Category: Patent Licensing

Categories
Biotech Patent Law Patent Licensing Patents Pharma

Pharmaceutical “Nominal Patent Life” Versus “Effective Patent Life,” Revisited

By Emily Michiko Morris and Joshua Kresh

Overlaid images of pills, a gloved hand of someone expecting a pill, and an eyedropperExecutive summary: Many critics of pharmaceutical companies argue that they abuse the patent system through “evergreening” or “thickets” to increase the amount of time they can avoid generic competition and keep drug prices high. Those critics have not looked at the real-world effects of pharmaceutical patents on generic entry, however. Our review of actual time to generic entry for more than one hundred of 2012’s top-selling drugs shows that:

    • The average effective patent life, as opposed to nominal patent life, of our dataset is 13.35 years, consistent previous studies on effective patent life;
    • Patents and exclusivities added to the Orange Book after a drug’s market entry does little to extend effective patent life; and
    • The number of patents protecting a brand-name drug has no significant correlation with effective patent life.

Thus, our study suggests that “evergreening” does not stop generic entry and that “thickets”—if they even exist—appear to be rather easy to circumvent.

The topic on everyone’s minds lately is drug prices and the fact that most Americans believe that drug prices in the United States are too high. Drug prices, like other health care costs, are a multifactorial and incredibly complex subject. Most of the current discussion on drug prices focuses on the role of patent protections, however, to the exclusion of almost everything else. In particular, a major criticism of the pharmaceutical industry is that it is abusing the patent system by filing for serial patents to prolong its ability to charge supracompetitive prices for the drugs that it has developed.

To prove the existence of such “evergreening” through patents, a number of studies focus on nominal patent life, based on the expected expiration date of the last patent on a given set of drugs. The later the expiration date, according to evergreening theory, the longer a brand-name drug can fend off entry by price-lowering generic versions. The most well-known—and certainly the most thorough—study applying this approach is Prof. Robin Feldman’s “Evergreen Drug Patent Database” (often informally referred to as the “Hastings Database,” after UC Law San Francisco’s former name).

The Hastings Database contains an exhaustive list of not only all patents but also any regulatory exclusivities granted by the FDA, both of which can stall generic drug approval and thus market entry as well. The Database then identifies “evergreening” by looking at how many additional patents or exclusivities are added to the “Orange Book,” the FDA’s list of patents and exclusivities that pharmaceutical companies assert cover their brand-name small-molecule drugs (SMDs).[1] Specifically, the Hastings Database counts how many patents and exclusivities are added after what the database labels as the “protection cliff” for each drug, as defined by all patents and exclusivities added to the Orange Book by two months after FDA approval.[2] According to the Hastings Database’s calculations, companies extend the patent lives of their drugs for several years by adding such later filed patents and exclusivities.

This calculation presents merely the nominal patent life of a given drug, however, not the period of time during which patents actually protect a drug from generic market entry. The latter, or effective patent life, is a more accurate and more meaningful measure of how long brand-name drug companies can fend off generic market entry. Unlike nominal patent life, effective patent life (EPL) does not focus on patent terms. Instead, EPL focuses on the time between a brand-name drug’s approval and first market entry and generic market entry because this is the only time in which the brand-name company might be able to charge supracompetitive prices. The differences between nominal patent life and effective patent life can be quite large, as generics often enter the market regardless of whether the brand-name still has patent term remaining.[3] This is a point that many earlier studies have shown.[4]

To reaffirm this point, we did our own study of the nominal patent lives listed in the Hastings Database. For our sample set, we looked at the top-selling small-molecule drug products from 2012, based on the idea that flagship brand-name products are most likely to draw generic market entry and that drugs from 2012 would now have had twelve years in which generics could do so. To select the drug products for our sample, we used the list of the top 200 drugs by total U.S. retail sales in 2012 assembled by the Njardarson Group at the University of Arizona.[5] After we eliminated any biologics, as well as any SMDs not included in the Hastings Database, we had a sample size of 131 drug products.

We then added data from the Hastings Database. These data included each drug product’s FDA approval date, the expiration dates for both the earliest and latest patent or regulatory exclusivity listed in the Orange Book for each drug product, and each product’s “protection cliff” dates. We also included any further time past those protection cliff dates that the Hastings Database identifies added by patents or exclusivities beyond those that comprise each protection cliff. This latter set of data, which the Hastings Database labels as “Additional Prot(ection) Time,” is important because it is how Hastings calculates alleged “evergreening.”

To these data from the Hastings Database we then added data from other resources as well: both the date on which each Reference List Drug (RLD) began marketing (i.e., the date on which the relevant brand name entered the market), and similarly the date on which the first generic for each RLD entered the market. We added these market entry dates from the earliest listed dates included in the National Drug Code Directory’s Structured Product Labeling Resources (SPL) database[6] for the earliest approved New Drug Application (NDA) listed in the Hastings Database. (A large number of drug products have multiple NDAs and multiple market entry dates, so we used the earliest RLD market entry dates for the earliest approved NDAs to err on the side of the longest EPLs for each product.) Based on these dates, we calculated the EPL for each drug product based on the time between the product’s first marketing date and the date on which the first generic for that product entered the market.

Because the Hastings Database defines evergreening as protection beyond its “protection cliff” rather than as nominal patent life, we computed two further datapoints. First, to compare directly with the Hastings Database’s “Additional Prot(ection) Time,” we also calculated EPL based not on RLD market entry dates but on Hastings’ protection cliff dates—that is, we calculated the effective patent life for each drug product beyond its protection cliff. This allowed us to compare what is in effect Hastings’ nominal “Additional Prot(ection) Time” with what is in effect our sample’s effective “Additional Prot(ection) Time.” Second, to make the Hastings Database more comparable with nominal patent life (NPL) determinations in other studies, we also derived the NPL for each drug product based on the time between its RLD market entry date and the latest expiration date of any patent or exclusivity listed in the Hastings Database for the product.

Our analysis of our sample set is ongoing, but some of the initial results are significant. Not surprisingly, the average EPL from our sample—including the 14 drug products for which the FDA currently lists no generic versions—is several years shorter than the average NPL we computed from the Hastings Database. The average NPL from Hastings is 19.14 years (median = 19.20), but the average EPL from our sample is 13.35 years (median = 14.01). Our sample’s average EPL is thus consistent with EPLs from other studies.

More interesting, however, is that our sample’s average effective “Additional Prot(ection) Time”—1.61 years (median = 1.19)—is also much shorter than Hastings’ nominal “Additional Prot(ection) Time”—13.34 years (median = 13.52). In other words, the effective patent life of our sample, on average, extends only 1.61 years past Hastings’ “protection cliff.” This means that most of the mean EPL from our sample stems from the patents and exclusivities that comprise Hastings’ protection cliff (those listed in the Orange Book up to two months after FDA approval). This in turn shows that if, as is frequently claimed, patents and exclusivities are later added for brand-name drug products simply to avoid their protection cliffs, that particular tactic is ineffective.[7]

That being said, many of the drug products in our sample may have had shortened EPLs because generics were able to enter the market early through Paragraph IV certifications contesting either the infringement or validity of the latest expiring patents for those drugs. We therefore looked at the approval letters for as many of the earliest entering generics as we could find on the Drugs@FDA: FDA-Approved Drugs online database. The FDA’s approval letters typically include whether the approved generic has filed a Paragraph IV challenge and which patents it were challenging. We were able to pull up generic approval letters for 87 of the drug products in our sample. Of those products, 16 either faced no Paragraph IV challenges at all or at least none challenging the latest expiring patent. For another 26 of the 87 drug products, their patent owners did not sue the first-to-file generic even though the generic filed a Paragraph IV challenge to the latest expiring patent. This does not mean that the first-to-file generic did not itself then file a declaratory judgment action against the latest expiring or other patents, but it does mean that the patent owner did not think it worthwhile to sue the Paragraph IV generic early enough to obtain a 30-month stay on that generic’s FDA approval. Several of the 87 products, however, had multiple first-to-enter generics entering the market on the same day, but the FDA database did not display the approval letters for all those generics. We may therefore be underestimating the number of products that faced Paragraph IV challenges.

It is also possible that the time needed to resolve Paragraph IV challenges by itself may have delayed generic entry in many cases. Similarly, it is possible that the mere existence of later-expiring patents deterred potential generics from even trying to enter the market early. We therefore used Hastings’ raw data to derive the number of patents protecting each drug product in our sample. We counted all individual patents listed, treating any pediatric extension, patent term restoration, or other patent term extension as a separate patent if it had the potential to extend nominal patent life. We then looked for any correlation between the number of patents per drug product and the effective patent life for each product but found no statistically significant difference from a null hypothesis of zero correlation. This again suggests that simply adding more patents, regardless of whether they are listed in the Orange Book later or earlier, is not an effective tactic for delaying generic market entry.

Perhaps most significantly, our findings suggest once again that looking at only patents and patent terms reveals little to nothing about how long brand-name drug products can stave off generic entry. Nominal patent life, for example, tells us little about the actual effect patents have because nominal patent life fails to consider the scope of each patent. Many patents, especially later-filed patents, on new indications for which a drug patent can be used or new ways of manufacturing a product, can either be carved out of a generic’s FDA application or designed around. Even new dosage patents may not stop generic entry if physicians can simply split or multiply the dosage of a generic to achieve the newly patented dosage. Much the same can be said of new formulation patents as well. And even if other types of patents can be avoided only through Paragraph IV challenges, these challenges may have little effect in extending effective patent life, as suggested by our data.

[1] Small-molecule drugs are small and simple substances that can be synthesized though chemical reactions, unlike “biologics,” which are a relatively new class of therapeutics that are much larger and more complex molecules that are synthesizable only through biological processes.

[2] The Hastings Database also calculates for each drug the length of time between the expiration of its first patent or regulatory exclusivity and the expiration of its last.

[3] See, e.g., C. Scott Hemphill & Bhaven N. Sampat, When Do Generics Challenge Drug Patents?, 8 J. Empirical L. Stud. 613, 643 (2011) (noting that effective patent lives are shorter than nominal patent lives).

[4] See, e.g., Henry G. Grabowski et al., Continuing Trends in U.S. brand-Name and Generic Drug Competition, 24 J. Med. Econ. 908, 916 (2021) (calculating to EPL – or “market exclusivity period” (MEP) – as only 13.0 to 14.1 years for new chemical entities); C. Scott Hemphill & Bhaven M. Sampat, 31 J. Health Econ. 327, 330 (2012) (finding EPL of 12.15 years versus NPL of 15.89 years for new chemical entities).

[5] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://sites.arizona.edu/njardarson-lab/files/2023/11/Top-200-Pharmaceutical-Products-by-US-Retail-Sales-in-2011_small_0.pdf.

[6] https://www.fda.gov/industry/structured-product-labeling-resources/nsde

[7] The difference between average EPL and NPL for the products in our sample is statistically significant, based on a paired two-tail t-test with p value <<0.01. The same is true of the difference between effective and nominal “Additional Prot(ection) Time” for our sample.

Categories
Patent Licensing

LeadershIP 2020: Injunctive Relief in Standard-Essential Patent Cases

The following post comes from Colin Kreutzer, a 2E at Scalia Law and a Research Assistant at CPIP.

a hand holding a phone with holograms hovering above the screenBy Colin Kreutzer

The LeadershIP conference is dedicated to promoting an open dialogue on global issues surrounding innovation, intellectual property, and antitrust policy. On September 10th, LeadershIP kicked off its 2020 series of virtual events with a panel discussion featuring three government agency leaders: PTO Director Andrei Iancu, NIST Director Walter Copan, and Assistant Attorney General Makan Delrahim of the DOJ’s Antitrust Division.

Moderator David Kappos, a former PTO Director and current partner at Cravath, Swaine & Moore LLP, led a discussion about the role of standard-essential patents (SEPs) in modern industry and the legal effect that an SEP designation has on patent owners. The main topic of discussion was the importance of retaining the right to injunctive relief against infringers. The panelists had released a joint statement on this subject last year, following some unwelcome court decisions and what they viewed as misinterpretations of an earlier statement from 2013. View the video of the panel discussion here.

SEPs and F/RAND

The adoption of industry-wide technical standards helps industries to thrive by promoting efficiency and interoperability among competitors. A group that authors such standards is known as a standards developing organization (SDO), and it can include representatives from governments, private companies, and universities all over the world. For example, mobile communications standards such as 4G broadband technology are developed by the ITU, a group within the United Nations.

Developing a complex technical framework necessarily involves the use of many patented technologies. When the use of a certain patented technology is essential for adhering to the industry standard, it is known as a standard-essential patent.

Since owning an SEP can give the patent owner leverage over an entire industry, SDOs often require an agreement from patent owners before electing to use their technology in the standard. To be included, owners must commit to licensing their invention to all interested parties on terms that are fair, reasonable, and non-discriminatory (FRAND). Some forms of this agreement omit the word “fair,” leaving only “RAND.” They can be collectively referred to as F/RAND commitments.

Holdup and Holdout

The combination of public standards and private property rights can create perverse incentives for both patent owners and technology implementers alike. Once a company is bound to an industry standard, a patent owner may refuse to honor its F/RAND commitment and demand licensing fees that are grossly disproportionate to the patent’s actual value. A practice like this is known as “holdup.” But the presence of F/RAND agreements can encourage the licensee to practice “holdout” as well. In that case, a company will simply use the technology without paying any fees, ostensibly because the owner would not agree to fair and reasonable terms. Holdup and holdout can both weaken standard-setting efforts by breeding distrust and discouraging participation.

The panelists talked about the chain of events that they feel resulted in too much emphasis on preventing holdup at the expense of giving holdout a green light.

The 2013 and 2019 Letters

In 2013, the PTO and DOJ released a joint policy statement on the issue of appropriate legal remedies for SEP owners. The statement said it may not always be proper seek an injunction in a district court or to ban importation of products using an exclusion order at the International Trade Commission. Citing “an effort to reduce . . . opportunistic conduct” and the need to “provide assurances to implementers of the standard that the patented technologies will be available,” the letter suggested that a voluntary F/RAND commitment may imply that “money damages, rather than injunctive or exclusionary relief, is the appropriate remedy for infringement in certain circumstances.” The letter indicated that, at least under certain circumstances, no remedies should be available that would halt the actual flow of products or impede the implementation of a technical standard. Instead, the SEP owners could expect only monetary judgments that would be decided after the fact.

In the years following this statement, several court decisions were handed down denying injunctive relief in SEP infringement cases. In Apple v. Motorola for example, the N.D. Illinois court reasoned that when an SEP owner commits to licensing its patent to everyone, the dispute narrows to one of price: “[b]y committing to license its patents on FRAND terms, Motorola committed to license the [patent] to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation.” On appeal, the Federal Circuit objected to this rationale as a per se rule, but it upheld the denial of injunctive relief all the same.

The agencies became concerned that an entirely different legal standard was being applied when the patent in question was encumbered by a F/RAND commitment. So in 2019 the USPTO and DOJ, now joined by the NIST, released a new statement. In this one, they sought to clarify that, while F/RAND commitments should be considered as a factor, they “need not act as a bar” to injunctive or exclusionary orders. The three agency heads were unified on the importance of keeping these remedies available.

Andrei Iancu, Director, USPTO

Director Iancu talked about the critical role that innovation plays in the United States economy and the need to be vigilant in our protection of IP. Inventors must be certain that their protections are reliable, whether regarding infringement, remedies, march-in rights, or any other current issue. He discussed the various measures the Office is taking to improve our IP system. This includes COVID-response actions, such as fee deferral for small entities and the switch to an all-electronic filing system.

For an IP system to be robust, it must be founded on sound policy considerations. In this vein, Director Iancu discussed various PTO policies. Recent changes at the PTAB are designed to ensure a balance between patent owners and petitioners. The Office has issued new guidance on § 101 issues to provide greater clarity on what constitutes patentable subject matter. The PTO’s chief economist reported that “uncertainty” has decreased by 44% following this new guidance. And, of course, the joint policy statement is a step toward restoring all available remedies.

On the main topic, Director Iancu kept it simple: SEPs are patents. He emphasized that injunctive relief truly goes to the heart of the property rights conferred by a patent, as the right to exclude is explicitly provided in our Constitution. He rejected the notion that a special set of rules should apply when a F/RAND commitment is involved, and he warned about what would happen if there were: “One of the fundamental principles here is that if you have categorical rules, whether in fact or as perceived, then you create a system that leads to perverse incentives and bad outcomes.” There will be far less incentive to negotiate a license agreement up front when infringers “know categorically that they will not be enjoined.”

Walter Copan, Director, NIST

Director Copan discussed the various roles that NIST play in our economy and in promoting innovation, including: advanced 5G communications, standards leadership and cooperation with the private sector, cybersecurity, biotech innovation and protection, and manufacturing and supply chain security.

His most important objective at NIST is strengthening America’s competitiveness in the world. A strong IP system is the “bedrock” of this position and SEPs figure in prominently. The U.S. share of worldwide IP is on the decline while that of China is growing. One avenue that China is using to assert itself on the world stage is through China Standards 2035, a 15-year plan to become the leader in standards development for next generation technology. Copan and others made a case for the desired SEP remedies as part of an effort to maintain or improve the United States’ global standing on issues of IP and standards development. He said that our international partners are starting to see “the value and power of injunctive relief” to discourage infringement at will.

He also emphasized the same core ideas as the other panelists: SEPs are patents, and they are entitled to the same remedies as any other patent. Rather than favoring one of holdup or holdout over the other, we should focus on encouraging good-faith negotiation.

As a patent owner himself, he has been through a number of injunctive processes and knows first-hand that this form of relief is a “key part in the suite of remedies” available. He expressed excitement about the new policy statement and the international momentum that accompanies it, but he cautioned that this effort “is a journey” and there is a long way to go.

Makan Delrahim, Assistant Attorney General, USDOJ Antitrust Division

Assistant Attorney General Delrahim described the issues in the context of his New Madison approach to IP and antitrust policy, and the four core principles that form the basis of the New Madison approach.

First, patent holdup is not an antitrust issue. The DOJ has long recognized that SDOs are procompetitive institutions, and that the interoperability they provide is a major benefit to consumers. However, that does not mean that SEP holdup is an inherently anticompetitive practice, or that antitrust law is the appropriate forum in which to settle such disputes. He described as “radical” the idea that a patent owner could be accused of an antitrust violation simply for reneging on F/RAND obligations, and that contract law would be far more appropriate.

Second, SDOs shouldn’t be used as “vehicles” by which either implementers or patent owners gain advantages over each other. Instead SDO policies should strive for a balance which maximizes the incentives for innovators to innovate and for implementers to implement. “Negotiating in the shadow of dubious antitrust liability is not only unnecessary, it dramatically shifts the bargaining power between patent holders and implementers in a way that distorts the incentives for real competition on the merits.”

Third, as discussed above, the fundamental right conferred by a patent is the right to exclude. Courts should be very hesitant to take that right away. Doing so can effectively create a compulsory licensing regime, which has been largely disfavored in the U.S. for decades.

Finally, at least from an antitrust perspective, the refusal to license a patent should not be considered per se legal. This will allow F/RAND negotiations to take place “in the shadows of contract law” without the threat of treble damages under the Sherman Act, and thus without “skewing the negotiations in favor of an implementer.”

Conclusion

In closing, the panelists were unified in their views as laid out in the joint policy statement. They were optimistic about the direction in which the law is headed, both in the U.S. as well as with international partners such as Germany and the U.K. And they looked forward to continuing the full restoration of a critical remedy for owners of standard-essential patents.

Categories
Antitrust Innovation Patent Licensing

Jonathan Barnett on the “License as Tax” Fallacy and the Real-World Benefits of Licensing

The following post comes from David Ward, a rising 2L at Scalia Law and a Research Assistant at CPIP.

the dictionary entry for the word "innovate"By David Ward

“Casual metaphors can have dangerous consequences.” CPIP Senior Fellow for Innovation Policy Jonathan Barnett’s new paper, The ‘License as Tax’ Fallacy, seeks to undo what he considers to be a dangerous, casual metaphor, namely, that intellectual property is a “state-granted monopoly” and therefore licensing is a “monopolistic tax” on consumers. Instead, Prof. Barnett explains that licensing is a tool that creates value for consumers and producers alike.

Historical Roller Coaster

This “IP = monopoly” metaphor has seen a bit of a jurisprudential roller coaster over the past century. Its origin is tied to monopoly-busting antitrust cases, as one might expect, starting around the end of the New Deal era of the late 1930s. Many of the battles were over the practice of “tying” patented products to other products in bundles. For those unaware, in antitrust, “tying” is essentially an arrangement that requires the buyer of one product to buy something else as well, and this often can be viewed as anticompetitive. These patent-tying cases led to the Supreme Court making a hard-and-fast rule in the 1962 case United States v. Loews. The Loews case effectively outlawed tying arrangements in patent licenses as anticompetitive, without having to prove any actual anticompetitive consequences.

This pivotal case cemented a metaphorical assumption that intellectual property is a state-granted monopoly. Further evolution of this mindset led to an effective halt of many licensing transaction options that were once available to sellers in the IP market. Prof. Barnett points out that this ended up harming consumers rather than protecting them. Sellers wishing to license their intellectual property, but restrict how it was used, would often not sell rather than risk getting hit with an antitrust lawsuit under the not-so-IP-friendly antitrust rules in the courts. And those that did license charged higher prices since they could not enforce value-saving restrictions.

The roller coaster didn’t stop there, though, as the late 1970s Supreme Court moved away from the stifling hard-and-fast rules in two new decisions, U.S. Steel and Sylvania. Instead of assuming that many IP license provisions (such as tying) were anticompetitive on their face, the Court began requiring proof that the provision in question was actually anticompetitive—just as in nearly every other antitrust case. This more license-friendly trend toward requiring proof of anticompetitive IP practices culminated in the 1995 U.S. Department of Justice Antitrust Guidelines for Licensing of Intellectual Property, which concluded that antitrust challenges to licensing transactions have to provide evidence of harm to the market. The bright line licensing rules of the past were effectively gone.

Recent Years: The Lexmark Case

But the coaster did not stop there either, as the mid-2000s and recent years have seen a resurgence of more hard-and-fast IP licensing rules. A great example of the resurgence of these rules is the 2017 case Impression Products v. Lexmark International, which involved the oft-dreaded purchasing of printer ink cartridges. Lexmark sold two types of ink cartridges: expensive ones that users could refill, and cheap ones that users were not allowed to refill. The cheap cartridges included a licensing provision that did not allow users to refill the cartridge in exchange for the lower cost. Impression Products, however, bought the empty, cheap cartridges from third party resellers, refilled them, and sold them for a profit, despite being aware of this license provision that prohibited refilling them.

Impression Products leaned on what is called the “patent exhaustion doctrine” to win the case. This doctrine can end a patent owner’s right to control a product once it has been sold, much in the same way that used bookstores don’t have to get a copyright license to sell a used book. However, the Court overturned a long-standing, fact-specific rule that required examining the market impact of such provisions in patent reseller cases. Instead, it adopted a hard-line rule that does not allow patent owners to enforce their licensing provisions on products that have already been sold, without any analysis on the market impact.

This illustrative example of a return to the hard-and-fast rules of the past is exactly what Prof. Barnett warns against. In the instance of printer ink cartridges, companies now provide fewer options at a higher price since they can’t enforce a provision that allows them to offer a lower-value, lower-cost alternative. But the anticompetitive implications of the Lexmark decision can have far-reaching effects on intellectual property as a whole; hard-line rules that prohibit the enforcement of licensing provisions without any analysis of the impact on the market creates less choice and higher cost for consumers. This, of course, is exactly the opposite of the aim of the antitrust laws.

The Need for Evidence

It’s important to note that Prof. Barnett acknowledges that intellectual property can cause anticompetitive practices that harm consumers. But he contends that there needs to be evidence showing that specific intellectual property licenses have anti-consumer implications, as there is in most other antitrust cases. The theoretical fear of intellectual property licensing clogging up markets with exorbitant rates (the “licensing tax”), if it has any merit, should be backed up by evidence.

A great case study for this issue comes from the smartphone market. In the smartphone industry, there are countless “standards” for wireless signals and products, such as 4G, that are required for our many devices to interact in a uniform manner. The inventors of these standards have what are called “standard essential patents,” or SEPs. There is a great fear that these patents, being quite literally essential to smartphone manufacturers, will allow their owners to exploit markets and charge anticompetitive pricing.

The great mystery is that, despite this, there isn’t evidence that this hypothetical scenario exists. Prof. Barnett examines three decades of market performance in this industry and shows that SEP licensing royalties account for a modest three to five percent of global handset revenues. This is in stark contrast to the hypothetical models that anticipated double-digit royalty percentages because of the “IP licensing tax.”

Prof. Barnett attributes this disconnect to several factors, but most importantly he points to the fact that regulators, legislatures, and judges should be focusing on real-world impacts from actual evidence and data when contemplating new rules and regulations.

The Real-World Benefits of Licensing

Although some assume that licensing will create anticompetitive environments, there is ample evidence to show that licensing enables competition and diverse markets. Prof. Barnett uses several real-life models to demonstrate this point.

The first model is the “Hub-and-Spoke” structure, where several smaller intellectual property owners license their IP to large companies with commercial power and reach. The best example of this is in the movie business, where outside production companies license their works to large studios. Each party specializes in something different, and a mutually beneficial relationship occurs. If IP licensing agreements cannot be enforced, such as in Impression Products, then content production would consolidate vertically to larger in-house organizations as firms look to protect their creative property. Essentially, not allowing licensing enforcement in this setting actually consolidates the market, rather than diversifying it.

The second model is the reverse of this, where large, usually research-based, firms license their innovations to many different commercialized entities. A prime example of this is Qualcomm, which licenses its wireless communications technology to many smartphone device manufacturers. Rather than hoard their technologies, these firms want to use licensing mechanisms to reach as many users as possible; more users equal more royalties, so there is an incentive to license to many manufacturers at affordable rates. This creates a positive feedback for more R&D and innovation, rather than an “IP = monopoly” hypothetical scenario where innovators gouge licensees.

The third model involves hybrid pooling and anti-licenses. Patent pools and other aggregate entities like music performing rights organizations create ecosystems of mutual benefit to help navigate dense “thickets” of intellectual property. For instance, rather than needing to get a license for every song played at a music venue, the venue can simply get one “blanket license” from a performing rights organization that licenses thousands of songs from the organization’s musicians at once. And somewhat more surprising is the complete lack of licenses at all. Many IT companies give away licenses for free to build a consumer base of users as an early adoption strategy. Contrary to the license-as-tax view, there is no necessary basis to even assume licenses are always used or even the best option for an owner.

Licenses Aren’t Taxes

The theoretical boogeyman of IP licensing creating monopolistic “taxes” has not held up to the intense scrutiny of the evidence, Prof. Barnett concludes. Any restrictions of IP licensing should be based in evidence and not be a knee-jerk reaction to hypothetical scenarios that have not come to pass, such as in the smartphone industry. There is far more evidence to show that licensing creates value for the market than there is evidence to show it “taxes” the market. And thus, this dangerous, common metaphor of “IP = monopoly” should be put to rest.

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.

Categories
Innovation Patent Licensing

Study Finds IEEE’s 2015 Patent Policy Sowing Uncertainty and Slowing Innovation

dictionary entry for the word "innovate"By Kevin Madigan & Adam Mossoff

As the world prepares for the game-changing transition to 5G wireless systems, the high-tech industry must continue to efficiently develop and implement technologies and networks that work together across different platforms and devices. Few people are aware of how this happens, because it occurs solely between the companies who develop and implement technological products and services in the marketplace, such as Qualcomm, InterDigital, Microsoft, Apple, and others. These companies participate in private standard setting organizations, which develop technological standards agreed upon by these companies, such as three-prong electrical plugs, USB drives, hard disk storage drives, and even communications technologies such as Wi-Fi and 2G, 3G, and 4G.

In sum, the development of standards is a key part of how new technological innovations are efficiently sold and used by consumers and work for everyone. The reason standard setting organizations came into existence is because the alternative is neither efficient nor good for consumers. A standards “war” between companies in the marketplace leads to years of incompatible devices being sold while consumers wait for one company to establish (private) market dominance with its products and services such that everyone else must use that standard, such as what happened between VHS and Betamax in the 1980s or the market fight between Blu-ray Disc and HD DVD in the 1990s, to name just two examples. Standard setting organizations preempt this unnecessary and wasteful commercial war by bringing together the innovators and implementers of new technology to agree beforehand on a standard so that new standardized products and services can get into the hands of consumers faster.

Unfortunately, some standard setting organizations are changing their rules for the companies that invest hundreds of millions of dollars in long-term R&D to create groundbreaking technologies like those used in our smartphones. These new rules create uncertainty for these innovators. As a result, this uncertainty is threatening investments in new high-tech products and the ongoing growth in the U.S. innovation economy.

Detailing this troubling trend is a recently released, in-depth, and rigorous study by Kirti Gupta and Georgios Effraimidis, which tracks the changes in the rules for the creators and owners of the technologies incorporated into technological standards by one of the largest and more influential organizations—the Institute of Electrical and Electronics Engineers-Standards Association (IEEE). In 2015, the IEEE adopted a new policy governing how owners of patents on technologies incorporated into its technological standards can protect and secure their investments via their legal rights to their patents. This shift in policy required patent owners effectively to relinquish their legal right to stop deliberate and unauthorized uses of their property and thus made it harder for them to license reasonable royalties for the use of their technology equally among all industry stakeholders.

As Gupta and Effraimidis show through detailed analyses, the IEEE’s new policy has distorted the longstanding market processes and licensing negotiations that have led to billions of smartphones being sold to consumers at relatively low cost around the world over the past decade. This is a vitally important study, because it brings key data to the policy discussions about technological standards, patents, and the incredible products and services made possible by them and on which everyone relies on today.

A Quick Summary of Standard Setting Organizations and Patented Technologies

A traditional requirement of the IEEE and several other standard setting organizations is that innovators commit to license equally their patented technologies that are incorporated into an agreed-upon standard for all companies implementing this standard in products and services. The law already provides that a patent owner will receive a “reasonable royalty” as damages for any past unauthorized uses of a patented technology, and thus standard setting organizations added the contractual requirement that this reasonable royalty also be non-discriminatory. To create a pleasant-sounding acronym, the phrase used is that licensing rates for patented technologies incorporated into market standards must be fair, reasonable, and non-discriminatory (FRAND). The goal of FRAND is to ensure that all companies creating products and services that are sold to consumers in the marketplace pay the same rates for incorporating the necessary standardized technologies into these products and services, such as the standardized 4G transmission technology used by everyone’s smartphones.

About a decade ago, some professors and lawyers posited a theory based on an abstract, economic model that owners of patents on technologies incorporated into these standards could exploit their ability to seek injunctions for violations of their patents and thus impose unduly higher costs on the companies implementing these standards in things like smartphones, laptop computers, tablets, and other devices and services. It was a simple story about property owners “holding up” people who wished to use their technologies, cashing in on the ubiquitous knowledge that any property owner can post a sign that says “no trespassing.” Based on this “patent holdup” theory, which deduced from an abstract model that patent owners would demand inordinately high royalties from the companies that need to incorporate agreed-upon technological standards into their products and services, these academics argued for “reforms” in the law to stop “patent holdup.”

But the “patent holdup” theory is just that—a theory. More than a decade of rigorous empirical studies have not only failed to confirm the “patent holdup” hypothesis of systemic market failures in the patent-intensive high-tech industry, and instead have found market conditions that directly contradict the core claim of “patent holdup” theory (see here for a letter to Assistant Attorney General Makan Delrahim summarizing this research and listing many of the studies). One study has shown that the average royalty rate for key technologies used in smartphones is only 3.4%, which is contrary to the 67% royalty rate predicted by “patent holdup” theory. Another study, among others, found significant quality-adjusted drops in consumer prices of smartphones and increasing entry of new manufacturers of smartphones, as well as other market conditions in the smartphone industry, that directly contradict the predictions of “patent hold” theory.

Unfortunately, in response to lobbying and the successful pushing of the “broken patent system” narrative in Washington, D.C., antitrust regulators forged ahead at the DOJ to push for policy changes at standard setting organizations on the basis of this unproven “patent holdup” theory. (Thankfully, recent antitrust regulators have returned back to evidence-based, balanced policy-making.) Several years after the first article propounding the “patent holdup” theory was published in 2007, implementers began pushing this theory at the IEEE to effect changes in its internal patent policy, which ultimately responded to this effort by revising its patent policy in 2015.

IEEE Policy Changes for Owners of Patents on Technological Standards

As Gupta and Effraimidis explain, the IEEE’s new patent policy has been highly controversial and generated much discussion among academics and industry practitioners. Separate from what they disclose in their article, there have been allegations that the internal process at the IEEE in changing its patent policy was initially cloaked in secrecy and was not open to all IEEE members as to when meetings were held and as to what the substantive decision-making processes were at these meetings. One commentator referred to it politely as an “opaque decision-making process” by the IEEE. If true, this is very troubling given that this violates the exemption accorded to the IEEE under the antitrust laws for operating as a standards setting organization.

Essentially, the IEEE patent policy was changed in 2015 in two key ways that impacted innovators. First, the new policy prohibits a patent owner seeking an injunction until all efforts at obtaining a license fee have been exhausted, including suing and litigating to a final judicial decision awarding a reasonable royalty. This of course incentives purported licensors to drag out licensing negotiations while they are infringing the patent, imposing large costs on patent owners in having to file lawsuits and pursue their legal remedies in court for many years and who have no choice but to allow the unauthorized use of their property during this time.

Extending these negotiations then allows licensors to take advantage of the second major rule change by the IEEE in its patent policy: the policy shifts licensing rates from the longstanding, market-based licensing of the technology given the value of the consumer device to the component level of the value of the chip itself. Of course, a smartphone without 4G or Wi-Fi is a beautiful 1995 cell phone with a very pretty, colorful screen and nothing more, which is why the free market settled on the value added to the entire smartphone for the basis of the licensing rate for this standardized technology. Moreover, calculating royalty rates based on the very cheap computer chips that contain the valuable technology fails to account for the hundreds of millions of dollars in R&D investments in developing the technology in the first place. Again, this is why the arrangement first reached in the free market between innovators and implementers was a balanced approach in device-level licensing rates that accounted for the costs of R&D and the costs of manufacturing the smartphones that contained the technology derived from this R&D. As a recent empirical study has shown, this is approximately 3.4% per smartphone, which is anything but an example of a massive payment to patent owners on 4G or Wi-Fi, especially for these core technologies that make a cell phone a “smartphone.”

Why then did IEEE change its patent policy? Consistent with the concerns about the “opaque decision-making process” at the IEEE, economist Greg Sidak has identified how the new rules were drafted by an ad hoc committee at the IEEE dominated almost entirely by implementers who license the patented technologies from the innovators who develop and contribute these technologies to the standard-setting process. In effect, the licensees strategically dominated the process and used their clout to push through a policy change that devalued the patented technologies, because they were seeking to lower their own manufacturing costs in implementing this technology in the consumer products and services they manufacture and sell in the marketplace. As evidence, Sidak shows that comments submitted in opposition to the new rules were rejected at nearly double the rate of those in support, reflecting a process that betrayed the IEEE’s core principles of openness, consensus, and the right to appeal. Instead of alleviating any alleged problems caused by patent owners, the IEEE’s rule changes actually facilitated collusion among implementers and resulted in “buyer-side price-fixing” of the patented technologies.

Negative Impact on Contributions of New Technology to Standards at the IEEE

The heart of the Gupta and Effraimidis article is not the theoretical and empirical background to the “patent holdup” dispute, but a detailed empirical study of the impact the new IEEE patent policy has had on the standard development process. Focusing on IP-intensive standards related to the development of Wi-Fi and Ethernet networks, the study first looks into the number of Letters of Assurances (LoAs) submitted to the IEEE in the years before and after the patent policy change took effect.

(LoAs are documents submitted by inventing companies who contribute new technological innovation in the standard-setting process. These technology contributors have patents on these innovations, and in these LoAs, they identify what patents may be essential to the standard that is being developed and they identify the terms under which they’re willing to license this technology if it ends up being incorporated into the standard that is ultimately set by the standard setting organization. An LoA is labeled “positive” if the contributor agrees to license its technology under the patent policy set by the standard setting organization or “negative” if the contributor declines to commit to these terms.)

The Gupta and Effraimidis study found that the number of positive LoA submissions has dropped a whopping 91% since IEEE changed its patent policy in 2015 and the number of negative LoAs rose to an all-time high in 2016. Gupta and Effraimidis explain:

The results suggest that many [patent] owners are reluctant to license their patent portfolio on the new FRAND terms. More importantly, the uncertainty on implementers’ side has increased, as new standards . . . have been approved despite the presence of negative and/or missing LoAs . . . .

Their article also tracks changes in the duration of the comments period that takes place before a new standard is approved—this is the period of time during which IEEE members discuss, debate, and resolve any concerns about a standardized technology before it is ultimately adopted as an official standard by the IEEE. Before the IEEE’s new patent policy went into effect in 2015, the average duration of the first two rounds of comments was 233 days. After the new patent policy took effect, Gupta & Effraimidis found a 42.5% increase in the comment period duration, resulting in an average resolution time of 332 days. This increase by almost half in the standard-setting process, especially in an industry marked by rapid development of new smartphones, laptops, and other high-tech consumer products and services, is concerning, to say the least. These delays are wasting private as well as public resources and impeding the commercial development of important IP-intensive technologies.

Finally, the Gupta and Effraimidis study analyzes the change in the number documents submitted at the IEEE that trigger the development of a new standard technology, which is a proxy for the development of new standards by the IEEE. Here, Gupta and Effraimidis’ findings contradict another recent study that alleged a high number of submissions in 2016 reflected a positive impact of the IEEE’s new patent policy. Gupta and Effraimidis reveal that hundreds of the submissions counted in the prior study either came from standards for which no patented inventions were contributed or were for standards of little or no value. Focusing properly on submissions for technologies that have significant value and produce an overwhelming majority of IEEE standards, they find submissions of new standards documents have in fact declined by 16% since 2015.

In sum, the changes in the internal standard-setting process at the IEEE since it adopted its new patent policy in 2015 represent a concerning shift following a strategic and collusive effort by implementers to devalue the patented technology created by innovators and contributed to standard setting organizations like the IEEE. The evidence is slowly building, showing that the IEEE’s new patent policy has devalued the innovative activity of technological innovators based on a purely theoretical and unproven claim that there is a systemic problem with so-called “patent holdup” in the smartphone and other high-tech industries. Unfortunately, in leaping into action on the basis of unproven theories, the IEEE has contributed to pervasive uncertainty and weakened incentives in the development and commercial implementation of innovative technologies, as is increasingly being documented and discussed by legal scholars and economists.

Moving Forward

The Gupta and Effraimidis study analyzes for the first time empirical data in fully detailing the effects of the IEEE’s new patent policy on the standard setting process. Their study shows that innovators are unwilling to continue to contribute the technologies they develop to the standard setting process under onerous terms requiring them effectively to give up their legal rights to their patents, and that these policies are having a perverse effect in creating inefficient licensing negotiations and delayed standards development. Their findings may sound intuitive to patent lawyers and innovators, but it is imperative to bring data into the public policy debates after ten years of concerted efforts to implement unproven theories, such as “patent holdup” theory, in both law and in the policies of private organizations like IEEE.

Gupta and Effraimidis conclude that a proper patent policy for a standard setting organization like the IEEE “should enhance incentives of technology contributors to innovate, while ensuring unlimited access to the new technology standards.” In considering its key role as a long-time professional association for the high-tech industry reaching back to Nikola Tesla and Thomas Edison, as well as its key role as standard setting organization in the innovation economy, the IEEE hopefully will reconsider its patent policy in light of actual economic and legal evidence. It should return back to the balanced patent policy that successfully promoted the computer and mobile revolutions of the past four decades. The future of new and innovative consumer products is at stake, such as the 5G technology that was first being developed many years ago and will start to be introduced into consumer products in the coming year.

Categories
Antitrust Patent Licensing

Department of Justice Recognizes Importance of Reliable Patent Rights in Innovation Economy

dictionary entry for the word "innovate"It is undeniable that the patent system has been under stress for the past decade, as courts, regulators, and even the Patent Office itself (as the newly confirmed Director Andrei Iancu has acknowledged) have sowed legal uncertainty, weakened patent rights, and even outright eliminated patent rights. This is why a series of recent speeches by Assistant Attorney General Makan Delrahim—head of the Antitrust Division at the Department of Justice—have signaled an important and welcome policy change from the past decade. It’s just one step, but it’s an important first step to restoring reliability and predictability to property rights in patents, which, as Director Iancu has also been saying in recent speeches, drives innovation and economic growth by promoting investments by inventors, venture capitalists, and companies in the new inventions that make modern life a veritable miracle today.

Delrahim’s speeches are important because one significant point of stress for the patent system and the innovation economy over the past decade has occurred at the intersection of antitrust law and the licensing of patents in standard setting organizations (SSOs). Many people are unaware of this particular issue, and it’s understandable why it flies under the radar screen. The technical standards set by SSOs are the things that make everything work, such as electrical plugs, toasters, and pencils, among millions of other products and services, but they are not obvious to everyday consumers who use these products. Also, antitrust law is a complex domain of lawyers, policy-makers and economists. Still, the patented innovation that comprises technical standards, such as 4G, WiFi, USB, memory storage chips, and other key features of our smart phones and computers, have been essential drivers of innovation in the telecommunications revolution of the past several decades.

In a series of recent speeches, Delrahim has signaled an important and welcome change from his predecessors in how antitrust law will be applied to patented technology that is contributed to the standards that drive innovation in the high-tech industry. Delrahim’s predecessors at the DOJ gave many speeches criticizing (and instigating investigations of) alleged “anti-competitive behavior” by patent owners on technical standards. The DOJ’s approach was one-sided, unbalanced, and lacked evidence confirming the allegations of anti-competitive behavior. Instead, Delrahim is emphasizing the key importance of promoting and properly securing to innovators the technology they create through their long-term, risky, and multi-billion-dollar R&D investments (as succinctly described in two paragraphs here about Qualcomm’s R&D in 5G by an official at the Department of Treasury).

Delrahim has announced that he will return to an evidence-based, balanced antitrust policy at the DOJ. He will not take action against innovators unless there is real-world evidence of consumer harm or proven harm to the development of innovation. The absence of such evidence is well known among scholars and policy-makers. In February 2018, for instance, a group of scholars, former government officials, and judges wrote that “no empirical study has demonstrated that a patent-owner’s request for injunctive relief after a finding of a defendant’s infringement of its property rights has ever resulted either in consumer harm or in slowing down the pace of technological innovation.” It’s significant that Delrahim has announced that the DOJ will constrain its enforcement actions with basic procedural and substantive safeguards long provided to citizens in courts, such as requiring actual evidence to prove assertions of harm. This guards against unfettered and arbitrary regulatory overreach against innocent owners of private property rights. This self-restraint is even more important when overreach negatively impacts innovation, which portends badly for economic growth and the flourishing lives we have all come to expect with our high-tech products and services.

For example, Delrahim has rightly recognized that “patent holdup” theory is just that—a theory about systemic market failure that remains unproven by extensive empirical studies. Even more concerning, “patent holdup” theory—the theory that patent owners will exploit their ability to seek injunctions to protect their property rights and thus “holdup” commercial implementers by demanding exorbitantly high royalties for the use of their technology—is directly contradicted by the economic evidence of the smart phone industry itself. The smart phone industry is one of the most patent-intensive industries in the U.S. innovation economy; thus, “patent holdup” theory hypothesizes that there will be higher prices, slower technological development, and less and less new development of products and services. Instead, as everyone knows, smart phones—such as the Apple iPhone and the Samsung Galaxy, among many others—are defined by rapidly dropping quality-controlled prices, explosive growth in products and services, and incredibly fast technological innovation. The 5G revolution is right around the corner, which will finally make real the promise of the Internet of Things.

In sum, Delrahim has repeatedly stated that antitrust officials must respect the equal rights of all stakeholders in the innovation industries—the inventors creating fundamental technological innovation, the rights of the companies who implement this innovation, and the consumers who purchase these products and services. This requires restraining investigations and enforcement actions to evidence, and not acting solely on the basis of unproven theories, colorful anecdotes, or rhetorical narratives developed inside D.C. by lobbyists and activists (such as “patent trolls”). This is good governance, which is what fosters ongoing investments in the R&D that makes possible the inventions that drives new technological innovation in smart phones and in the innovation economy more generally.

We will delve more deeply into the substantive issues and implications of Delrahim’s recent speeches in follow-on essays. Since his speeches have been delivered over the course of the past six months, we have aggregated them here in one source. Read them and come back for further analyses of these important speeches (and more speeches that will likely come, which we will keep adding to the list below):

  • November 10, 2017. In a speech at the University of Southern California, Gould School of Law, Assistant Attorney General Delrahim discussed why patent holdout is a bigger problem than patent hold-up. “[T]he hold-up and hold-out problems are not symmetric. What do I mean by that? It is important to recognize that innovators make an investment before they know whether that investment will ever pay off. If the implementers hold out, the innovator has no recourse, even if the innovation is successful.” He further noted that antitrust law has a role to play in preventing the concerted anticompetitive actions that occur during holdout.
  • February 1, 2018. In a speech at the U.S. Embassy in Beijing, Delrahim noted that the proper antitrust focus should be on protecting the innovative process, not “short-term pricing” considerations. With this focus, using antitrust remedies should be approached with “caution.”
  • February 21, 2018. In a speech at the College of Europe, in Brussels Belgium, Delrahim observed that antitrust enforcers have aggressively tried to police patent license terms deemed excessive, and “have strayed too far in the direction of accommodating the concerns of technology licensees who participate in standard setting bodies, very likely at the risk of undermining incentives for the creation of new and innovative technologies.” The real problem and solution he noted is that the “dueling interests of innovators and implementers always are in tension, but the tension is best resolved through free market competition and bargaining.”
  • March 16, 2018. In a speech at the University of Pennsylvania Law School, Delrahim expanded on his detailed remarks from his talk at USC by adding some historical context from the founding fathers. He also made the core point that “patent hold-up is not an antitrust problem,” noting that FRAND commitments from patent owners are part of the normal competitive process and are therefore appropriately policed by contract and common law remedies. He further describes the necessary impacts of having a right to exclude in the patent right, including that the “unilateral and unconditional refusal to license a patent should be considered per se”
  • April 10, 2018. In a keynote address at the LeadershIP Conference on IP, Antitrust, and Innovation Policy in Washington, D.C., Delrahim emphasized the harm that can occur when “advocacy positions lead to unsupportable or even detrimental legal theories when taken out of context.” He specifically noted that some advocacy about patent hold-up could undermine standard setting as “putative licensees have been emboldened to stretch antitrust theories beyond their rightful application, and that courts have indulged these theories at the risk of undermining patent holders’ incentives to participate in standard setting at all.”
Categories
Biotech Economic Study Patent Licensing Uncategorized

UNITAID’s Request for Suggestions on Breaking Down IP Barriers Ignores Harmful Patent Delay

dictionary entry for the word "innovate"Last month, global health initiative UNITAID launched an appeal for suggestions on breaking down barriers that frustrate the progress of public health. UNITAID is a multilateral partnership hosted by the World Health Organization whose mission is to develop systematic approaches to identifying challenges in the treatment of devastating diseases such as HIV, TB, and malaria. The call for suggestions comes as UNITAID launches a renewed effort to improve access to health products for “the needy and vulnerable.”

Unfortunately, UNITAID’s request takes a narrow view of the obstacles to a better public health system, choosing to blame intellectual property and patents for blocking access to life-saving medicines. The call for suggestions posits that while patents reward innovation, they also hamper access to drugs by limiting competition. After promoting several controversial mechanisms that would strip patent owners of their intellectual property rights, UNITAID urges responders to submit ideas that would further weaken patent systems around the world.

In response to UNITAID’s request, CPIP’s Mark Schultz and Kevin Madigan submitted comments that call attention to a serious and underappreciated problem detailed in the forthcoming white paper, The Long Wait for Innovation: The Global Patent Pendency Problem. Excessive patent application processing delays and inefficient patent systems are obstructing the distribution of ground-breaking new drugs by deterring both home-grown startups and foreign companies from investing in innovation. The following comments stress that effective property rights are critical to delivering health products to patients and that without a competent patent system, the market for medical innovations cannot function.

High-Level Suggestions to UNITAID on Intellectual Property Rights
Mark Schultz & Kevin Madigan[1]
September 15, 2016

We submit these comments in response to UNITAID’s call for high-level suggestions on intellectual property rights (IPRs). UNITAID’s request for suggestions observes that IPRs can pose a barrier to health products reaching “the needy and vulnerable.” However, the suggestions received will be incomplete if they fail to account for how effective IPRs are critical to delivering health products to patients.

An effective IPR system is essential to a well-functioning market in health products. It’s not just that patents secure investment in inventing a new cure; they also secure the investment made to bring that cure to patients in each market. A country’s ineffective IPR system can deter companies from making the substantial investments necessary to build a market in that country—these investments can include regulatory compliance, securing and negotiating reimbursement, building a distribution system, and educating health care providers about the benefits and administration of the drug. In fact, recent studies have shown a link between weak patent protection and delayed availability of drugs.[2]

In a forthcoming white paper for the Center for the Protection of Intellectual Property at Antonin Scalia Law School, The Long Wait for Innovation: The Global Patent Pendency Problem, we illuminate an under-appreciated obstacle to bringing new drugs to patients. (The paper will be available soon at http://cip2.gmu.edu.) While debates and headlines focus on issues of patentable subject matter and exclusive property rights, the problem of patent pendency has been largely overlooked and under-examined. The reality is that in many countries, it simply takes too long to get a patent, thus deterring both home-grown startups and foreign companies from creating or even distributing ground-breaking new drugs.

Graph: Figure 1: Average Granted Pharmaceutical Application Age for Selected Countries 2011-2015 (in years). Argentina, 3.04. China, 3.1. USA, 3.8. Australia, 3.97. Korea, 4.37. Japan, 6.33. EPO, 6.51. India, 6.73. Egypt, 8.14. Brazil, 13.01. Thailand, 14.91.

As Figure 1 shows, our study found that in 2011-2015, average time from application to grant for pharmaceutical patents ranged from Argentina, at 3.04 years, to Thailand at 14.91 years. The averages mask even worse problems—in 2015, Thailand issued 10 pharmaceutical patents with less than a year of term left. Five of them had 3 months or less of term left.

A long patent pendency period can deter a drug-maker from entering a market. Until a patent grant confirms that it can protect its investment in building a market, it is less likely to enter the market. If a company takes a wait-and-see approach, then consumers are in for a very long wait in countries such as Thailand and Brazil.

Causes of patent delay include a number of factors, many of which simply call for good governance. They include a simple lack of patent examiners and duplication of work already done by other capable patent offices. Our study suggests accelerated examination procedures, hiring more and better-qualified examiners, and work-sharing and recognition programs.

UNITAID is to be lauded for its innovative, market-based solutions, but well-functioning markets are founded on effective property rights. Without a competent patent system, the market for medical innovations cannot function. There should be a functioning market before one seeks to identify and correct market failures.

[1] Mark Schultz is Co-Founder and Senior Scholar at the Center for the Protection of Intellectual Property (CPIP) at Antonin Scalia Law School at George Mason University. Kevin Madigan is Legal Fellow at CPIP. The views of the authors are their own and not those of CPIP or GMU.

[2] Iain M. Cockburn, Jean O. Lanjouw, & Mark Schankerman, Patents and the Global Diffusion of New Drugs, NBER Working Paper 20492, http://www.nber.org/papers/w20492 (2014); Ernst R. Berndt & Iain M. Cockburn, The Hidden Cost of Low Prices: Limited Access to New Drugs in India, 33 Health Affairs 1567 (2014); Joan-Ramon Borrell, Patents and the Faster Introduction of New Drugs in Developing Countries, 12 Applied Econ. Letters 379 (2005).