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CPIP Scholars Join Comment Letter to FTC Supporting Evidence-Based Approach to IP Policymaking

a hand reaching for a hanging, shining keyOn December 21, 2018, CPIP Senior Scholars Jonathan Barnett, Chris Holman, Erika Lietzan, Adam Mossoff, Sean O’Connor, and Kristen Osenga joined a comment letter that was filed with the FTC as part of its ongoing hearings on Competition and Consumer Protection in the 21st Century. The comment letter was joined by 18 legal academics, economists, and former government officials—including former USPTO Director David Kappos and former Federal Circuit Chief Judge Paul Michel. The comment letter is copied below.

***

December 21, 2018

Via Electronic Submission

Mr. Donald S. Clark
Secretary of the Commission
Federal Trade Commission
600 Pennsylvania Avenue NW
Washington, DC 20580

Re: Competition and Consumer Protection in the 21st Century Hearings—
Public Comments Following Hearing #4 on Innovation and Intellectual Property Policy

Dear Secretary Clark,

As legal academics, economists, and former government officials who are experts in antitrust law and intellectual property law, we respectfully submit these comments and an Appendix in response to the request for public comments following the Federal Trade Commission’s Hearings on Innovation and Intellectual Property Policy held October 23-24, 2018, as part of the FTC’s Hearings on Competition and Consumer Protection in the 21st Century.

We support evidence-based policy-making by the FTC concerning all aspects of technological innovation, intellectual property (IP) rights, and the relationship between IP rights and innovation markets. It is imperative that the FTC ground any policy statements, investigations, or enforcement actions, not on academic theories about how IP rights might potentially be misused in stylized theoretical models, but on persuasive evidence of actual consumer harm from anti-competitive practices in real-world markets. Otherwise, regulatory overreach could undermine the economic incentives and resulting stream of innovative products and services that consumers enjoy in markets in which reliable and effective IP rights attract the private capital necessary to fund the high costs of R&D and the commercialization process.

Few economists and policymakers would question that reliable and effective property rights are a necessary predicate for supporting investment in conventional physical-goods markets. Logic holds that this economic principle applies for the innovators, investors, and entrepreneurs in the information technology and life sciences markets at the core of the US innovation economy.

Given reliable and effective IP rights, multiple empirical studies support the proposition that firms are more willing to incur substantial costs and bear significant risks in undertaking long-term R&D. Two well-known examples are the approximately $2.6 billion dollars required to bring a new drug to market or the billions in dollars required to develop new communications technologies like 5G. These and other long-term R&D investments occur in commercial environments in which courts and administrative agencies secure reliable and effective IP rights.

In recent years, antitrust agencies have sometimes taken policy actions in IP-intensive markets that overlook this fundamental connection between secure property rights, investment incentives, R&D, and commercialization activities. These regulatory actions have been based on academic theories and anecdotal reports that have not been put to thoroughgoing, rigorous empirical tests.

To illustrate the risks of making policy without firm empirical support, consider the smartphone industry. For over a decade, theoretical predictions have been made that comparatively high numbers of patents covering technologies used in a single multi-component consumer product—a smartphone—would create “patent thickets,” “royalty stacking,” and “patent holdup” that would increase prices, constrain output, and stunt innovation. Based on these conjectures, antitrust agencies around the world have issued policy statements, undertaken enforcement actions, and imposed billions of dollars in fines—often directed at the firms that had pioneered the fundamental technologies behind wireless communications. Yet those proposing this testable hypothesis never actually tested it. Empirical researchers who subsequently did so found little to no evidence of “patent holdup.” Contrary to theory, real-world market conditions in the smartphone industry are characterized by constant lower quality-adjusted prices, robust market entry by new producers, and continuously increasing performance standards. Consumers in the US and around the globe have benefited from the virtuous feedback effect between secure property rights in new technologies, strong investment flows, and robust R&D output. The evidentiary burden surely rests on those who propose taking policy actions that would erode the property-rights foundation behind this technological and economic success story.

The smartphone industry is just one of multiple innovation markets that exhibit a positive relationship between reliable and effective patent rights, increased innovation, and economic growth. This evidence demonstrates a close relationship in the biopharmaceutical, medical device and certain information technology markets between patent protection and startups’ ability to secure financing for R&D and to undertake the costly commercial task of translating R&D into new products and services for consumers. This relationship is especially powerful in the case of startups that are often the source of breakthrough innovation. One empirical study shows that a startup with a patent more than doubles its chances of obtaining venture capital funding compared to a startup without a patent. Without a secure IP portfolio, venture capital and other investors will decline to support startups that often have few other legal or commercial mechanisms by which to secure their products and services against imitation by larger incumbents. For similar reasons, larger firms that specialize in R&D but do not have downstream production and distribution capacities require a secure IP portfolio to support a licensing infrastructure that generates the returns necessary to fund continued R&D that ultimately benefits downstream companies in the value chain and end-users in the marketplace.

Antitrust policy has long followed an error-cost approach that takes into account the relative costs associated with overenforcement (false positive errors) and underenforcement (false negative errors) of the antitrust laws. Consistent with this approach, the FTC’s policymaking and enforcement actions in innovation markets should be based on valid empirical evidence that makes it possible to weigh the likely costs and benefits of the agency’s actions.

This concern is especially relevant in evaluating the likelihood of consumer harm and the impact on innovation from patent infringement litigation. Like any form of civil litigation, patent litigation can be used for either legitimate or opportunistic purposes. Based on a limited body of evidence that suffers from substantial methodological shortcomings, antitrust agencies have issued statements and taken actions supporting blanket denials of the availability of injunctive relief for all patent owners who primarily license their technologies (“non-practicing entities”).

A broader empirical literature has looked more closely with rigorous analysis and uncovered a far more nuanced market and legal reality. First, no empirical study has demonstrated that patent owners’ requests for injunctive relief after findings of defendants’ infringement of their property rights have resulted systematically either in consumer harm or in slowing down the pace of technological innovation. Second, researchers have found that the “non-practicing entities” or “patent assertion entities” rubric encompasses a large number of business models that generate social gains by providing licensing and other mechanisms for undercapitalized individual inventors, startups, small firms, and universities. These innovators lack the commercial means to extract revenue from R&D that can generate valuable new products and services for consumers. Painting all of these entities with the same rhetorical broad brush threatens to unravel a rich ecosystem of inventors, startups, and entrepreneurs that rely on the legal backstop of injunctive relief to support markets in intellectual assets. Abusive litigation practices by a limited number of patent owners could and should be targeted surgically through fee-shifting and other standard tools available in all civil litigation. Again, regulatory intervention without a firm evidentiary basis runs the risk of harming consumer welfare by undermining the reliable and effective patent rights on which innovators, venture capitalists, startups, and other market participants rely in creating and expanding the innovation markets that benefit everyone.

In support, we attach an Appendix of articles that provide rigorous empirical studies and evidence-based analyses of IP-driven innovation markets, patent licensing, and patent litigation.

In conclusion, the FTC should continue to develop policies and undertake enforcement actions only with evidence of proven harms to consumers and with proper consideration of the costs in undermining reliable and effective IP rights that have consumer-welfare enhancing effects in the US innovation economy. A balanced consideration of the evidence on both harms and benefits is necessary to ensure balanced protection of innovators and consumers. We are confident that a commitment by the FTC to a program of evidence-based policy-making will lead to a vibrant, dynamic innovation economy supported by a secure foundation of IP rights that will continue to benefit consumers in the US and around the world.

Sincerely,

Kristina M. L. Acri
Associate Professor of Economics
The Colorado College

Jonathan Barnett
Professor of Law
USC Gould School of Law

Andrew Beckerman-Rodau
Professor of Law
Suffolk University Law School

Ronald A. Cass
Dean Emeritus,
Boston University School of Law
Former Vice-Chairman and Commissioner,
United States International Trade Commission

The Honorable Douglas H. Ginsburg
Senior Circuit Judge,
United States Court of Appeals for the District of Columbia Circuit, and
Professor of Law,
Antonin Scalia Law School
George Mason University

Stephen Haber
A.A. and Jeanne Welch Milligan Professor
Stanford University

Christopher M. Holman
Professor of Law
UKMC School of Law

Keith N. Hylton
William Fairfield Warren Distinguished Professor
Boston University School of Law

David J. Kappos
Former Under Secretary of Commerce and Director
United States Patent & Trademark Office

Erika Lietzan
Associate Professor of Law
University of Missouri School of Law

The Honorable Paul Michel
Chief Judge (Ret.),
United States Court of Appeals for the Federal Circuit

Damon C. Matteo
Course Professor
Tsinghua University in Beijing

Adam Mossoff
Professor of Law
Antonin Scalia Law School
George Mason University

Sean M. O’Connor
Boeing International Professor of Law
University of Washington School of Law

Kristen Osenga
Professor of Law
University of Richmond School of Law

Matthew L. Spitzer
Howard and Elizabeth Chapman Professor of Law
Northwestern University School of Law

Saurabh Vishnubhakat
Associate Professor of Law
Texas A&M University School of Law

Joshua D. Wright
University Professor,
Antonin Scalia Law School
George Mason University
Former Commissioner,
Federal Trade Commission

APPENDIX

Kristina M. L. Acri, née Lybecker, Economic Growth and Prosperity Stem from Effective Intellectual Property Rights, 24 Geo. Mason L. Rev. 865 (2017), http://georgemasonlawreview.org/wp-content/uploads/2017/11/24_4_Lybecker.pdf

Ashish Arora & Robert P. Merges, Specialized Supply Firms, Property Rights and Firm Boundaries, 14 Ind. & Corp. Change 451 (2005)

Jonathan H. Ashtor, Does Patented Information Promote Progress? (June 22, 2017), https://ssrn.com/abstract=2857697

Jonathan H. Ashtor, Opening Pandora’s Box: Analyzing the Complexity of U.S. Patent Litigation, 18 Yale J. L. & Tech. 217 (2016), https://ssrn.com/abstract=2736556

Jonathan M. Barnett, Antitrust Overreach: Undoing Cooperative Standardization in the Digital Economy (Nov. 2018), https://ssrn.com/abstract=3277667

Jonathan M. Barnett, Has the Academy Led Patent Law Astray?, 32 Berk. Tech. L. J. 1313 (2017), http://btlj.org/data/articles2017/vol32/32_4/Barnett_web.pdf

Jonathan M. Barnett, From Patent Thickets to Patent Networks: The Legal Infrastructure of the Digital Economy, 55 Jurimetrics J. 1 (2014), https://ssrn.com/abstract=2431917

Jonathan M. Barnett, Three Quasi-Fallacies in the Conventional Understanding of Intellectual Property, 12 Journal of Law, Econ. and Pol. 1 (2016), https://ssrn.com/abstract=265636

Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Unpacking Patent Assertion Entities (PAEs), 99 Minn. L. Rev. 649 (2014), https://ssrn.com/abstract=2346381

Richard Epstein, F. Scott Kieff & Daniel F. Spulber, The FTC, IP, and SSOs: Government Hold-Up Replacing Private Coordination, 8 J. Comp. L. & Econ. 1 (2012), https://ssrn.com/abstract=1907450

Richard A. Epstein & Kayvan Noroozi, Why Incentives for Patent Hold Out Threaten to Dismantle FRAND and Why It Matters, 32 Berkeley Tech. L. J. (2018), https://ssrn.com/abstract=2913105

Joan Farre-Mensa, Deepak Hegde, & Alexander Ljungqvist, What Is a Patent Worth? Evidence from the U.S. Patent ‘Lottery’ (USPTO Econ. Working Paper No. 2015-5, Mar. 2017), https://ssrn.com/abstract=2704028

Alexander Galetovic & Stephen Haber, The Fallacies of Patent Holdup Theory, 13 J. Comp. L. & Econ. 1 (2017), https://academic.oup.com/jcle/article/13/1/1/3060409

Alexander Galetovic, Stephen Haber, & Lew Zaretzki, An Estimate of the Average Cumulative Royalty Yield in the World Mobile Phone Industry: Theory, Measurement and Results (Feb. 7, 2018), https://hooverip2.org/working-paper/wp18005

Alexander Galetovic, Stephen Haber, & Ross Levine, An Empirical Examination of Patent Hold Up, 11 J. Comp. L. & Econ. 549 (2015), https://academic.oup.com/jcle/article/11/3/549/800066

Douglas H. Ginsburg, Koren W. Wong-Ervin, & Joshua Wright, The Troubling Use of Antitrust to Regulate FRAND Licensing, CPI Antitrust Chronicle (Oct. 2015), https://www.competitionpolicyinternational.com/assets/Uploads/GinsburgetalOct-151.pdf

Douglas H. Ginsburg, Taylor M. Ownings, & Joshua D. Wright, Enjoining Injunctions: The Case Against Antitrust Liability for Standard Essential Patent Holders Who Seek Injunctions, The Antitrust Source (Oct. 2014), https://ssrn.com/abstract=2515949

Stuart J.H. Graham & Ted Sichelman, Why Do Start-Ups Patent?, 23 Berk. Tech. L. J. 1063 (2008), https://ssrn.com/abstract=1121224

Stuart J.H. Graham & Saurabh Vishnubhakat, Of Smart Phone Wars and Software Patents, 27 J. Econ. Persp. 67 (2013), http://ssrn.com/abstract=2291603

Kirti Gupta, Technology Standards and Competition in the Mobile Wireless Industry, 22 Geo. Mason L. Rev. 865 (2015), http://www.georgemasonlawreview.org/wp-content/uploads/2015/06/GuptaTechStandards.pdf

Stephen Haber, Patents and the Wealth of Nations, 23 George Mason L. Rev. 811 (2016), https://ssrn.com/abstract=2776773

Christopher M. Holman, The Critical Role of Patents in the Development, Commercialization and Utilization of Innovative Genetic Diagnostic Tests and Personalized Medicine, 21 B.U. J. Sci. & Tech. L. 297 (2015), http://www.bu.edu/jostl/files/2015/12/HOLMAN_ART_FINALweb.pdf

Ryan T. Holte, Trolls or Great Inventors: Case Studies of Patent Assertion Entities, 59 St. Louis U. L.J. 1 (2014), https://ssrn.com/abstract=2426444

Albert G.Z. Hu and I.P.L. Png, Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, 65 Oxford Econ. Papers 675 (2013), https://academic.oup.com/oep/article-abstract/65/3/675/2362113

Keith N. Hylton, Patent Uncertainty: Toward a Framework with Applications, 96 B.U. L. Rev. 1117 (2016), https://ssrn.com/abstract=2714434

Zorina Khan, Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century, 21 Geo. Mason L. Rev. 825 (2014), http://www.georgemasonlawreview.org/wp-content/uploads/2014/06/Khan-WebsiteVersion.pdf

Scott Kieff & Anne Layne-Farrar, Incentive Effects from Different Approaches to Holdup Mitigation Surrounding Patent Remedies and Standard-Setting Organizations, 9 J. Comp. L. & Econ. 1091 (2013), https://www.researchgate.net/publication/274522003_Incentive_effects_from_different_approaches_to_holdup_mitigation_surrounding_patent_remedies_and_standard-setting_organizations

Bruce H. Koboyashi & Joshua D. Wright, Federalism, Substantive Preemption, and Limits on Antitrust: An Application to Patent Holdup, 5 J. Comp. L. & Econ. 1 (2009), https://ssrn.com/abstract=1143602

Bruce H. Koboyashi & Joshua D. Wright, The Limits of Antitrust and Patent Holdup: A Reply to Cary et al., 78 Antitrust L.J. 505 (2012), https://ssrn.com/abstract=2704591

Anne Layne-Farrar, Why Patent Holdout is Not Just a Fancy Name for Plain Old Patent Infringement, CPI North American Column (Feb. 2016), https://www.competitionpolicyinternational.com/wp-content/uploads/2016/02/NorthAmerica-Column-February-Full.pdf

Anne Layne-Farrar, Patent Holdup and Royalty Stacking Theory and Evidence: Where Do We Stand After 15 Years of History?, OECD Intellectual Property and Standard Setting (Nov. 18, 2014), http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/WD%282014%2984&doclanguage=en

Anne Layne-Farrar, Moving Past the SEP RAND Obsession: Some Thoughts on the Economic Implications of Unilateral Commitments and the Complexities of Patent Licensing, 21 Geo. Mason L. Rev. 1093 (2014), http://www.georgemasonlawreview.org/wpcontent/uploads/2014/06/Layne-Farrar-Website-Version.pdf

Gerard Llobet & Jorge Padilla, The Optimal Scope of the Royalty Base in Patent Licensing, 59 J. L. & Econ. 45 (2016), https://ssrn.com/abstract=2417216

Alan C. Marco & Saurabh Vishnubhakat, Certain Patents, 16 Yale J.L. & Tech. 103 (2013), http://ssrn.com/abstract=2324538

Kevin R. Madigan & Adam Mossoff, Turning Gold to Lead: How Patent Eligibility Doctrine is Undermining U.S. Leadership in Innovation, 24 Geo. Mason L. Rev. 939 (2017), http://georgemasonlawreview.org/wpcontent/uploads/2017/11/24_4_Madigan_Mossoff_2.pdf

Keith Mallinson, Don’t Fix What Isn’t Broken: The Extraordinary Record of Innovation and Success in the Cellular Industry under Existing Licensing Practices, 23 Geo. Mason L. Rev. 967 (2016), http://www.georgemasonlawreview.org/wp-content/uploads/Mallinson-FINAL.pdf

Keith Mallinson, Theories of Harm with SEP Licensing Do Not Stack Up, IP Fin. Blog (May 24, 2013), http://www.ip.finance/2013/05/theories-of-harm-with-sep-licensing-do.html

Ronald J. Mann, Do Patents Facilitate Financing in the Software Industry?, 83 Tex. L. Rev. 961 (2005), https://ssrn.com/abstract=510103

Jorge Padilla & Koren W. Wong-Ervin, Portfolio Licensing to Makers of Downstream End-User Devices: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level, 62 The Antitrust Bulletin 494 (2017), https://doi.org/10.1177/0003603X17719762

Kristen Osenga, Formerly Manufacturing Entities: Piercing the “Patent Troll” Rhetoric, 47 Conn. L. Rev. 435 (2014), https://ssrn.com/abstract=2476556

Kristen Osenga, Ignorance Over Innovation: Why Misunderstanding Standard Setting Operations Will Hinder Technological Progress, 56 U. Louisville L. Rev. 159 (2018). https://scholarship.richmond.edu/law-faculty-publications/1502/

Kristen Osenga, Sticks and Stones: How the FTC’s Name-Calling Misses the Complexity of Licensing-Based Business Models, 22 Geo. Mason L. Rev. 1001 (2015), https://ssrn.com/abstract=2834140

Jonathan D. Putnam & Tim A. Williams, The Smallest Salable Patent-Practicing Unit (SSPPU): Theory and Evidence (Sept. 2016), https://ssrn.com/abstract=2835617

David L. Schwartz & Jay P. Kesan, Analyzing the Role of Non-Practicing Entities in the Patent System, 99 Cornell L. Rev. 425 (2014), https://ssrn.com/abstract=2117421

Gregory Sidak, What Aggregate Royalty Do Manufacturers of Mobile Phones Pay to License Standard-Essential Patents?, 1 Criterion J. Innovation 701 (2016), https://www.criterioninnovation.com/articles/sidak-aggregate-royalty-to-license-standard-essential-patents.pdf

Gregory Sidak, The Antitrust Division’s Devaluation of Standard-Essential Patents, 104 Geo. L.J. Online 48 (2015), https://georgetownlawjournal.org/articles/161/antitrust-division-sdevaluation-of/pdf

Gregory Sidak, Testing for Bias to Suppress Royalties for Standard-Essential Patents, 1 Criterion J. on Innovation 301 (2016), https://www.criterioninnovation.com/articles/sidak-bias-to-suppress-sep-royalties.pdf

Matthew Spitzer, Patent Trolls, Nuisance Suits, and the Federal Trade Commission, 20 N.C. J.L. & Tech. 75 (2018), https://scholarship.law.unc.edu/ncjolt/vol20/iss1/2

Daniel F. Spulber, Standard Setting Organizations and Standard Essential Patents: Voting and Markets, Econ. J. (2018), https://doi.org/10.1111/ecoj.12606

Daniel F. Spulber, Patent Licensing and Bargaining with Innovative Complements and Substitutes (June 2018), https://ssrn.com/abstract=2818008

Daniel F. Spulber, How Patents Provide the Foundation of the Market for Inventions, 11 J. Comp. L. & Econ. 271 (2015), https://ssrn.com/abstract=2487564

David J. Teece, Competing Through Innovation: Technology Strategy and Antitrust Policies (Edward Elgar, 2013), https://www.e-elgar.com/shop/competing-through-innovation

David J. Teece, Edward F. Sherry, & Peter Grindley, Patents and ‘Patent Wars’ in Wireless Communications: An Economic Assessment, 95 Comm. & Strat. 85 (2014), https://ssrn.com/abstract=2603751

David J. Teece & Edward F. Sherry, On Patent ‘Monopolies’: An Economic Re-Appraisal, CPI Antitrust Chronicle (Apr. 2017), https://ssrn.com/abstract=2962208

Joanna Tsai & Joshua D. Wright, Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts, 80 Antitrust L.J. 157 (2015), https://ssrn.com/abstract=2467939

Gregory J. Werden & Luke M. Froeb, Why Patent Hold-Up Does Not Violate Antitrust Law (Sep. 24, 2018), https://ssrn.com/abstract=3244425

Joshua D. Wright, SSOs, FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts, 21 Geo. Mason L. Rev. 791 (2014), http://www.georgemasonlawreview.org/wpcontent/uploads/2014/06/Wright-Website-Version.pdf

Ziedonis, Rosemarie H. and Bronwyn H. Hall, The Effects of Strengthening Patent Rights on Firms Engaged in Cumulative Innovation: Insights from the Semiconductor Industry, in Gary D. Libecap (ed.), Entrepreneurial Inputs and Outcomes: New Studies of Entrepreneurship in the United States (2001).

Categories
Innovation Patent Law Pharma

A Cure Worse Than the Disease? Proposed Changes to European Patent Law are Threatening Pharmaceutical Innovation

a hand reaching for a hanging, shining keyInnovation is all around us. We love and appreciate the latest video games, software apps, and smartphones. We await the integration of self-driving cars and other forms of artificial intelligence. Beyond the gadgets and luxuries we think we can’t live without, there are even more essential products that affect the lives of millions around the world on a daily basis. Patented medicines are at the top of the list of innovations that save lives and preserve the quality of life. Unfortunately, some proposed changes to European patent law are jeopardizing the development and delivery of safe and effective drugs, threatening jobs and innovation, and putting global public health at risk.

Policy-makers and the public acknowledge that balance is critical in the legal regimes governing essential medicines. Our generation is the beneficiary of patent protections which strike a balance. European regulators have long acknowledged that the benefits of new cures (e.g., arising from the research and development of therapies) require a societal investment in the form of intensive capital resources and strong intellectual property protection. In turn, a balanced system includes a reasonable patent term as a quid pro quo for the public disclosure of knowledge and the follow-on generic industry.

The medicines sector highlights the need for that careful balance, as well as the success of the current legal regime. New drug research and the development of new cures is extremely capital intensive. Legions of European scientists, engineers, and clinicians can work for years on a new drug’s development and regulatory review. A recent Tufts University center study reports that, on average, more than $2.6 billion is spent on R&D for a new prescription drug that gains market approval; the life-cycle cost rises to $2.9 billion when other post-approval development costs are included.[1] This is a 145% increase, correcting for inflation, over the estimate the center made in 2003.

In practice, for every drug that is successfully developed, reviewed, and made available to patients, many dozens more fail. CPIP Senior Scholar Erika Lietzan has observed:

The overall attrition rate for new drugs remains high—‘horrendously high’ according to [U.S.] NIH Director Francis Collins—and may be increasing. Recent estimates place the phase 2 failure rate at sixty-five to seventy percent and even higher for drugs with new mechanisms of action.[2]

Due to this high failure rate and costly investment in R&D, well-balanced intellectual property rights are essential for innovators to commercialize the products that do make it to market and improve—or even save—consumers’ lives.

Medicines must be safe and effective, and while regulatory review is essential, it is a time-consuming and highly expensive process. The reality is that the essential patent term is eaten away by years of regulatory review delay.[3] This extra review process is what makes the investment and research questions in the bio-pharmaceutical space so different from a smartphone or the latest virtual reality entertainment software. Professor Lietzan christened this the “innovation paradox.” She explains:

In medicine today, we face an innovation paradox. Companies that develop new medicines depend on a period of exclusive marketing after approval, to fund their research and development programs. This period is made possible by patent protection and regulatory data exclusivity.[4]

Likewise, it is the reason that there needs to be some supplementary legal protection to raise new capital and investments for cures and therapies.

The practical effect is that the necessary regulatory review results in the loss of years of effective patent term protection, warranting special treatment for innovative pharmaceutical products that come to market with little time to realize the benefits of exclusivity. In the 1990s, European policy-makers successfully restored the balance between innovation and the public interest by establishing the Supplementary Protection Certificate (SPC), which provides limited exclusive legal protection after a patent’s expiry.

Supplemental Protection Certificates Ensure a Necessary Balance

Supplementary Protection Certificates (SPCs) reinforce the balance between the rights of innovators and the public by extending the exclusive term for a variety of compounds, e.g., human and veterinary medicines and plant products. SPCs provide a limited extension of legal protections (e.g., exclusivity capped at five-and-one-half years) to compensate for the patent term effectively lost during the regulatory review process to ensure safety and efficacy.

Since SPCs were established, it is estimated that more than 20,000 SPCs for patented products have been filed in Europe during the period 1991–2016.[5] Despite the SPC’s twenty-plus-year track record of success, it, and the balance it preserves, is coming under pressure due to special interest lobbying by the generic drug industry.

The European Commission (EC) recently proposed waiving the SPC for pharmaceuticals and biosimilars[6] and permitting limited generic drug protection via the following two provisions prior to the SPC’s expiration:

(1) The “Manufacturing Provision.” This proposal would “allow EU generic or biosimilar manufacturers to develop and store generic or biosimilar manufacturers in Europe . . . with the goal of enabling immediate generic or biosimilar market entry following the expiration of intellectual property protections . . . .”

(2) The “Export Provision.” This proposal would “allow generic or biosimilar manufacturers to export products to countries where no intellectual property protection for the products is in place.”

While these two proposals are touted as limited in scope, their impact would be significant and detrimental on many fronts across Europe, including for the public health, innovation, jobs, and trade.

The Dangerous Impact of SPC Waiver

The overall impact of the SPC waiver threatens the balance that has worked so well for twenty-plus years, plain and simple. Specifically, the negative impact and risks are evidenced through the inherent complexity of a medicine’s regulatory review process, undermining the public health via counterfeit medicines, and harming Europe’s economy and jobs.

a. Risks of Limiting Innovation for a Variety of Important New Compounds and Cures

 

The most important reason to preserve the current balance is that it is a proven path to develop new medicines for the public’s health. Recently, a commentator highlighted two critical medicines that would not be available to patients, but for the opportunity afforded by the SPC process: (1) Fingolimod (a drug to treat renal failure after a kidney transplant that was subsequently brought to the market for the treatment of multiple sclerosis (MS)); and, (2) Secukinumab (a treatment of psoriasis, psoriatic arthritis, and ankylosing spondylitis (a type of spinal arthritis) that required an extended, more complicated clinical trial review period).[7] In both cases, the benefits of the additional period of exclusivity under the SPC provided the necessary time and resources for the follow-on clinical trials and research for the medicine’s safety and efficacy review.

Ultimately, SPCs benefit capital intensive pursuits, such as new drug discovery and development, by yielding new drugs or new applications for such drugs. More importantly, the patients who need these drugs clearly benefit. As Europe looks to an aging population and increasing health care costs, there is an ever growing need for effective cures for diseases such as HIV/AIDS, Alzheimer’s, multiple sclerosis (MS), cancers, and others requiring orphan drugs.[8] The SPC system is an important part of how the next generation of pioneering life-saving medicines will come into being.

b. Risk to the Public Health and Safety Through Counterfeit Medicines

 

Another key concern for stakeholders and the public at-large resulting from the current proposals is the inevitable increase of piracy and counterfeiting of these medicines. Global piracy and counterfeiting of medicines is big business. A 2016 study estimated that drug piracy costs Europe more than €10 billion each year, may result in the loss of up to 40,000 direct jobs, and may have a total direct and indirect negative impact of over €17 billion and 90,000 job losses.[9]

In addition to the significant financial impact, piracy and counterfeiting is a matter of public health and safety. It is often the case that the counterfeit medicines are manufactured without sufficient quality controls, or worse, with unsafe or dangerous substitute ingredients. The SPC Export Provision waiver heightens the risk that poor quality or unsafe counterfeits will be diverted across borders. Counterfeit drugs are a massive public health risk throughout Europe and big business for criminal enterprises that either ship fake, unsafe medicine or divert counterfeits across borders trying to profit on the product demand and price differentials among nations.

The SPC Export Provision waiver will ultimately increase medicines piracy and counterfeiting on many grounds, including making it difficult to distinguish between medicines produced legally in one country and other jurisdictions without adequate IP protection, making it difficult to prevent product diversion, and diminishing quality control due to infringement.

c. The European Economic Case: Jobs and Trade

 

Europe boasts a first-class research-based pharmaceutical industry which is estimated to have invested €31.5 billion in R&D in 2015 alone.[10] The leading European countries which contribute to this annual R&D investment include Germany, France, Italy, Spain, and the U.K. The research industry trade association, EFPIA, explains some of the economic benefits of the SPC regime:

The SPC is part of an incentives framework that helps to generate the 35 billion in investment in R&D in Europe by the research-based industry. . . . It helps to safeguard over 750,000 jobs directly employed by biopharmaceutical companies and critically facilitates, research into unmet medical needs, finding treatments and cures for patients across Europe and beyond.[11]

R&D Investment in Europe (2016). Germany, 19%. France, 15%. Italy, 4%. Spain, 3%. U.K., 16%. Rest of Europe, 43%.

European Pharmaceutical Industry: Recent Trends and Statistics[12]

Evaluating the economic factors around an industrial policy proposal—new manufactured units, SMEs, direct and indirect jobs—is a legitimate part of the policy debate. In the public health context, it is one of several factors for policy-makers. Both sides of the debate have offered competing economic analyses of the impact of the waiver.[13] However, the past is prologue, and Europe has 20-plus years of a positive economic experience with the SPC regime.

Today’s debate over the SPC waiver is reminiscent to biotechnology patentability debates in the 1980s that weakened intellectual property rights and drove innovative activity out of Europe. As a recent article explains, the legal choices made by Europe during that crucial era led to an irreparable loss of its technological global leadership in the biotech and health care arena:

Europe lost the competitive and commercial edge in biotechnology to the U.S., which had the foresight to protect a new and innovative industry. This new industry both revolutionized modern medical research and healthcare treatments and brought economic growth to the many U.S. cities in which these new companies sprouted and flourished.[14]

Likewise, additional commentators warn that an SPC waiver poses a threat to Europe’s global competiveness: “Europe is becoming an innovation backwater, easily outspent on R&D by peer nations such as the United States, Japan, South Korea and Australia, according to the 2017 European Innovation Scorecard.”[15] While there are allegations that the SPC waiver would be beneficial for European jobs and its economy, this has been debunked for their flawed methodology or extreme overstatement of the facts.[16]

Conclusion

The EC’s proposed SPC waiver provisions are a cure far worse than the disease. The policy debate around this subject boils down to whether Europe wants a strong or a weak health care system for its citizens. The purported goals advanced by special interest tactics certainly sound noble: more competition, lower prices. In fact, the opposite ignoble result is an inevitable undermining of the incentives for the discovery and development new medicines.

The EC should reconsider the proposed waiver for many reasons. The current SPC system offers a successful twenty-year-plus track record. It respects the balance between patients and the medicines innovation ecosystem. The waiver will directly stifle innovation in the guise of fostering competition, as well as dampen the future of innovative medicines and harm the European economy. One must conclude that the SPC waiver should be reconsidered for the sake of the public health and future well-being of the European citizenry.

[1] https://www.scientificamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b/.

[2] Erika Lietzan, The Drug Innovation Paradox, 83 Missouri Law Review 39 at 78-79 (2018) (describing the U.S. regime), available at https://ssrn.com/abstract=2948604.

[3] Id. at 59 (“Through the 1970s, as the modern new drug premarket paradigm took shape, scholars and policymakers became aware of diminishing effective patent life. Because inventors typically file active ingredient patent applications before clinical testing starts, these patents tend to issue before or during the trials. At the time, a patent lasted for seventeen years from issuance. Today, it generally lasts for twenty years from the filing of the patent application. In either case, a significant portion of the term of an active ingredient patent may lapse before FDA approves the marketing application. This shortens the period of time that the drug sponsor may exploit the invention in the market while enjoying patent rights.”).

[4] Id.

[5] Malwina Mejer, 25 years of SPC protection for medicinal products in Europe: Insights and challenges (May 2017), available at https://ec.europa.eu/info/publications/25-years-spc-protection-medicinal-products-europe-insights-and-challenges_en.

[6] The European Medicines Agency (EMA) explains that “[a] biosimilar is a biological medicine highly similar to another already approved biological medicine (the ‘reference medicine’). Biosimilars are approved according to the same standards of pharmaceutical quality, safety and efficacy that apply to all biological medicines. The European Medicines Agency (EMA) is responsible for evaluating the majority of applications to market biosimilars in the European Union (EU). Biological medicines offer treatment options for patients with chronic and often disabling conditions such as diabetes, autoimmune disease and cancers.” Available at https://www.ema.europa.eu/en/human-regulatory/overview/biosimilar-medicines-overview.

[7] Nathalie Moll, Betting on innovation, the case for the SPC, available at https://www.efpia.eu/news-events/the-efpia-view/blog-articles/betting-on-innovation-the-case-for-the-spc/.

[8] The European Medicines Agency (EMA) notes that “[a]bout 30 million people living in the European Union (EU) suffer from a rare disease. The [EMA] plays a central role in facilitating the development and authorization of medicines for rare diseases, which are termed ‘orphan medicines’ in the medical world.” Available at https://www.ema.europa.eu/en/human-regulatory/overview/orphan-designation.

[9] http://www.pharmexec.com/counterfeit-drugs-cost-europe-more-10-billion-year.

[10] https://www.ihealthcareanalyst.com/european-pharmaceutical-industry-recent-trends-statistics/.

[11] https://efpia.eu/news-events/the-efpia-view/statements-press-releases/efpia-statement-on-the-implementation-of-the-spc-manufacturing-waiver/.

[12] https://www.ihealthcareanalyst.com/european-pharmaceutical-industry-recent-trends-statistics/.

[13] http://ecipe.org/blog/ec-spc/; https://www.medicinesforeurope.com/newsroom/.

[14] Kevin Madigan & Adam Mossoff, Turning Gold Into Lead: How Patent Eligibility Doctrine is Undermining U.S. Leadership in Innovation, 24 Geo. Mason L. Rev. 939 (2017) (“We believe these are sensible provisions to avoid weakening Europe’s IP framework further, particularly in today’s context of intense global competition for pharmaceutical research and development investment.”), available https://ssrn.com/abstract=2943431.

[15] See, e.g., Philip Stevens, The European Commission’s pharmaceutical innovation incentives review is at risk of serious overreach, available at http://ecipe.org/blog/ec-spc/.

[16] Sussell et al, Reconsidering the economic impact of the EU manufacturing and export provisions, J. of Generic Medicines, 1-17. (citing arithmetic error and providing a counter factual analysis of the unit, job, SME, and economic benefits in a recent generic industry study praising the SPC waiver proposal).

Categories
Copyright Innovation Patent Law

VIDEOS: Panel Presentations from the CPIP 2018 Fall Conference

2018 Fall Conference flyerOn October 11-12, 2018, CPIP hosted its Sixth Annual Fall Conference, IP for the Next Generation of Technology, at Antonin Scalia Law School, George Mason University, in Arlington, Virginia.

After the breakthrough technology that gave us the mobile technology revolution of the past fifteen years, another leap forward in technology is about to break out into consumer products and services. Our panelists addressed how IP rights and institutions can foster and support this technological advance and considered how IP helps creators, inventors, the creative industries, and the innovation industries move forward.

We are grateful for the panelists, moderators, and audience members who made our Sixth Annual Fall Conference such a huge success, and we hope you will enjoy the videos!

PANEL 1: NEW TECHNOLOGIES, BUSINESS MODELS, AND STANDARDS

  • Jim Harlan, Senior Director, Standards and Competition Policy, InterDigital
  • Anne Layne-Farrar, Vice President, Charles River Associates
  • Robert Sachs, President, Robert R. Sachs PC
  • Prof. Ted Sichelman, University of San Diego School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Moderator: Prof. Kristen Osenga, University of Richmond School of Law, Senior Scholar, Center for the Protection of Intellectual Property

PANEL 2: NEW/SHIFTING BUSINESS MODELS FOR THE CREATIVE INDUSTRIES

  • Troy Dow, Vice President & Counsel, The Walt Disney Company
  • Prof. Eric Priest, University of Oregon School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Jessica Richard, Vice President, Federal Public Policy, Recording Industry Association of America
  • Nicola Searle, Digital Economy Fellow & Senior Lecturer, Goldsmiths, University of London
  • Moderator: Prof. Sandra Aistars, Antonin Scalia Law School, George Mason University, Director of Copyright Research and Policy & Senior Scholar, Center for the Protection of Intellectual Property

PANEL 3: NEW/SHIFTING BUSINESS MODELS FOR THE INNOVATION INDUSTRIES

  • Prof. Jonathan Barnett, USC Gould School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Henry Hadad, Senior Vice President & Deputy General Counsel, Bristol-Myers Squibb
  • Prof. Erika Lietzan, University of Missouri School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Jake Mace, Vice President of Licensing, Dominion Harbor
  • Moderator: Prof. Christopher Holman, University of Missouri-Kansas City School of Law, Senior Scholar, Center for the Protection of Intellectual Property

PANEL 4: A DIFFERENT PERSPECTIVE ON BIG DATA

  • Prof. Ryan Abbott, School of Law, University of Surrey
  • Robert Atkinson, Founder & President, Information Technology and Innovation Foundation
  • Prof. Michael Smith, Heinz College, Carnegie Mellon University
  • Marian Underweiser, Senior Counsel, IBM Research
  • Moderator: Prof. Robert Ledig, Antonin Scalia Law School, George Mason University

PANEL 5: THE FUTURE OF STANDARD SETTING, 5G, AND WHERE IT’S ALL HEADED

  • Kirti Gupta, Senior Director of Economic Strategy, Qualcomm
  • Prof. Adam Mossoff, Antonin Scalia Law School, George Mason University, Founder, Executive Director, & Senior Scholar, Center for the Protection of Intellectual Property
  • Richard Taffet, Partner, Morgan Lewis & Bockius LLP
  • Gregory Werden, Senior Economic Counsel, Antitrust Division, U.S. Department of Justice
  • Moderator: Prof. Sean O’Connor, Antonin Scalia Law School, George Mason University, Director of International Innovation Policy & Senior Scholar, Center for the Protection of Intellectual Property

PANEL 6: THE HISTORY OF IP AND TECHNOLOGICAL SHIFTS: LESSONS FROM THE ANCIENT HISTORY OF THE 1990S AND BEFORE

  • Prof. Bruce Boyden, Marquette University Law School
  • Prof. Joseph Gabriel, Florida State University College of Medicine
  • Prof. Justin Hughes, Loyola Law School, Los Angeles
  • Ron Katznelson, Founder & President, Bi-Level Technologies
  • Moderator: Prof. Ross Davies, Antonin Scalia Law School, George Mason University

Categories
Innovation Patent Law

Proposal for Drug Price Controls is Legally Unprecedented and Threatens Medical Innovation

dictionary entry for the word "innovate"By Adam Mossoff, Sean O’Connor, & Evan Moore*

The price of the miracle drugs everyone uses today is cause for concern among people today. The President has commented on it. Some academics, lawyers, and policymakers have routinely called for the government to “do something” to lower prices. The high prices are unsurprising: cutting-edge medical treatments are the result of billions of dollars spent by pharmaceutical companies over decades of research and development with additional lengthy testing trials required by the Food & Drug Administration. Earlier this year, though, the New York Times called for the government to use a federal law in forcing the sale of patented drugs by any private company to consumers in the healthcare market, effectively creating government-set prices for these drugs.

The New York Times proposal was prompted by an article in the Yale Journal of Law and Technology, which asserts that this law (known as § 1498) has been used by the federal government in the past to provide the public with lower-cost drugs. This claim—repeated as allegedly undisputed by the New York Times—is false. In fact, the proposal to use § 1498 for the government to set drug prices charged by private companies in the healthcare market would represent an unprecedented use of a law that was not written for this purpose.

Let’s first get clear on the law that the New York Times has invoked as the centerpiece of its proposal: § 1498 was first passed by Congress over a hundred years ago. It was a solution to a highly technical legal issue of how patent owners could overcome the government’s immunity from lawsuits when the government used their property without authorization. What ultimately became today’s § 1498 waived the federal government’s sovereign immunity against lawsuits, securing to patent owners the right to sue in federal court for reasonable compensation for unauthorized uses of their property.

This law resolved vexing legal questions about standing and jurisdiction, securing to patent owners the same right to constitutional protection of their property from a “taking” of their property by the government under the Fifth Amendment as all other property owners. This short summary makes clear that § 1498 is solely to provide compensation for government use of patented invention; it is neither a price control statute nor a general license for government agencies to intervene in private markets.

This is confirmed by the text of § 1498, which provides that when a patented invention is “used or manufactured by” the government, the patent owner is owed a “reasonable and entire compensation.” Thus, § 1498 acknowledges that the government has the power to use a patent for government use as long as it pays reasonable compensation to the patent owner. The predecessor statute was initially limited to direct government use of the invention. But in 1918 it was amended to cover government contractors as well. The issue was that patentees were suing and obtaining injunctions for infringement by private contractors, which slowed important production of war materials during World War One.

Just as the initial statute precluded an injunction against the government—providing only for “reasonable and entire compensation” as the sole remedy—the amended statute further shielded government contractors by placing the sole remedy for the latter’s infringement on the government as well. This makes sense given that the private company was working at the behest of the government itself. Thus, central to any such defense was that the contractor needed to show that it was infringing the patent on the “authorization and consent” of the government. And, just as for the government’s direct infringement, the contractor’s infringement was covered only to the extent it was for legitimate government use. Any private market use by the private company placed its infringing uses outside the statute and thus the company was fully liable for regular patent remedies, including injunctive relief.

The article published in the student-edited law journal that precipitated the New York Times proposal misconstrues § 1498 because it engages in an economic sleight of hand, characterizing pharmaceutical patents as an unwarranted tax paid by the public. The underlying argument is that drugs are expensive due to monopoly pricing and any drug sold above its basic cost of production represents economic deadweight loss. This argument ignores one of the key economic functions of the patent system, which is to secure the opportunity for innovators to recoup extensive costs in R&D expenditures and which are not reflected in costs of production themselves, such as the more than $2 billion in R&D spent by innovative pharmaceutical companies in creating a new drug.

The argument by the journal article thus applies to any patent (and has been made against all patents by other critics of the patent system), but the authors limit their proposal to cases of “excessive” prices for certain drugs, such as the cutting-edge, groundbreaking Hepatitis C treatment that ranges from $20,000-$90,000 for a 12-week treatment plan. Section 1498, they argue, should be used not just for the government’s own use of patented drugs for military personnel or other public employees, but for any infringement of the patent approved by the government in the name of providing lower prices to the public.

If the article authors and the New York Times had their way, the federal government would simply declare that a drug is too expensive and thus it would preemptively authorize any private company to make and sell the drug more cheaply. The pharmaceutical company would sue the companies for patent infringement, and the government would intervene under § 1498, claiming that these companies are essentially contractors acting at the behest of the government. Under the legal rules governing payment of “reasonable compensation” under § 1498 and payment of “just compensation” under the Fifth Amendment, the property owner receives the “fair market value” for the unauthorized use.

To the article authors and the New York Times this means a minimal royalty based off the mistaken premise that the price comparison would be retail price of the drug if it were not covered by a patent (like a generic). But instead, § 1498 procedures routinely rule that the government must compensate the patent owner the full measure of patent damages as would have been awarded in a regular patent infringement trial. Section 1498 does not provide a back door, cheaper “compulsory license” even for appropriate government use. The article authors and the New York Times would like to ignore the innovating pharmaceutical company’s R&D expenditures incurred beforehand and have the government compensate the company at significantly less than what it would receive under normal circumstances.

Aside from the flawed economic and legal argument underlying this price-control proposal, it represents an unprecedented use of § 1498, despite the claims by the article authors to the contrary. In the article, the authors assert that § 1498 was used exactly in this way in the 1950s and 1960s. But this is false: the federal government has never used § 1498 to authorize private companies to sell drugs to private consumers in the healthcare market in the United States. In these cases, the Department of Defense (“DoD”) relied on § 1498 to purchase military medical supplies from drug companies that infringed patents. Statements from agency heads during congressional hearings at the time confirm that the DoD, NASA, and the Comptroller General all understood the law as applying to procurement of goods for government use.

In other words, the government has never relied on or argued that § 1498 applies outside of the federal government procuring patented goods and services for its own use by its own agencies or officials. This is also true for government contractors: § 1498 shields a contractor’s infringement only while it is working directly for the federal government, and thus the private company cannot deliver the goods or services directly to private markets. If the contractor does this, its infringement falls outside the scope of § 1498, and it can be sued as a matter of private right directly for patent infringement under the patent laws.

Despite this significant commercial and legal difference between private companies working as contractors for the federal government and private companies selling products in the marketplace, the article authors (and thus the New York Times) claim otherwise. The New York Times, for instance, asserts that “In the late 1950s and 1960s, the federal government routinely used 1498 to obtain vital medications at a discount.” The New York Times further asserts that § 1498 “fell out of use” due mainly to the lobbying efforts of pharmaceutical companies. This is false. The historical record is absolutely clear that government agencies and courts have all applied § 1498 only to situations of government procurement and its own direct use. It has never been used to authorize private companies infringing patents for the sole purpose of selling the patented innovation to consumers in the free market.

The question then becomes whether § 1498 permits the federal government to simply declare certain patented products to be “too expensive” and this then justifies the government to indemnify private companies under its sovereign immunity to infringe the patent in selling the drug in the private healthcare market on the basis of this allegedly public purpose. Section 1498 has never been used in this way before, including when the government purchased drugs in the 1950s and 1960s. The authors of the article in the Yale Journal of Law and Technology claim they “recover this history and show how § 1498 can once again be used to increase access to life-saving medicines.” But § 1498 was never used in this way historically—the federal government has never used this law to permit private companies to sell drugs to private consumers in the private healthcare market. This proposal is an unprecedented use of a law in direct contradiction to its text and its 100+ years of application by federal agencies and courts.

Perhaps the most surprising aspect of the New York Times proposal is that it refers to § 1498 as an “obscure” provision of the patent law. First, it is not a statutory provision in the Patent Act, but rather is part of the federal statutes authorizing the judiciary to hear lawsuits. This underscores the early point that § 1498 was merely a technical fix to an unintended loophole existing since the 19th century that prevented, or at least complicated, patent owners suing the government for unauthorized uses by officials or agencies—even as the courts routinely opined that patents are property and that government should have to pay for their use. Second, while § 1498 may be “obscure” to the public at large, patent lawyers and government lawyers know this law very well. It is the bread and butter of government contract work and the legal basis of hundreds, if not thousands, of lawsuits against the federal government for over a century.

As the courts have long recognized, § 1498 is an eminent domain law. It provides a court with the authority to hear a lawsuit and award just compensation when the federal government or a person acting directly at its behest as its agent or contractor uses a patent without authorization. Section 1498 does not grant the government a new power to authorize infringement of a patent for the sole purpose of a company selling a product at a lower price in the market, effectively imposing de facto government price controls on drugs. The proposal in an academic journal and repeated by the New York Times to use § 1498 in this way is unprecedented. Even worse, it threatens the legal foundation of the incredible medical innovation in this country created by the promise to pharmaceutical companies of reliable and effective patent rights as a way to secure to them the fruits of their innovative labors.

*Evan Moore is a 2L at Antonin Scalia Law School, and he works as a Research Assistant at CPIP.

Categories
Innovation

VIDEO: Dr. Irwin M. Jacobs Delivers Keynote Address at CPIP 2018 Fall Conference

On October 11-12, 2018, CPIP hosted its Sixth Annual Fall Conference, IP for the Next Generation of Technology, at Antonin Scalia Law School, George Mason University, in Arlington, Virginia. Our conference addressed how IP rights and institutions can foster and support the next leap forward in technology that is about to break out into consumer products and services.

Dr. Irwin M. Jacobs with CPIP Founder Adam Mossoff
Dr. Irwin M. Jacobs with CPIP Founder Adam Mossoff

Without doubt, the highlight of our conference was the keynote address by Dr. Irwin M. Jacobs—the inventor of the digital transmission technology for cell phones that gave birth to the smartphone revolution and the founder of Qualcomm. Dr. Jacobs has been a luminary in the telecommunications industry for many years, and he delighted conference attendees with endearing stories and wonderful insights from his inventive and commercial activities over the years.

We hope you will enjoy Dr. Jacobs’ keynote address as much as we do!

The video is available here, and it is embedded below:

Categories
Innovation Inventors Patents

New “Invalidated” Documentary Highlights the Problems With the PTAB: Free Screening on October 26

a lit lightbulb hanging next to unlit bulbsBy Devlin Hartline and Aditi Kulkarni*

The “Invalidated” documentary will be screened this Friday, October 26, at 5:30 PM in Washington, D.C. To register for this free event, which features a presentation by Bunch O Balloons inventor Josh Malone among others, please click here.

Imagine that you’re a father of eight children who puts everything on the line to bring your invention to the marketplace. After a successful Kickstarter campaign that brings in close to $1 million, you protect your invention by securing several patents on the innovative technology. Your invention is a huge market success, and sales exceed your wildest dreams. When the copycats come along, you think your patent rights will protect you. After all, that’s what the patent system is for. But you quickly realize that the system is stacked against you, the lone inventor, and it instead favors the large companies that willingly violate your rights for profit.

While this horror story may sound farfetched, it’s exactly what happened to Josh Malone, the inventor of Bunch O Balloons. And the unfortunate reality is that Malone is not the only inventor to be let down by the patent system that is meant to protect inventors from unscrupulous infringers. Thankfully, Malone is not taking things lying down. Not only is he fighting for his rights in the courts and at the U.S. Patent & Trademark Office—the very Office that granted him the rights in the first place—but he also has become a vocal activist fighting to reform the patent system. In fact, Malone is now telling his story in a new documentary entitled “Invalidated.” The full video, which prominently features CPIP Founder Adam Mossoff and runs about 50 minutes long, is available at both iTunes and Amazon.

You can watch the trailer here:

Inspired by childhood memories, Josh Malone invented Bunch O Balloons to solve a real-world problem. His invention allows anyone to fill and tie around 100 water balloons in just one minute. As a child, he spent days filling up hundreds of water balloons to play with his friends. Though he eventually stopped playing with balloons, the idea of finding a better way to play never left him. His idea finally materialized through a method to save his children’s time by filling several balloons at once. Malone burned the midnight oil perfecting his invention, and his family also invested their time and efforts backing his venture. After failing through several experiments and exhausting their savings, Malone finally succeeded with Bunch O Balloons.

Patent figure for Bunch O Balloons: fluid source leading to balloons

Ready with the product’s final prototype embodying his invention, Malone shot a video for a Kickstarter campaign to advertise his product and to raise some much-needed funds. The campaign was a hit, bringing in close to $1 million. Malone was even interviewed on the Today Show, where he got into an impromptu water balloon fight with Carson Daly. The purchase orders then started pouring in from toy manufacturers and big retailers like Walmart. They were all interested in profiting from the competitive advantage they would get from Malone’s novel—and fun—invention.

On realizing his invention’s strength and wanting to protect it from potential infringers, Malone filed several patent applications with the U.S. Patent & Trademark Office (USPTO). While the patent applications were pending, Malone came to know that a product nearly identical to his own was being advertised and sold in the marketplace under the name, “Balloon Bonanza.” Investigating further, Malone realized that Telebrands, the marketing company that originated the “As Seen On TV” advertisements, had stolen his idea and begun selling knock-off versions of his invention.

Image comparison of Bunch O Balloons versus Balloon Bonanza

Malone sued Telebrands in the Eastern District of Texas, seeking a preliminary injunction to prevent the marketer from further infringing his rights. The district court granted the injunction, agreeing with Malone that his patent was likely valid and infringed. Telebrands fought back, appealing the injunction to the Federal Circuit and again challenging the validity of Malone’s patent on indefiniteness and obviousness grounds. The Federal Circuit sided with Malone, holding that it was not clear error for the district court to conclude that he was likely to succeed on the merits. The Court of Appeals rejected Telebrands’ arguments as failing to raise a substantial question concerning the validity of Malone’s patent.

Telebrands also challenged the validity of Malone’s patent before the Patent Trial & Appeal Board (PTAB) in a post-grant review (PGR) proceeding. During the pendency of Telebrands’ appeal to the Federal Circuit on the preliminary injunction, the PTAB rendered its final written decision: Telebrands had shown by a preponderance of the evidence that Malone’s patent was invalid as indefinite. Of course, had the issue been decided in the district court, the mere preponderance standard would have been insufficient to overturn the presumably valid patent. But in the PTAB, the rules are different, and they favor challengers such as Telebrands that use the additional venue to game the system.

The Federal Circuit was well aware of the PTAB’s decision to the contrary when it upheld the district court’s determination that Malone was likely to succeed on merits in assessing the propriety of the preliminary injunction. In fact, it mentioned the PTAB proceedings in a footnote, noting that its decision was not binding and that it was nevertheless unpersuasive. When Malone subsequently appealed the PTAB loss, the Federal Circuit finally got its chance to directly address the PTAB’s decision on the merits. The Court of Appeals held that, even applying the PTAB’s more relaxed standard, Malone’s claims were not unpatentable for indefiniteness. The Federal Circuit thus made good on the earlier indications from both itself and the district court that Malone’s patent was indeed valid.

While Malone ultimately has been victorious so far, he’s been forced to spend millions of dollars protecting his rights. He reported in July of 2017 that he’d already spent $17 million, and that it might grow to as much as $50 million before it’s all through. That’s an insane amount of money for most lone inventors, and Malone is fortunate enough to have made enough revenue in sales to be able to afford it. Most people aren’t so lucky. And the battle for inventors is certainly far from over, especially when infringers with deep pockets can repeatedly play the game and wear down their victims in multiple forums. As Malone laments, “the PTAB simply encourages infringers like Telebrands to double down on the expense of litigation, rather than acquiescing to the adjudication by the District Court.”

It’s no wonder that, in his dismay, Malone joined other frustrated inventors to symbolically burn their patents outside of the USPTO in the summer of 2017. Malone’s story is a stereotype example of how the big infringers attempt to overwhelm the little guy by simply outspending them should they dare to challenge the wrong. Such gamesmanship at the expense of inventors is not the purpose of the PTAB. As Professor Mossoff notes in the documentary: “The original argument for why we needed the PTAB is that, every once in a while, there will be a mistakenly issued patent they shouldn’t have issued, and that these patents can clog the gears of the innovation economy. Unfortunately, what Congress created was a completely unrestrained, unrestricted agency whose job is to cancel patents.”

America’s Founders recognized that a stable and effective patent system is vitally important for the innovation ecosystem to thrive. American inventors like Josh Malone have made a significant difference in people’s lives, and the patent system exists to reward them for their efforts. Inventors should be able to trust that the patent system will be there to protect them when others trample on their rights. They need those rights to be meaningful in order to recoup their investments and to realize their just rewards. The Founders understood that benefiting inventors through such private gains would redound to the public benefit. But as Malone’s story demonstrates, we will need to make some changes to the patent system before the Founders’ vision can be fully realized.

*Aditi Kulkarni is working towards an LLM Degree in Intellectual Property at Antonin Scalia Law School, and she works as a Research Assistant at CPIP.

Categories
Antitrust Innovation Patent Licensing

IP for the Next Generation of Mobile Technology: How the Antitrust Division Devalued Standard-Essential Patents

In advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, we are highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years.

hand holding a phone with holographs hovering over the screenAs we highlighted in previous posts in this series (see here and here), a 2015 policy change at the Institute of Electrical and Electronics Engineers-Standards Association (IEEE)—a standard-setting organization (SSO) for mobile technologies—placed one-sided restrictions on patent owners that have demonstrably harmed innovator participation and technological advancement.

Writing about the policy revisions, economist Gregory Sidak, the Founder and Chairman of Criterion Economics LLC in Washington, D.C., explains how the IEEE made these profound changes to its patent licensing policies with the encouragement and blessing of the Antitrust Division of the U.S. Department of Justice. The amendments were intended to ameliorate the supposed problems of patent holdup and royalty stacking, but they went much further than necessary and weakened the rights of patent owners in the process.

Despite the lack of evidence of harm from patent holdup or royalty stacking, the Antitrust Division commended the IEEE for changing its policies. Mr. Sidak notes that the Antitrust Division simultaneously turned a blind eye to the collusion of the implementers who had pushed for the changes (and who benefited from them by way of suppressed royalty obligations at the expense of the patent owners), and he argues that this course of action was a dereliction of duty on the part of the Antitrust Division to dispassionately assess the competitive implications of such concerted activity.

To read the Sidak article, which was published in the Georgetown Law Journal, please click here.

Categories
Innovation Patent Licensing

IP for the Next Generation of Mobile Technology: How Ignorance of Standard Setting Operations Hinders Innovation

In advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, we are highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years.

hand holding a phone with holographs hovering over the screenThe development and implementation of technology standards is a complex process, and it’s one often misunderstood by commentators, courts, and government agencies. In an article detailing the Federal Trade Commission’s (FTC) misguided suit against Qualcomm for alleged unwillingness to license its patents on fair, reasonable, and nondiscriminatory (FRAND) terms, CPIP Senior Scholar Kristen Osenga exposes a pervasive ignorance of technology standards and the standard setting organizations (SSOs) that develop them.

According to Professor Osenga, the lack of sound economic evidence and evidentiary findings in the FTC’s allegations are indicative of a larger and more fundamental lack of knowledge that is negatively impacting important legal, business, and policy decisions. It’s a troubling trend that has the potential to not just hinder the development of technology standards, but innovation itself.

To read the Osenga article, which was published in the University of Louisville Law Review, please click here.

Categories
Innovation Patent Licensing

IP for the Next Generation of Mobile Technology: How IEEE’s Policy Changes Have Created Uncertainty for Innovators

In advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, we are highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years.

hand holding a phone with holographs hovering over the screenEarlier this year, CPIP’s Adam Mossoff and Kevin Madigan detailed an in-depth empirical study on the troubling repercussions of policy changes at the Institute of Electrical and Electronics Engineers-Standards Association (IEEE).

In a rigorous study tracking the activity of creators and owners of technologies incorporated into standards by the IEEE, Kirti Gupta and Georgios Effraimidis show how policy shifts at the IEEE have required patent owners to effectively relinquish their legal right to stop the deliberate and unauthorized uses of their property. Unfortunately, as Gupta and Effraimidis explain, the current unbalanced nature of standard setting at the IEEE is resulting in inefficient licensing negotiations and delayed standards development, and it’s threatening the development of new and innovative consumer products at a crucial time for mobile technologies.

The full Gupta & Effraimidis study is available here, and the synopsis by Adam Mossoff and Kevin Madigan can be found here.

Categories
Innovation Patent Licensing

Focusing on IP for the Next Generation of Mobile Technology

hand holding a phone with holographs hovering over the screenIn advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, the Center for the Protection of Intellectual Property will be highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years. These articles address issues related to patent licensing, standard setting in the mobile technology sector, and developing business models at the dawn of the 5G era. Contrary to the tread-worn claims that new technological developments render IP rights obsolete, these articles show how stable and effective property rights in innovative technologies continue to foster the groundbreaking advancements that benefit societies.

Much debate in the mobile technology sector has centered on recent policy changes in the standard setting organizations responsible for the development of global industry standards. In a recent paper focusing on the Institute of Electrical and Electronics Engineers Standards Association (IEEE), mobile industry expert Keith Mallinson explores the practical impact of policy changes made in 2015 by the IEEE that implemented the “patent holdup” theory by restricting the rights of owners of patents on technology that is contributed to standards.

Providing an empirical analysis of the activity of innovators of new standards technology since the 2015 change in the IEEE’s patent policy, Mallinson finds that innovators are not contributing their patents resulting from their massive investments over many years into risky research and development of cutting-edge technologies. This is evidence that the one-sided and unbalanced restrictions on innovators, and not on implementers, that were imposed by the IEEE in 2015 under the “patent holdup” theory have slowed the adoption and implementation of pioneering technologies. Mallinson explains that a more balanced and clear respect for the rights of owners of patented technologies that are contributed to standards must be restored in order to better facilitate technological advancements.

To read the Mallinson article, which first appeared on the 4iP Council website in September 2017, please click here.