Category: Uncategorized

Letter on FCC Set-Top Box Regulation Once Again Confuses the Issue

Post author By Joshua Grove
Post date July 27, 2016

Last week, a group of law professors wrote a letter to the acting Librarian of Congress in which they claim that the current FCC proposal to regulate cable video navigation systems does not deprive copyright owners of the exclusive rights guaranteed by the Copyright Act. The letter repeats arguments from response comments they filed along with the Electronic Frontier Foundation (EFF), accusing the Copyright Office of misinterpreting the scope of copyright law and once again bringing up Sony v. Universal to insist that copyright owners are overstepping their bounds. Unfortunately, the IP professors’ recurring reliance on Sony is misplaced, as the 30-year-old case does not address the most significant and troubling copyright violations that will result from the FCC’s proposed rules.

In 1984, the Supreme Court in Sony held that recording television shows on a personal VCR was an act of “time-shifting” and therefor did not constitute copyright infringement. The court also ruled that contributory liability requires knowledge, and such knowledge will not be imputed to a defendant based solely on the characteristics or design of a distributed product if that product is “capable of substantial noninfringing uses.” But while this precedent remains good law today, it does not apply to the real concerns creators and copyright owners have with the FCC’s attempt to redistribute their works without authorization.

The FCC’s proposed rules would require pay-TV providers to send copyrighted, licensed TV programs to third parties, even if the transmission would violate the agreements that pay-TV providers carefully negotiated with copyright owners. A different group of IP scholars recently explained to the FCC that by forcing pay-TV providers to exceed the scope of their licenses, the proposed rules effectively create a zero-rate compulsory license and undermine the property rights of creators and copyright owners. The compulsory license would benefit third-party recipients of the TV programs who have no contractual relationship with either the copyright owners or pay-TV providers, depriving creators and copyright owners of the right to license their works on their own terms.

This unauthorized siphoning and redistribution of copyrighted works would occur well before the programming reaches the in-home navigational device, a fact that the authors of the recent letter to the Librarian of Congress either don’t understand, or choose to ignore. Creators and copyright owners are not attempting to “exert control over the market for video receivers,” as the letter suggests. The manufacture and distribution of innovative devices that allow consumers to access the programming to which they subscribe is something that copyright owners and creators embrace, and a thriving market for such devices already exists.

As more consumers resort to cord cutting, countless options have become available in terms of navigational devices and on-demand streaming services. Apple TV, Roku, Nexus Player and Amazon Fire Stick are just a few of the digital media players consumers can choose from, and more advanced devices are always being released. But while the creative community supports the development of these devices, it is the circumvention of existing licenses and disregard for the rights of creators to control their works that has artists and copyright owners worried.

Sony has become a rallying cry for those arguing that copyright owners are attempting to control and stymie the development of new devices and technologies, but these critics neglect the substantial problems presented by the transmission of digital media that Sony couldn’t predict and does not address. In the era of the VCR, there was no Internet over which television was broadcast into the home. In 1984, once a VCR manufacturer sold a unit, they ceased to have any control over the use of the machine. Consumers could use VCRs to record television or play video cassettes as they pleased, and the manufacturer wouldn’t benefit from their activity either way.

The difference with the current navigation device manufacturers is that they will receive copyrighted TV programs to which they’ll have unbridled liberty to repackage and control before sending them to the in-home navigation device. The third-party device manufacturers will not only be able to tamper with the channel placement designed to protect viewer experience and brand value, they will also be able to insert their own advertising into the delivery of the content, reducing pay-tv ad revenue and the value of the license agreements that copyright owners negotiate with pay-TV providers. The FCC’s proposal isn’t really about navigational devices, it’s about the control of creative works and the building of services around TV programs that the FCC plans to distribute to third parties free of any obligation to the owners and creators of those programs.

The authors of the letter conflate two distinct issues, misleading influential decision makers that may not be as well versed in the intricacies of copyright law. By stubbornly comparing the copyright issues surrounding the FCC’s proposed rules to those considered by the Supreme Court in Sony, they craftily try to divert attention away from the real matter at hand: Not what consumers do with the creative works they access in the privacy of their own homes, but how those works are delivered to consumers’ homes in the first place.

It’s curious that after many rounds of back-and-forth comments discussing the FCC’s proposal, proponents of the rules still refuse to address this primary copyright concern that has been continuously raised by creators and copyright owners in corresponding comments, articles, and letters (see also here, here, here, and here). Perhaps the authors of the recent letter simply do not grasp the real implications of the FCC’s plan to seize and redistribute copyrighted content, but given their years of copyright law experience, that is unlikely. More probable is that they recognize the complications inherent in the proposal, but do not have a good answer to the questions raised by the proposal’s critics, so they choose instead to cloud the issue with a similar-sounding but separate issue. But if they truly want to make progress in the set-top box debate and clear the way for copyright compliant navigational devices, they’ll need to do more than fall back on the same, irrelevant arguments.

Tags copyright, copyright infringement, innovation, intellectual property, legislation, Supreme Court, U.S. Copyright Office

The Dangerous Combination of Content Theft and Malware

Post author By Joshua Grove
Post date July 25, 2016

Cross-posted from the Mister Copyright blog.

Malware, short for malicious software, has been used to infiltrate and contaminate computers since the early 1980s. But what began as relatively benign software designed to prank and annoy users has developed into a variety of hostile programs intended to hijack, steal, extort, and attack. Disguised software including computer viruses, worms, trojan horses, ransomware, spyware, adware, and other malicious programs have flooded the Internet, allowing online criminals to profit from illicit activity while inflicting enormous costs on businesses, governments and individual consumers.

Purveyors of malware target unsavory websites to embed and distribute their programs, often making deals with those in the business of disseminating stolen content. Content theft websites that appear online through legitimate hosting and content delivery systems are frequently riddled with devious malware that infect the computers of users looking to download or stream pirated music, movie and television shows.

Last week, the Digital Citizens Alliance (DCA) published a report detailing how US tech companies are allowing cyber criminals to use their services to perform a myriad of illegal exploits. Enabling Malware focuses on how stolen content is being used as bait to infect users’ computers and how domestic hosting and content delivery companies are permitting online criminals to profit from the spread of dangerous malware.

Employing the expertise of Internet security firm RiskIQ, the report found that 1 in 3 content theft websites expose users to infectious malware and that visitors are 28 times more likely to encounter malware on content theft sites than mainstream, legitimate websites. And although these nefarious websites are usually created and maintained by overseas operators, they rely on North America hosting companies to function.

It’s a tricky partnership because while the hosting companies are not breaking the law by allowing disreputable websites to make us of their services, they are facilitating criminal networks whose activities could have catastrophic consequences. The report likens these service companies to landlords who turn a blind eye to the illegal activity of a renter. The issue is the same one being examined by the Copyright Office in its DMCA 512 study: When does a service provider have the requisite knowledge of illicit activity to trigger a duty to address the problem?

But while Section 512 of the DMCA hopes to combat copyright infringement online, the introduction of malware to content theft sites has consequences more far-reaching and dire than the dissemination of stolen works. Once malware infiltrates a system and hackers are able to take over, the results can be disastrous. The report details a wide range of criminal activity that can result from malware infection including the theft of bank credentials and credit card information that is then subsequently sold online, locking computers and demanding ransoms to return access, and hijacking webcams to film users without consent. The report warns:

[T]hese companies are now contributing to a growing issue for Americans: the threat of computer infections, the rise of identity theft and loss of financial information. The U.S. Department of Justice reports that 16.2 million U.S. consumers have been victimized by identity theft, with financial losses totaling over $24.7 billion.

According to the study, one of the most notorious companies enabling the websites that spread malware is CloudFlare. Marketing itself as a global content protection and security service provider, CloudFlare actually conceals a website’s true hosting information, inserting their network information instead. This allows for notorious content theft websites to mask information related to their actual hosting companies, making it more difficult to identify those complicit in their illegal activity.

Employing CloudFlare’s services are websites like Putlockerr.io, which offers a wide array of pirated movies for download. But when a user attempts to watch a movie via Putlocker, they download more than pirated content. After a user clicks to watch a movie, they are redirected to a new site that prompts them to download a new video player in order to view the content. This download is in fact a mechanism to deliver the malware that will wreak havoc on their system.

One of the worst distributors of malware identified by RiskIQ was watchfreemoviesonline.top. According to the study, the websites malware exposure rate was 32 percent and baited users into downloading the infectious software by offering popular movies like Captain America: Civil War in advance of its theatrical release. Watchfreemoviesonline.top uses Hawk Host, a company offering services similar to CloudFlare, to hide information about their actual hosting affiliations.

The Digital Citizens Alliance contacted both CloudFlare and Hawk Host to inform them of the findings of the RiskIQ report, and received differing responses. After being presented with clear evidence of the shady and illegal activities of watchfreemoviesonline.top, Hawk Host acknowledged that the site violated their terms of service and told the DCA that the site would come down. Hawk Host also agreed to meet with DCA researches to further discuss the RiskIQ report.

Unfortunately, the DCA’s interaction with CloudFlare was not as encouraging. In response to an email informing the company of the findings of the RiskIQ report, CloudFlare responded with a vague comment disclaiming any responsibility for the content of their client websites.

In the past few years, there’s been progress among service companies’ accountability efforts, with many refusing to deal with criminal websites. Payment providers like PayPal and Visa have stopped permitting illicit websites to use their services, and online advertisers have vowed to stop dealing with infamous content theft sites. But in order to eradicate content theft sites and the malware they propagate, the companies that help veil their identities and enable criminal activity must be help accountable.

Tags CloudFlare, content theft, copyright, copyright infringement, DCA, Digital Citizens Alliance, Hawk Host, malware

Biotech High Tech Industry History of Intellectual Property Innovation Intellectual Property Theory Inventors Legislation Patent Law Patent Litigation Patent Theory Patentability Requirements Software Patent Supreme Court Uncategorized

Federal Circuit Brings Some Clarity and Sanity Back to Patent Eligibility Doctrine

Post author By Joshua Grove
Post date July 14, 2016

By Adam Mossoff and Kevin Madigan

Following the Supreme Court’s four decisions on patent eligibility for inventions under § 101 of the Patent Act, there has been much disruption and uncertainty in the patent system. The patent bar and most stakeholders in the innovation industries have found the Supreme Court’s decisions in Alice Corp. v. CLS Bank (2014), AMP v. Myriad (2013), Mayo Labs v. Prometheus (2012), and Bilski v. Kappos (2010) to be vague and doctrinally indeterminate. Given the moral panic about the patent system that has been created as a result of ten years of excessive lobbying in D.C. for legislation that weakens patent rights, judges have responded to the excessive discretion they have under these cases by invalidating whole swaths of patented innovation in the high-tech, biotech, and pharmaceutical industries. The Patent Office is also rejecting patent applications at record levels, even for traditional inventions outside of high-tech and life sciences directly affected by the recent § 101 case law.

In Sequenom v. Ariosa, the Supreme Court had the opportunity to bring some clarity to the law of patent eligibility and to reign in some of the judicial and Patent Office excesses, but unfortunately it rejected this opportunity when it denied Sequenom’s cert petition this past June. Fortunately, the Court of Appeals for the Federal Circuit is now taking the lead in providing some much-needed legal guidance on patent eligibility to the inventors and companies working in the innovation industries. In two recent decisions, Enfish v. Microsoft and Rapid Litigation Management v. CellzDirect, the Federal Circuit has set forth some important doctrinal guideposts for defining what counts as a patent-eligible invention. Not only do these two decisions bring some reason and clarity back to the law of patent eligibility under § 101, they provide important doctrinal insights on how stakeholders may wish to address this problem if they ultimately choose to seek relief in Congress.

Enfish and the Patentability of Computer-Implemented Inventions (a/k/a “Software Patents”)

At the time it was decided, some commentators believed that the Alice decision was a directive from on high that most, if not all, computer software programs were not patentable inventions. This was a surprising claim if only because the Alice Court did not once use the phrase “software” in its entire opinion. Of course, “software patent” is not a legal term in patent law; the proper term is “computer-implemented invention,” as used by the Alice Court, and so the Court may have been only avoiding vague rhetoric from the patent policy debates. More important, though, this claim about Alice contradicts the Court’s opinion in Bilski just four years earlier, when the Court warned the Federal Circuit not to adopt a bright-line rule that limited § 101 to only physical inventions of the “Industrial Age,” because this created unnecessary and innovation-killing “uncertainty as to the patentability of software.”

Unfortunately, the ambiguities in Alice and in the Court’s prior patentable subject matter decisions, such as Mayo, left enough discretionary wiggle room in applying the generalized patent-eligibility test to permit judges and patents examiners to wage war on computer-implemented inventions. They thus made real again in the twenty-first century Justice Robert Jackson’s famous observation in 1949 that “the only patent that is valid is one which this Court has not been able to get its hands on.” Jungersen v. Ostby & Barton Co., 335 U.S. 560, 572 (1949) (Jackson, J., dissenting). As one commentator remarked several months after Alice was decided, “It’s open season on software patents.” The data over the next several years has borne out the truth of this statement.

The key argument against patents on computer-implemented inventions, such as key components of word processors, programs that run internet searches (like the patented innovation that started Google), and encryption software, is that such inventions are inherently “abstract.” The judicial interpretation of § 101 has long maintained that abstract ideas, laws of natural, and natural phenomena are unpatentable discoveries. In Alice, for instance, the Court held that a complex software program for extremely complex international financial transactions was an “abstract idea” and thus unpatentable under § 101. But beyond claims that something long known is “abstract,” the Court has failed to define with precision what it means for a discovery to be abstract. With little to no specific guidance from the Alice Court, it is no wonder that judges and examiners have succumbed to the recent moral panic about patents and declared “open season” on patents covering computer-implemented inventions.

In this context, the Federal Circuit’s decision in Enfish v. Microsoft is extremely important because it ends the unreasoned, conclusory “I know it when I see it” rejections of patents as “abstract” by judges and examiners.

In Enfish, the Federal Circuit reversed a trial court’s summary judgment that a patent on a computer-implemented invention was an unpatentable abstract idea. The patent covered a type of database management system on computers, a classic incremental innovation in today’s digital world. In its decision, the trial court dissected the invention down into the most basic ideas in which all inventions can be reframed as representing; for example, methods of using internal combustion engines can easily be reframed in terms of the basic laws in thermodynamics. In this case, the trial court asserted that this patent on a computer-implemented invention covered merely the “abstract purpose of storing, organizing, and retrieving” information. The trial court thus easily concluded that the invention was merely “abstract” and thus unpatentable.

The Federal Circuit rejected the trial court’s conclusory assertion about the invention being “abstract” and further held that such assertions by courts are a legally improper application of § 101. With respect to the patent at issue in this case, Judge Todd Hughes’ opinion for the unanimous panel found that

the plain focus of the claims is on an improvement to computer functionality itself, not on economic or other tasks for which a computer is used in its ordinary capacity. Accordingly, we find that the claims at issue in this appeal are not directed to an abstract idea within the meaning of Alice.

More important, the Enfish court cautioned courts against the methodological approach adopted by the trial court in this case, in which “describing the claims at such a high level of abstraction and untethered from the language of the claims all but ensures that the exceptions to § 101 swallow the rule.” The court recognized that adopting a “bright-line” rule that computer-implemented inventions—the “software patents” decried by critics today—are necessarily “abstract” runs counter to both § 101 and the recent Supreme Court cases interpreting and applying this provision: “We do not see in Bilski or Alice, or our cases, an exclusion to patenting this large field of technological progress.”

Further confirming that Enfish represents an important step forward in how courts properly secure technological innovation in the high-tech industry, the Federal Circuit relied on Enfish in its recent decision in BASCOM Global Services Internet Inc v AT&T Mobility LLC. Here, the Federal Circuit again rejected the trial court’s dissection of a patent claim covering a software program used on the internet into an “abstract” idea of merely “filtering content.” The BASCOM court emphasized that courts must assess a claim as a whole—following the Alice Court’s injunction that courts must assess a patent claim as “an ordered combination of elements”—in determining whether it is a patentable invention under § 101. As numerous patent scholars explained in an amicus brief filed in support of Sequenom in its failed cert petition before the Supreme Court, requiring a court to construe a “claim as a whole” or “the invention as a whole” is a basic doctrinal requirement that runs throughout patent law, as it is essential to ensuring that patents are properly evaluated both as to their validity and in their assertion against infringers.

CellzDirect and the Patentability of Discoveries in the Bio-Pharmaceutical Industry

The high-tech industry is not the only sector of the innovation industries that has been hit particularly hard by the recent §101 jurisprudence. The biotech and pharmaceutical industries have also seen a collapse in the proper legal protection for their innovative discoveries of new therapeutic treatments. One recent study found that the examination unit at the Patent Office responsible for reviewing personalized medicine inventions (art unit 1634) has rejected 86.4% of all patent applications since the Supreme Court’s decision in Mayo. Anecdotal evidence abounds of numerous rejections of patent applications on innovative medical treatments arising from extensive R&D, and the most prominent one was the invalidation of Sequenom’s patent on its groundbreaking innovation in prenatal diagnostic tests.

In this light, the decision on July 5, 2016 in Rapid Litigation Management v. CellzDirect is an extremely important legal development for an industry that relies on stable and effective patent rights to justify investing billions in R&D to produce the miracles that comprise basic medical care today. In CellzDirect, the trial court found unpatentable under § 101 a patent claiming new methods for freezing liver cells for use in “testing, diagnostic, and treating purposes.” The trial court asserted that such a patent was “directed to an ineligible law of nature,” because scientists have long known that these types of liver cells (hepatocytes) could be subjected to multiple freeze-thaw cycles.

In her opinion for a unanimous panel, Chief Judge Sharon Prost held that the method in this case is exactly the type of innovative process that should be secured in a patent. Reflecting the same methodological concern in Enfish and BASCOM, the CellzDirect court rejected the trial court’s dissection of the patent into its foundational “laws of nature” and conventional ideas long-known in the scientific field:

The claims are simply not directed to the ability of hepatocytes to survive multiple freeze-thaw cycles. Rather, the claims of the ’929 patent are directed to a new and useful laboratory technique for preserving hepatocytes. This type of constructive process, carried out by an artisan to achieve “a new and useful end,” is precisely the type of claim that is eligible for patenting.

In other words, merely because a patentable process operates on a subject matter that constitutes natural phenomena does not mean the patent improperly claims either those natural phenomena or the laws of nature that govern them. To hold otherwise fails to heed the Mayo Court’s warning that “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas,” and thus to dissect all patents down into these unpatentable foundations would “eviscerate patent law.” The CellzDirect court was explicit about this key methodological point in evaluating patents under § 101: “Just as in [the industrial process held valid by the Supreme Court in] Diehr, it is the particular ‘combination of steps’ that is patentable here”—the invention as a whole.

Conclusion

The U.S. has long prided itself as having a “gold standard” patent system—securing to innovators stable and effective property rights in their inventions and discoveries. As scholars and economic historians have long recognized, the patent system has been a key driver of America’s innovation economy for more than two hundred years. This is now threatened under the Supreme Court’s § 101 decisions and the “too broad” application of the Court’s highly generalized patent-eligibility tests to inventions in the high-tech and bio-pharmaceutical sectors. The shockingly high numbers of rejected applications at the Patent Office and of invalidation of patents by courts, as well as the general sense of legal uncertainty, are threatening the “gold standard” designation for the U.S. patent system. This threatens the startups, new jobs, and economic growth that the patent system has been proven to support. Hopefully, the recent Enfish and CellzDirect decisions are the first steps in bringing back to patent-eligibility doctrine both reason and clarity, two key requirements in the law that have been sorely lacking for inventors and companies working in the innovation economy.

Tags abstract idea, Adam Mossoff, Bilski, Bob Sachs, broken patent system, innovation, patent, patent litigation, patentability, Section 101, Supreme Court, USPTO

Biotech Innovation Patent Law Uncategorized

Proposed CREATES Act Threatens Patent Owners’ Rights

Post author By Joshua Grove
Post date July 5, 2016

By Erika Lietzan, Kevin Madigan, & Mark Schultz

Earlier this month, a bipartisan group of Senators introduced the Creating and Restoring Equal Access to Equivalent Samples Act (or CREATES Act). The proposed bill is aimed at deterring what the bill’s author, Sen. Patrick Leahy, claimed were “inappropriate delay tactics that are used by some brand-name drug manufacturers to block competition from more affordable generic drugs.” Whether the bill would produce the intended consequences is the subject of some debate, but we thought it important to point out some (hopefully) unintended consequences: The CREATES Act would impose vague standards and draconian remedy provisions to force innovators to surrender their intellectual property rights for the benefit of generic competitors.

The CREATES Act

It’s no surprise that the legislation might generate unintended consequences, as it would add further complexity to an already challenging regulatory scheme for approving drugs.

As a general rule, for a generic drug manufacturer to get permission to market a duplicate of an already approved drug, it usually[1] must have access to samples of the already approved drug. The generic drug company uses these samples in the bioequivalence studies required in its abbreviated new drug application. The same general principle applies to companies developing biosimilar versions of already approved biological medicines; they conduct comparative trials for approval of their abbreviated applications, and these trials generally require samples of the “reference” product. In addition, FDA sometimes[2] requires drug and biologic manufacturers to develop risk evaluation and mitigations strategies (REMS) if safety measures beyond standard labeling are needed to ensure that the product’s benefits outweigh its risks. These REMS can include elements to assure safe use (ETASU)—essentially, a system of use or distribution restrictions—if necessary to mitigate a specific serious risk. A generic or biosimilar manufacturer seeking to distribute its version of a product that is subject to a risk management distribution program must generally develop its own system or negotiate to share the existing system.

The CREATES Act is spurred by concerns that innovators are hampering competition by strategically exploiting these regulatory requirements imposed on their generic and biosimilar competitors. That is, critics contend that innovators are raising barriers that prevent their generic and biosimilar competitors from obtaining samples of the reference drug and from participating in existing distribution programs.

While the FTC and members of Congress have raised these concerns before, the concerns are particularly topical because of the controversy surrounding Turing Pharmaceuticals and its notorious former CEO Martin Shkreli (described by one publication as the most-hated man in America). Turing is a small company that acquired the only license to market the off-patent drug Daraprim and raised the price by over 5000%, meanwhile preventing potential competitors from obtaining samples for use in developing a competing supply. While Turing is a small company marketing an off-patent drug, its actions have been misattributed (through confusion or purposeful obfuscation) to mainstream, R&D-intensive innovative drug companies.

The CREATES Act proposes to prevent strategic exploitation of regulatory requirements by giving generic and biosimilar manufacturers their own strategic advantage in their negotiations with competitors – the threat of a lawsuit. The Act would give these follow–on developers the ability to sue their competitors to obtain samples of any drugs that they wish to use as references in testing for approval of generic and biosimilar versions. Follow–on drug developers could also sue their competitors to be allowed to share in existing distribution systems.

Although the Act contemplates that the parties will negotiate with respect to purchase of samples and sharing of any distribution system already in place, it would decisively shift bargaining power in favor of follow-on competitors. To begin with, it imposes unreasonable deadlines on innovators—for instance, one month to manufacture and provide samples, after which the follow–on applicant may sue. Also, it creates enormous liability exposure. If the plaintiff proves its case, the court will order the innovator to provide “sufficient” quantities of its product for testing and, if applicable, to share its REMS distribution system with its follow–on competitor. Further, the court must award not only reasonable attorney fees and costs, but also a “monetary amount sufficient to deter” the innovator from failing to provide other applicants with sufficient quantities, or failing to share its risk management system, as applicable. The “maximum” award—which will surely be taken as a suggestion at least of the magnitude envisioned—is the total revenue on the product for every day that the innovator failed to provide samples or to agree to share its developed risk management system. It bears no rational relationship to any harm suffered by the follow–on applicant and is functionally punitive.

The CREATES Act Creates Potential Intellectual Property Problems

The CREATES Act raises two significant intellectual property issues. Essentially, it would create a mechanism to force innovators and patent owners to supply their products and intellectual property to their competitors.

First, it would require an intellectual property owner to make its product for the benefit of a competitor. The Act allows a generic or biosimilar applicant to sue for drug samples to use in testing. In many instances, those drugs will still be under patent. While the so-called Bolar provision permits a generic or biosimilar applicant to conduct tests during the patent term, the CREATES Act turns the Bolar shield into a sword by empowering a court to order a company to provide its patented drug to a potential competitor. This, in turn, will require the company to manufacture the drug for that competitor. Whether it makes a small or large supply for the market, it will need to adjust its production to ensure supplies for its competitor as well, and indeed as many competitors as want samples. This conflicts directly with a basic and valued tenet of the patent system in the United States: we do not require a patent owner to practice his or her invention. In short, the CREATES Act directs courts to order patent owners to practice their patents for the benefit of others.

Second, it would require a drug company with intellectual property rights in a REMS distribution system to forego those rights for the benefit of a competitor. The Act allows a generic or biosimilar applicant to sue the innovator in order to use the specific risk management system that the innovator developed. Although current law creates a default rule that generic drug companies and drug innovators should use a single shared system, there is no such default rule for biosimilar companies and biologic innovators. And the default for generic drugs is simply a default; FDA may waive the default if, for instance, some aspect of the system is claimed by a patent or subject to trade secret protection. This bill would authorize the court to order the innovator to share its system, regardless of any unexpired patent or trade secret protection. It short, it permits courts to order intellectual property holders to surrender their intellectual property or face the threat of monetary penalties.

An innovator may have lawful and legitimate reasons for declining to manufacture its patented product for its competitors and for declining to share its patented risk management system with those competitors. Yet, the unreasonable deadlines and punitive liability provisions of the CREATES Act mean that it will have little scope to resist the demands of its competitors. This essentially nullifies the innovator’s intellectual property—which will discourage future investment and innovation in the pharmaceutical industry.

Important IP Rights in Safety Systems: The Example of Celgene

The IP problems unleashed by the CREATES Act are illustrated by their effect on the IP rights and incentives of a company such as the Celgene Corporation (which submitted a statement on the bill to the Senate Judiciary Committee). Celgene is an innovative biopharmaceutical company that focuses on treatments for cancer and immune–inflammatory related diseases in patients with limited treatment options. The company’s first approved drug was Thalomid, initially approved by FDA for leprosy and then approved for its primary indication—multiple myeloma, a particularly pernicious form of blood and bone marrow cancer. The active ingredient of Celgene’s product, thalidomide, is a powerful teratogen, causing severe disfiguring birth defects. It was marketed in other parts of the world in the late 1950s and early 1960s as a treatment for morning sickness in women, and FDA has estimated that more than 10,000 children in 46 countries were born with severe birth defects attributable to thalidomide. As a result of this history and the special risks associated with this life–saving medicine, Celgene developed an extremely detailed and meticulous protocol dedicated to ensure safe distribution, prescription, and use. Essentially, Celgene’s innovative contribution was inventing a safe way to use an otherwise dangerous drug to fight cancer. The company’s special system for managing the risk of thalidomide is formalized at FDA as the “elements to assure safe use” portion of a REMS. It is also subject to patent protection.

The CREATES Act would force companies such as Celgene to share the proprietary elements of their REMS programs. It would give the company the choice: share its patent system or face a lawsuit that might result in catastrophic damages and mandatory sharing anyway. This functionally nullifies the patent. This, in turn, would discourage innovation and investment in the programs. The essence of thalidomide, and other drugs subject to use and distribution restrictions, is that these drugs require special programs. Their benefits do not outweigh their risks, without these special programs in place. If functionally nullifying the innovator’s patent protection means the innovator will not invest in creative solutions to difficult safety risks, then the products that require these solutions cannot be approved—and will never reach patients.

Conclusion

The CREATES Act has been presented as a panacea for the suspect activity of a few bad actors. But while it might force those companies to share their products and safety systems, it would also affect—and penalize—the much larger group of innovators that have legitimate reasons for withholding the fruits of their labors. By imposing unreasonable deadlines for action, failing to consider legitimate explanations for the choices made by innovative drug manufacturers, and imposing draconian penalties, it tramples the intellectual property rights of drug innovators. Yet, this industry is deeply reliant on intellectual property rights; they provide the incentive for research into tomorrow’s cures. The CREATES Act should be laid aside, if Congress truly wants to promote innovation and investment in life-saving medicines for future generations of Americans.

Erika Lietzan is an Associate Professor at University of Missouri School of Law and is participating in CPIP’s 2016-2017 Thomas Edison Innovation Fellowship Program.

[1]In fact, the situation is more complicated than proponents of this bill have stated. In instances where samples of an already-approved drug are unavailable for any reason, FDA has several regulatory options at its disposal. After all, if a brand company withdraws its product from the market, that doesn’t preclude generic companies from seeking approval, even years later. So long as the Reference Listed Drug (RLD) was not withdrawn for safety or efficacy reasons, it can be cited in a generic application. In that situation, one thing FDA can do is designate another generic to be the RLD for bioequivalence testing. The statute says only that the ANDA must demonstrate bioequivalence; it does not expressly require that the generic applicant use the innovator’s product in the testing.

Even if there aren’t other generics, it might be possible to obtain ANDA approval based on a showing of bioavailability and the same therapeutic effect. FDA has repeatedly noted, when finding that a particular RLD was not withdrawn for safety or efficacy reasons, that the agency may approve an ANDA for a generic version of a withdrawn product even if the withdrawn product is not commercially available. These Federal Register notices state that if the RLD is not available for bioequivalence testing, the applicant should contact the FDA’s Office of Generic Drugs to determine what showing would be required to satisfy the approval requirements of the statute.

[2]Despite the controversy around this issue, there are relatively few REMS, and even fewer with ETASU. The FDA maintains a downloadable list on its website, with the ETASU marked. As of this writing (July 2016) there are 75 REMS listed, only 40 of which have ETASU. Of these, 6 already have approved generics that share in an approved risk management system. More than a dozen of the remaining products are still under regulatory exclusivity.

Tags biologics, biosimilars, Bolar provision, Celgene, CREATES Act, Erika Lietzan, FDA, FTC, generics, innovation, intellectual property, Martin Shkreli, medicine, patents, Patrick Leahy, R&D, REMS, Thalomid

Innovation Inventors Patent Law Statistics Uncategorized

Do As I Say, Not As I Do: Google’s Patent Transparency Hypocrisy

Post author By Joshua Grove
Post date June 30, 2016

It is common today to hear that it’s simply impossible to search a field of technology to determine whether patents are valid or if there’s even freedom to operate at all. We hear this complaint about the lack of transparency in finding “prior art” in both the patent application process and about existing patents.

The voices have grown so loud that Michelle K. Lee, Director of the Patent Office, has made it a cornerstone of her administration to bring greater transparency to the operations of the USPTO. She laments the “simple fact” that “a lot of material that could help examiners is not readily available, because the organizations retaining that material haven’t realized that making it public would be beneficial.” And she’s been implementing new programs to provide “easy access by patent examiners to prior art” as a “tool to help build a better IP system.”

We hear this complaint about transparency most often from certain segments of the high-tech industry as part of their policy message that the “patent system is broken.” One such prominent tech company is search giant Google. In formal comments submitted to the USPTO, for instance, Google asserts that a fundamental problem undermining the quality of software patents is that a “significant amount of software-related prior art does not exist in common databases of issued patents and published academic literature.” To remedy the situation, Google has encouraged the Patent Office to make use of “third party search tools,” including its own powerful search engines, to locate this prior art.

Google is not shy about why it wants more transparency with prior art. In a 2013 blog post, Google Senior Patent Counsel Suzanne Michel condemned so-called “patent trolls” and argued that the “PTO should improve patent quality” in order to “end the growing troll problem.” In comments from 2014, three Google lawyers told the Patent Office that “poor quality software patents have driven a litigation boom that harms innovation” and that making “software-related prior art accessible” will “make examination in the Office more robust to ensure that valid claims issue.” In comments submitted last May, Michel even proposed that the Patent Office use Google’s own patent search engines for “streamlining searches for relevant prior art” in order to enhance patent quality.

Given Google’s stance on the importance of broadly available prior art to help weed out vague patents and neuter the “trolls” that wield them, you’d think that Google would share the same devotion to transparency when it comes to its own patent applications. But it does not. Google has not mentioned in its formal comments and in its public statements that even using its own search engine would fail to disclose a substantial majority of its own patent applications. Unlike the other top-ten patent recipients in the U.S., including many other tech companies, Google keeps most of its own patent applications secret. It does this while at the same time publicly decrying the lack of transparency in the patent system.

The reality is that Google has a patent transparency problem. Not only does Google not allow many of its patent applications to be published early or even after eighteen months, which is the default rule, Google specifically requests that many of its patent applications never be published at all. So while Google says it wants patent applications from around the world to be searchable at the click of a mouse, this apparently does not include its own applications. The numbers here are startling and thus deserve to be made public—in the name of true transparency—for the first time.

Public Disclosure of Patent Applications

Beginning with the American Inventors Protection Act of 1999 (AIPA), the default rule has been that a patent application is published eighteen months after its filing date. The eighteen-month disclosure of the patent application will occur unless an applicant files a formal request that the application not be published at all. An applicant also has the option to obtain early publication in exchange for a fee. Before the AIPA, an application would only be made public if and when the patent was eventually granted. This allowed an applicant to keep her invention a trade secret in case the application was later abandoned or rejected.

The publication of patent applications provides two benefits to the innovation industries, especially given that the waiting time between filing of an application and issuance of the patent or a final rejection by an examiner can take years. First, earlier publication of applications provides notice to third parties that a patent may cover a technology they are considering adopting in their own commercial activities. Second, publication of patent applications expands the field of publicly-available prior art, which can be used to invalidate either other patent applications or already-issued patents themselves. Both of these goals produce better-quality patents and an efficiently-functioning innovation economy.

Separate from the legal mandate to publish patent applications, Google has devoted its own resources to creating greater public access to patents and patent applications. From its Google Patent Search in 2006 and its Prior Art Finder in 2012 to its current Google Patents, Google has parlayed its search expertise into making it simple to find prior art from around the world. Google Patents now includes patent applications “from the USPTO, EPO, JPO, SIPO, WIPO, DPMA, and CIPO,” even translating them into English. It’s this search capability that Google has been encouraging the Patent Office to utilize in the quest to make relevant prior art more accessible.

Given Google’s commitment to patent transparency, one might expect that Google would at least be content to allow default publication of its own applications under the AIPA’s eighteen-month default rule. Perhaps, one might think, Google would even opt for early publication. However, neither appears to be the case; Google instead is a frequent user of the nonpublication option.

Google’s Secrecy vs. Other Top-Ten Patent Recipients

After hearing anecdotal reports indicating that Google was frequently using its option under the AIPA to avoid publishing its patent applications, we decided to investigate further. We looked at the patents Google received in 2014 to see what proportion of its applications was subject to nonpublication requests. To provide context, we also looked at how Google compared to the other top-ten patent recipients in this regard. The results are startling.

Unfortunately, there’s no simple way to tell if a nonpublication request was made when a patent application was filed using the USPTO’s online databases—nonpublication requests are not an available search field. The same appears to be true of subscription databases. The searches therefore have to be done manually, digging through the USPTO’s Public PAIR database to find the application (known in patent parlance as the “file wrapper”) for each individual patent that includes the individual application documents. Those interested in doing this will find startling numbers of patent applications kept secret by Google, both in terms of absolute numbers but also as compared to the other top-ten recipients of U.S. patents.

By way of example as to what one needs to look for, take the last three patents issued to Google in 2014: D720,389; 8,925,106; and 8,924,993.

For the first patent, the application was filed on December 13, 2013, and according to the application data sheet, no request was made to either publish it early or not publish it at all:

Since no such request was made, the application would normally be published eighteen months later or upon issuance of the patent. Indeed, that is what happened in due course—this patent issued just over one year after the application was filed, as it was concurrently published and issued in December of 2014.

For the second patent in our small set of examples, the application was filed on April 20, 2012. In this case, Google requested nonpublication by including a letter requesting that the application not be published:

Google thus opted out of the default eighteen-month publication rule, and the application was not published until the patent issued in December of 2014, some twenty months later.

Finally, for the third patent, the application was filed on November 10, 2011, and the application data sheet shows that Google requested the application not be published:

Google here again opted out of the default publication rule, and the application was not published until the patent issued in December of 2014—more than three years after the application was filed.

We applied this methodology to a random sample of 100 patents granted to each of the top-ten patent recipients in 2014.

In 2014, Google was one of the top-ten patent recipients, coming in sixth place with 2,649 issued patents:

SOURCES: USPTO PatentsView Database & USPTO Patent Full-Text and Image Database

We randomly sampled 100 patents for each of the top-ten patent recipients for 2014. We reviewed the file wrapper for each to determine the proportion of nonpublication requests in each sample.

Our results revealed that Google is an extreme outlier among top-ten patent recipients with respect to nonpublication requests. Eight of the top-ten patent recipients made zero requests for nonpublication, permitting their patent applications to be published at the eighteen-month deadline. The eighth-ranking patent recipient, Qualcomm, requested that one application not be published. By contrast, Google formally requested that 80 out of 100—a full 80%—of its applications not be published.

The following chart shows these results:

SOURCE: USPTO Public PAIR Database

Conclusion

Based on this result, Google deliberately chooses to keep a vast majority of its patent applications secret (at least it did so in 2014). This secrecy policy for its own patent applications is startling given both Google’s public declarations of the importance of publication of all prior art and its policy advocacy based on this position. It is even more startling when seen in stark contrast to the entirely different policies of the other nine top patent recipients for 2014.

It is possible that 2014 was merely an anomaly, and that patent application data from other years would show a different result. We plan to investigate further. So, stay tuned. But for whatever reason, it appears that Google doesn’t want the majority of its patent applications to be published unless and until its patents finally issue. This preference for secrecy stands in contrast to Google’s own words and official actions.

As one of the top patent recipients in the U.S., you’d think Google would want its applications to be published as quickly as possible. The other top recipients of U.S. patents in 2014 certainly adopt this policy, furthering the goal of the patent system in publicly disclosing new technological innovation as quickly as possible. The fact that Google does otherwise speaks volumes.

Three Years Later, DMCA Still Just as Broken

Post author By Joshua Grove
Post date June 30, 2016

By Matthew Barblan & Kevin Madigan

In 2013, CPIP published a policy brief by Professor Bruce Boyden exposing the DMCA notice and takedown system as outdated and in need of reform. The Failure of the DMCA Notice and Takedown System explained that while Section 512 of the DMCA was intended as a way for copyright owners and service providers to work together to fight infringement in the digital age, the notice and takedown system has been largely ineffective in managing the ever-increasing amount of piracy.

Three years later, the DMCA is still just as broken. Since we published the brief, courts have further diminished service providers’ responsibility to cooperate with copyright owners to detect and deter infringement, rendering the DMCA even more fruitless and desperately in need of retooling.

Boyden explained the fundamental problems with the system at the time, beginning with the fact that “despite all the notice, there is precious little takedown to show for it. Unless a site employs some sort of content filtering technology, the same content typically re-appears within hours after it is removed.” The notice and takedown system is particularly unsuited for the twenty-first century, where “infringement is persistent, ubiquitous, and gargantuan in scale. It is a problem that needs to be policed” with more than just takedown notices that don’t give copyright owners “a single day when the content is not available on the most heavily trafficked sites.”

Boyden noted that “even for the largest media companies with the most resources at their disposal, attempting to purge a site of even a fraction of the highest-value content is like trying to bail out an oil tanker with a thimble.” And Boyden pointed out that the courts hadn’t made the situation any better: “The DMCA’s unsuitability as a tool to manage chronic, persistent, and pervasive infringement is particularly apparent after recent decisions from the Second and Ninth Circuit that construed the duty of website owners very narrowly under Section 512.”

To further illustrate his point, Boyden collected data on takedown notices sent by MPAA companies and counter-notices received. Between March and August of 2013, MPAA companies sent takedown notices for over 25 million infringing URLs and received only 8 counter-notices in response. That’s a counter-notice rate of 0.000032%, suggesting that the astronomical volume of notices represents a likewise astronomical volume of infringement rather than overly-aggressive notice-sending.

Grand Totals. Infringing URLs: 25,235,151. URLs Sent to Websites: 13,238,860. URLs Sent to Search Engines: 11,996,291. Counter-Notices Received: 8.

Boyden concluded:

The impossibility of keeping up with new [infringing] uploads means that an online service provider can create a site aimed at and dedicated to hosting infringing copyrighted works, comply with every takedown notice, and still benefit from the safe harbor, as long as its intent remains hidden. If the site has enough users, any popular content removed will be supplanted by new copies almost immediately.

Sadly, three years later the “chronic, persistent, and pervasive” infringement that Boyden described continues, with stolen copyrighted works popping up on sites almost immediately after being taken down. Google Search—one product of one company—has receive nearly 90 million takedown notices this month alone. The situation has gotten so bad that last week a long list of artists, including Paul McCartney and Taylor Swift, signed a digital petition to bring attention to a broken DMCA system that allows companies like YouTube to benefit from infringement at the expense of songwriters and artists.

The artists’ main message: “The existing laws threaten the continued viability of songwriters and recording artists to survive from the creation of music.” They note that “the tech companies who benefit from the DMCA today were not the intended protectorate when it was signed into law nearly two decades ago,” and they ask Congress to “enact sensible reform that balances the interests of creators with the interests of the companies who exploit music for their financial enrichment.”

Recognizing the growing frustration with the DMCA, the U.S. Copyright Office initiated a study earlier this year to examine whether the statute is fulfilling its purpose. We submitted comments to the Copyright Office on behalf of a group of copyright law scholars, noting that courts have disrupted the balance Congress sought to create when it enacted the DMCA. In particular, courts have eliminated any incentive for service providers to work with copyright owners to develop policies and procedures to prevent or curb piracy online. In just one example of how deeply courts have distorted congressional intent, under courts’ current interpretation of the DMCA, search engines can continue to index even obviously infringing sites like The Pirate Bay with no fear of potential of liability.

Adding insult to injury, courts have recently shifted the balance of power even further away from artists and towards service providers, making it easier than ever for companies to enable and profit from infringement while turning a blind eye—or even encouraging—piracy on their sites. In this month’s Capitol Records v. Vimeo decision, for example, the Second Circuit extended the DMCA safe harbor to Vimeo despite smoking-gun evidence that Vimeo employees encouraged users to post stolen works on their site and had viewed the illicit videos at issue in the suit. In a jaw-dropping opinion, the court let Vimeo off the hook simply because the evidence of Vimeo employees encouraging infringement wasn’t directly tied to the specific infringing videos that plaintiffs included in their suit.

CPIP’s Devlin Hartline explains:

After Capitol Records v. Vimeo: A service provider can encourage its users to infringe on a massive scale, and so long as the infringement it encourages isn’t the specific infringement it gets sued for, it wins on the safe harbor defense at summary judgment. This is so even if there’s copious evidence that its employees viewed and interacted with the specific infringing material at issue. No jury will ever get to weigh all of the evidence and decide whether the infringement is obvious. At the same time, any proactive steps taken by the service provider will potentially open it up to liability for having actual knowledge, so the incentive is to do as little as possible to proactively “detect and deal” with piracy. This is not at all what Congress intended. It lets bad faith service providers trample the rights of copyright owners with impunity.

As courts continue to gut the DMCA, making it harder than ever for artists to protect their property and livelihoods, Congress would be wise to heed Bruce Boyden’s advice from three years ago: “It is long past time for a retooling of the notice and takedown regime.”

Tags Bruce Boyden, Capitol Records v. Vimeo, Devlin Hartline, Digital Millennium Copyright Act, DMCA, Google, MPAA, notice and takedown, Paul McCartney, Pirate Bay, Section 512, Taylor Swift, U.S. Copyright Office, whack-a-mole, YouTube

Second Circuit Deepens Red Flag Knowledge Circuit Split in Vimeo

Post author By Joshua Grove
Post date June 28, 2016

The Second Circuit’s recent opinion in Capitol Records v. Vimeo is, to put it mildly, pretty bad. From its convoluted reasoning that copyrights under state law for pre-1972 sound recordings are limited by the DMCA safe harbors, despite the explicit statement in Section 301(c) that “rights or remedies” under state law “shall not be annulled or limited” by the Copyright Act, to its gutting of red flag knowledge by limiting it to the nearly-impossible situation where a service provider actually knows that a specific use of an entire copyrighted work is neither fair nor licensed yet somehow doesn’t also surmise that it’s infringing, it’s hard to see how either result is compelled by the statutes, much less how it was intended by Congress. On the latter point, the Second Circuit in essence has written red flag knowledge out of the statute, reducing the DMCA to a mere notice-and-takedown regime. The reality is that Congress expected red flag knowledge to do far more work, incentivizing service providers to take action in the face of a red flag—even without a notice.

If there’s any good to come from Vimeo, it might only be that the Second Circuit has now deepened the circuit split with the Ninth Circuit in Columbia Pictures v. Fung on two issues related to red flag knowledge. Under the statute, red flag knowledge exists when a service provider is “aware of facts or circumstances from which infringing activity is apparent.” The two circuits are already split on the issue of whether red flag knowledge must pertain to the particular works that are being sued over in the suit. And now with Vimeo, the circuits are split on the issue of whether a service provider can gain red flag knowledge just by looking at an infringing work. The deeper the circuit split, the greater the chance an appeal will make it to the Supreme Court, which would hopefully clean up the current red flag knowledge mess.

In Fung, the defendant, Gary Fung, operated several piracy havens, including isoHunt, TorrentBox, Podtropolis, and eDonkey. The district court found Fung liable for inducement under MGM v. Grokster and denied him safe harbor protection under the DMCA. The district court’s decision came in 2009, two years before the Ninth Circuit first held in UMG v. Shelter Capital that red flag knowledge requires “specific knowledge of particular infringing activity.” It also came two-and-a-half years before the Second Circuit held in Viacom v. YouTube that red flag knowledge is only relevant if it pertains to the works-in-suit. Regardless, since the vast majority of content available on Fung’s sites was copyrighted, including specific content that he himself had downloaded, the district court held that Fung hadn’t even raised a triable issue of fact as to whether he had red flag knowledge. The fact that none of the works he had been sued over were the same as the ones he had been found to have red flag knowledge of was irrelevant.

On appeal, the Ninth Circuit affirmed the district court’s holding that Fung had red flag knowledge as a matter of law. The opinion came out just one week after the same panel of judges issued a superseding opinion in UMG v. Shelter Capital reiterating that red flag knowledge requires “specific knowledge of particular infringing activity.” Importantly, in applying that standard to Fung, the Ninth Circuit did not say that the specific knowledge had to be of the particular works-in-suit. For whatever reason, Fung had failed to argue otherwise. Google even filed an amicus brief supporting the plaintiffs but nonetheless arguing that “the DMCA’s knowledge standards are specific and focus on the particular material that the plaintiff is suing about.” Apparently unaware that this actually helped his case, Fung filed a supplemental brief calling Google’s argument “fallacious.”

In the Ninth Circuit’s opinion, even though red flag knowledge had to relate to particular infringing activity, that activity did not have to involve the particular works-in-suit. Moreover, the Ninth Circuit held that the “material in question was sufficiently current and well-known that it would have been objectively obvious to a reasonable person” that it was “both copyrighted and not licensed to random members of the public.” Since Fung failed to expeditiously remove the particular material of which he had red flag knowledge, he lost his safe harbor protection across the board. Thus, the Ninth Circuit in Fung held that: (1) red flag knowledge that strips a service provider of its entire safe harbor protection does not have to pertain to the particular works-in-suit, and (2) material can be so “current and well-known” that its infringing nature would be “objectively obvious to a reasonable person.”

The Second Circuit in Vimeo parted ways with the Ninth Circuit on these two holdings. Since the “evidence was not shown to relate to any of the videos at issue in this suit,” the Second Circuit held that it was “insufficient to justify a finding of red flag knowledge . . . as to those specific videos.” The Second Circuit thus applied the red flag knowledge standard on a work-by-work basis, in direct contrast to the Ninth Circuit in Fung. Also, the Second Circuit held that “the mere fact that a video contains all or substantially all of a piece of recognizable, or even famous, copyrighted music” and was “viewed in its entirety” by an “employee of a service provider” was not enough “to sustain the copyright owner’s burden of showing red flag knowledge.” The court added that even “an employee who was a copyright expert cannot be expected to know when use of a copyrighted song has been licensed.” So while the Ninth Circuit said it would have been objectively obvious to Fung that particular works were infringing, the Second Circuit in Vimeo set the bar far higher.

Curiously, the Second Circuit in Vimeo didn’t even mention Fung, despite the fact that it was deepening the circuit split with the Ninth Circuit. One wonders whether the omission was intentional. Either way, the circuit split has only gotten deeper. While in the Ninth Circuit an infringement can be so obvious that a court can find that a service provider had red flag knowledge without even sending it to a jury, the Second Circuit says that courts can’t let a jury decide whether a service provider had red flag knowledge even with the most obvious of infringements. And while in the Ninth Circuit a service provider loses its entire safe harbor for failing to remove an obvious infringement that it hasn’t been sued over, the Second Circuit says that red flag knowledge has to be determined on a work-by-work basis for only the works-in-suit. Given this growing divide between the Second and Ninth Circuits, it seems like only a matter of time before the Supreme Court will weigh in on the red flag knowledge standard. And if the Court does finally weigh in, one hopes it will put common sense back into the DMCA.

Tags Capitol Records v. Vimeo, circuit split, Columbia Pictures v. Fung, Digital Millennium Copyright Act, DMCA, Gary Fung, Google, inducement, MGM v. Grokster, Ninth Circuit, pre-1972 sound recordings, red flag knowledge, safe harbors, Second Circuit, Section 301, Section 512, UMG v. Shelter Capital, Viacom v. YouTube, Vimeo

Economic Study Innovation Inventors Patent Law Patent Licensing Uncategorized

How Strong Patents Make Wealthy Nations

Post author By Joshua Grove
Post date June 24, 2016

By Devlin Hartline & Kevin Madigan

How did the world’s wealthiest nations grow rich? The answer, according to Professor Stephen Haber of Stanford University, is that “they had well-developed systems of private property.” In Patents and the Wealth of Nations, recently published in the CPIP Conference issue of the George Mason Law Review, Haber explains the connection: Property rights beget trade, trade begets specialization, specialization begets productivity, and productivity begets wealth. Without a foundation of strong property rights, economic development suffers. But does the same hold true for intellectual property, particularly patents? Referencing economic history and econometric analysis, Haber shows that strong patents do indeed make wealthy nations.

Before diving into the history and analysis, Haber tackles the common misconception that patents are different than other types of property because they are monopolies: “It is not, as some IP critics maintain, a grant of monopoly. Rather, it is a temporary property right to something that did not exist before that can be sold, licensed, or traded.” The simple reason for this, Haber notes, is that a patent grants a monopoly only if there are truly no substitutes, but this is almost never the case. Usually, there are many substitutes and the patent owner has no market power. And the “fact that patents are property rights means that they can serve as the basis for the web of contracts that permits individuals and firms to specialize in what they do best.”

Turning back to his claim that strong patents make wealthy nations, Haber presents data showing the relationship between the strength of enforceable patent rights and the level of economic development across several different countries. The results are remarkably clear: “there are no wealthy countries with weak patent rights, and there are no poor countries with strong patent rights.” The following figure shows how GDP per capita increases as patent rights get stronger:

Haber - Figure 1: The Relationship Between Enforcable Patent Rights and GDP/c in 2010 (Excludes Oil-Based Economies, 2005 PPP$). X-axis: Strength of Enforceable Patent Rights in 2010 (from 0 to 45). Y-axis: GDP Per Capita in 2010, PPP$ from PWT 8.1 (from $0 to $60,000).

Of course, while it’s clear that patent strength and GDP per capita are related, it’s possible that the causality runs the other way. That is, how do we know that an increase in GDP per capita doesn’t foster an environment where patents tend to be stronger? This is where the evidence from economic historians and econometric analysts comes into play. Exploring what economic history has to tell us about the impact of patent laws on innovation, Haber asks whether the Industrial Revolution was bolstered by the British patent system and whether the United States emerged as a high-income industrial economy because of the U.S. patent system.

To the first question, Haber notes that the consensus among historians is that “from at least the latter half of the eighteenth century, the patent system promoted the inventive activity associated with the Industrial Revolution.” He then cites the recent book by Sean Bottomley that carefully shows how “many of the changes to Britain’s patent laws and their enforcement—the requirement for detailed specifications, patents conceived as property rights, the emergence of patent agents—all preceded, rather than followed, the onset of industrialization.” Haber also cites a research paper by Petra Moser, which finds that countries in the nineteenth century with weak patent systems trailed both Britain and the United States in technological development.

Moving to the United States, Haber notes that three generations of economic historians have agreed that just after it gained independence, the country’s strong patent system played a pivotal role in fomenting the remarkable industrial developments that soon followed. After pointing out that the United States was the first country to call for a patent system in its Constitution, Haber compares the GDP per capita for the United States, Britain, and Brazil from 1700 to 1913. The following figure shows just how quickly the agrarian American colonies caught up with, and ultimately surpassed, Britain in GDP per capita, while the GDP per capita of Brazil, a country that became independent at about the same time but had no patent system, stagnated:

Haber - Figure 2: GDP per capita, 1700-1913 (in Real 1990 Dollars). UK, USA, and Brazil. X-axis: 1700, 1820, 1930, 1840, 1850, 1860, 1870, 1880, 1890,1900, 1913. Y-axis: $0 to $5,500 by $500 increments.

As the figure shows, the GDP per capita in the United States and Brazil were less than half that of Britain in 1700, and by 1913, the United States had overtaken Britain as both countries left Brazil far behind. Noting that “there is uniformity of views among economic historians that the U.S. patent system played a large role” in this success, Haber provides specifics examples of improvements upon the British patent system that contributed to it, including broad access to property rights in technology through low fees and a routine and impersonal application process under the Patent Act of 1790. He goes on to highlight the importance of major reforms to the U.S. patent system introduced in the Patent Act of 1836, including the examination process that “reduced concerns third parties might have had about a patent’s novelty, thereby facilitating the evolution of a market for patented technologies.”

The second half of the nineteenth century saw the development of an active market for inventions in the United States, leading to the emergence of a class of specialized and independent inventors as well as patent brokers, patent agents, and patent attorneys, who would connect the inventors with manufacturers looking to buy or license new technologies. While some of these intermediaries were derided, much like the “patent trolls” of the twenty-first century, as “patent sharks,” Haber contends that this market for inventions played a critical role in the emergence of new industrial technologies and centers: “[O]ne would be hard pressed to make the case that patents in the nineteenth century, or the intermediaries who represented their inventors, did anything but facilitate the rapid development of American manufacturing.”

Haber then shifts his focus to econometric analysis, examining the different ways that economic scholars research the relationship between patent rights and economic progress in different countries over a period of time. He stresses that accurate econometric estimation of causal relationships is a relatively young area of inquiry requiring considerable care. He uses the example of a widely-cited study by Josh Lerner, which looks at “whether the strengthening of patents affects the rate of change of innovation in an economy within a two-year window after a patent reform.” Haber points out that many changes neither begin nor end so quickly. With laser technology, for example, “follow-on innovations” have developed “over decades, not two-year windows,” and Lerner’s study thus discounts much innovation.

Looking at studies that utilize a “very long time dimension,” Haber cites one finding that “there is a significant positive effect of patent laws on innovation rates” and another finding that “patent intensive industries in countries that improve the strength of patents experience faster growth in value added than less patent-intensive industries in those same countries.” Haber praises a recent study by Jihong Zhang, Ding Du, and Walter G. Park, who “not only find that there is a positive relationship between the strength of enforceable patent rights and innovation in developed economies, but that that relationship holds for underdeveloped economies as well.”

In sum, Haber states that “there is a critical mass of multi-country studies” that leads to two conclusions:

First, there is a causal relationship between the strength of patent rights and innovation. Second, this relationship is non-linear: there are threshold effects such that stronger patent rights positively impact innovation once a society has already reached some critical level of economic development. The reason for the non-linearity probably resides in the fact that innovation is not just a product of the strength of patent rights, but of other features of societies, which are necessary complements, that tend to be absent at low levels of economic development.

Finally, Haber looks at whether the innovation landscape of the twenty-first century is somehow so different that the lessons from economic history and econometric analysis no longer apply. In particular, he questions whether the emergence of patent licensing firms, sometimes called “patent assertion entities” or “PAEs,” and the alleged strategic behavior of “patent holdup” with standard-essential patents (SEPs) are really new features of the U.S. patent system that might hinder innovation. Haber concludes that the evidence shows that neither PAEs nor patent holdup is hindering innovation. In fact, there’s little reason to think that patent holdup even exists.

Haber takes on the recent study by James Bessen and Michael Meurer, which claims that PAEs are a new phenomenon that “constitute a direct tax on innovation” to the tune of “$29 billion per year.” This claim has been rebutted, Haber notes, by scholars such as B. Zorina Khan, whose recent study shows that many great inventors of the nineteenth century were themselves PAEs. Haber further cites the recent paper by David L. Schwartz and Jay P. Kesan that carefully demonstrates fundamental problems with Bessen and Meurer’s methodology, including selection bias, the conflation of “costs” with “transfers,” the lack of a benchmark for comparison, and the failure to even consider the benefits of PAE activity.

Turning to patent holdup, Haber points out that products have long been comprised of numerous patented innovations, and he cites a recent paper by Adam Mossoff showing that there’s nothing “new about firms whose sole source of revenue comes from the licensing of essential patents.” As to evidence that innovation is hindered by patent holdup, Haber notes that the “theoretical literature” says it’s possible, but the “evidence in support of this theory, however, is largely anecdotal.” Haber then cites his recent study with Alexander Galetovic and Ross Levine, which looks at the “extensive economics literature on the measurement of productivity growth” and shows that “SEP holders” are not able “to negotiate excessive royalty payments” as predicted by the patent holdup theory.

In conclusion, Haber acknowledges that while “no single piece of evidence” should “be viewed as dispositive,” it’s certainly quite “telling that the weight of evidence from two very different bodies of scholarship, employing very different approaches to evidence—one based on mastering the facts of history, the other based on statistical modeling—yield the same answer: there is a causal relationship between strong patents and innovation.” Haber then challenges the naysayers to make their case: “Evidence and reason therefore suggest that the burden of proof falls on those who claim that patents frustrate innovation.” Given the copious evidence showing that strong patents make wealthy nations, the IP critics have their work cut out for them.

For a PDF version of this post, please click here.

Advertiser Pledge Sets Example of Accountability in the Fight Against Piracy

Post author By Joshua Grove
Post date June 23, 2016

Cross-posted from the Mister Copyright blog.

It should come as no surprise that popular websites make money by hosting advertisements. Anyone surfing the web has undoubtedly been bombarded with ads when visiting certain sites, and for websites that offer free services or user experiences, advertisements are often the only way to generate revenue. Unfortunately, websites that promote and distribute pirated material also attract advertisers to help fund their illicit enterprises, and despite a recent push for awareness and response to these sites, legitimate advertisers, search engines, and domain name registrars continue to enable them to profit from flagrant copyright infringement.

A 2014 study by the Digital Citizens Alliance found that ad-sponsored content theft is a big and growing business. Even after a year that saw the shutdown of some of the most notorious file-sharing websites, an examination of 589 illicit websites found aggregate annual advertising revenues of $209 million. Premium brand advertising also rose from 89 observed brands in 2013 to 132 to in 2014.

The transition from downloading to streaming as the preferred method of consuming entertainment has led to content thieves taking advantage of higher advertising rates, as the cost of advertising during a video stream is far greater than a traditional display ad. Additionally, the Digital Citizens Alliance stresses that websites are easily able to ditch a domain name targeted by authorities and set up shop under a new one, contributing to the never-ending whack-a-mole nature of online piracy:

The content theft industry’s low barriers to entry and the ability of operators to switch domains quickly make it easy for new sites to fill the void left by those that do get shut down, and to evade enforcement.

The presence of recognizable brand advertisements on websites involved in illegal activity does damage far beyond lining the pockets of those distributing the unauthorized works. When users visit a website in search of music, a television show, or movie, and they see the creative work (or links to the work) displayed alongside professional, recognizable advertisements, the advertisements lend legitimacy to the website. This can be especially dangerous for younger or less-informed users who have no idea that downloading or streaming the creative works through one of these websites is copyright infringement that will ultimately harm creators and artists.

The confusion these ad placements create is similar to the misperceptions furthered by search engines and domain name registrars that have made little effort to preclude pirate websites from taking advantage of their services. Despite promises to remove them from their search results, Google continues to display links to pirate websites alongside legitimate links in its results, often displaying the illicit links at the very top of the search results.

Filmmaker and artists’ rights activist Ellen Seidler recently exposed Google’s unwillingness to remove links to websites that distribute unauthorized creative works when she ran a simple Google search for her film And Then Came Lola. As she relates, not only was the film’s official website nowhere to be found among the first page of results, the list was made up of many websites offering pirated versions of the film. Sadly, most people searching for Ellen’s movie would not be able to immediately distinguish between legitimate and illicit links and would likely be steered towards a pirate website.

Domain name registrars have also added to the confusion surrounding the legitimacy of certain infamous pirate sites by allowing them to play domain name musical chairs and evade prosecution. The Pirate Bay—one of the most notorious file-sharing websites—has operated using domain names from 14 different countries, jumping from domain to domain name to stay online in the face of prosecution. Copyright Alliance CEO Keith Kupferschmid warns against providing sanctuary to sites like The Pirate Bay, revealing that the website recently returned to its original .org domain run by the U.S.-based Public Interest Registry (PIR):

It is shocking that a domain name registry in the United States – one that is dedicated to “the public interest” – is allowing a blatantly illegal site to have a home on the .org domain. This is especially disturbing given that the operators of The Pirate Bay have been found guilty of criminal copyright infringement, The Pirate Bay domain names have been seized or suspended around the globe, and even its co-founder, Peter Sunde, has walked away from it.

Despite these alarming trends in the facilitation of pirate websites, there have been some recent initiatives to deter companies from doing business with illicit websites. One notable initiative is the Trustworthy Accountability Group (TAG). A joint effort by the Association of National Advertisers (ANA), the American Association of Advertising Agencies (4A’s), and the Interactive Advertising Bureau (IAB), TAG was formed “to create transparency in the business relationships and transactions that undergird the digital ad industry, while continuing to enable innovation.” In 2015, TAG announced the launch of the Brand Integrity Program Against Piracy—an effort to help advertisers and advertising agencies keep their ads off websites that promote or distribute counterfeit goods or pirated content.

TAG’s mission has resonated with both advertisers and ISPs, demonstrated by a recent announcement that dozens of leading ad agencies, as well as Google and GoDaddy, have taken TAG’s Anti-Piracy Pledge. The Pledge includes a vow to curb the placement of digital advertising on websites associated with the unauthorized distribution of materials and lists the following actions that companies can take to ensure compliance:

(i) directly employing the services of validated Digital Advertising Assurance Providers;

(ii) directly employing advertising placement services that carry the TAG logo “Certified Against Piracy”; and/or

(iii) placing online advertisements through Advertising Agencies that do business exclusively with advertising placement services that carry the TAG logo “Certified Against Piracy

TAG created Digital Advertising Assurance Providers (DAAPs) as part of its Brand Integrity Program to help advertisers identify and weed out websites that do not meet their brand standards. The DAAPs are validated technology companies that the advertisers can employ to gauge the level of risk they are comfortable with and then eliminate websites and other properties that do not meet the advertisers’ standards for risk of infringement.

It’s difficult to measure how harmful advertising on illicit websites is to creators and copyright owners, but it’s not a stretch to presume that without ad revenue, many pirate sites would lose their incentive to operate. In her call to action to marketers, Hannibal executive producer Martha De Laurentiis lays out the destructive effect piracy has on the creative community:

It forces companies to either shrink their production budgets or commit to fewer, less risky projects. And ultimately, it harms audiences by limiting the types of stories that creatives can tell.

De Laurentiis explains that these pirate sites bring in millions in advertising dollars a year, and because they don’t pay for distribution rights for the creative works they steal, profit margins are estimated at around 90%. Potential profits of this scale are irresistible to those behind the pirate sites, but with a little vigilance and responsibility these incentives could be eliminated.

The co-chairs of the International Creativity and Theft-Prevention Caucus, Senator Orrin Hatch, Senator Sheldon Whitehouse, Congressman Bob Goodlatte, and Congressman Adam Schiff, recently praised TAG for its promotion of the Anti-Piracy Pledge, and it seems like the movement for more responsibility in digital advertising is gaining traction. But domain name registrars and search engine services need to follow the example set by advertisers and establish accountability and awareness in their sectors. Only when these services refuse to aid websites that distribute stolen copyrighted works will real progress be made in the fight against digital piracy.

Capitol Records v. Vimeo: Courts Should Stop Coddling Bad Actors in Copyright Cases

Post author By Joshua Grove
Post date June 22, 2016

Here’s a brief excerpt of my new post that was published on IPWatchdog:

Here’s where we are after Capitol Records v. Vimeo: A service provider can encourage its users to infringe on a massive scale, and so long as the infringement it encourages isn’t the specific infringement it gets sued for, it wins on the safe harbor defense at summary judgment. This is so even if there’s copious evidence that its employees viewed and interacted with the specific infringing material at issue. No jury will ever get to weigh all of the evidence and decide whether the infringement is obvious. At the same time, any proactive steps taken by the service provider will potentially open it up to liability for having actual knowledge, so the incentive is to do as little as possible to proactively “detect and deal” with piracy. This is not at all what Congress intended. It lets bad faith service providers trample the rights of copyright owners with impunity.

To read the rest of this post, please visit IPWatchdog.

Tags actual knowledge, Capitol Records v. Vimeo, copyright, copyright infringement, Digital Millennium Copyright Act, DMCA, Judge Abrams, Judge Leval, red flag knowledge, safe harbor, Second Circuit, Viacom v. YouTube

Recent Posts

Recent Comments

Archives

Categories