. if that opportunity is made too freely available. and (iii) rather than automatically invalidating a patent that is successfully challenged in post grant review. it may be over used by well resourced defendants to chill the assertion of good patents. the NAS and various other commentators. The key differences between our proposal and other variations of post grant review as follows: First we propose the adoption of a variable presumption of validity such that: (i) issued patents would only receive a weak presumption of validity (not subject to the clear and convincing evidence standard). Third. We have proposed that Congress should avoid reforms that attempt to either strengthen or weaken the exclusive rights of patent holders generally in favor of reforms that are likely to raise the costs of obtaining or enforcing bad patents significantly more than they raise the costs of obtaining or enforcing good patents. Finding the right balance between lowering the cost of challenging bad patents and increasing the chances of harassment to good patents can be achieved by using multiple stages of review under the MPGR process. To meaningfully address the bad patent phenomenon. post grant review must find a way to deal 48 of 60 . (“MPGR”) with two distinct stages in order to balance the goal of greater scrutiny for bad patents with the need to minimize potential harassment of good patents. however the hyper-assertion of vaguely worded claims has at least as much potential to damage the incentive function of the patent system.
once that patent issues it can only be invalidated through clear and convincing evidence.F. as such it is less likely to be a bad patent. Once a patent has been challenged in post grant review and is upheld. The main reason for this is that the presumption of validity and the convincing evidence standard together provide significant protection against adjudicative error for good patents as well as bad ones. presumption of validity plus convincing evidence standard) require that all patents should be subject to the one evidentiary standard. No. it must be noted that current reexamination procedures allow the presumption of validity to be overcome preponderance of the evidence and can result in the cancellation of the patent.). AMF Bowling. Vol. Kegel Company. 1997) (Invalidity must be established by facts supported by clear and convincing evidence. it does not seem likely that lowering the standard of proof required to challenge patent validity will not have a differential impact on bad patents. § 1. 28. B.e. While it is true that the application of the clear and convincing evidence standard in relation to patent validity is difficult to reconcile with the realities of modern patent examination.com/abstract=869826.226 Post grant review provides us with an excellent opportunity to revisit the one-size-fits-all application of the strong form of the presumption of validity with something that is both more rational and more nuanced. We can’t be certain that an unsuccessfully challenged patent will not later be shown to be invalid.] Mark Lemley and his coauthors have also proposed a variable presumption of validity in a slightly different context. differential impact analysis indicates that calls for the abolition of the clear and convincing evidence standard may be misconceived. Winter 2005-2006 Available at SSRN: http://ssrn. However. that in some pre-Federal Circuit cases the presumption of validity was eliminated if the prior art in court was not before the patent office. e. 1429 (Fed. We propose that issued patents should generally only be entitled to a weak presumption of validity: i. What to do About Bad Patents. et al. Inc. it should then be entitled to strong presumption of validity. Treating reviewed and unreviewed patents differently is consistent with the differential impact approach because patents that have been unsuccessfully challenged via post grant review (or litigation) are less likely to be bad patents. Inc. we propose the application of a variable presumption of validity tied to post grant review. 127 F. but could be invalidated on the preponderance of the evidence rather than the onerous clear and convincing evidence standard. v.R. that at least one private actor thought that the patent was commercially significant.224 Although this may sound like a radical shift from current practice. Lemley. Mark A. [The fact that a patent has been subject to post grant review also conveys a second piece of information. nonetheless.. 10-13.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 with patents that may be legitimate in one sense but are illegitimately asserted beyond their natural scope.3d 1420.e. As an alternative to simply keeping or abolishing the strong form of the presumption of validity.. Regulation.225 Under the current system a patent applicant can obtain a patent without definitively proving anything at the patent office. they should be presumed valid.. A Variable Presumption of Validity As we suggested in part __. 224 49 of 60 .555.g. [cite] 226 See. 4. Their proposal is that “applicants should be allowed to “gold-plate” their patents by paying for the kind of searching review that would merit a strong presumption of validity’ but otherwise a weaker form of the presumption of validity should apply. Cir. See. pp. Note also. none of the arguments in favor of retaining the strong form of the presumption of validity (i. but we can be relatively confident that it will not be easily invalidated. 225 37 C.
below. on the preponderance of the evidence.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 We further propose that rather than automatically invalidating a patent that is successfully challenged in post grant review. Our proposal adopts an escalating structure that acknowledges the differences between reviewed and unreviewed patents and between post grant review and actual litigation. in terms of the Challenger Focused Model. post grant review will still have a significant disciplining effect on bad patents because it sends a strong signal to potential infringers about the patent’s quality and makes it easier for them to actually invalidate it. that their patent is valid and infringed she is entitled to enforce her rights. but that if the patent holder can show. Nonetheless. the model of post grant review we propose here is more about information revelation than adjudication. In some ways. such patents should merely be weakened by attaching a presumption of invalidity. The presumption of invalidity means that a patent that is successfully challenged would still be valid in a technical sense but that if the patent holder wished to enforce it against a potential infringer she would face an uphill battle in court. thus setting up the potential for contradictory outcomes. Table 1 Current System Patent issued Post grant review upholds patent Strong Presumption of Validity Strong Presumption of Validity Reform Proposal Weak Presumption of Validity Strong Presumption of Validity Presumption of invalidity Patent invalidation Post grant Patent invalidated review/reexamination goes against patent Patent litigation (PH loses on the issue of validity) Patent invalidation 50 of 60 . the presumption of invalidity makes the lack of appeal rights and other procedural safeguards with respect to post grant review more palatable. As the table makes clear. not merely a substitution thereof. even if it is not the final forum of dispute for all controversies. If post grant review is implemented in this way. it would truly serve as a compliment to litigation. The presumption of invalidity quite literally means that the patent is presumed to be invalid as an evidentiary matter. The difference between the variable presumption of validity and the current patent system is illustrated on Table 1. The current system also suffers in that both post grant review and litigation can lead to exactly the same outcome. The presumption of invalidity weakens patents successfully challenged in post grant review but it does not destroy them. By lowering the stakes of post grant review. This is a significant departure from the current reexamination system and from the post grant review proposals currently before Congress. the current system is indiscriminate in that it subjects reviewed and unreviewed patents to the same strong form of the presumption of validity. In that case the patent would then be entitled to the strong presumption of validity. post grant review will function as a low cost form of adjudication for a large number of cases.
post grant review can improve the patent system by allowing for more focused examination of patents that appear to have been improperly granted.227 For example. 2. Substantial New Question of Patentability: Stage one of the system of post grant review that we propose would be require any person wishing to challenge the validity of an issued patent to satisfy a patent office examiner (not the person who examined the patent in the first place) that there is a substantial new question of patentability in relation to the patent. Rev. 37 CFR § 1.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 C. we propose a very different kind of limitation on the right to challenge the validity of a patent. For post grant review. we propose that post grant review should be divided into two phases such that patent challengers have to essentially pre-qualify for the right to challenge the patent. without the participation of the patent holder.228 The substantial new question of patentability test clearly limits the situations in which challengers can subject a patent owner to post grant review. Post grant review should be open to any person who is able to convince the patent office that there is a reasonable chance that one or more of the patent claims was issued in error. Post grant review would also be much more open than the present litigation system because it is significantly cheaper. Accordingly. but a badly structured system of post grant review may also allow potential infringers to harass patent owners whose patents are not suspect. This limitation is necessary from the perspective of differential impact because post grant review is not intended to catch every mistake made by the PTO. These restrictions prevent parties without a strong direct interest from challenging the patent. Pre-qualification will reduce the universe of reviewable patents down to Currently. (ii) it is conducted on an ex parte basis. One likely objection to this requirement is that it will not allow for the review of bad patents where the examiner did consider all the relevant material. the first stage of post grant review should be used as a screening device according to whether the challenge rises to the level of a “substantial new question in relation to patentability. the filtering device we propose discriminates purely on the basis of the strength of the challenge presented. 1. May 2004). 228 See 35 USC 102 (Conditions for patentability. and (iii) the PTO’s Stage One determination on the initial challenge would become a matter of public record. To address this potential concern. nor is it meant to function as a total substitution for litigation. novelty and loss of right to patent) 227 51 of 60 . a challenger could submit prior art that was not reviewed by the examiner and argue that the prior art demonstrated that the claimed inventions was not in fact novel at the time the patent holder “invented” it. MANUAL OF PATENT EXAMINING PROCEDURES § 2201 (8th Ed. The current patent system limits the opportunity to challenge a patent to those persons who (a) have a reasonable apprehension of being sued by the patent holder and (b) have several hundred thousand dollars to spend on federal court litigation. See. but simply misunderstood the technology.515.” Whereas the standing requirements of patent litigation restrict challengers based on how directly they are threatened by the patent holder. Stage One Under our proposal the first stage of postgrant review has three key features: (i) the requirement that the challenger establishes that a substantial new question of patentability has been raised in relation to the patent. Multi-stage Post Grant Review One of the main fears in relation to post grant review is that it will be subject to the same kinds of strategic abuse that plague the current patent litigation system.. reexamination requires a finding of a substantial new question of patentability based on the prior art submissions.
Stage One MPGR findings would be published by the patent office and any challenger would be entitled to use those findings in subsequent post grant review or litigation. The differential impact here should be obvious: bad patents are more easily challenged. other potential challengers don’t even get the advantage of knowing how strong the parties thought the patent to be. whereas good patents are actually strengthened by the first stage of the MPGR process. Another benefit of the ex parte nature MPGR Stage One is that it forces potential infringers to disclose what may be their best evidence at an early stage in the proceeding. it will be easier for a third party to pick up where the initial challenger left off. but the PTO’s Stage One determination on the initial challenge would become a matter of public record and the patent holder is then notified of the patent office’s proceeding and decision. Also. From this point on. If she is wrong. Patent holder’s will naturally be concerned that their rights may be unfairly affected by the first stage of the MPGR process. the patent is nonetheless not invalid . but the first hurdle to MPGR has been cleared. Also. but it means that any future challenger must reinvent the wheel. Stage One Proceedings Ex Parte An important feature of the first stage of post grant review is that it takes place on an ex parte basis. she is in a good position to fend off the patent holder’s demands for a license. excluding them from the first stage of post grant review actually benefits them by reducing the possibility that post grant review is being used by challengers to harass good patent holders. However. Mandatory Publication of Stage One Findings: As previously discussed. This reduces the early settlement problems discussed in conjunction with the public good problem. So what is the significance of these published findings? The patent is not invalid at this stage. a challenger is not forced to pursue the MPGR process to its final conclusion. Early settlement can efficient from the point of view of the parties. it is the patent holder who is advantaged because the PTO will publicly announce that. even in light of the challenger’s prior art. or possibly even the knowledge of.all at no cost to the patent holder. The patent holder only becomes involved in the review process if a patent examiner can be convinced that the challenger has raised an objection to the patent that merits postgrant review and that is appropriate to the post grant review forum. the patent holder. Under our proposal. even if the initial challenger is appeased by the patent holder. without the involvement of. before the patent holder has incurred any cost in defending her patent. One of the main advantages of this two stage structure is that it allows a potential infringer to can obtain the benefit of the patent office’s opinion on “newly discovered” art references at a very low cost. Individual challengers will often be better off settling with the patent holder for a trivial amount of money than investing more resources into their challenge only to have to share their victory with all of their competitors. If the potential infringer is right.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 those where errors are most likely and where an administrative system can most efficiently deal with them. the public recording of the patent office’s determination as to the existence of a substantial new question of patentability conveys significant information to the market about the 52 of 60 . and there is a substantial new question of patentability. one of the problems with relying on private parties to challenge invalid or over reaching patents is that even those parties that do have the incentive to start such an action may well lack the incentive to finish it. assuming that the terms of settlement are kept secret.
however. any party – including the original challenger. The second stage of MPGR consists of a review of the challenge by a review panel of the PTO. see 35 U. A unique feature of our proposal is that it would bring questions of claim construction into post grant review such that both sides of the bad patent phenomenon can be addressed. At this stage.C. Existing post grant review proposals and the current system of reexamination all proceed from the assumption that the outcome of these procedures is either a win for the patent holder or the invalidation of the patent. Claim Construction and Post Grant Review The current patent system does not provide any mechanism for dealing with ambiguous patent claims other than federal court litigation. 2.S. The Balance of MPGR The multi-stage system of post grant review we have proposed consists of two distinct stages in order to balance the goal of greater scrutiny for bad patents with the need to minimize potential harassment of good patents. 229 53 of 60 . but their ability to pursue subsequent litigation should be an effective substitute. the patent holder. D. those patent holders who believe that the patent office has incorrectly ruled against their patent still have the option of proving the validity of their patent in litigation. § 134. but if it does not.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 likely quality of patent: it provides a low cost method of clearly flagging at least some bad patents without raising the costs to good patent holders. with arguments to the PTO. The first stage of MPGR is essentially a gate keeper stage where third parties must meet certain requirements in order to trigger a review of the patent that can affect the patent owner’s rights. We expect that in most cases a patent holder who loses in post grant review will see the writing on the wall and abandon attempts to enforce the patent. Stage Two The second stage of MPGR consists of a review of the challenge by a (three person) review panel of the PTO. or a new challenger – may force the continuance of the MPGR process or join the MPGR process.229 Patent holders would not be able to appeal patent review decisions. on their own. 3. the patent holder can remove the hanging question of patentability by continuing. In the case where the original challenger does not continue the process and no new challenger picks up the process. but the actual cancellation of the patent itself. The implications of this presumption of invalidity are discussed in detail in section __ above. One of the advantages of merely applying a presumption of invalidity to a patent that is discredited in post grant review is that it facilitates a streamlined process within the patent office that does not deprive the patent holder of due process. This review would take the form of an adversarial proceeding in which any interested party may be allowed to make written submissions. Ideally this review panel would consist of three experienced patent examiners. Under the current reexamination system decisions of the patent office are appealable to the Patent and Appeals Board. This review would take the form of an adversarial proceeding in which any interested party may be allowed to make written submissions. none of whom had made a decision with respect to the patent at any other time. The MPGR process may very well end at the first stage. The MPGR system proposed in this article offers a middle ground whereby a successful patent challenge results in a presumption of invalidity. the second step of MPGR consists of an examination a review panel within the PTO with adversarial participation by all interested parties.
However. obviousness. 104 Mich. For many patent owners broad claim construction is a mixed blessing.513 claims “a method of preventing packet loss during transfer of a plurality of data packets between a network interface card and a host operating system of the computer system. Genentech. in the 2004 case of Superguide Corp. A proposition that the PTO may. a developer of VOIP technology might be concerned that a particular patent dealing very generally with packet loss might be infringed by the developer’s specific techniques that deal with packet loss in the context of VOIP. where meaning A is fairly narrow and would not implicate the activities of the potential infringer but meaning B is much broader and would implicate the activities of the potential infringer. L. 37 C. or may not agree with. and (2) if so is the claim valid? The reason for this second element is that there is an inherent link between claim scope and validity. There is. AWH Corp. 2004) 230 231 54 of 60 . The Changing Meaning of Patent Claim Terms.234 The developer should be able to ask the PTO to confirm its understanding that the patent does not apply to the type of packet loss prevention used in VOIP.231 How can post grant review address the over-assertion of patents that may nonetheless have a core of validity? Our proposal is that post grant review should be tailored to allow potential infringers to negate certain claim constructions. Cir.S. enablement. § 1. v. For example. U. 415 F.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Poor quality examination.F. Although the PTO may be in no better position to say what the true meaning of patent claim should be after post grant review than it was at the time the patent issued. Rev. Genentech235 the court had to decide the proper scope of the patent holder’s rights with respect to the 358 F. 2005). Lemley.3d 1303. For example. In consequence established patent holders and entrepreneurial patent collectors have an incentive to take a second look at old patents relating to one technology to determine whether it can plausibly be asserted in relation to some new technology. the ambiguity of language and the unpredictable path of technology all lead to ambiguous patent claims. Phillips v.3d 1247 (Fed Cir. the problem with asking the PTO to adjudicate claim construction is that any construction given by the PTO may prove to be just as fallible as the initial claim language.232 For example assume that a potential infringer has reason to be concerned about a patent whose claims could be construed to mean either A or B. it should be able to determine what the patent does not mean. Cir. a solution to this problem. the patent office is supposed to give claims “their broadest reasonable interpretation consistent with the specification” both at the time of examination and under reexamination. Any definitive claim construction rendered by the PTO may simply provide a second set of words that will be ambiguous and subject to the unpredictable path of technology for the remainder of the life of the patent. in Chiron v. 101 (2005) 232 [Possible analogy to as-applied challenge in constitutional law] 233 Under the current law.3d 870 (Fed.R. 363 F. Patent 6. e..” 235 Chiron v.233 Under our proposal. Mark A. Any question of claim construction presented in this fashion should in fact contain two distinct questions: (1) does the claim encompass meaning B. but on the hand. or written description. however. the broader a claim becomes the more likely it is to be found invalid on the basis of novelty.016. DirecTV Enterprises230 the question was whether a patent relating to “a system for electronically controllably viewing updateable information” on an analog television should also be construed to cover digital television technology that was not developed until well after the patent issued. potential infringers would present the PTO with a negative claim construction. See also. On the one hand broad claims increase the likelihood that the patent will confer economic power if valid. 2004). 1316 (Fed. 234 See.75(d)(1). For example. It would be advantageous if the potential infringer was able to put the issue of claim construction to the PTO through the process of post grant review.g.
237 A significant problem in medical applications of this technique is that the end product contains murine (mouse derived) antibodies that are strongly rejected by the human immune system. clear. and of the manner and process of making and using it. Indeed. but that the patent holder had failed to meet the enablement requirements with respect to that technology. concise. This question was significant because one of the patent holder’s competitors had developed superior monoclonal antibodies through the application of recombinant DNA technology.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 isolation/creation of monoclonal antibodies that were capable of binding with human antigen associated with breast cancer. there was no way the 561 patent could have enabled a patent that covered Chimeric antibody technology because that technology had not been invented at the relevant time. Where the patent office determines either 1. Under this approach. according to the Federal Circuit. The Court further held the patent holder’s later applications in 1985 and 1986 also failed to meet the enablement requirement because even though the technology to genetically engineer chimeric antibodies existed at that point. and exact terms as to enable any person skilled in the art to which it pertains. Hybridoma cells are used to produce monoclonal antibodies by interacting with cells from an animal that has been challenged with the relevant antigen." 241 35 USC 112 (The specification shall contain a written description of the invention.240 The Chiron case illustrates that broad claim construction is a two edged sword. Broadly interpreted patent claims expand the universe of potentially invalidating prior art. (3) neither 1 nor 2 (which carries the implication that the claim in question covers the defined product process or method). in such full.239 These antibodies are mar more useful in medical applications because of lower rates of rejection by the human immune system. The court ruled that the patent claims applied to both methods of producing the antibodies.236 The patent holder had developed a number of these antigens using hybridoma technology developed in the early 1980’s.241 Post grant review should be structured to allow potential infringers (or other interested parties) to present negative claim constructions for the patent office to review. (2) determine that the claim in question does cover the defined product process or method but that in light of that construction the patent should not have been issued.  239  240 The court held that genetically engineered antibodies. specifically chimeric antibodies. to make and use the same. by definition. outside the bounds of the enablement requirement. or whether it was limited to those produced through the plaintiff’s hybridoma technology. or with which it is most nearly connected. that negative construction would have to be 236 Id. This new technology arose after the patent holder’s initial filing date and thus was. The question for the court in that case was whether the patent claims covered all creation of monoclonal antibodies that were capable of binding with human antigen associated with breast cancer.238 In the late 1980’s scientists developed a way to overcome this problem by using recombinant DNA technology.) 237 238 55 of 60 . The patent office would have essentially three different possible response to a request for a negative claim construction: (1) determine that the claim in question does not cover the defined product process or method. While an expansive reading of the patent’s claims may help the patent owner assert her rights more broadly. in order to claim rights with respect to a nascent technology the patent would have to have provided a "specific and useful teaching. DNA that encodes the binding portion of monoclonal mouse antibodies is merged with human antibodies to produce “chimeric” or “humanized” antibodies. it may also jeopardize the validity of the patent. and they also makes it more difficult to meet the statutory requirements of written description and enablement. and shall set forth the best mode contemplated by the inventor of carrying out her invention. first appeared as a successful technology in the literature of this art field in May 1984.
com/abstract=688005 (describing how many “bad” patents are never revoked or even challenged in court). the question of differential cost is just as significant as cost in general. If post grant review is going to work as a genuine alternative to litigation. This. both discovery and oral arguments should not be necessary for the parties to make effective arguments concerning patentability. Controlling the legal costs of post grant review requires eliminating the two greatest expenses of litigation: discovery and oral argument. 244 See. the patent would be presumptively invalid with respect to that claim. Where the patent office determines 3.. Scope and Discovery The fundamental design constraint for post grant review is cost. at 41 (Illinois Law and Economics Working Paper Series. 244 we believe that so long as the scope of reviewable issues is kept narrow. This ensures that the patent office can review the patent without any inquiry into the inventor’s state of mind or personal knowledge at the time of the application. Disputed Features of post grant review The procedural details of post grant review are of critical importance because post grant review only makes sense if it presents a viable low cost alternative to litigation. and enablement. discovery will be unnecessary. it should also be allowed to develop an appropriate filtering standard under its rule making authority. Consistent with the House proposal. supra note 13. supra note 11. at § 328 (draft amendment to H. In contrast to the proposals for limited discovery in the PDQ Act243 and the recommendations for discovery by the NAS and the FTC. NAS REPORT. The practical effect of this recommendation is that post grant review would extend to novelty. Kesan & Andres A. LE05-004. obviousness. best mode or inequitable conduct.R. Why “Bad” Patents Survive in the Market and How Should We Change? – The Private and Social Costs of Patents. we believe the scope of post grant review should be limited to issues relating to patentability. The patent office should be given a broad discretion to decide whether to consider applications for negative claim constructions.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 taken into account in any subsequent litigation. it must be significantly more affordable than patent litigation. Where the patent office determines 2.g. requires that the scope of issues under review in post grant review be limited so that the exclusion of discovery and oral argument does not lead to injustice. Given these limitations. FTC REPORT.242 However. but would not include issues such as statutory bars. commentary typically focuses generally on the attractiveness of post grant review to potential challengers. This leads us to make the following recommendations with respect to other disputed features of post grant review: 1. at 96. it could be employed in a similar filtering fashion. an important criteria should be whether any proposed element of post grant review imposes higher costs on bad patents than it does on good patents. As we have argued at length in this article. available at http://ssrn. we envisage that the patent office would review applications for a negative claim construction to determine whether they raised a significant question. e. E. 2795 recommended discovery for depositions of persons submitting affidavits or declarations as well as any additional discovery that is “required in the interest of justice”). Working Paper No. the patent would be entitled to a strong presumption of validity with respect to an infringer who fell within the specifications of the negative construction. 243 Patent Act of 2005. 2005). Accordingly. How does this relate to our proposed threshold of a substantial new question of patentability? Essentially. Issues of Format. supra note 8. in turn. 242 Jay P. Gallo. at 11. Although this is not the same as substantial new question of patentability. 56 of 60 .
968 (2004). supra note 8. Patent Act of 2005.247 The NAS further proposes a trigger allowing post grant review whenever the patent holder alleges infringement by lawsuit or notice of intent to file suit. adversarial participation during post grant review should be confined to written submissions only. prior publications. 251 Jay P. at 115 (one year window plus a trigger). we see more immediate and definable negative effects that result from a limited time period for post grant review. Kesan & Andres A. Kunin & Anton W. and the current House reform bill all recommend a limited time period during which post grant review may be utilized. supra note 11. Consistent with maintaining a low cost system. n168 (FTC cites the PTO’s one year recommendation and recommends a fixed period for post grant review availability).SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 [We also propose that the rules of evidence in any new system of post grant review should follow the current rules of PTO reexamination. thereby “engendering commercial stability and fostering the market for patent licensing. holders of good patents who are nonetheless ignorant of their patent’s strength have an incentive to wait until the limited opposition period closes before they assert their rights. 250 Id.249 property law favors a settled title because this allows value expectations to settle. it must be available to potential infringers at any point in time after the patent has issued. 245 246 57 of 60 . 247 NAS REPORT. 971 (2004). FTC REPORT. Chisum. 2005).] 2. The NAS. at 115. 97 2005). we believe that post grant review must be available for the life of the patent. they would submit themselves to post grant review when litigation would serve as higher bar to the challenge of their valid and good patents. LE05-004.250 and efficiency results from reducing uncertainty over patent validity. Second. Donald S. Gallo.S. SYMPOSIUM: IDEAS INTO ACTION: IMPLEMENTING REFORM OF THE PATENT SYSTEM: Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. at 234-235.J.248 In contrast. 19 BERKELEY TECH. at § 9. 4 CHISUM ON PATENTS § 11. Critics suggest that the opposition period be limited for a variety of reasons: a limited period reduces the misuse of post grant review proceedings by challengers who wish to delay or injure the patent holder. First. Interested third parties who fail to monitor PTO proceedings would reside in an information void. They would be precluded in many instances from availing themselves of the low cost post grant review alternative to litigation. Window of Opportunity If post grant review is going to provide a real alternative to litigation.com/abstract=688005. § 301. If no limited opposition period existed. 248 NAS REPORT. Otherwise. 19 BERKELEY TECH.C.251 While these are real concerns. Why “Bad” Patents Survive in the Market and How Should We Change? – The Private and Social Costs of Patents. if bad patent holders know that competitors do not closely monitor PTO proceedings. L. Only patents. Merges. The Metamorphosis of Inter Partes Reexamination. Fetting. at n74 (quoting Steven G. 249 Joseph Farrell & Robert P.245 and certain specific affidavits not concerning statutory bars or argument246 are allowed for submission.J. L. supra note 13. 943. then it would make no difference when ignorant holders of good patents 35 U. Similarly. Working Paper No. the bad patent holders have an incentive to then wait until the close of the opposition period before asserting their patents. a limited time period for post grant review creates a burden on firms to actively and closely monitor every PTO proceeding for subject matter which relates to their current or future products. This monitoring is an “across the board” increase in costs which does not differentially target only bad patents. the FTC. varying from 9 months to a year. supra note 8.07[d][iii] (Rel. at 37 (Illinois Law and Economics Working Paper Series. available at http://ssrn.
This is an inefficient use of resources and the probability of later challenges should be eliminated through the use of a more timely challenge during the amendment process. Kuo. a study by Allison et al. Allison et al. 252 253 58 of 60 . but that they be subject to the same adversarial proceedings as all other patentability considerations during post grant review. & TECH. they would assert their rights whenever it became strategically optimal. has shown that litigation of patents occurs throughout the life of the patent. Barker. this differs from other recommendations. therefore. The main advantage of applying a variable presumption of validity is that it differentiates based on patent characteristics that are tied to validity in a probabilistic sense. Appx Figure 1 (2004). 254 See Gerald J. supra note 11. patent litigation.J. Proposal to Change the Patent Reexamination Statute to Eliminate Unnecessary Litigation. Though the challenger may be motivated by differing concerns than the patent office. Amendment of Claims During Post Grant Review We propose that amendments be allowed during post grant review. Id. L. In some respects. see Marvin Motsenbocker.. F. 105 (2002) (suggesting that post grant review be allowed whenever the validity of apatent is brought into question by the filing of an infringement action or if the patent holder has taken action that would allow the filing of a declaratory judgment action).SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 asserted their rights. Valuable Patents. but does not address the issue of whether they may be argued against by the challenger. The Implications of Differential Impact for Post Grant Review The differential impact criteria we have established in this article suggests the implementation of a very different kind of post grant review system from those that are currently on the table. Valuable Patents.257 The FTC recommends allowing amendments. Post-Grant Review of Patents: Enhancing the Quality of the Fuel of Interest. The undesirable alternative is to allow uncontested amendments which could. the PTO would still be the ultimate arbiter of patentability issues and should be able to separate rhetoric from truly relevant prior art and argument. portions of which have been previously suggested in the literature and by the NAS: (i) post grant review should be available for a fixed period immediately after issuance plus whenever the patent is asserted. 9 (2005). 256 John R.252 More accurately. 898 (1994) (suggesting that mandatory reexamination be required when party presents patent invalidity defense). 92 GEO. 257 NAS REPORT. Allison et al. we would suggest at least two other alternatives then. supra note 8.256 3. 887. Patents that are issued and never challenged have John R. REV. Third.258 The circumstances of the amendments is such that it would seem negligent not to allow the expertise and information forwarding capabilities of the challenger to be heard. L.253 If an unlimited window for post grant review is too politically infeasible. Mossinghoff & Vivian S.. 456-57 (2004). be subject to another round of post grant review challenges based on new submissions by the current challenger. MARSHALL L. 92 GEO. The first point of departure is the variable presumption of validity. 43 IDEA 83. Policing Patent Usage with an Open Post Grant Review. 258 FTC REPORT. 435. on average. 435. The NAS report is silent on this matter. REV.255 This last suggestion could be particularly effective considering that a large number of patents currently litigated have been previously sold or transferred. 193-196.J. reaches a peak during the third year following issuance and continues at a significant pace through at least the fifteenth year following issuance. eventually. Troll or no Troll. 255 See David G. at 16. 27 J. 2005 DUKE L.254 or (ii) post grant review should be available for a fixed period plus whenever the patent is renewed or sold. It is certainly not concentrated within the first nine months of issuance.
if not the ruling stands. While this may allow a number of invalid patents to escape post grant review. changes in the structure of patent litigation can be expected to have flow-on effects for patent examination. This streamlined system will keep the cost of post grant review affordable and will also make it clear that post grant review is not simply an alternative forum for litigation. it will also protect the majority of good patents from unmeritorious post grant review proceedings. Our proposal is that post grant review should not be the subject of any appeal. Multi-stage post grant review is essential to ensuring that post grant review has more impact on bad patents than on good ones by balancing the need for low cost challenge with the need to protect patent holder from undue harassment. a patent holder who believes that the patent office was in error should simply attempt to enforce her rights in court. However. Another advantage of the variable presumption of validity is that facilitates a streamlined post grant review system that does not overlap with judicial proceedings by applying a presumption of invalidity to patents that are successfully challenged in post grant review. None of these reforms are directly addressed to examination reform. This filtering device will narrow those cases eligible for post grant review down to instances where there is obviously a significant question to be addressed. The second point of departure between the system of post grant review we envisage and the current raft of legislative proposals is that we believe that post grant review should be comprised of two distinct stages. If she is successful. this is only an option to persons who have a reasonable apprehension of being sued for infringement by the patent holder. The MPGR system encourages diligent drafting without mandating it. but to test that opinion currently requires commitment to substantial litigation costs. Our proposal is that potential infringers should be able to negate certain claim constructions through post grant review.5 hours. however. For example. MPGR may be more efficient than a single stage process because it allows potential infringers to resolve one of the major uncertainties of patent litigation very early in the process. 59 of 60 .SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 probably only been scrutinized for between 18 and 41. rather. Our third point of departure with the current post grant review proposals relates to claim construction. Under our proposed multi-stage post grant review. It is often the case that a potential infringer will form the opinion that a particular piece of prior art is fatal to the validity of the patent. A patent which is upheld after post grant review seems much more likely to be valid than one which has not. Currently the only way a potential infringer can obtain any certainty with respect to ambiguous patent claims is via federal court litigation. patent holders can reduce their exposure to post grant review based on a substantial new question of patentability by conducting more thorough prior art searches at the time they file their applications. the patent office’s post grant review determination is effectively overruled. challengers would have to effectively earn the right to challenge a patent by convincing the patent office that they were able to demonstrate some substantial new question of patentability that had not been considered at the time the patent was initially examined. This seems overly restrictive because it does not provide any means whereby a person can test the meaning of a patent claim without investing in activity that is potentially infringing. whereas a patent that has been subject to post grant review will have been subjected to hundreds if not thousands of hours of intensive examination.
SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 CONCLUSION Forthcoming 60 of 60 .
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