A DIFFERENTIAL IMPACT ANALYSIS OF PATENT REFORM MATTHEW SAG & KURT ROHDE

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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 msag@depaul.edu

* 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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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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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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....................60 4 of 60 ....................................58 F.............................................................58 CONCLUSION ........................... The Implications of Differential Impact for Post Grant Review .... Amendment of Claims During Post Grant Review .............................................................................SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 3......................................

See. Microsoft. rather than encouraging the “progress of science and the useful arts” as required by the U. infra. research and development. strongly support calls for patent reform. Zeroes. Patent & Trademark Office. ZDNet Australia.39187609.S. Editorials from several major papers decry that “there’s something rotten in the U. and yet efforts in Congress to implement patent reform legislation have repeatedly failed.3d 1338.S. Kepplinger.7 The technology sector’s calls for reform have begun to resonate in the media.”9 and that “the nation’s patent system is a Responding to the Federal Circuit’s decision in In re Lee. See also. business leaders and government officials have all expressed concerns that too many patents are issued for “inventions” that are obvious.A. 2006. 1 5 of 60 . Patent Reform. hostage to the patent trolls” Financial Times. 1998.3 declining patent quality and overly broad patent rights are reducing incentives to invest in manufacturing.2 INTRODUCTION Patent reform is on the national agenda because of a widespread perception that changes in the standards of patentability. 1345 (Fed.S. Los Angeles Times.1.C.com. cl. IBM calls for patent reform. Const. “Get it now from Ebay.6 In addition to patents that should never have been issued. The Onion is a satirical newspaper.4 Even obvious beneficiaries of the patent system.htm).” – Esther M.”8 “the U. David Streitfeld.com/ibm/publicaffairs/gp/patentreform.zdnet. Technology heavyweights including Intel.pdf . 5 IBM. March 29. The Wall Street Journal.S. patent system to a point of crisis. in the Supreme Court. 4 See. 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. Art.39023165.00.g. December 4. 277 F.com/content/node/29130. 7. available at http://www. 11 April 2005 (available at http://www.S. 1 “Microsoft Patents Ones. and Oracle argue that although the patent system is the foundation for the United States' global leadership position in technological development.S. such as IBM which receives more U. Academics. 8.ibm. 3 The United States Constitution provides Congress with the power "To promote the Progress of Science and useful Arts. Constitution." U. Deputy Commissioner of the U. 2006. March 25.au/news/0. Cir. 2005 7 See Part I. 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. These companies fear that. Patents than any other company. I. patent system is profoundly flawed. 2002). 6 See e. 8. 2 Available at http://www. March 16. 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.theonion.5 Bad patents and costly litigation lie at the heart of the crisis of confidence in the patent system. L. 8 The Problem With Patents.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 “We can’t reject something just because it’s stupid. 2003) at 1. Note: This Headline is Patented.” – THE ONION. by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.S. Patent sanity is pending. Times (Feb. Brendon Chase. patent system. sec.

of Am.com/patent/2005/12/patent_reform_2. John R. 19 Berkeley Tech L. a case that calls into question the Federal Circuit’s jurisprudence in relation to obviousness. 1837 (2006). Inc. The Federal Circuit has exclusive jurisdiction over appeals arising under federal patent law. 577 (1999). available at http://patentlaw. Chairman of the House Subcommittee on Courts. Patent Reform 2005 -. Allocating Power over Fact-Finding in the Patent System. 5096) introduced earlier this year. 2005. 2005.ftc..S. 11 eBay Inc. The Boston Herald July 24. Teleflex. Arti K. L. MercExchange. Carrots and Sticks to Create a Better Patent System. by Representative Lamar Smith. Ct. November 1. Los Angeles Times. v. Joseph Scott Miller.R. available at http://www. 305. See also. Ltd. v.) 13 Ill. LEXIS 4912 (U. proposed a bipartisan reform bill that would have dramatically changed the patent landscape. Rev.J. See. Tool Works Inc.gov/os/2003/10/innovationrpt. v. Incentives to Challenge and Defend Patents: Why Litigation won’t Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. Kesan and Andres A. 829 (2002). 727 (2002). this time under the rubric of the Patents Depend on Quality Act 2006. 826. THE ECONOMIST. Eisenberg. Merges. 45 B. 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. Rebecca S. (2004).S.economist. 2006 U. December 8. Obvious to Whom? Evaluating Inventions from the Perspective of PHOSITA. 193 (U. Jay P. See Statement on the Patents Depend on Quality Act of 2006. 907 (2004). 2795. Arti K.. the Internet. L. 535 U. 2004.S. 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. 2006) 14 Merck KGaA v. Vornado Air Circulation Sys. 2005. e.S. 55 (2003). H. The Responsibility of the Rulemaker: Comparative Approaches to Patent Administration Reform. patent system... Rai. e. the pharmaceutical industry. 2005 Sunday. 2005) 15 KSR Int'l Co. (“the PDQ Act”) (H. L. Monopolies of the Mind. Kesan. restricting that search to the last 5 years yields over 400 hits.15 In 2005 Congressional Representatives Lamar Smith and Howard Berman. F. 2006 U. John R. See. Holmes Group. 109th Cong. Thomas. 61 (2006). Inc. Thomas. Inc. Why ‘Bad’ Patents Survive in the market and How Should We Change?—The Private and Social Costs of Patents. 126 S. L. Robert P.html.It is Over. Building a Better Bounty: LitigationStage Rewards for Defeating Patents. Metabolite Labs. 19 An unrestricted search of the LexisNexis U..C.S. (available at http://www. 667 (2004). TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY (October 2003). L.S. 14 Berkeley Tech. Ink. (2005). 1035 (2003).house.typepad. Statement of Representative Howard Berman (D-CA). 2001 U. Jay P.com/business/displayStory. Dennis Crouch. 16 Patent Reform Act of 2005.18 Regrettably. 17 Berkeley Tech L.J. patent system should be reformed.J. 1281 (U. 20 FEDERAL TRADE COMMISSION.16 However. Gallo. 545 U. Holdings v. The Case for Registering Patents and the Law and Economics of Present Patent-Obtaining Rules.S.. 2006) (cert. Representative Smith has again proposed significant changes to the U.pdf [hereinafter FTC 9 10 6 of 60 .17 Undeterred.S.S.19 The Federal Trade Commission (FTC)20 and the National Academy of Sciences (NAS)21 Patent sanity is pending. 885 (2004).L. December 4. and independent inventors.g. 103 Colum. Ct. this legislation also seems destined to be shelved because of looming mid-term elections in November.. 12 Lab.”10 The Supreme Court has recently heard cases on the scope of patent injunctions.14 In addition to these cases. 17 See.J. available at http://www. Inc. Law Review Database for the term “patent” within 5 words of the term “reform” yields over 700 hits.gov/list/speech/ca28_berman/Patent_Quality. PATENTLY O BLOG. Integra Lifesciences I. 126 S. 18 The bill was introduced on April 5.cfm?Story_id=3376181&no_na_tran=1. U.C. Engaging Facts and Policy: A Multi-Institutional Approach to Patent System Reform.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 mess.S. 763 (2002). 2006. Joseph Farrell & Robert P.R. As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform. Rev.g. Scott Kieff. 19 Berkeley Tech L. and Intellectual Property. These days it seems that everyone has an idea as to how the U. 17 Berkeley Tech. the Court has recently granted certiorari in KRS International. L.. Merges. L.11 the limits of patentable subject matter..J. Rev.J. Corp. LEXIS 4893 (2006) (Writ of certiorari dismissed as improvidently granted. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties. Ill. 19 Berkeley Tech. granted). Indep. 55 Emory L. v.html). L. Introduced June 8.J. 19 Berkeley Tech.J. Rai.S.

21 NAS REPORT. 7 of 60 . rather than attempting to strengthen or weaken the exclusive rights of patent holders across the board. infra. The structure of the article is as follows. 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.). it is first necessary to understand why the patent office issues bad patents and how bad patents continue to survive in the market place. rather than attempting to strengthen or weaken the exclusive rights of patent holders across the board. To analyze which reforms are most likely to have a differential impact on bad patents. 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.. changes to substantive patent law doctrines. The failure of the legislative reform efforts underscores the importance of prioritizing the most important elements of patent reform – those with Differential Impact. and structural reform of patent litigation.). Rather than simply defining bad patents as patents that should not have been issued. 22 [cite] 23 See Part I. there may in fact be too many reform proposals currently on the table. 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. 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. as discussed in detail in Part II of this article. If the patent system is to continue to fulfill its constitutional function of promoting rather than hindering innovation. we believe that the highest priority should be given to those reforms that have a Differential Impact: i.e. there have at least 15 days of Congressional hearings devoted to patent reform.S. we must tailor patent reform to address the problems related to bad patents without unduly prejudicing the interests of the holders of good patents. 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.B. as the failure of the Patent Reform Act of 2005 and the likely failure of the PDQ Act demonstrate. supra note 8 (The National Academy of Sciences report on the U. 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. In contrast. as yet. Part II examines the origin of bad patents and applies two different economic models to explaining their persistence. Many of the current reform proposals proceed from the assumption that patents are either too easy to get. we do know with some certainty that bad patents are too easy to get and too easy to enforce. the second model focuses on a patent holder’s incentive to assert a patent. Part I also introduces the differential impact test for evaluating patent reform proposals. In other words. or too easy to enforce – an assumption which is. Consequently. The first model focuses on a potential infringer’s incentives to challenge a bad patent.23 However. 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. 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.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 have both issued comprehensive reports on the subject in the last few years. we argue a more complete definition focuses on the manner in which patents are used.22 and there is an extensive law review literature proposing reforms to the way patents are examined. unproven.

uncertain. we propose (i) adopting a variable presumption of validity depending on the level of review that a patent has been subject to. Part IV explains how the differential impact test not only supports the idea of post grant review in general. The differential impact test supports the adoption of post grant review to enhance the incentives of private actors to oppose bad patents. 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. Post grant review can have a differential impact on bad patents by significantly lowering the cost of challenging the bad patents. These proposals are all designed to ensure that post grant review provides a low cost way to challenge bad patents. 8 of 60 . expensive and time-consuming nature of patent litigation. post grant review will actually benefit good patents by reducing uncertainty and information asymmetries relating to patent quality.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 quality of patent examination and the complex. but also how it can be applied to building a better model for post grant review than those currently on the table. but does not undermine the value of good 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. Furthermore. 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. 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. In short. and (iii) bringing questions of claim construction into post grant review such that both sides of the bad patent phenomenon can be addressed. (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.

The key argument against patent trolls is not that their assertions are invalid. 25 U. eBay v MercXchange oral argument.30 As the NAS notes in its 2004 report. 30 Bad patents should not be confused with so-called patent trolls.368. March 29.637.29 The danger of bad patents is that they undermine the incentive function of the patent system.”).7 lines 4 – 6. 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” ). THE NEED FOR A PRIORITIZING TOOL A.26 the Hair Comb-over Patent.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 PART I. there would not be much incentive to try to hit the ball into the field.257. Patent No.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”). patent system now creates numerous perverse effects that undermine that central mission. the exact definition of the term disputed. the monopoly cost of the patent holder’s rights and her incentive to invest in innovation are two sides of the same coin. However.S. but the issues are in fact severable. as opposed to those who invest (directly or indirectly) in innovation. or is it a fishing technique?” p. 21.25 a Method for Exercising Your Cat (with a laser pointer).S. 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. See e.html. is the troll the scary thing under the bridge. 5. 27 U. We also note that in spite of its widespread use. Patent No.443.248 (issued July 10.036 (issued Aug. 6. 6. the U.27 and the Peanut Butter & Jelly Sandwich patent. Justice Kennedy “Well.24 the Beerbrella.S.com/crazy. in its modern incarnation. Patent No.g. Where patents are properly granted and properly asserted. “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. 2006. The patent monopoly imposes costs on third parties who must either license patents or incur costs to avoid infringing them. 24 9 of 60 . infra.004. or are asserted well beyond their legitimate scope. however. Popular and academic discussion of patent trolls is commonly linked to questions of patent quality. “patents on trivial innovations may confer market power or allow firms to use legal resources aggressively as a competitive weapon without consumer U.freepatentsonline. 1999) (“a sealed crustless sandwich”).S. Wednesday. The reforms addressed in this paper do not begin to address that problem. 6.596 (issued Dec.227 (issued April 9. If a baseball player could get a home run from hitting a foul ball. 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. 28. We are not aware of any evidence that patent trolls are more likely to have or assert bad patents than practicing entities. 2001) (patent for cutting or styling hair using scissors or combs in both hands). but they are typically of little consequence except to prompt the question. 2002) (“A method of swing[ing] on a swing is disclosed. Patent No. 22. The Problem With Patents Historically patents were intended to reward research and innovation. 29 The term ‘bad patents’ is defined more exactly in Section I-A. 26 U.447 (issued Oct. Some of the more trivial illustrations of the perversity of the modern patent system include patents such as the Tarzan Swing Method.S. except in so far as a particular troll is relying on a bad patent. Patent No. 28 U. 6. 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. For many other examples see http://www.

3d 1337. The letter states that the firm is willing to negotiate a license. LAW ASSOC. However. 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. when aggressive patent holders can extract substantial license fees simply through leveraging the overwhelming costs and delays involved in challenging a patent. 31 10 of 60 .S.. Dana Corp. Deere & Co. for some help. whether good or bad. REPORT OF THE ECONOMIC SURVEY 108 (2005). 383 F.C. 379 F.C. most obviously because it was “anticipated” by an earlier invention that the patent office examiner was not aware of.. 1342 (Fed. based on the firm’s asserted patent rights. Carla could submit it to the patent office for an administrative process known as reexamination – but if she does. Consider the hypothetical example of Carla. Supp. LAW ASSOC. 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. Co.S. 34 See.000 to invalidate the patent (give or take a few hundred thousand). a friendly patent lawyer. INTELLECTUAL PROP. Carla receives a letter from a patent licensing firm. After reviewing the letter and the patent. A PATENT SYSTEM FOR THE 21ST CENTURY 95 (Nat’l Acads.. Cir.000. The remedy for willful infringement is based on 35 U. 2d 645 (D. Del.35 (5) even if Carla could persuade a court to hear her case.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 benefit.C. Press 2004) [hereinafter NAS REPORT]. concerning a particular aspect of internet-based shopping cart checkout technology. Carla can get an opinion letter that says the patent is invalid and that even if was valid.S. 33 AM. a small internet retailer. Just before the critical holiday retail season. § 285 ("the court in exceptional cases may award reasonable attorney fees to the prevailing party"). Jane offers several pieces of information and advice: (1) the patent should probably never have been issued for a number of reasons.36 (6) given that the patent is likely flawed. MERRILL et al. The firm offers the license for an annual fee of $50. REPORT OF THE ECONOMIC SURVEY 102 (2005). 32 35 U. Carla does not infringe it. § 284 ("the court may increase the damages up to three times the amount found or assessed") and 35 U..32 (2) for $30. 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.33 (3) without such a letter. § 102 (Novelty). 36 AM. v. it would probably cost her around $800. Carla is suspicious of the validity of the patent because the claimed invention seems too broad and abstract to be assertable. INTELLECTUAL PROP. 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).”31 Bad patents divert scarce research and development dollars from engineering to lawyering. The availability of robust patent protection acts as a significant stimulus to investment in research and development and innovation. 2004). the incentives to get a good patent are reduced and the overall burden of the patent system on society is increased.000 are not uncommon in areas such as New York City. Carla asks Jane.997.. A proliferation of unmeritorious allegations of patent infringement and subsequent litigation is clearly bad for defendants. Armed with these suspicions. they also divert patent licensing revenue from the holders of good patents. 35 Vermeer Mfg. but it is also bad for those companies that have invested in innovation and rely on the patent system to protect that investment. prices as high as $40.000. she either STEPHEN A. Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v.34 (4) Carla probably can’t go to court to have the patent declared invalid because she lacks standing for declaratory judgment. Although the average cost of a patent opinion from a mid-sized firm is $23.

Patent No. http://www. § 303(a). with the judge holding that no reasonable jury could have found that the scope of the patent’s claims covered internet hyperlinks.. 10.S. because all the alternatives are worse.C. 1989). Joseph Farrell & Robert P.S. 40 See Kurt Kleiner.gov/web/offices/dcom/olia/reports/reexam_report. Merges.uspto. This is the real perversity of the current patent system: rational actors will license patents they strongly suspect are either invalid.873. well before the technology they effectively claimed to own was invented. Jane cheerfully suggests that Carla should consider paying the $50. 217 F. See generally UNITED STATES PATENT AND TRADEMARK OFFICE. supra notes 2 and 6. available at http://www. BT claimed that this patent read on the technology used in internet hyperlinks.873. 2002). BT’s infringement claims were dismissed on summary judgment. and proposals to reform the structure and procedures of patent litigation. § 302 and inter partes reexamination under 35 U. describes a system where multiple users can access data on a central computer by using remote terminals. See also. The Act also provides for Commissioner ordered reexaminations under 35 U.662 (issued Oct. See.N. 37 11 of 60 . she won’t be able to make the same arguments again in any later court proceeding.000.C. 943. substantive doctrinal changes. they were still able to cause significant financial harm before they were formally rejected. this sub-section briefly reviews some of the major reforms under consideration. 19 Berkeley Tech. L. U.S.S. Report to Congress on Inter Partes Reexamination. BT in Court to Enforce Hyperlink Patent. if she incorrectly loses in the PTO. Given one of widely perceived problems with the patent The Patent Act provides for both ex parte reexaminations under 35 U. 42 See. Examination Reform The first group of reform proposals relates to the process by which patents are examined and ultimately issued by the patent office.39 However. 967 (2004). Corp. 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. regardless of the likely invalidity of the patent. examination reform. 41 British Telecomms. February 11. 35 U. or simply do not apply to them.38 In the end. B.662.C.J. Reform Proposals Congress has recently been invited to consider a wide range of tonics to cure what ails the patent system. Supp. 401 (S.htm (last visited __). 39 See.ns?id=dn1905. 4. BT contacted various Internet Service Providers and demanded license fees for the ISP’s actions.C. 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 While the bad patent assertions by BT were eventually removed from the market place.37 or worse still. One of the many striking things about BT’s claims was that this patent was initially filed in 1976. infra. eventually issued in 1989. 4. 2002 .SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 won’t be able to participate meaningfully in that reexamination process. claiming those actions facilitated the infringement of the patent by providing ISP subscribers with access to the internet. These proposals are later evaluated in relation to the Differential Impact test.42 The cornucopia of reform proposals can be dived into three main groups. Part III. NEW SCIENTIST. 2d 399. The BT hyperlink patent provides a good example. telecommunications giant British Telecom (“BT”) attempted to assert patent rights over the creation hyperlinks on the internet. PLC v.S.com/article. the actual assertion of bad patents is probably more corrosive to public confidence in the patent system. Patent No. § 311.S. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. Prodigy Communs. In 2002. 317.Y.40 BT’s U.newscientist. When eventually challenged in federal court. than the mere existence of silly patents.D. 1.

the PDQ Act provides for the mandatory publication of patent applications.50 Most patent applications are already published after 18 months under the 71 Fed. 109th Cong. (10 July 2006). Changes to Practice for the Examination of Claims in Patent Applications. 48 Patent Reform Act of 2005. [2006 ref] 49 Patent Reform Act of 2005. 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.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. 84 B. the Act provides for Pre-grant opposition. Lemley and Kimberly A. and Applications Containing Patentably Indistinct Claims.U. Rev. Third.R.pdf. § 8 (2005). Moore.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. 61.uspto. 2795. § 7 (2005). explain the relationship of the prior art to the invention on a claim by claim basis. (Available at http://www.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 system is that too many suspect patents are issued. 48. the simple solution appears to be to improve the quality of examination thus removing bad patents at the source.47 In addition to changes initiated by the patent office. Reg. 109th Cong. Reg. 3.” Id. NYLS Legal Studies Research Paper No.43 streamlining the examination process by requiring applicants to designate representative claims for initial examination.gov/web/offices/com/sol/notices/71fr48. argument. (Available at http://www. "Peer to Patent: Collective Intelligence and Intellectual Property Reform" (April 25. 63 (2004). they will be able to submit that prior art 6 months after the patent is first published. [2006 ref] 50 Patent Reform Act of 2005. The patent office hopes that the proposed change will “improve the quality of issued patents. 2006).) . 2795.gov/web/offices/com/sol/notices/71fr61.49 If passed in its current form.uspto. 36323. conduct prior art searches.uspto. Indeed. Requests for Continued Examination Practice.gov/web/offices/com/sol/notices/71fr36323. Beth Simone. limit the patent to three independent claims and no more than 20 claims in total. Proposed Changes to Practice for Continuing Applications.R. 2006). Ending Abuse of Patent Continuations. Reg. the patent office itself has taken up the cause of examination reform. Changes To Information Disclosure Statement Requirements and Other Related Matters. Changes to Practice for Petitions in Patent Applications To Make Special and for Accelerated Examination (26 June 2006) (Available at http://www. 3. (__) 44 71 Fed. 71 Fed. accelerated examination applicants must file electronically.”48 Second. the PDQ Act proposes three significant changes to patent office procedure. Mark A. 109th Cong. or evidence presented could not have been previously submitted. 2006). making them easier to evaluate.pdf) 47 71 Fed. Under the proposed rules. Notice of proposed rule making (Jan.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. H. and litigate” and give “the public a clearer understanding of what is patented. the PDQ Act will the current law to allow third parties to submit references to the examiner during prosecution of a patent application. Reg. 05/06-18 Available at SSRN: http://ssrn. H.L.uspto. 36323. [2006 ref] 43 12 of 60 . Notice of proposed rulemaking (Jan. Accelerated examination applicants must also agree to have an interview with the patent examiner. proposing significant changes such as limiting the applicant’s right to file continuations. 2795. Noveck. See also.)If recently proposed rule changes are adopted. enforce. (Available at http://www. H.pdf. applicants who wish to file any kind of continuation application will have to support that filing with “a showing as to why the amendment. § 3 (2005). First.pdf.R.com/abstract=898840. identify all the limitations in the claims that are disclosed in the submitted references (with accurate citations to the references). submit all prior art that is closest to their invention.gov/web/offices/com/sol/notices/71fr38808.) 45 See.” Id. 46 See. the PDQ Act would change the uniquely American “first inventor” rule to the international standard of “first inventor to file.

the patent office would publish the patent application and invite the public to submit prior art before the patent is issued. 56 John R.Enact Legislation to Specify that Challenges to the Validity of a Patent Are To Be Determined Based on a “Preponderance of the Evidence”).55 These proposals are assessed in light of the differential impact test in Part III of this article. e. NAS REPORT.g. 3. 55 See. 511 (2003). FTC REPORT.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. Thomas.Tighten Certain Legal Standards Used to Evaluate Whether A Patent Is “Obvious”).59 Miller suggests that third parties should receive a bounty in situations where the “court Id. See. 54 See. 44. at 13 (Recommendation 3 .Reinvigorate the nonobviousness standard). 342 (2001). supra note 8. Bounties and Fee-Shifting: The three bounty/fee-shifting proposals reviewed below illustrate the diversity of recommendations on the Congressional table. Litigation Reforms In addition to changes to patent office procedure and substantive patent doctrines discussed above. to creating an administrative review system for determining patent validity as an alternative to district court litigation. facilitating collective action by alleged infringers.g. Rev. 2001 U. Strandburg.58 As an alternative.g. supra note 11 (Recommendation 9).C. Doctrinal reform The FTC. the NAS and the academic community have all suggested numerous doctrinal reforms for patent law. FTC REPORT. supra note 11.51 2. 51 52 13 of 60 . 2001 U. 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. Katherine J. 305. e. See Id.J. there is a considerable array of reform proposals on the table ranging from providing incentives for third party patent bounty hunters. supra note 8. Again. FTC REPORT.. ILL. e. supra note 11. Thomas. ILL. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties. Meurer. B.52 (2) narrowing the scope of willful infringement. L. L. Joseph Miller advocates a litigation stage bounty. 57 John R. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. the significant change contemplated by the PDQ Act would be to make publication mandatory.56 Under the Thomas proposal. the submitting party would receive a bounty determined by the patent office and paid by the applicant. at 704. e. 342 (2001). Michael J...SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 current regime. NAS REPORT. REV. For example. L.57 If application claims are rejected based on these third party submissions of prior art.54 and (4) curtailing the availability of injunctions for patent infringement. 509. at 20 (Recommendation 2 . What Does The Public Get?: Experimental Use And The Patent Bargain. 59 Joseph Scott Miller. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties. Controlling Opportunistic and Anti-Competitive Intellectual Property Litigation. at 11 (Recommendation 2 . 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. 53 See. see generally. 58 Id. Another significant area not addressed here is the scope of the experimental use defense.g.. L. L. 305. Congress is also being asked to consider major changes to the entire structure through which patent disputes are litigated. at 117 (Recommendation 6). 19 BERKELEY TECH. Wis. Significant proposals include: (1) raising the threshold of non-obviousness. 81 (2004). REV.

Patent System Reform: Economic Analysis and Critique. 19 JOURNAL OF ECONOMIC PERSPECTIVES 75 (Spring 2005). Kesan. L. 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. 683 (2004). 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. enablement.66 The Patent Reform Act of 2005 and the PDQ Act both adopt variations of the post grant review model. at 707. 795 (2002). drafting. Probabilistic Patents. However. and possibly inequitable conduct by the patent applicant before the PTO. Id. or public interest advocacy groups such as The Electronic Frontier Foundation and the Public Patent Foundation to challenge the validity of suspect patents.J. Rev. 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). He argues that mandatory joinder would lower the individual defendant’s costs of litigation.J.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. Cal. Patent System Reform: Economic Analysis and Critique. see also. Post grant review would supplement the current third party and inter-partes reexamination systems Id. and encourage defendants to challenge bad patents. at 711-712. NAS REPORT.] 61 Jay P. but distinct proposal.J. supra note 11 (Recommendation 1). 19 Berkeley Tech.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. 17 BERKELEY TECH. 1017 (2004). L.”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. [Miller’s bounty system would thus incorporate challenges to best mode. L.. prevent patentees from suing smaller companies first. 64 See Carl Shapiro. 63 See Carl Shapiro. pro-defendant. or license. at 795.”60 Jay Kesan offers a related. 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.g. 62 Id.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. 66 See. L. 763. e. 1017 (2004). 60 14 of 60 . Mark A. This would provide incentives to challenge only those patents likely to be commercially valuable. supra note 8 (Recommendation 3). 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. and prosecuting its patent application.65 Post Grant Review: The FTC. 65 Mandatory Joinder: An Indirect Method For Improving Patent Quality 77 S. 787. 19 Berkeley Tech. Kesan proposes a one-way. Lemley and Carl Shapiro. FTC REPORT. 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. reduce overall litigation costs.

Mandatory Joinder: An Indirect Method for Improving Patent Quality. Note. 61 N.72 Currently.).C. 317 69 See. June 8. Too Much. This estoppel effect makes reexamination extremely risky unless a potential infringer is already engaged in federal court litigation. REC. 77 S. 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. In the words of Rep. 19 Berkeley Tech. 185. or Just Right? A Goldilocks Approach to Patent Reexamination Reform. there appears to be no agreed upon definition of what makes a patent “bad. enablement and best mode). 905. 943. Lamar Smith a system of post grant review will “provide meaningful. 205-206 (1998) (Reporting that.”) See also.”70 C. Merges. 2005). 683 (2004).67 The Patent Act provides that any issue raised by a challenger during reexamination cannot be revisited in a later trial involving that challenger.S. 967 (2004). roughly half of all litigated patent claims are found invalid by the courts for reasons such as anticipation or obviousness.C. 71 See e. (Defining bad patents as “patents that do not meet the statutory requirements of novelty and nonobviousness. not the claim level but the authors of this study treat cases with split rulings on claim validity as two separate patents.J. in a sample of 300 cases. Merges. Lemley. L. L. 73 John R.g. Cal.) Jay Kesan offers a more helpful definition. E1160 (daily ed. Rev. Surv. Empirical Evidence on the Validity of Litigated Patents. (Noting that the broad consensus among patent experts is that these risks of reexamination are too great.J. L. but what is lacking from the patent reform debate so far is a framework for prioritizing these reforms. what is it about a patent that makes it bad. 865. Too Little. For example. Katharine M.” 72 Primarily. 966 table 2 (2004) (only 392 ex parte reexamination requests in 2003). Congress faces a dizzying array of options when it comes to overhauling the patent system. it is not uncommon for a patent to be found to be invalid on the basis of 67 Joseph Farrell & Robert P. This analysis is at the patent level. This raises two questions: first. L. 19 BERKELEY TECH. This article addresses that need by proposing that Congress should apply the Differential Impact test to determine which reforms are most pressing. Am. A Differential Impact on Bad Patents As the previous sub-section demonstrates. 68 35 U. § 102 (Novelty). We argue that the highest priority for patent reform should be reserved for those measures that will have a differential impact on bad patents. § 103 (Non-obviousness) and § 112 (written description.” The term is often used loosely to denote patents that should not have been issued.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 which are rarely used because of their prejudicial estoppel effects. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. and second.U. low-cost alternatives to litigation for challenging the patent validity. The challenger has no opportunity to litigate any argument or prior art evidence used in reexamination should the patent office make a mistake. 26 AIPLA Q. (Defining bad patents as “patents that are likely to be invalidated if subjected to litigation or an administrative challenge.J.69 According to its proponents. only 54% of final validity decisions found the patent valid. 15 of 60 . Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. 35 U. Ann.73 Are all these patents “bad”? Defining bad patents solely with reference to standards of patentability is problematic. Allison & Mark A. 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. Edward Hsieh.S. What are Bad Patents? For all the discussion of falling patent quality and opportunistic litigation.71 Patents can fail to meet the standards of patentability despite being issued by the PTO. Joseph Farrell & Robert P.Y. 943.) 70 151 CONG. Zandy. what is differential impact? 1.68 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.

FAS Techs. LEXIS 9708 (Fed. But since we have had a patent system for a long time. 76 On this theory. but rather that there is substantial conflicting evidence as to the magnitudes of those costs and benefits.3d 1448. These are the patents that undermine the incentive rationale of the patent system. Sonic Trading Mgmt.S. Subcomm on Patents. and more about whether it is used as the basis for an assertion of rights that is objectively lacking in merit. 2. J. 1998) (Rader. dissenting) (Noting that almost 40% of all district court claim constructions appealed to the Federal Circuit since Markman I were reversed). App.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. 77 Fritz Machlup. LLC. it was the broad assertion of rights by BT that made the hyperlink patent a bad patent. v. 898-899 (Fed. 2d Sess. Study No 15. 79 (1958). In sum. But this invalidity in not the only way that patents go bad. 77 Machlup was not suggesting that there is no evidence as to whether the patent system has costs or benefits. however. economist Fritz Machlup concluded that: No economist. We are empirically uncertain about far too many things to know whether See e. 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. Cybor Corp.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. Cir. Clearly. Trademarks. Cir. 1330 (Fed. Even a technically valid patent can become a bad patent if it is asserted beyond its legitimate scope. the uncertain nature of claim construction makes predicting the ultimate validity of any patent claim a speculative art at best. As an alternative defining bad patents as invalid patents. 1476 (Fed... confers a net benefit or a net loss upon society… If we did not have a patent system. 138 F.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. AWH Corp. J. we propose a functionalist definition of bad patents that focuses more clearly on those patents which are likely to distort the allocation of resources. properly cataloged in the collection of a German University Library qualified as anticipating prior art. Cir. J.2d 897. An Economic Review of the Patent System. it would be irresponsible.74 Similarly. see also Phillips v. Cir. The second element of bad patents relates to patent scope. 2006) (Mayer. What is Differential Impact? In his seminal 1958 review of the economic literature relating to the patent system.). Inc. 85th Cong. In re Hall 781 F..) 75 See.3d 1303. on the basis of our present knowledge. 2005) (Mayer. 74 16 of 60 . 2006 U. 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. it would be irresponsible. 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. to recommend instituting one.g. dissenting) (Describing the process of claim construction as mayhem. v. dissenting). on the basis of present knowledge of its economic consequences. and Copyrights of the Senate Comm on the Judiciary. on the basis of present knowledge. Lava Trading. as it now operates. to recommend abolishing it. The BT Hyperlink patent may well have been properly granted. the patent did not become “bad” until BT argued for a claim construction that was unsupported by the actual invention.. 415 F. could possibly state with certainty that the patent system. 1986) (Holding that a single copy of a doctoral thesis...

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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).
78 79

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PART II

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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96 See. which have ranged between 60 percent and 70 percent for 20 years. Allison et al. The error rate is the ratio of patents issued with errors to the total number of patents issued. a study by Quillen and Webster (adopted by the NAS) found that. somewhat like John R. 463 (2004). L. 92 GEO. if the application were to issue as a patent without the required correction. 456-57 (2004). accounting for continuations. 101 U. L. Continuing Patent Applications and Performance of the U. much higher.95 and (iii) continuation. continuations-in-part. Allison et al. 11 FED.”) 95 John R. L. 99Id. http://www. James. 335-49 (2003). See also R.J. supra note 11. B. 727.99 However. 35 USC 101. 94 20 of 60 . and.J. 8 J. 17 BERKELEY TECH.S. See H. (introduced 6/8/2005). ultimately. 98 Id. 92 GEO.J. 100 C. PERFORMANCE AND ACCOUNTABILITY REPORT FOR FISCAL YEAR 2002 18. the examiners who allowed the case are not disciplined for their oversight. the PTO’s internal culture and organization predispose examiners to granting patents too easily..101 although many believe that number to be much. 35 USC 112) and judicially created doctrines.. While this is may be in line with standard assumptions about the selection of disputes for litigation. 97 See FTC REPORT.uspto.S. of 4.. & TRADEMARK OFF. available at http://patentlaw. Lemley. Valuable Patents. 1-21 (2001).J.102 The important policy question that flows from this is whether it is worth spending money to make patent examination any better.97 This is compared with a 67% approval rate in Europe and 64% in Japan. U. Some examples of errors include the issuance of a claim having anticipatory prior art under 35 USC 102. nor must the USPTO award damages to affected members of the public to compensate for an improvidently granted patent. Quillen and O.96 The FTC reports that the PTO’s approval rate might be as high as 98%. SOC'Y 335. This is “20 to 30 percent higher than official estimates [by the PTO]. continuation-in-part. Arguably. Thomas.gov/web/offices/com/annual/2002/1-58.S. Valuable Patents.com/patent/2006/03/does_the_wall_s. and the European Patent Offices.2791.94 (ii) patent examiners are only rewarded for initial response to. Jr. the fact that persistent applicants are almost always successful does not indicate a high threshold of quality control. the federal courts. CIR.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Even taking into account its limited resources. and divisional applications. F.) 102 John R. To amend title 35. and divisional applications can be used to wear down an Examiner until at least some claims issue. 103 Legislation has even been proposed to this end. Empirical Evidence on the Validity of Litigated Patents. consumers.J. even the PTO acknowledges that its error rate is around 5%.103 In contrast.2%. 185.typepad. Clarke.in particular. 435. 435. patent applications. Sponsor: Rep Sensenbrenner. The costs of failing to acquire information are simply shifted to other actors . Patent lawyers and a number of academics have called for better funding for the PTO to improve patent examination.pdf (Showing an official “error rate. the difference with patents is that they have previously been subject to a review process before entering the pool for selection. The imperfect nature of patent examination is widely acknowledged. Japan. the PTO has been criticized for simply being too willing to grant patents. 1. with respect to patent fees.S. 26 AIPLA Q. and final determinations of. or relevant prior art under 35 USC 103 that would render the allowed claim obvious. 205-206 (1998) (only 54% of the patents were found valid in a population of 300 final validity decisions). 733 (2001) (“Courts do not fine the USPTO upon invalidating a patent. Allison & Mark A. PAT. “the USPTO eventually issued patents on between 85 percent and 97 percent of the applications filed between 1993 and 1998…. and for other purposes. SYMPOSIUM: PATENT SYSTEM REFORM: The Responsibility of the Rulemaker: Comparative Approaches to Patent Administration Reform. John R. Factors that might contribute to a culture of permissive patent issuance include: (i) patent examiners face no penalties for issuing ultimately bad patents. the patentee's competitors. Patent Office. 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. PATENT AND TRADEMARK OFFICE.. (75% approval rate).98 The PTO argues that the true figure is more like a 75% approval rate or even a 60% rate.g.” 100 Whatever the reasons for the PTO’s high rate of allowance might be. Other errors include lack of compliance of the claim to the other statutory requirements (e. (2005). Continuity Law and its Impact on the Comparative Patenting Rates of the U. Webster. USPTO Director Jon Dudas. Address at 2005 AIPLA Meeting (2005). United States Code. at 217.html (60% approval rate).” based on internal quality assurance measures.R.

based on a novel by Peter George.107 its advantages may be overstated. 92 GEO. Scott Kieff. U.J. Valuable Patents. and just as importantly. but not the product market). See also. but his main contention is that the primary reform goal should be “to strengthen the validity inquiry made by the trial courts. not the validity of the patent holder’ claims. Allison et al. Weak Incentives to challenge Faced with the threat of litigation from the holder of a questionable patent. 943. patent holders have strong incentives to over-claim their rights. at 1532. or (3) simply exit the market. This need not mean that it is bad if the USPTO issues a lot of invalid patents. Critical responses to Lemley’s “rational ignorance” theory include Shubha Ghosh & Jay Kesan. not examined).” Lemley clearly recognizes that some examination related reforms are worth pursuing. L. 1495. John R. Rev. issuance. or will be used in circumstances that don't crucially rely on the determination of validity. 1219 (2004). 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. Rational Ignorance at the Patent Office. 1495. see also. Strangelove.) 105 Mark A. Merges.. Joseph Farrell & Robert P. 106 Mark A.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Dr.g.). alleged infringers have weak incentives to challenge bad patents and second. L. L.” Id. much like the rational ignorance theory of voting (from which its name is apparently derived). the entire system of application. 40 HOUS.105 As Mark Lemley explains: Society ought to resign itself to the fact that bad patents will issue. It depends crucially on the fact that very few patents are ever the subject of litigation. L.html.J. 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. Lemley. STRANGELOVE OR: HOW I LEARNED TO STOP WORRYING AND LOVE THE BOMB (1964) (Directed by Stanley Kubrick. Robert Schenk. negotiation. Rev 55 (2003) (Arguing that patent applications should be registered. and attempt to deal with the problem ex post. at 1523-25.104 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.106 Although the “rational ignorance” theory of patent examination is attractive. and enforcement should be evaluated as a whole. This result is admittedly counterintuitive. or even licensing. 946 (2004) (“it would be a disgrace for a system to enforce a lot of improper patents. 435 (2004). 1. 1497 (2001). Id. as explained in more detail in the next section. 107 See. Rational Ignorance (2002) at http://www. B. Because of this. challenge.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. 19 BERKELEY TECH. uncertainty and expense of patent litigation is central to the problem of bad patents for two reasons: first. 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.C. licensing. 1510-11 (2001). U.com/econ/LogicOfChoice/RatIgnorance. The delay. Rational Ignorance at the Patent Office. L. REV. 95 Nw. e. examination. L. Lemley. an alleged infringer will choose whether to (1) pay the license fees the patent holder demands. 104 21 of 60 . if the patent is asserted in litigation. the models DR. In fact.ingrimayne. What Do Patents Purchase? In Search of Optimal Ignorance in the Patent Office. REV. The Case for Registering Patents and the Law and Economics of Present Patent-Obtaining Rules. Rather. (2) challenge the validity or application of the patent. see also. There are a number of reasons to suspect that bad patents are not effectively dealt with by market and judicial forces. 95 Nw. The Persistence of Bad Patents Several structural features of patent litigation combine to shield bad patents from the scrutiny of the market. F.

22 of 60 . challenge the patent.109 Their models are developed from the point of view of a potential defendant who is faced with the choice of either licensing. Merges. 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. 683 (2004) (proposing a mandatory joinder solution). L. Why “Bad” Patents Survive in the Market and How Should We Change? – The Private and Social Costs of Patents. e.. 667 (2004) (proposing a regime of litigation-stage bounties to encourage defendants to challenge patent validity). REV. ignoring or challenging a patent holder’s assertion that some aspect of her business infringes on the patent holder’s rights. cf. L. Lemley & Carl Shapiro. Utility Functions: UWin ULose ULicense 109 = π–L–I = π – L – I – CL – CP – P = π – CL – I See. the validity of the asserted patent becomes less and less relevant to the alleged infringer’s decision to challenge. PERSP. Joseph Scott Miller. 19 BERKELEY TECH. available at http://ssrn. = Cost of gathering information related to patent validity. Probabilistic Patents. 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. 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). at 21 (Illinois Law and Economics Working Paper Series.com/abstract=688005. Mandatory Joinder: An Indirect Method for Improving Patent Quality. 19 BERKELEY TECH. Edward Hsieh. 19 J. 2005). (2005) (exploring the suboptimal incentives of private parties to challenge patents in courts and considering potential reforms). Kesan & Andres A. Jay P. 2. 77 S. Mark A. = Probability that the alleged infringer would be able to successfully challenge the patent. = Cost of any damages as a result of losing a challenge to the patent. ECON.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 discussed in this section demonstrate that as the cost of litigation increases. = Additional penalty cost of license payments after challenging the patent and losing. or exit the field. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. = Cost of legal challenge. Working Paper No.J. The alleged infringer must decide whether to take a license. Joseph Farrell and Robert P. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. 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. Gallo. 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.J.g. L. CAL.

Comparative statics 23 of 60 . 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). 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. but acknowledging that exclusive and defensive patent holders charge different kinds of prices. they can use the threat of exclusion to extract licensing fees (extractive). 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). 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. In effect.e. i. 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. if UChallenge > ULicense. Comparative Statics This yields useful comparative statics. defensive patent holders charge royalties denominated in the royalties they don’t pay for other people’s patents. or exit the field based on which is least costly or most profitable.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. take a license. then the alleged infringer will simply exit the field. Generally. if both challenging the patent or accepting the license would drive the alleged infringer out of business. These diverse applications can be accounted for in the model by simply treating all patent holders as being like extractive. α → 1. 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).110 First. the alleged infringer will challenge if litigation costs are less than the cost of licensing. 110 Comparative statics is a modeling technique used in economics and political science. Similarly. However. i.e. exclusive patent holders charge royalties that no potential infringer could afford to pay.e. the alleged infringer of a potentially bad patent will decide whether to challenge the patent. 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. On the other hand. as the probability of winning approaches total certainty. if UChallenge> 0 and ULicense> 0.

. Non-Cooperative Games. in The New Role of Intellectual Property in Commercial Transactions 39 (Melvin Simensky & Lanning G. Heald. It is difficult to estimate what the average patent license demand is. Rev. 1175. The relationship between licensing costs and litigation costs is complicated.5 million for a higher value patent. For patents valued between $1M and $25M. See also. royalty rates are directly tied to the profits of the alleged infringer. patent litigation costs tend to stick at the lower and upper bounds respectively. Quantitative Methods of Valuing Intellectual Property.J. 111 See.. However. litigating an individual patent case is likely to cost around $650. Kevin M. Bryer eds. 1175. Non-Cooperative Games. But in actual fact. 55 Rutgers L.e. Prop. 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. Intell. 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. Bramson.) 24 of 60 .). Heald.000. For those patents which exceed $25M in value.S. Bronwyn H. Heald.) 114 AM. 424 (2004)..org/papers/W9731.114 It is not surprising that parties in high stakes cases would spend more than those in lower stakes cases. Currier. and the Complex Mathematics of Patent Pricing.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. the costs of an unsuccessful challenge become less important. COMPARATIVE STATICS ANALYSIS IN ECONOMICS (2000). and the Complex Mathematics of Patent Pricing. Russell Denton and Paul J.11. Russell Denton and Paul J. 55 Rutgers L. INTELLECTUAL PROP. 635 PLI/Pat 465. Prospects for Improving U. REPORT OF THE ECONOMIC SURVEY 22 (2005) (For a patent valued at less than $1M over its life. as successfully challenging the patent becomes more likely. Random Walks. 423. 113 See. Random Walks. the cost of discovery alone approaches $350. Russell Denton and Paul J. Valuing Patents.000 per claim at issue per side. Valuation of Patent Licenses 12 Tex. (citing Robert S. 1191 (2003). Rev.25M for discovery and $2M for complete litigation. F. costs average $3M for discovery and $4. available at http://papers. An interesting result from Comparative Static 1 is that the alleged infringer’s potential profit appears to have disappeared from the equation. Parr & Gordon V. As a general matter one would expect parties to invest more in litigation as the stakes of a given dispute increase. 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. According to a recent survey conducted by the American Intellectual Property Law Association. 1994).111 Under this method. i. the alleged infringer’s potential profit is still significant as determinant of CL. the average costs rise to $1. Anecdotal experience suggests that outside of the $1 million to $25 million range. Smith. litigation costs are only weakly related to potential profit. 471 (2001). Although the cost of a patent license and the potential profit of the alleged infringer are closely tied. CL = f(π).. Rev. P. Non-Cooperative Games.000 for a low valued patent and up to $4. See.000 to $3 million dollars per suit or $500. but anecdotal evidence suggests that it is significantly less than the minimum threshold costs of patent litigation. Random Walks. but not very high.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. 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.nber. L. Patent quality via Post-grant Opposition. 1191 (2003).5M for litigation. LAW ASSOC. See also Ted Hagelin.pdf (Estimating legal costs of patent litigation ranging between $500. expenditure on patent litigation only follows this assumption within a certain range of cases – those where the stakes are high. Hall et al. See also F. and the Complex Mathematics of Patent Pricing. 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. 55 Rutgers L. (May 2003). Russell L. 1191 (2003). Technologies and Portfolios: Rules of Thumb.

Jay Kesan and Gwendolyn Ball find that between seven and four percent of cases end with a final judgment in one form or other. 117 Id.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. a potential infringer contemplating challenging the validity of a patent has to expect that her litigation costs will amount to at least around $500. LE05-027 Available at SSRN: http://ssrn. 115 116 25 of 60 . For example. For example. Gwendolyn G. 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). 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. 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.com/abstract=808347. "How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes" . at 61. the probability that an alleged infringer will challenge any given patent assertion is effectively zero in a large number of cases. 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. it also affects those cases in which the defendant is able to win on summary judgment. In their recent empirical study of the resolution of patent cases. and Ball..116 However. as illustrated in Figure 2.000. but the evidence shows that they are not.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 litigation costs will not. Jay P. 30 – 34. the authors also find that a further seven to eight percent of cases are disposed of through summary judgment.115 assuming that her profit is a mere $1 million and that a 5% royalty is customary in her industry. The high cost of patent litigation might be less concerning if those cases that ended in summary judgment were considerably cheaper. U Illinois Law & Economics Research Paper No. Kesan. Recall the first comparative AIPLA. 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). p.000 litigation bill against a license demand of only $50. examining patent cases filed in 1997. she has to weigh that $500.000. 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.

Implications of the Challenger Focused Model The Challenger Focused Model has at least six significant implications with respect to the survival of bad patents. To begin with. 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. Patent holders are in the driving seat in this regard because they get to determine what license fees they will demand. 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 . challenge is very likely. at high levels of profit. Furthermore. and (6) enhanced damages and injunctions have a chilling effect on patent challenges. 2. C. 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.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 static which indicated that. 1. (4) information asymmetries insulate bad patents from challenge. it never makes sense to challenge. (3) the uncertainties of patent litigation insulate bad patents from challenge. if the cost of licensing is lower than the minimum threshold of litigation. an alleged infringer would challenge if litigation costs were less than licensing costs. (5) challenges to bad patents are likely to be an undersupplied public good. (2) high litigation costs insulate bad patents from challenge. as the probability of success approaches 1. Figure 2 maps the predicted outcomes for a continuum of π given the distribution assumptions in Figure 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. 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. and they do so in full knowledge of the litigation costs faced by alleged infringers. there is a very small transition window in between where the probability of success is relevant to the alleged infringer’s determination. 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. discussed below). if the patent holder’s royalty demands are high enough.

but according to one rough estimate. Meurer. 1502 (2001). ECON. Lemley. 573. Patenting in the Shadow of Competitors. 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. v. 9 LEWIS & CLARK L. Rational Ignorance at the Patent Office. LAW ASSOC. Lanjouw & Josh Lerner.126 As long as the minimum threshold of litigation costs remains high. 123 Mark A. 471 (1995). REV. For patents valued between $1M and $25M. June 29. INTELLECTUAL PROP. Eli Lilly lost nearly 30% of its stock market value. the cost of discovery alone approaches $350. He found pharmaceutical companies experienced sharp drops in market value after key patents were held noninfringed or invalid. the average costs rise to $1.L. the Canadian company at the center of the recent Blackberry litigation was described as “critically distracted” by the protracted litigation. L. 223.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.thestreet. 1520 (2001) (finding that the average time from issuance to a final litigated decision on validity is 8. 127 The effectiveness of post grant review in this regard is discussed in Part __. The mere public announcement of a patent law suit can depress the defendant’s stock price on average 2 to 3%.. REV. Ct. Research In Motion. 124 Mark A.5 million for a higher value patent. uses event study methodology to examine the reactions of firm stock prices to court decisions in patent cases.6 years on average – exacerbates this problem considerably. TheStreet.S. 10 (2005) (“Glynn Lunney Jr.) 119 Troy Wolverton.5M for litigation. U.com. L.6 years).). the total direct cost of patent litigation in the U.123 It is difficult to precisely measure the costs of patent litigation. 95 Nw. FIN. In most cases.S.125 As noted above. every year exceeds $2 billion. 121 James Bessen and Michael J. costs average $3M for discovery and $4. 44 J. RIM's Up. 239 (1994). eBay Inc. Rational Ignorance at the Patent Office. 230-231.122 The extraordinary length of time it takes to invalidate a patent through litigation – 8. MercExchange.html?cm_ven=GOOGLEN&cm_cat=FREE& cm_ite=NA. L. Lemley. 38 J.L. 1837 (U.119 Patent litigation can also have a negative effect on relations with outside investors. the lingering cloud of patent litigation can be especially harmful to small firms. 1495. U.. & ECON. 126 AM. In one case. & Econ. infra. particularly those firms with limited product diversity.”) 122 See Jean O.C. Still on the Ropes.124 This figure excludes money actually paid by way of settlement or final judgment. Tilting the Table? The Predatory Use of Preliminary Injunctions.000 for a low valued patent and up to $4. For example. 125 Id.120 and sometimes much more. Any patent reform that reduced the minimum threshold of litigation costs would greatly decrease the ability of patent holders to do this. REV. 221.L. The Costs of Inefficient Bargaining and Financial Distress: Evidence from Corporate Lawsuits. 2006. serious patent litigation distracts key personal from their core responsibilities.. http://www.000. the American Intellectual Property Law Association Economic Survey places the average cost of patent litigation at around $650.118 The costs of litigation can not be measured purely in terms of lawyer’s fees. 120 Sanjai Bhagat et al. 35 J. 463. 95 Nw. 575-76 (2001).121 In addition.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. 126 S. 27 of 60 . 1. see also Lerner. 1495.25M for discovery and $2M for complete litigation. REPORT OF THE ECONOMIC SURVEY 22 (2005) (For a patent valued at less than $1M over its life. For those patents which exceed $25M in value. either in terms of the stock price for publicly traded companies or the availability of future rounds of venture capital financing in smaller companies. Lessons For Patent Policy From Empirical Research On Patent Litigation. bad patent holders will be able to avoid challenge by simply pitching the license demands below the cost of litigation.com/_googlen/tech/gamesandgadgets/10294275.

401 F. the PTO issued an initial ruling rejecting all of the claims contained in the MercExchange multiple database searching. LLC v. Every patent includes “one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant regards as her invention.. TECH. available at http://www.3d 1303. 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. 2d 695 (E. Cir. reversed in part. As a normative matter. there will often be disagreements between plaintiffs and defendants as to the precise meaning of the patent claims. 129 See. even seemingly straightforward words such as “a.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). 2004.technologyreview.3d 1323. Kline. and in May 2005. 2005) 131 See. uncertain.S. most patent challengers are confident that they should win. 133 Phillips v.3d 1323 (Fed.C..sec. Inc. MercExchange. because language is ambiguous and the path of technology is unpredictable.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. eBay.g. 1330 (Fed.” “to. Cir. 2005) 128 28 of 60 . in March 2005. Cir. eBay. MercExchange. the PTO issued an initial ruling rejecting all of the claims contained in MercExchange’s online auctions patent. 28.” and “when” become the subject of contested argument.. Va. the claim construction process is probably the most significant. 130 Note that the Federal Circuit also invalidated all claims asserted against eBay and its subsidiaries arising out of the multiple database search patent.” “or. e. eBay Annual Report For FY 2005. However. 2003). AWH.gov/Archives/edgar/data/1065088/000095013406003678/f17187e10vk. 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. MercExchange. In the context of a patent claim.C. Douglas J. 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.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 3. All litigation is uncertain to some extent.. 132 35 U. In the recent Federal Circuit decision in Phillips v. 1310 (Fed. The Uncertainties of Patent Litigation Insulate Bad Patents from Challenge As the eBay case illustrates.D. Inc.128 it was far more successful in inter partes reexamination in the patent office. Claim construction is the critical stage of patent litigation where the court decides what the words describing the patent holder’s rights actually mean. the PTO issued an initial ruling rejecting all of the claims contained in the MercExchange electronic consignment systems patent. L.asp (describing patent litigation as complex. 415 F. 275 F. Supp.com/articles/04/04/wo_kline042804. Apr. Patent Litigation: The Sport of Kings.131 The Uncertainty of Claim Construction Although there are many causes of uncertainty in patent litigation. Although eBay lost on the merits in federal court. at http://www. Inc.L. affirmed in part. impeding. and expensive). but reversed the district court’s order granting summary judgment in eBay’s favor regarding the auction patent. LLC v. 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.. 2005).”132 Theses claims define the boundaries of the patent holder’s rights with respect to the invention. eBay. AWH Corp. 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.133 the court wrestled with the question of whether the term “baffles” should be given its ordinary meaning as a “means for obstructing. In January 2005. v.htm#103. but anecdotal reports from judges and patent lawyers indicate that patent litigation is a particularly uncertain form of legal action. REV..

Devon Indus. a Markman hearing should give parties a firm understanding of what subject matter is covered by the patent at issue.136 Confirming this pessimism. 391 (1996). In reality the scope of the patent is unclear at every stage. 2000. v. 2-3 (2001) ("In the absence of a route for expedited appeal of claim construction.J. 52 F. Linde Air Products Co. 2-3 (2001) ("District court judges improperly construe patent claim terms in 33% of the cases appealed to the Federal Circuit. 339 U.3d 1420. at 607. 1423 (Fed. 137 Christian A. 672 (2004). 16 BERKELEY TECH. 370. in Markman v.. 138 F. In essence. 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. 1476 n. 1997). Westview Instruments. 339 U. Chu. Moore. Unfortunately. 1. 1. Cir. Are District Court Judges Equipped to Resolve Patent Cases?.S. 138 See. L. 15 Harv."). 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. Are District Court Judges Equipped to Resolve Patent Cases?. 1998.3d 967. Panel Discussion: Claim Construction from the Perspective of the District Judge 54 Case W.g. Polk Wagner & Lee Petherbridge. & TECH. 671.. Inc.L. parties must proceed through the decision making and litigation process with often erroneous claim and scope interpretations. Inc. Kimberly A. Cir.. 979 (Fed.").135 Indeed. 134 By making claim construction a question of law. 152 U. Moore. J. 134 29 of 60 . 15 HARV. v. from issuance through litigation and appeal. however.”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. Westview Instruments. See also Markman v. 1104 (2001).16 (Fed.. see also. O'Malley.L. the effect of Markman has been to significantly increase the Federal Circuit’s discretion in reviewing claim construction.138 Claim construction is also rendered uncertain for potential infringers by the by the doctrine of equivalents.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Before 1996. 139 Sage Prods. R. 140 Graver Tank & Manufacturing Co. J. 1075. the Supreme Court determined that claim construction was a question of law. district courts are forced to proceed with lengthy and expensive patent litigation based on their frequently erroneous claim construction. 1998) (en banc) (Rader.S. FAS Techs. J.3d 1448. the Federal Circuit has not settled on a consistent methodology for claim construction. Res.S. & Tech. 135 See e.137 Ostensibly. 1995) (en banc). Christian Chu finds that for cases involving claim construction and filed between January 1. Rev. Inc. Is the Federal Circuit Succeeding? An Empirical Assessment of Judicial Performance. 136 Honorable Kathleen M. 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. or at least that the Federal Circuit will say that we got it wrong. 517 U.141 In reality the doe probably does more to protect patent holders from the incompetence of their attorneys than anything else. 1105 (2004). dissenting) (almost 40% of all claim constructions reversed in whole or in part since Markman I). L. 126 F. 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. Cybor Corp. leading to significant doctrinal instability and confusion at the lower courts. and April 30. Unfortunately. Empirical Analysis of the Federal Circuit's Claim Construction Trends.. v. claim construction was regarded as a question of fact. Pa. 605 (1950) 141 Graver Tank. Kimberly A. The Supreme Court argues that the inherent ambiguity of language and the unpredictable path of technological Markman v.. Cir. the Federal Circuit modified the district court judge’s claim interpretation in 44% of the cases and reversed it in 30% of cases. Westview Instruments.

S. Abolishing the Doctrine of Equivalents and Claiming the Future After Festo. v.2d 878. See.”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. 149 See infra __. The Presumption of Validity A second significant cause of uncertainty in patent litigation is the Federal Circuit’s interpretation of the presumption of validity. The scope of a patent is not limited to its literal terms but instead embraces all equivalents to the claims described.to a less-constrained question of similarity.) 146 Id. 1429 (Fed. a defendant seeking to invalidate a patent must do more than cast significant doubt on the patent’s validity. Shoketsu Kinzoku Kogyo Kabushiki Co. If competitors cannot be certain about a patent's extent.) 143 The Court acknowledges that “the doctrine of equivalents renders the scope of patents less certain. Shoketsu Kinzoku Kogyo Kabushiki Co. and its value to inventors could be destroyed by simple acts of copying. Unimportant and insubstantial substitutes for certain elements could defeat the patent. may conserve judicial resources but is not necessarily the most efficient rule. suits that a rule of literalism might avoid..J 1157 (2004) (arguing for the abolition of the doctrine of equivalents). L. 145 Festo Corp. 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..3d 1420. literalism. their value would be greatly diminished. Shoketsu Kinzoku Kogyo Kabushiki Co. 535 U. Inc.").. or is not. v.. see also. 142 30 of 60 . Sarnoff.142 However. it is by no means an antidote to the uncertainty and confusion that equivalents adds to the already uncertain arena of claim interpretation.” Festo Corp. 722. 727 (2002) (When the patentee responds to the rejection by narrowing her claims.”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. they may be deterred from engaging in legitimate manufactures outside its limits. 722. 732 (2002). Chesterton Co. 282 (2000) (providing in relevant part that.147 Although the current Patent Act clearly establishes that an issued patent carries a presumption of validity.C. 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 . Cir.. According to the Federal Circuit.S. 19 Berkeley Tech. v. Each claim of a patent .S. 535 U. this prosecution history estops him from later arguing that the subject matter covered by the original. If patents were always interpreted by their literal terms. For this reason. Inc.. 970 F. The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity. Joshua D.. the presumption of prosecution history estoppel only applies to amendments made for a “substantial reason related to patentability. A..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. e. 147 See. 127 F.” This heightened standard of proof might make sense if patents were subject to a more rigorous system of examination. the clearest rule of patent interpretation.). 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.145 however.143 As Josh Sarnoff explains. but given the very limited nature of patent examination at the patent office.148 it is only by virtue of case law that this presumption has been elevated to the high standard of “clear and convincing evidence. v. Kegel Company. broader claim was nothing more than an equivalent.S.. it is particularly hard to defend as a matter of principle. or they may invest by mistake in competing products that the patent secures. 148 35 U. It may be difficult to determine what is. AMF Bowling. what the Court does not seem to take account of is the ways in which the doe itself exacerbates the ambiguity of claim language.g. 535 U. . In addition the uncertainty may lead to wasteful litigation between competitors. New England Braiding Co."). "A patent shall be presumed valid.W. Cir. she must prove by “clear and convincing evidence” that the patent is invalid. 144 Id. an equivalent to a particular element of an invention. shall be presumed valid independently of the validity of other claims .. 1997) (Invalidity must be established by facts supported by clear and convincing evidence.149 In theory a defendant could Festo Corp. v. 722. 882 (Fed.

Moore. but the practicality of doing so is another matter entirely.” 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. 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. 99 MICH.150 Given that juries in patent cases are comprised of lay people who are unfamiliar with both the relevant law and the relevant technology. 368 (2000). All of these activities may change her evaluation of how likely she is to successfully challenge the patent holder. the strength of the patent in light of the known prior art. she may have very little information upon which to assess its merits. Furthermore. the patent owner generally has much greater knowledge of the validity and scope of her patent.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. Juries and Patent Cases: An Empirical Peek Inside the Black Box.g. These information asymmetries are such that. and the prosecution history – including any narrowed claims. An essential problem with bad patents is differentiating them from good patents. blackberry/ebay] See Kimberly A.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. Put simply. 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. L. 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. but only by increasing the alleged infringer’s information costs.) 150 151 31 of 60 . Even if the alleged infringer possesses what she believes to be “killer” prior art – e. at least at the early stages. 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. 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. her success in extracting license fees from other targets. she can hire engineers to research the technology. 365. 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. the alleged infringer may have a well founded objective belief that a patent is invalid. She knows things such as the amount of effort that was made to research the prior art before the patent was filed. In contrast. Judges. When an alleged infringer receives a threat letter. some information asymmetries can only be overcome through discovery. (Concluding that juries are significantly pro-patentee in suits for infringement. which means spending several hundred thousand dollars on litigation. and/or she could gather information on her own through public and private sources. a weak lawsuit may be difficult to distinguish from a strong lawsuit. REV. 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. 4. [example.

ILL. 158 Joseph Farrell & Robert P. 668-673 (2004). 313. 157 Farrell and Merges point to the case of Gilbert Hyatt’s negotiations with North American Philips Corporation as an example. 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”). Merges.J. 943 (2004). as long as the alleged infringer’s competitors are also subject to the same costs. even if her expectation of victory is high. 19 BERKELEY TECH.com v. but Phillips Corporation chose to settle the dispute early. Wash. 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.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 5. 161 Amazon. The patent holder’s incentive is obvious due to Blonder-Tongue: if she settles with the defendant. 73 F. Found. 667. v.. Phillips agreed to help Hyatt extract royalties from other competitors in the field.155 Furthermore. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. Supp. 19 BERKELEY TECH. Challenges to Bad Patents are Likely to be an Undersupplied Public Good As a several commentators have observed. 153 Joseph Scott Miller. at 15.com.J. if she wins she must share the benefits of her labor with the whole world.158 Gilbert Hyatt was a non-manufacturing patent holder who sought royalties from manufacturers in the LCD industry. 667. L. 333. Many of the targeted competitors considered litigation. 2001). As part of the settlement.J. 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. 402 U.156 If two parties are involved in patent litigation. John R. L.Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. 239 F. Dec. L. L. 667 (2004). L. of Ill. Thomas.D.com.S. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. she maintains some chance of enforcing the patent against future defendants.3d 1343 (Fed. 160 Joseph Scott Miller. 350 (1971) (a finding of patent invalidity during litigation applies to all. 305. 152 32 of 60 . 155 Joseph Farrell & Robert P.159 Joseph Miller highlights a different example160 of the incentive-to-settle using the Amazon “one-click” patent case against BarnesAndNoble. Cir. REV. Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help. Inc. 1992. An alleged infringer who settles cheaply can not only avoid sharing her victory with competitors. 19 BERKELEY TECH. 157 Later licensees will typically pay greater licensing fees than those who were early-to-the-table. 2001 U. not just to the benefit of the challenging party). Although an alleged infringer must bear the whole burden of pursuing her claim of invalidity. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. 19 BERKELEY TECH. 154 Joseph Scott Miller. Barnesandnoble. including all her competitors. each party actually has an incentive to settle the litigation through licensing. the alleged infringer’s utility from successfully challenging a patent may be overstated by the challenger focused model. 1999).. she can actually impose a higher cost on those competitors if the appearance of settlement increases their perception of the validity of the patent. 159 Philips Licenses Hyatt’s Microcomputer Patents.. 943. they will not supply the optimum level of resistance to the demands of patent owners.154 A related problem is that in some markets.J.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. Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties. L. 970 n32 (2004). PATENT WORLD. and both realize that the invalidation challenge will be successful. 1991 / Jan.153 This suggests that unless alleged infringers can find some method of coordinating. Merges. 1228 (W. in return for beneficial terms. Univ. Some alleged infringers will be able to simple pass royalty costs through to the consumer. Not quite so obvious is that the alleged infringer’s incentive to settle can be just as compelling. 19 BERKELEY TECH. Inc.J. reversed. 156 Id.

Lanjouw & Josh Lerner. 165 See. L. 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. 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. 667. 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. Morrison-Knudsen Co.”162 While not formally deciding the invalidity of the patent. Barnes and Noble settled the case.165 award enhanced damages for willful infringement. Cir. Patent Damages. Inc.2d 1380.J.. the Federal Circuit has tended to exacerbate these penalties through its increased willingness to order preliminary and final injunctions. Smith International. Blair and Thomas F. Cir. 1993). 672 (2004). Turner. The Nonmanufacturing Patent Owner: Toward a Theory of Efficient Infringement.”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. 1358. 44 J."). However. 164 Joseph Scott Miller. 1568 (Fed. 10 TEX. & ECON.S.166 and its greater flexibility in calculating patent damages in general. Tech. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. 168 Julie S. Jean O. 671-72 (2004).. ("[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. 19 BERKELEY TECH. § 283 (2005).J.171 In a 1983 case. 573. L. 717 F. ULSI Sys. even if bad patents are initially challenged. 179. L. 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.A. 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.com. Amazon. 6.167 The possibility of a preliminary injunction can have a substantial chilling effect on a potential infringer’s willingness to pursue litigation.. 575-76 (2001). 169 Intel Corp. Tilting the Table? The Predatory Use of Preliminary Injunctions. 2 (2001). 162 163 33 of 60 .3d at 1347. 86 Calif.J. 239 F. 205 n. v. 19 BERKELEY 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. Comment. INTELL. 1389 (Fed.) 167 Roger D. 166 Underwater Devices Inc. 995 F.102 (1998).168 Furthermore. 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. 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. PROP. v. 667. 1.C. Despite the Federal Circuit’s recognition that a preliminary injunction is “a drastic and extraordinary remedy that is not to be routinely granted.”169 the court now routinely issues preliminary injunctions170 in patent infringement cases.2d 1566. Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents. Rev.. 170 The court’s authority with respect to preliminary injunctions is found in 35 U. Joseph Scott Miller.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 shopping website. v. we should not be confident that alleged infringer’s will pursue those challenges to completion.L. Cotter Rethinking.163 Instead of accepting the certain invalidation of Amazon’s patent by the district court. L. Since its formation. Consequently.

) See also. Cir. v. even if the probability that the patent is invalid is very high. Rev. Cir. Litton Sys. Cir. 2007 (2005).178 Second. In particular. See also. 57576 (2001)... a significant number of technology companies direct their personnel not to read patents. 718 F. 573. 1996). Inc.L. 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. Ltd. v. Trade Comm'n Workshop 420-21 (Feb. uncertainty in litigation. D.179 [expand: are these opinions actually worth anything? ] Third. 1556 (Fed. high litigation costs. 1389 (Fed. 171 175 Underwater Devices Inc. J. 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. Enhanced damages are provided for in 35 U. 757 F.177 The steroidal nature of willful infringement rule has three predictable consequences.175 and will likely be reversed in the near future. Inc. Rev. 32 F.C. 59 SMU L Rev 123 (2006) (Discussing various disincentives to read patents and patent applications. Morrison-Knudsen Co.”174 This stance is inconsistent with the Supreme Court’s decision in eBay.S. Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy: Fed.) 176 179 34 of 60 . 173 Smith International.. v. The distorting effect of the threat of treble damages and attorney’s fees for willful infringement is widely recognized. Intermedics Orthopedics. 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. Lanjouw & Josh Lerner.. 1994) citing Roper Corp.gov/opp/intellect/020227trans. 1581 (Fed. 1983). 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. Stryker Corp. some alleged infringers settle cases they might otherwise pursue because of fear of attorneys fees and treble damages. 1414-16 (Fed. 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. v. 718 F. First. L. many companies will obtain noninfringement opinions in order to demonstrate their exercise of due care in avoiding infringement.173 Since then.3d 1409. information asymmetries. 27.2d 1380. Cir. & ECON. 172 Smith. 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 See..2d 1266. Cir. L.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Hughes Tool Co. 1985). 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. Cir.2d 1573 (Fed. 717 F. 96 F.ftc. 1983). 174 Reebok Int’l. According to Federal Circuit case law. Tilting the Table? The Predatory Use of Preliminary Injunctions. available at http://www. Hughes Tool Co. 44 J. Inc. Possession in Patent Law.. 284 (2000).176 However.2d 1573. The Disclosure Function Of The Patent System (Or Lack Thereof) 118 Harv. 1983).pdf. when they cannot avoid learning about the existence of a patent. 1272 (Fed. 2002) (statement of Jordan Greenhall).3d 1552. Inc. Timothy Holbrook.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. 178 The Disclosure Function Of The Patent System (Or Lack Thereof) 118 Harv. The cumulative effect of these factors is that the overall incentive for any given potential infringer to challenge a patent is often very weak. Baker. v.

it would be very difficult for the holders of bad patents to rely on licensee capitulation. 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. The challenger focused model is very useful for explaining why bad patents survive. they are only indirectly related to the validity of the underlying patent because of the uncertainties of patent litigation and information asymmetries. when probability of success is very high. Challenge if: L < αCL + (1-α) (CP + P) (equation 1) All other things being equal. or because the patent claims were obviously too narrow to support such assertion. 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. 35 of 60 . this new model focuses on the patent holder’s incentive to assert her patent. In the next section we present an assertion focused model. alleged infringers are unlikely to challenge. 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. the higher litigation costs rise. even the holders of good patents have a lot to lose from patent litigation. as it would be under a system of post grant review. a certain percentage of valid good patents are likely to be incorrectly invalidated due to judicial error. This may seem counter-intuitive. the holders of good patents have almost as much to fear from a challenge to the validity of their patents as bad patent holders. Instead of focusing on the potential infringer’s incentive to challenge a patent. As a result. As noted above. An Assertion Focused Model In this section we present a new model for analyzing patent reform proposals. 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. This is an important insight of the challenger focused model.180 As discussed in the previous section. If the minimum threshold for litigation was considerably less. E. but recall that the label “bad patent” is not synonymous with invalid patents. Or. 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. Furthermore. If the minimum threshold for litigation is several hundred thousand dollars. Under the current system. the less likely an alleged infringer will be to challenge. the challenger focused model shows that the alleged infringer’s prospects of success are often not significant in deciding whether to challenge a patent. If patent holders can keep their royalty demands at less than the cost of litigation. even where the prospects of success are a significant factor in the alleged infringer’s decision making process. in terms of the notation. no matter how confident they are of winning. 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. Furthermore. the most important factor determining whether an alleged infringer will challenge is the ratio of litigation costs to licensing costs. including the relationship of the incentive to assert to 180 See infra __. keeping patent royalty demands below this amount is easy for the patent holder to do.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.

However. 36 of 60 . the probability that the target retaliates given she does not accept the license.k. the probability that the target will accept a license (γ). and R is the cost of retaliation. and the probability and gravity of the target retaliating against the patent holder.181 = Gross profit to patent holder from licensing the patent. but that they will also attempt to reduce or entirely eradicate the commercial value of the patent. the licensing revenue the patent holder will derive if the target accepts the license (π). 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.] When a patent holder sends an infringement notice to an alleged infringer. Variable Definitions: γ π T R δ = Probability of target accepting a license. she hopes that the target will agree to her demands without complaint. Accordingly.γ)(T + δR) Restating in terms of δR yields: Assert if: δR < (γπ – T)/(1 . thus forcing the patent owner to either sue or implicitly acknowledge it is unable to enforce its claims. Other more subtle forms of retaliation include publicly defying the patent.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 the quality of the underlying patent.γ) (equation 2) The most important implication of this model is that where targeting costs are low and the prospect of retaliation is small. δ is the conditional probability of retaliation. a rational 181 γ is the reciprocal of α in the Challenger Focused Model. [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).T) + (1 . this inequality will almost always be met. Every assertion of right by the patent holder carries with it some possibility that the target will retaliate.γ)(T + δR) The patent holder will assert if UAssert > 0 γ(π . 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.T) > (1 . The possibility of retaliation is the cornerstone of this model. the patent owner also faces a risk with each new potential licensee that their target will not only try to evade paying license fees. targets). = Cost to patent holder to locate and engage potential licensees (a. see supra note __. = Probability of retaliation by adversarial target from the point of view of the patent holder.a. Utility function: The patent holder’s utility in asserting her patent can be expressed in terms of the notation as follows: UAssert: γ(π . = Cost to patent holder from retaliation efforts by the target.

183 In the face of substantial information asymmetries. 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. because uncertainty and information asymmetries have a leveling out effect. 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. Once a few licensees have signed up. Note that the probability that a target will accept a license offer is not completely outside of the patent holder’s control. their willingness to accept a license will be unrelated to the underlying quality of the patent. So. 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.C. It is difficult to conceive of reforms to the current system that reduce γ for bad patent holders without similarly affecting good patent holders. 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. If the holder of a good patent knows the patent to be good. even where the probability that a target will accept a license is low. the more the patent holder demands from the target. Furthermore. in terms of the notation. 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. A target’s propensity to accept a license will depend in part on the cost of the license. Both of these are factors within the patent holder’s control. γ = f(π. a target is likely to over-estimate the validity of bad patents and underestimate the validity of good patents. 37 of 60 .182 A target’s propensity to accept a license will also depend on how effectively they have been targeted. if the holder of a bad patent knows the patent to be bad. the more likely it is that a target will opt to license. The introduction of a system of post grant review will expose all patent holders to an increased threat of challenge. the assertion focused model treats good and bad patent holders the same. 184 Id. or in terms of the model it will increase δ. as the Challenger Focused Model indicates.3 infra. But what is significant is that. In other words. This reputation can be as much for litigiousness as for the quality of their patents. 183 See Part III. 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. In fact. However. it is in her best interest to communicate this information to the target. it is in her best interest to restrict any information about the quality of the patent. So far. reforming it such that the expected value of retaliation faced by good patents starts to diverge form that of bad patents is more feasible. The more accurately the patent holder identifies her potential targets and the more effort she expends to make her threats of litigation credible.184 Although changing the patent system to have a differential impact on γ is unrealistic. 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. if all patents look the same to an alleged infringer. the more likely it is that the target will refuse to pay. uncertainty and information asymmetries discourage alleged infringers from challenging patents.T). Alternatively. as long as the system is designed correctly.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 patent holder will broadly assert her patent.

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. In our view.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. it is also designed to maximize the differential impact on bad patents. 38 of 60 . In this way. 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. 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. RBad > RGood. 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. post grant review provides a signal of patent quality for good patents that bad patent holders face great costs in imitating. 185 186 Id. In the final part of this paper we propose a Multistage Post Grant Review (“MPGR”) system. 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. as opposed to seeking to identify every single improvidently granted patent. 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.A infra (two stages of post grant review). See Part IV. In terms of the model.

187 are within PTO’s discretion to implement and do not require legislative action. adopting the international practice of awarding the patent to the first inventor See Part III. rather than attempting to strengthen or weaken the exclusive rights of patent holders across the board.B.189 Spending more money on patent examination requires either getting more money from Congress. 1497 (2001) (The PTO should be rationally ignorant of the objective validity of patents. by ending “fee diversion. As such they are not the focus of this paper. We take no position on whether raising the quality of patent examination in general is justified. L. but this is by no means certain. a number of interesting proposals to reform patent examination have been made over the last few years. The examination reforms proposed under the PDQ Act are all justified under a differential impact analysis. (examination reform) Mark A. 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. Many of these proposals simply require the reallocation of resources within the PTO.” 191 Patent pendency is the time it takes the PTO to issue a patent once it the application is filed. 1495. education and national security. because it is too costly for the PTO to discover those facts. 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. Rational Ignorance at the Patent Office. online peer review and accelerated examination procedures. Examination reform As discussed in Part II.190 increasing patent filing fees or significantly increasing patent pendency. we consider it to be neutral in terms of our differential impact analysis. 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.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 PART III. U. 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. First. A.) 189 Id.191 Assuming that we don’t want to divert the necessary funds away from health. 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. 95 Nw. Lemley. Reforms such as limiting the applicant’s right to file continuations. 188 While improving examination for the small fraction of issued patents that are actually asserted would clearly be worthwhile. In other words. Good and bad patentees are each likely to be deterred from filing applications as the cost rises and/or the pendency increases. To the extent that a reform proposal merely calls for the optimization of current resources. The harder question is whether more resources should allocated to patent examination. 190 For example. 187 188 39 of 60 . 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. REV. requiring applicants to designate representative claims for initial examination. improving examination for the other 95% would largely be a waste of resources. 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.192 Additionally.A. 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.

would remain secret until the day they were issued by the PTO.198 Until relatively recently. June 8.195 Such harmonization would consolidate the ownership of patent rights across national boundaries and allow for more streamlined examination internationally. See also. 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. [2006 ref] But see F. patent law with that of most foreign countries.J. § 3 (2005). Those applicants were allowed to opt out of automatic publication. 2005). 109th Cong. The Case for Registering Patents and the Law and Economics of Present Patent-Obtaining Rules. Nonetheless. 122(b)(2)(B). 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. 45 B. 259. 196 Gerald J. First. § 8 (2005). 266 (2003). it has the option of negotiating a Patent Reform Act of 2005. The U. Rev 55 (2003). L. In 1999. 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. Furthermore. 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.S. Mossinghoff. 195 151 CONG. 11 Tex. H. 2795. H.R. PAT. patent examiners will have access information that they may have overlooked.199 The relevant provisions of the PDQ Act will effectively close this loophole and make 18 month publication the rule for all patent applications.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. Congress passed the American Inventors Protection Act which introduced the requirement to publish patent applications eighteen months after their earliest filing dates. Scott Kieff. 197 Patent Reform Act of 2005. SOC'Y 425.C. [2006 ref] 198 Patent Reform Act of 2005. 2795.S. However. H. 109th Cong.196 The second examination reform proposed under the PDQ Act is Pre-grant opposition. 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.R. E1160 (daily ed.S. 427 (2002) (between 1983 and 2000. Prop. 109th Cong.C. patents filed in the U. 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. Intell.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. L. § 7 (2005). [2006 ref] 199 35 U. 84 J. & TRADEMARK OFF.)] F. 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. If a company is aware that a patent that reads on their business may issue in the near future. the first to file won 1917 of the 2858 interference cases).R. 2795.193 One advantage of a first to file system is that it reduces uncertainty by prompting earlier disclosure of the invention to the public. REC. Mandatory publication would improve the patent system by reducing the possibility that third parties are taken by surprise by an issued patent. 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. Toshiko Takenaka. The third examination reform proposed under the PDQ Act is mandatory publication of all patent applications after 18 months. 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. Second. First-to-Invent System Has Provided No Advantage to Small Entities.194 A first to file system is also advantageous because it would and harmonize U. 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.S. 193 194 40 of 60 . Finally.

2002) (general knowledge). Patent System . Cir.Design Choices and Expected Impact. 202 In re Lee. and contrary to the goals of the patent system).205 The doctrinal arguments in favor of reforming the Federal Circuit’s approach may be persuasive.g.”200 However.S. the Federal Circuit does not allow a patent examiner to reject an application using general knowledge. (Law Prof brief). own understanding or experience).typepad.pdf (arguing that Federal Circuit’s current approach to non-obviousness. http://patentlaw. 06-03 Available at SSRN: http://ssrn. 989. Feb. Post-Grant Reviews in the U.a sometimes difficult standard to achieve practically.com/patent/ksramicus. at 1. 200 201 41 of 60 . Of course.C. No. Br. 7.S. but it is difficult to justify the reform on the basis of 35 U. Patent Law Viewed Through an Evidentiary Lens: The 'Suggestion Test' as a Rule of Evidence (March 2006). L.com/patent/ksramicus.”) See also: http://patentlaw.S.C.com/abstract=893965 (Finding that the Federal Circuit has not narrowed the suggestion test. 999 (2004). 1. 203 David Streitfeld.typepad. This does not necessarily mean that such reforms are ill-advised. Bronwyn H.J. Inc. Christopher Anthony. In this sub-section we argue that while narrowing the scope of willful infringement is clearly advantageous in terms of differential impact. 103(a). 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.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 license with the applicant early on and to potentially design around the patent. 04-1350 (Katherine Strandburg et al)..B. LEXIS 4912 (2006) Question Presented: Whether the Federal Circuit erred in holding that a claimed invention cannot be held "obvious. is at odds with the statutory language. 1345 (Fed. lowering the burden of proof on patent challengers. 202 This requirement is intended to prevent the examiner from indulging in hindsight. 2003. only one is strongly recommended under a differential impact analysis. in the absence of some proven "'teaching. (See Lemley/Shapiro forthcoming paper).S. 2001) (common sense. sec. but it also has the effect of sometimes preventing the patent office from “reject[ing] something just because it’s stupid. Cir. of Twenty-Four Intellectual Property Law Professors as Amici Curia in Support of Petitioner. § 103. B. Cotropia. Of the four main areas of doctrinal reform reviewed in Part II.201 For example. 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. inconsistent with Supreme Court precedent. but it does imply that they are probably not a legislative priority at this time. 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.pdf. L. Hall & Dietmar Harhoff. 1386 (Fed. common sense or the examiner’s own understanding or experience unless that knowledge is “articulated and placed on the record” . Teleflex. other reforms such as raising the threshold of non-obviousness.”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. v. But see. 204 See e.A. 258 F." and thus unpatentable under 35 U. Tulane Public Law Research Paper No. 277 F.204 The Supreme Court has recently granted certiorari in KSR v. 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. this only helps to the extent that surprise is really the problem.3d 1379. Note: This Headline is Patented. TIMES.) 205 KSR Int'l Co. In re Zurko. Doctrinal reform Differential impact analysis has some interesting implications for doctrinal reform. 2006 U. 19 BERKELEY TECH. and curtailing the availability of injunctions for patent infringement cannot be recommended on the basis of differential impact. Teleflex to address the question of whether a finding of obviousness should require proof of some suggestion or motivation to combine prior art references.3d 1338.

(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. which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit.g. 207 See.. and yet imposes a low threshold for the notice required to trigger willful infringement on the other hand. 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. Holbrook. eliminating the willfulness zone would increase the probability of retaliation for bad patents but not for good patents. v. SRI Int'l Inc.J.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. 1470 (Fed. An Economic Analysis of Enhanced Damages and Attorney's Fees for Willful Patent Infringement.J. Thomas F. B. 1024-25 (N. 206 42 of 60 . Cir. Supp. Cal.3d 1462. and (2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity. 208 O'Hagins. 59 SMU L Rev 123 (2006)..” Id.207 Before a potential infringer can file a motion for declaratory judgment pursuant to 28 U. Advanced Tech. Holding that “actual controversy” requires both “(1) an explicit threat or other action by the patentee. The reason for this differential impact is that good patent holders rely more on the strength of their patents to See. CIR. taking a broader view. The PDQ Act also provides that damages for willful infringement may be awarded against a party if. Inc.D. 276 F. Inc.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 the differential impact test set forth in this article. 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 infringer engaged in conduct that was not colorably different from the conduct previously found to have infringed the patent. M5 Steel Mfg. Tangri. 1997). 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.S. “after having been found by a court to have infringed that patent. 127 F. Ending Patent Law's Willfulness Game.210 In terms of the assertion focused model discussed in Part II. § 2201. 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. Also note that the court’s determination of an infringer’s willfulness shall be made without a jury. v. Labs. The reason for this is simply that changing the standards of patentability changes what constitutes a bad patent. 14 FED. Possession in Patent Law.C.”208 The effect of willful infringement doctrine is to increase the penalties for unsuccessful patent challenge.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. as a policy analysis tool. 2d 1020. and which resulted in a separate finding of infringement of the same patent. If passed in its current form. Cotter.” 209 Section 6. 18 BERKELEY TECH. Id. they must possess a “reasonable apprehension of suit.. Furthermore. e. 291 (2004/2005). Lemley & Ragesh K. 2. L. differential impact only makes sense if we take the existing standards of patentability as given. Narrowing the Scope of Willful Infringement The defects of the current doctrine of willful infringement have been thoroughly reviewed elsewhere. This oddity arises because the Federal Circuit sets a high threshold for declaratory judgment on the one hand. 1085 (2003). Timothy R. 210 Section 6. 2003). Mark A. However.

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 . one that would devalue both good and bad patents have a greater effect on bad ones.g. AMF Bowling.. No. the application of the clear and convincing evidence standard in relation to validity is difficult to reconcile with the realities of modern patent examination .g. Rev. They spend very little time. Inc. Arguably. 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. pp. 215 cite. 1495. 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. it does not provide a strong basis for doctrinal reform. If passed in its current form.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 dissuade the filing of declaratory judgment actions. (2) that remedies available at law.L. Examiners do not in fact spend long hours poring over a patent application or the prior art. e. Lemley. 1528 (“The presumption of validity has little if any basis in fact. Inc. Cir. 10-13. 95 Nw.g. Regulation. and far less than either the lawyers or the triers of fact in infringement cases. 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.213 Although we concede that the need for clear and convincing evidence of invalidity may have outlived its usefulness. (3) that. Vol.. Rational Ignorance at the Patent Office. However..e. regardless of whether they are good or bad. Even if this is the case. reducing the threshold will decrease the value of all patents.. 214 See Part __.3d 1420. U.'') 212 See. Kegel Company. 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. v. As an alternative to changing the standard. are inadequate to compensate for that injury. e. not the ambiguous wording of “offer to license” letters.”215 A plaintiff must demonstrate: (1) that it has suffered an irreparable injury. 3.211 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.”) See also. but it would also devalue the patent portfolios of every good patent holder by making them more easily subject to unwarranted challenges. and (4) that the public interest would not be disserved by a permanent injunction. the PDQ Act will slightly amplify the effect of the Supreme Court’s ruling in eBay. infra. 1429 (Fed. we propose creating a variable presumption of validity that would have a significantly differential impact.212 As such.com/abstract=869826 213 See e. Instead. FTC Report. A. They regularly miss the most relevant prior art. et al. the clear and convincing evidence standard is frequently considered a prime candidate for revision. Lemley. Mark. 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. 28. lowering the burden of proof with respect to invalidity may have a weakly differential impact – i. Winter 2005-2006 Available at SSRN: http://ssrn. 1997) (''Invalidity must be established by facts supported by clear and convincing evidence. Mark A. What to do About Bad Patents.214 4. Ending the “willfulness game” clearly meets the differential impact test. 127 F. a remedy in equity is warranted. 4. such as monetary damages.

it should be noted that the ability to obtain a final injunction adds significant negotiating leverage to both good and bad patents alike. Litigation reform The Challenger focused model shows that the high cost of patent litigation insulates bad patents from effective challenge in many cases.S. S. Briefs 130 (U.S. eBay v. 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. The bounty hunter proposals are effectively penalties for improvident patent drafting. The Assertion Focused Model shows the patent holder’s decision to assert is directly tied to the probability that their targets will retaliate. However. 2006) 2005 U. Ct. C. 796 (2002).. if such penalties are more broadly applied. 219 However. the fee-shifting and bounty hunter proposals might be too aggressive in their attempt to enhance the incentives for challenging patents. Brief Amici Curiae of 52 Intellectual Property Professors In Support Of Petitioners (January 26. 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.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. 216 217 44 of 60 . Ct. Fee-Shifting and Bounty Hunter Proposals The fee-shifting and bounty hunter proposals outlined in Part II.J.S. Therefore. Briefs 130 (U. 17 BERKELEY TECH. L. e.S. 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.g. Both models predict that changes to the structure of patent litigation significant potential to affect the behavior of patent holders and potential infringers. the resulting increased expenditure is not necessarily efficient given that the commercial value of the innovation will often be unknown at that time. 05-130. 2006) (2005 U. If these penalties are reserved for those patent holders who fail to look for and disclose even the most readily available prior art. Carrots and Sticks to Create a Better Patent System. then they should not trouble good patent holders too much. But.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. and Brief of Various Law & Economics Professors as Amici Curiae in Support of Respondent (March 10. Briefs 2006)). No. their incentives to challenge will remain unchanged with respect to the current system.”216 Significantly. Mercexchange. There may well be good reasons to relax the Federal Circuit’s inflexible stance toward final injunctions. Jay P. Penalizing improvident patent drafting should stimulate patent holders to improve patent quality at the application stage. 1. but. larger companies are unlikely to view the bounty payoff as a significant revenue stream. Smaller niche firms may form solely for the purposes of submitting prior art in Section 8 Section 8 218 See.218 In terms of the differential impact test. but this particular reform is not a high priority in terms of differential impact. 763.219 Furthermore. whereas the Kesan’s fee-shifting proposal constitutes a penalty for asserting an improvidently drafted patent.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 terms as the court deems reasonable. Briefs 2006). while potentially having a differential impact on bad patents. Both these measures should have a differential impact in that bad patents have a higher probability of triggering these costs. Kesan. S.

220 Second.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. 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. 222 Id. 2. but still leaves open the possibility of continuing patent attacks by non-interested parties based solely on financial reward incentives. it should be noted that its actual effects in the patent context are somewhat speculative. Herbert M.222 In sum. 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. while we see some potential for the fee-shifting and bounty hunter proposals. the prospect of fee-shifting should also reduce the incentives of potential infringers to settle strong invalidation cases early. Fee-shifting appears to have a differential impact because although all patent holders face slightly greater risks when they attempt to enforce their patents. Facilitating Collective Action Cooperative patent challenges and mandatory joinder are both aimed at solving collective action problems relating to patent litigation. 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 magnitude of those risks are tied the quality of the underlying patent. 1947-48 (2002) (“scholars have considered the impact of fee shifting on … [with] surprisingly little agreement”). For example. Kritzer. Fee shifting should have two important effects. The result is to reduce the frequency of low-merit claims. As Herbert Kritzer notes. the second is actually coercive. 1943. First. the prospect of fee shifting changes the patent holder’s incentives at the time of prosecution. at 795. their contribution is very much contingent on the exact details of their implementation.”) 220 221 45 of 60 .SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 anticipation of bounty payouts. Lawyer Fees and Lawyer Behavior in Litigation: What does the Empirical Literature Really Say? 80 TEXAS L. there is surprisingly little agreement among theoreticians as to the effect of fee-shifting on litigation in general. while properly designed fee shifting should have a differential impact on discouraging patent holders from pursuing weak cases. Id. This would be mitigated by the requirement of submission fees. 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. REV. 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). However. 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. 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. From the perspective of differential impact. The difference between the two proposals is that the first merely facilitates collective defense by potential infringers. Jay Kesan’s fee-shifting proposal is an important contribution.

The second is that good patent holders still face a significant chance of losing in federal court because of the uncertainties of litigation. In theory the holder of a bad patent could still attempt to play the same game under a post grant review regime. 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. However. First. 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. In contrast. no matter how sure one is that such a challenge would be successful. it does not appear to make sense to challenge a patent. post grant review will expose all patent holders to an increased threat of retaliation when they assert their patent rights. 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. the patent holder can expect to encounter serious opposition from potential infringers who believe that the patent has obvious defects.000. having a high probability of successfully challenging a patent was not enough to ensure that challenge would in fact be made. the risk of judicial error and fluctuations in patent law doctrine. For example. Recall that the main implication of the challenger focused model was that the higher litigation costs rise. the simplified parameters of the challenger focused model probably capture the behavior of a majority of firms. 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. if post grant review allows a potential infringer to challenge the validity of the patent for a mere $25. However. the less likely an alleged infringer will be to challenge the validity of a patent. 46 of 60 . 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. but that would require demanding almost negligible royalty rates.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 still has a differential impact because the expected cost of that retaliation should be much lower for good patents than for bad ones. When the cost of successful litigation is more the cost of licensing. By substantially reducing the monetary cost of challenging a patent’s validity. and (iii) post grant review will reduce uncertainty and information asymmetries relating to patent quality. Post grant review is different to federal court litigation in this respect for two reasons. 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. a patent holder can usually demand $50. Second. The challenger focused model also showed that in a large number of cases. Nonetheless. (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.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 3. 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.000 from 20 different alleged infringers and be fairly certain that none will challenge the patent’s validity in court. 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.

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. uncertainty and information asymmetries relating to patent quality have a leveling out effect. Consequently. 47 of 60 . 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. As the challenger focused model indicates would-be patent challengers face significant information costs in assessing patent quality. post grant review provides a signal of patent quality for good patents that bad patent holders face great costs in imitating.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. it will also signal the merits of patents that are reviewed and not found invalid. patents that survive post grant review will not only appear stronger. they will be entitled to a stronger presumption of validity in litigation. Furthermore. If post grant review functions as intended. it will not only expose patents that should never have been granted. Finally. 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. 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 will have a differential impact on bad patents by reducing uncertainty and information asymmetries relating to patent quality. Not only does post grant review provide a way to screen out some bad patents. In this way.

if that opportunity is made too freely available. As discussed in the previous Part.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 PART IV. we propose a multiple stage system of post grant review. 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. 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. To meaningfully address the bad patent phenomenon. In short. and (iii) rather than automatically invalidating a patent that is successfully challenged in post grant review. In this Part we explain 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 currently embodied in the PDQ Act or those proposed by the FTC. Patents that should never have been issued receive most of the attention in the bad patent debate. (ii) patents that have been unsuccessfully challenged in post grant review would be entitled to strong presumption of validity. post grant review must find a way to deal 48 of 60 . 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. Third. Second. (“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. such patents should merely be weakened by attaching a presumption of invalidity. 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. Differential Impact and Post Grant Review Under the differential impact test elaborated in this article. but also how it can be applied to building a better model for post grant review than those currently on the table. we have proposed that the current legislative push in relation to patent reform should be specifically targeted to address problems related to bad patents. however the hyper-assertion of vaguely worded claims has at least as much potential to damage the incentive function of the patent system. we propose bringing questions of claim construction into post grant review such that both sides of the bad patent phenomenon can be addressed. the NAS and various other commentators. In short. 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. 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. 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. MULTISTAGE POST GRANT REVIEW A. 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). it may be over used by well resourced defendants to chill the assertion of good patents.

but could be invalidated on the preponderance of the evidence rather than the onerous clear and convincing evidence standard. We propose that issued patents should generally only be entitled to a weak presumption of validity: i.3d 1420. 4. Kegel Company.. Inc. that at least one private actor thought that the patent was commercially significant. However. 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. We can’t be certain that an unsuccessfully challenged patent will not later be shown to be invalid.225 Under the current system a patent applicant can obtain a patent without definitively proving anything at the patent office. 127 F. 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. 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. Winter 2005-2006 Available at SSRN: http://ssrn.R. none of the arguments in favor of retaining the strong form of the presumption of validity (i. Note also. Once a patent has been challenged in post grant review and is upheld. As an alternative to simply keeping or abolishing the strong form of the presumption of validity.. A Variable Presumption of Validity As we suggested in part __. Inc. it should then be entitled to strong presumption of validity. Cir. Vol. e. Mark A. No. 10-13. 224 49 of 60 . Lemley. What to do About Bad Patents.555. [cite] 226 See.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. See. [The fact that a patent has been subject to post grant review also conveys a second piece of information. 1429 (Fed. AMF Bowling. 28. presumption of validity plus convincing evidence standard) require that all patents should be subject to the one evidentiary standard. pp. 1997) (Invalidity must be established by facts supported by clear and convincing evidence. 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. nonetheless.e. 225 37 C.e.com/abstract=869826. 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. we propose the application of a variable presumption of validity tied to post grant review. Regulation. as such it is less likely to be a bad patent..224 Although this may sound like a radical shift from current practice. et al. v. B. once that patent issues it can only be invalidated through clear and convincing evidence. but we can be relatively confident that it will not be easily invalidated. 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.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. 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.F. they should be presumed valid. § 1.g.] 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.).

Our proposal adopts an escalating structure that acknowledges the differences between reviewed and unreviewed patents and between post grant review and actual litigation. below. even if it is not the final forum of dispute for all controversies. on the preponderance of the evidence. This is a significant departure from the current reexamination system and from the post grant review proposals currently before Congress. such patents should merely be weakened by attaching a presumption of invalidity. In some ways. post grant review will function as a low cost form of adjudication for a large number of cases. thus setting up the potential for contradictory outcomes. the model of post grant review we propose here is more about information revelation than adjudication. but that if the patent holder can show. The presumption of invalidity weakens patents successfully challenged in post grant review but it does not destroy them. The presumption of invalidity quite literally means that the patent is presumed to be invalid as an evidentiary matter. it would truly serve as a compliment to litigation. 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 . As the table makes clear. The current system also suffers in that both post grant review and litigation can lead to exactly the same outcome. 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. in terms of the Challenger Focused Model. the current system is indiscriminate in that it subjects reviewed and unreviewed patents to the same strong form of the presumption of validity. not merely a substitution thereof. In that case the patent would then be entitled to the strong presumption of validity. the presumption of invalidity makes the lack of appeal rights and other procedural safeguards with respect to post grant review more palatable. By lowering the stakes of post grant review. The difference between the variable presumption of validity and the current patent system is illustrated on Table 1. that their patent is valid and infringed she is entitled to enforce her rights. If post grant review is implemented in this way. 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.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. Nonetheless.

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. Post grant review would also be much more open than the present litigation system because it is significantly cheaper. without the participation of the patent holder. Rev. 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. 37 CFR § 1. novelty and loss of right to patent) 227 51 of 60 . 228 See 35 USC 102 (Conditions for patentability. we propose a very different kind of limitation on the right to challenge the validity of a 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. (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. Accordingly. 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. For post grant review.227 For example. 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. post grant review can improve the patent system by allowing for more focused examination of patents that appear to have been improperly granted.228 The substantial new question of patentability test clearly limits the situations in which challengers can subject a patent owner to post grant review. 1. Pre-qualification will reduce the universe of reviewable patents down to Currently. 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.. May 2004). To address this potential concern. See. 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. reexamination requires a finding of a substantial new question of patentability based on the prior art submissions. and (iii) the PTO’s Stage One determination on the initial challenge would become a matter of public record. These restrictions prevent parties without a strong direct interest from challenging the patent. nor is it meant to function as a total substitution for litigation.” Whereas the standing requirements of patent litigation restrict challengers based on how directly they are threatened by the patent holder. 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. but simply misunderstood the technology.515. 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. 2. MANUAL OF PATENT EXAMINING PROCEDURES § 2201 (8th Ed. the filtering device we propose discriminates purely on the basis of the strength of the challenge presented. but a badly structured system of post grant review may also allow potential infringers to harass patent owners whose patents are not suspect.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 C.

Patent holder’s will naturally be concerned that their rights may be unfairly affected by the first stage of the MPGR process. or possibly even the knowledge of. whereas good patents are actually strengthened by the first stage of the MPGR process.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. 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. she is in a good position to fend off the patent holder’s demands for a license. Mandatory Publication of Stage One Findings: As previously discussed. but it means that any future challenger must reinvent the wheel. even if the initial challenger is appeased by the patent holder. and there is a substantial new question of patentability. However. the patent is nonetheless not invalid . Also. 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. 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. it is the patent holder who is advantaged because the PTO will publicly announce that. assuming that the terms of settlement are kept secret. but the first hurdle to MPGR has been cleared. Early settlement can efficient from the point of view of the parties. even in light of the challenger’s prior art. 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. Under our proposal. 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 . 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. From this point on. a challenger is not forced to pursue the MPGR process to its final conclusion. 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. If she is wrong. So what is the significance of these published findings? The patent is not invalid at this stage. The differential impact here should be obvious: bad patents are more easily challenged. This reduces the early settlement problems discussed in conjunction with the public good problem. without the involvement of. 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. 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.all at no cost to the patent holder. If the potential infringer is right. before the patent holder has incurred any cost in defending her patent. it will be easier for a third party to pick up where the initial challenger left off. 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. other potential challengers don’t even get the advantage of knowing how strong the parties thought the patent to be. the patent holder. Also.

At this stage. but the actual cancellation of the patent itself. none of whom had made a decision with respect to the patent at any other time. 229 53 of 60 . 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. 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.S. 2. 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. with arguments to the PTO. on their own. or a new challenger – may force the continuance of the MPGR process or join the MPGR process. 3. but if it does not. This review would take the form of an adversarial proceeding in which any interested party may be allowed to make written submissions.229 Patent holders would not be able to appeal patent review decisions. but their ability to pursue subsequent litigation should be an effective substitute. Under the current reexamination system decisions of the patent office are appealable to the Patent and Appeals Board. In the case where the original challenger does not continue the process and no new challenger picks up the process. 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.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. any party – including the original challenger. § 134. 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. The second stage of MPGR consists of a review of the challenge by a review panel of the PTO. The implications of this presumption of invalidity are discussed in detail in section __ above. The MPGR system proposed in this article offers a middle ground whereby a successful patent challenge results in a presumption of invalidity. the patent holder. however. This review would take the form of an adversarial proceeding in which any interested party may be allowed to make written submissions. The MPGR process may very well end at the first stage.C. 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. 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. Ideally this review panel would consist of three experienced patent examiners. the patent holder can remove the hanging question of patentability by continuing. see 35 U. Stage Two The second stage of MPGR consists of a review of the challenge by a (three person) review panel of the PTO. the second step of MPGR consists of an examination a review panel within the PTO with adversarial participation by all interested parties. 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. D.

Lemley. 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.” 235 Chiron v. For example. or written description. AWH Corp. however.3d 1303. 104 Mich. A proposition that the PTO may. For example. obviousness. 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.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.3d 1247 (Fed Cir. Cir. the ambiguity of language and the unpredictable path of technology all lead to ambiguous patent claims. 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. However. U. 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. Cir. 37 C. 2005). in Chiron v. 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.F. L. e.g. enablement. 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. 363 F. v.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. Rev. Patent 6. The Changing Meaning of Patent Claim Terms. There is. Mark A.75(d)(1). the broader a claim becomes the more likely it is to be found invalid on the basis of novelty. 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. 2004) 230 231 54 of 60 . 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. 101 (2005) 232 [Possible analogy to as-applied challenge in constitutional law] 233 Under the current law. but on the hand. 234 See. 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.3d 870 (Fed. For example.016. 1316 (Fed.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. See also. 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. 2004). Genentech235 the court had to decide the proper scope of the patent holder’s rights with respect to the 358 F. a solution to this problem. Genentech.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. On the one hand broad claims increase the likelihood that the patent will confer economic power if valid..R. For many patent owners broad claim construction is a mixed blessing.233 Under our proposal.S. or may not agree with. § 1. it should be able to determine what the patent does not mean. 415 F.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 Poor quality examination. Any question of claim construction presented in this fashion should in fact contain two distinct questions: (1) does the claim encompass meaning B. potential infringers would present the PTO with a negative claim construction. in the 2004 case of Superguide Corp. Phillips v.

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. This question was significant because one of the patent holder’s competitors had developed superior monoclonal antibodies through the application of recombinant DNA technology. outside the bounds of the enablement requirement. Broadly interpreted patent claims expand the universe of potentially invalidating prior art. 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. Indeed.239 These antibodies are mar more useful in medical applications because of lower rates of rejection by the human immune system. in such full. 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. While an expansive reading of the patent’s claims may help the patent owner assert her rights more broadly. and of the manner and process of making and using it. Where the patent office determines either 1. The court ruled that the patent claims applied to both methods of producing the antibodies.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. DNA that encodes the binding portion of monoclonal mouse antibodies is merged with human antibodies to produce “chimeric” or “humanized” antibodies. (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. or whether it was limited to those produced through the plaintiff’s hybridoma technology. and they also makes it more difficult to meet the statutory requirements of written description and enablement. [citation needed] 239 [citation needed] 240 The court held that genetically engineered antibodies. or with which it is most nearly connected.236 The patent holder had developed a number of these antigens using hybridoma technology developed in the early 1980’s. specifically chimeric antibodies.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.238 In the late 1980’s scientists developed a way to overcome this problem by using recombinant DNA technology. This new technology arose after the patent holder’s initial filing date and thus was. to make and use the same. in order to claim rights with respect to a nascent technology the patent would have to have provided a "specific and useful teaching.240 The Chiron case illustrates that broad claim construction is a two edged sword. 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. Under this approach. Hybridoma cells are used to produce monoclonal antibodies by interacting with cells from an animal that has been challenged with the relevant antigen. according to the Federal Circuit. and shall set forth the best mode contemplated by the inventor of carrying out her invention. that negative construction would have to be 236 Id. first appeared as a successful technology in the literature of this art field in May 1984. (3) neither 1 nor 2 (which carries the implication that the claim in question covers the defined product process or method). by definition." 241 35 USC 112 (The specification shall contain a written description of the invention.) 237 238 55 of 60 .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. and exact terms as to enable any person skilled in the art to which it pertains. but that the patent holder had failed to meet the enablement requirements with respect to that technology. concise. clear. it may also jeopardize the validity of the patent.

at 41 (Illinois Law and Economics Working Paper Series.R. 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. obviousness. 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. As we have argued at length in this article.242 However. E. best mode or inequitable conduct. 2005). available at http://ssrn. 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. discovery will be unnecessary. supra note 8. If post grant review is going to work as a genuine alternative to litigation. it should also be allowed to develop an appropriate filtering standard under its rule making authority. Where the patent office determines 3.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 taken into account in any subsequent litigation. This leads us to make the following recommendations with respect to other disputed features of post grant review: 1. Given these limitations. How does this relate to our proposed threshold of a substantial new question of patentability? Essentially. and enablement. Issues of Format. but would not include issues such as statutory bars. NAS REPORT. 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. supra note 13.com/abstract=688005 (describing how many “bad” patents are never revoked or even challenged in court). Kesan & Andres A. 243 Patent Act of 2005. 242 Jay P. the patent would be presumptively invalid with respect to that claim. In contrast to the proposals for limited discovery in the PDQ Act243 and the recommendations for discovery by the NAS and the FTC. 244 See. it could be employed in a similar filtering fashion. The practical effect of this recommendation is that post grant review would extend to novelty. we believe the scope of post grant review should be limited to issues relating to patentability. This. at § 328 (draft amendment to H. The patent office should be given a broad discretion to decide whether to consider applications for negative claim constructions. Scope and Discovery The fundamental design constraint for post grant review is cost. at 11. Although this is not the same as substantial new question of patentability. Working Paper No. 244 we believe that so long as the scope of reviewable issues is kept narrow.g. Why “Bad” Patents Survive in the Market and How Should We Change? – The Private and Social Costs of Patents. it must be significantly more affordable than patent litigation. in turn. FTC REPORT.. both discovery and oral arguments should not be necessary for the parties to make effective arguments concerning patentability. Gallo. LE05-004. e. at 96. the question of differential cost is just as significant as cost in general. 56 of 60 . 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. Consistent with the House proposal. supra note 11. commentary typically focuses generally on the attractiveness of post grant review to potential challengers. 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”). Where the patent office determines 2. Controlling the legal costs of post grant review requires eliminating the two greatest expenses of litigation: discovery and oral argument. we envisage that the patent office would review applications for a negative claim construction to determine whether they raised a significant question. Accordingly.

§ 301. varying from 9 months to a year.251 While these are real concerns.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. available at http://ssrn.S. Fetting. supra note 8.248 In contrast. 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. Window of Opportunity If post grant review is going to provide a real alternative to litigation.] 2. Kesan & Andres A. at 37 (Illinois Law and Economics Working Paper Series. Why “Bad” Patents Survive in the Market and How Should We Change? – The Private and Social Costs of Patents. at n74 (quoting Steven G. The NAS. FTC REPORT. Kunin & Anton W.07[4][d][iii] (Rel. 2005). 968 (2004). the FTC.245 and certain specific affidavits not concerning statutory bars or argument246 are allowed for submission. Otherwise. 245 246 57 of 60 . 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. Only patents. prior publications. n168 (FTC cites the PTO’s one year recommendation and recommends a fixed period for post grant review availability). 19 BERKELEY TECH.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. LE05-004.249 property law favors a settled title because this allows value expectations to settle.250 and efficiency results from reducing uncertainty over patent validity. Similarly. we believe that post grant review must be available for the life of the patent. adversarial participation during post grant review should be confined to written submissions only. 247 NAS REPORT.J. 250 Id. First. at 234-235.J. at 115 (one year window plus a trigger). They would be precluded in many instances from availing themselves of the low cost post grant review alternative to litigation. 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. Working Paper No. The Metamorphosis of Inter Partes Reexamination. L. This monitoring is an “across the board” increase in costs which does not differentially target only bad patents. if bad patent holders know that competitors do not closely monitor PTO proceedings. 251 Jay P. Consistent with maintaining a low cost system. If no limited opposition period existed. 248 NAS REPORT.C. Merges. then it would make no difference when ignorant holders of good patents 35 U. and the current House reform bill all recommend a limited time period during which post grant review may be utilized. 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. the bad patent holders have an incentive to then wait until the close of the opposition period before asserting their patents. Gallo. 19 BERKELEY TECH. we see more immediate and definable negative effects that result from a limited time period for post grant review. it must be available to potential infringers at any point in time after the patent has issued. supra note 11. 943. at § 9. L. 971 (2004). 249 Joseph Farrell & Robert P. 4 CHISUM ON PATENTS § 11. Donald S. supra note 13.com/abstract=688005. supra note 8. 97 2005). at 115. they would submit themselves to post grant review when litigation would serve as higher bar to the challenge of their valid and good patents. thereby “engendering commercial stability and fostering the market for patent licensing. Patent Act of 2005. Interested third parties who fail to monitor PTO proceedings would reside in an information void. Chisum. Second.

patent litigation. be subject to another round of post grant review challenges based on new submissions by the current challenger. Proposal to Change the Patent Reexamination Statute to Eliminate Unnecessary Litigation. 257 NAS REPORT. & TECH. at 16. supra note 11. 255 See David G. Amendment of Claims During Post Grant Review We propose that amendments be allowed during post grant review.252 More accurately. 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. The undesirable alternative is to allow uncontested amendments which could.254 or (ii) post grant review should be available for a fixed period plus whenever the patent is renewed or sold. Valuable Patents. supra note 8. 254 See Gerald J. Patents that are issued and never challenged have John R. L. REV. Third. a study by Allison et al. 435. Appx Figure 1 (2004). 27 J. Kuo. 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. F. 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. has shown that litigation of patents occurs throughout the life of the patent. Valuable Patents. 193-196.. we would suggest at least two other alternatives then. MARSHALL L. but does not address the issue of whether they may be argued against by the challenger..253 If an unlimited window for post grant review is too politically infeasible. eventually. see Marvin Motsenbocker. 9 (2005). 2005 DUKE L. 92 GEO. Barker. 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).J.256 3. 43 IDEA 83. The first point of departure is the variable presumption of validity. reaches a peak during the third year following issuance and continues at a significant pace through at least the fifteenth year following issuance. 256 John R. but that they be subject to the same adversarial proceedings as all other patentability considerations during post grant review. 898 (1994) (suggesting that mandatory reexamination be required when party presents patent invalidity defense). L. Post-Grant Review of Patents: Enhancing the Quality of the Fuel of Interest.257 The FTC recommends allowing amendments.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. Though the challenger may be motivated by differing concerns than the patent office. 456-57 (2004). REV. In some respects. The NAS report is silent on this matter. 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. Troll or no Troll.255 This last suggestion could be particularly effective considering that a large number of patents currently litigated have been previously sold or transferred. this differs from other recommendations. 92 GEO. on average. 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. Allison et al. they would assert their rights whenever it became strategically optimal. 887. Allison et al.J.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 asserted their rights. 435. 252 253 58 of 60 . It is certainly not concentrated within the first nine months of issuance. Id. Policing Patent Usage with an Open Post Grant Review. Mossinghoff & Vivian S. 258 FTC REPORT.

A patent which is upheld after post grant review seems much more likely to be valid than one which has not. Our third point of departure with the current post grant review proposals relates to claim construction. but to test that opinion currently requires commitment to substantial litigation costs. Our proposal is that post grant review should not be the subject of any appeal. Our proposal is that potential infringers should be able to negate certain claim constructions through post grant review. 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. Under our proposed multi-stage post grant review. 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. 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. 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. 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. 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. it will also protect the majority of good patents from unmeritorious post grant review proceedings. Currently the only way a potential infringer can obtain any certainty with respect to ambiguous patent claims is via federal court litigation. However. rather. None of these reforms are directly addressed to examination reform. 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. 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. While this may allow a number of invalid patents to escape post grant review. if not the ruling stands. 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. the patent office’s post grant review determination is effectively overruled. For example. changes in the structure of patent litigation can be expected to have flow-on effects for patent examination. a patent holder who believes that the patent office was in error should simply attempt to enforce her rights in court.5 hours.SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 probably only been scrutinized for between 18 and 41. this is only an option to persons who have a reasonable apprehension of being sued for infringement by the patent holder. however. 59 of 60 . 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. 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 MPGR system encourages diligent drafting without mandating it. If she is successful.

SAG & ROHDE PATENT REFORM AND DIFFERENTIAL IMPACT DRAFT 10/23/2009 CONCLUSION Forthcoming 60 of 60 .