Tag: David Lund

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Legislation Patent Law Uncategorized

Rep. Massie Introduces New Legislation to Restore America’s Patent System

dictionary entry for the word "legislation"Yesterday, Representative Thomas Massie introduced the Restoring America’s Leadership in Innovation Act of 2018 (H.R. 6264). This legislation would reverse many of the harms that have been caused by recent changes to the patent laws from all three branches of government. Patents are an important part of our innovation economy, providing an incentive for inventors to invent and protecting those creations for commercialization and investment.

Unfortunately, the past decade has witnessed the gradual weakening of our patent system. The America Invents Act (AIA) created new post-issuance methods for reviewing patent validity on top of the review that already occurred in federal courts. The Supreme Court has handed down case after case weakening patents and excluding broad swaths of innovation from the patent system entirely. The USPTO, through the Patent Trial and Appeal Board (PTAB), has been systematically invalidating worthwhile patents based on flawed procedures that are easily abused. Together, these changes have done substantial damage to our innovation economy.,

This new bill will reverse many of these recent changes. Although some of the proposals are new, most are merely the codification of what had long been the law for the patent system. The following provides a breakdown of the most important sections of this legislation:

    • Section 3 (the first substantive section), returns the United States to a first to invent patent system. As noted by CPIP Founder Adam Mossoff, giving patents to the first inventor rewards the intellectual labor that results in the invention. This conception of patents as private property rights protecting the innovator’s creation is arguably required by the Patent Clause of the Constitution, and thus, this Act will bring patent laws back within constitutional limits. Conversely, a first to file system merely rewards those who can win a race to the Patent Office.
    • Section 4 abolishes Inter Partes Review (IPR) and Post-Grant Review (PGR). In addition to covered business method review, which was created with a sunset provision, these procedures allow the Patent Office to cancel at patent it has previously issued. Numerous scholars have identified the substantial harms caused by the PTAB. The problems have been so extensive that other legislation focused on trying to fix these procedures has been introduced. This bill goes the necessary next step. Because these procedures fundamentally undermine the status of patents as private property, the bill eliminates IPR and PGR entirely.
    • Section 5 abolishes the PTAB. The PTAB is a terrible example of regulatory overreach. In light of the elimination of IPR and PGR and the return to a first to file system, the creation of the PTAB by the AIA to administer these systems serves no purpose. The legislation instead recreates the Board of Patent Appeals and Interferences, which existed prior to the AIA and handled the administrative appeals and trials that occurred under the prior system. This change also overrules the holding of Oil States v. Greene’s Energy and accomplishes legislatively the outcome of a CPIP led amicus brief in that case.
    • Section 6 eliminates fee diversion and provides for full funding of the USPTO. Innovators and the public alike count on the USPTO to perform timely, quality examinations of patent applications in the first instance. Ensuring that adequate resources are available for this purpose is essential, particularly given that applicants pay fees to the USPTO for precisely this purpose.
    • Section 8 is mainly technical to assure that the restored § 102 retains the one-year grace period and that certain disclosures by the inventor do not become prior art.
    • Section 9 reestablishes the previously long-held status of patents as a property right. The Constitution secures a patent as a property right and many scholars have noted the important implications of treating patents as property. This section not only states that a patent is a property right, but confirms that a patent may only be revoked in a judicial proceeding, which has substantial benefits, unless the patent owner consents to another procedure. This reverses the broad reasoning in Oil States. The parts of this section returning to patent owners the right to control their property also largely overturn Impression Products v. Lexmark International, now allowing patent owners to exclude unlicensed users from their supply chains.
    • Section 10 ends the automatic publication of patent applications. This change will allow applicants to keep their inventions secret until they have the security that comes with an issued patent.
    • Section 11 codifies the details of the presumption of validity and available defenses to patent infringement. For the first time, this will enshrine in statute that the “clear and convincing standard” must be used to invalidate a patent. Additionally, this section provides for tolling of the patent term during litigation challenging the patent’s validity.
    • Section 12 confirms that injunctions are available to protect the patent property. Although not explicit, the new statutory presumption that infringement of patent causes irreparable harm largely abrogates the Supreme Court’s decision in eBay, which dramatically limited the availability of injunctions. Furthermore, having this rule placed into the statute will limit the inter-court variability that has led to inconsistent outcomes.
    • Section 13 restores the possibility of invalidating a patent for failure to comply with the best mode requirement.
Categories
Patent Law Pharma

CPIP Scholars Examine the Flaws in the Term “Evergreening”

scientist looking through a microscopeIn their new paper, Evergreening of Pharmaceutical Exclusivity: Sorting Fact from Misunderstanding and Fiction, Professors Kristina Acri née Lybecker and Mark Schultz, along with CPIP John F. Witherspoon Legal Fellow David Lund, analyze how the term “evergreening” is used in the context of pharmaceuticals.

After sorting through the vagaries and rhetorical excesses that restrict meaningful discussion, they identify seven categories that capture typical uses of the term:

  • The assertion that the duration of existing patents can generally be “renewed” or “extended,” for very long or indefinite periods;
  • Obtaining additional patents related to a particular pharmaceutical or treatment;
  • The use of laws that allow patent owners to restore some portion of their term lost due to governmental delays;
  • The use of laws that give companies a limited term of exclusive time to market a drug;
  • Regulatory barriers that frustrate potential generic competitors’ ability to enter a market;
  • Business practices that largely rely on marketing to advantage innovators; and
  • Settling lawsuits with generic manufacturers that seek to invalidate a patent.

In addition to identifying practices claimed to be “evergreening,” this paper also discusses the impact and value of these practices. For most situations, the practices reflect specific policies that are having their desired effect, such as the increase in studies of drug safety and efficacy in children brought about by pediatric exclusivity. In some cases, the practices are simply legal impossibilities. Only in a few specific situations related to regulatory requirements do the authors observe strategic opportunities that could plausibly be considered problematic.

Because of the number of practices and the diversity of value those practices bring to pharmaceutical commercialization, the term obscures far more than it illuminates. Discussions about patents, exclusivities, and public health would benefit greatly from discussing the practices and policies specifically, rather than attempting to use a nebulous term such as “evergreening.”

The paper, which started as part of Professor Acri’s work through CPIP’s Thomas Edison Innovation Fellowship, can be found here. The abstract is copied below.

***

Evergreening of Pharmaceutical Exclusivity: Sorting Fact from Misunderstanding and Fiction

Abstract

When people use the term “evergreening” to describe pharmaceutical industry practices, they typically display an unwarranted confidence that they know exactly what they mean both descriptively and normatively. However, a consistent and coherent definition of “evergreening” does not appear to exist.

This article surveys legal, academic, trade, and popular sources that use the term “evergreening” to develop a taxonomy of the policies and actions to which the term is applied. We find that the term is used to cover roughly seven categories of circumstances. Our review finds that the use of the term, taken as a whole, is more typified by the diversity of practices to which it applies rather than any consistent meaning. There are some commonalties, but they exist mostly at a general level.

We then analyze these seven categories to determine if the rhetoric matches the reality. Evergreening is most frequently used as a pejorative term, with a common implication that the “evergreener” is engaged in some sort of strategic behavior at least, or perhaps an immoral if not illegal practice. However, the categorical application of a pejorative term such as “evergreening” to any of the general policies and types of actions we examine is unwarranted and inappropriate. Proponents often apply the term to ordinary use of legal rights as they were designed and the concept makes no meaningful distinction between beneficial and problematic actions.

Unfortunately, “Evergreening” is a key concept in health policy that obscures far more than it illuminates. Once the term is stripped of misunderstandings and loose rhetoric, little of value remains. This is not to say that all policies and actions that extend or preserve exclusive rights are prudent or defensible in individual cases. Rather, the discussion regarding patents and public health would gain much clarity and rationality from addressing the disparate things labeled as “evergreening” on their individual merits.

To read the paper, please click here.

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Legislation Patent Law

The STRONGER Patents Act: The House Receives Its Own Legislation to Protect Our Innovation Economy

U.S. Capitol buildingToday, Representatives Steve Stivers (R-OH) and Bill Foster (D-IL) introduced the Support Technology & Research for Our Nation’s Growth and Economic Resilience (STRONGER) Patents Act of 2018. This important piece of legislation will protect our innovation economy by restoring stable and effective property rights for inventors. This legislation mirrors a bill already introduced in the Senate, which I have previously discussed.

The STRONGER Patents Act accomplishes three key goals to protect innovators. First, the Act will make substantial improvements to post-issuance proceedings in the USPTO to protect patent owners from administrative proceedings run amok. Second, it will confirm the status of patents as property rights, including restoring the ability of patent owners to obtain injunctions as a matter of course. Third, it will eliminate fee diversion from the USPTO, assuring that innovators are obtaining the quality services they are paying for.

First and foremost, the STRONGER Patents Act aims to restore balance to post-issuance review of patents administered by the USPTO’s Patent Trial and Appeal Board (PTAB). The creation of the PTAB was a massive regulatory overreach to correct a perceived problem that could have been better addressed by providing more resources towards initial examination. While the USPTO has long been responsible for issuing patents after a detailed examination, it has recently taken on the role of killing patents the same USPTO previously issued. What the USPTO gives with the one hand, it takes with the other.

Data analyzing PTAB outcomes demonstrates just how dire the situation has become. Coordinated and repetitive challenges to patent validity have made it impossible for patent owners to ever feel confident in the value and enforceability of their property rights. In some cases, more than 20 petitions have been filed on a single patent. Although recent headway has been made to address this issue in the administrative context, it only listed factors to be used when evaluating serial petitions. A more complete statutory solution that prohibits serial petitions except in limited circumstances is necessary to fully protect innovators and provide certainty that these protections will continue.

The kill rate of patents by the PTAB is remarkable. In only 16% of final written decisions at the PTAB does the patent survive unscathed. The actual impact on patent owners is far worse. Disclaimer and settlement are alternate ways a patent owner can lose at the PTAB prior to a final written decision. Thus, the fact that only 4% of petitions result in a final written decision of patentability is more reflective of the burden patent owners faced when dragged into PTAB proceedings.

For these reasons, the PTAB has been known as a “death squad.” This sentiment has been expressed not only by those who are disturbed by the PTAB’s behavior, but also those—such as a former chief judge of the PTAB—who are perpetuating it. The list of specific patents that have been invalidated at the PTAB is mind-boggling, such as an advanced detector for detecting leaks in gas lines.

There are even examples where the PTAB has invalidated a patent that had previously been upheld by the Federal Circuit Court of Appeals. One recent examination further found that there have been at least 58 patents that were upheld in federal district courts that were invalidated in the PTAB on the same statutory grounds. The different results are not mere happenstance but are the result of strategic behavior by petitioners to strategically abuse the procedures of PTAB proceedings.

It has been well known that the procedures have been stacked against patent owners from day one. We and others have noted how broadly construing claims, multiple filings against the same patent by the same challengers, and the inability to amend claims, among other abuses, severely disadvantage patent owners in PTAB proceedings.

With the STRONGER Patents Act, these proceedings will move closer to a fair fight to truly examine patent validity. There are many aspects to this legislation that will improve the PTAB, such as:

  • Harmonizing the claim construction standard with litigation, focusing on the “ordinary and customary meaning” instead of the broadest interpretation a bureaucrat can conceive. This will promote consistent results when patents are challenged, regardless of the forum, by assuring that a patent does not mean different things to different people. Sections 102(a) and 103(a).
  • Confirming the presumption of validity of an issued patent will apply to the PTAB just as it does in litigation. This will allow patent owners to make investments with reasonable security in the validity of the patent. Sections 102(b) and 103(b).
  • Adding a standing requirement, by permitting only those who are “charged with infringement” of the patent to challenge that patent. This will prevent the abusive and extortionate practice of challenging a patent to extract a settlement or short a company’s stock. Sections 102(c) and 103(c).
  • Limiting abusive repetitive and serial challenges to a patent. This will prevent one of the most common abuses, by preventing multiple bites at the apple. Sections 102(d), (f) and 103(d), (f).
  • Authorizing interlocutory review of institution decisions when “mere institution presents a risk of immediate, irreparable injury” to the patent owner as well as in other important circumstances. This change will allow early correction of important mistakes as well as provide for appellate review of issues that currently may evade correction. Sections 102(e) and 103(e).
  • Prohibiting manipulation of the identification of the real-party-in-interest rules to evade estoppel or other procedural rules and providing for discovery to determine the real-party-in-interest. Because many procedural protections depend on identifying the real party-in-interest, this change will assure that determining who that real party is can occur in a fair manner. Sections 102(g) and 103(g).
  • Giving priority to federal court determinations on the validity of a patent. Although discrepancies will be minimized by other changes in this Act, this section assures that the federal court determination will prevail. Sections 102(h) and 103(h).
  • Improving the procedure for amending a challenged patent, including a new expedited examination pathway. This section goes further than Aqua Products, prescribing detailed procedures for adjudicating the patentability of proposed substitute claims and placing the burden of proof on the challenger. Sections 102(i) and 103(i).
  • Prohibiting the same administrative patent judges from both determining whether a challenge is likely to succeed and whether the patent is invalid. This section will confirm the original design of the PTAB by assuring that the decision to institute and final decision are separate. Section 104.
  • Aligning timing requirements for ex parte reexamination with inter partes review by prohibiting requests for reexamination more than one year after being sued for infringement. This section will prevent abuses from the multiple post-grant procedures available in the USPTO. Section 105.

Second, the STRONGER Patents Act will make other necessary corrections to allow patents to promote innovation. For example, as Section 101 of the Act confirms, patents are property rights and deserve the same remedies applicable to other kinds of property. In eBay v. MercExchange, the Supreme Court ignored this fundamental premise by holding that patent owners do not have the presumptive right to keep others from using their property. Section 106 of the STRONGER Patents Act will undo the disastrous eBay decision and confirm the importance of patents as property.

Third, the STRONGER Patents Act will once and for all eliminate USPTO fee diversion. Many people do not realize that the USPTO is funded entirely through user fees and that no taxpayer money goes to the office. Despite promises that the America Invents Act of 2011 would end fee diversion, the federal government continues to redirect USPTO funds to other government programs. This misguided tax on innovation is long overdue to be shut down.

Each of the steps in the STRONGER Patents Act will help bring balance back to our patent system. In addition to the major changes described above, there are also smaller changes that will be important to ensuring a vibrant and efficient patent system. CPIP co-founder Adam Mossoff testified to Congress about the harms being done to innovation through weakened patent protection. It is great news to now see Congress taking steps in the right direction.

Categories
Patents Supreme Court

CPIP Scholars Ask Federal Circuit to Fix Patent Eligibility Doctrine in Cleveland Clinic Appeal

files labeled as "patents"Last week, a group of CPIP scholars filed an amicus brief in Cleveland Clinic Foundation v. True Health Diagnostics, a case currently on appeal to the U.S. Court of Appeals for the Federal Circuit. The patents at issue cover diagnostic tests used to assess a person’s risk of developing cardiovascular disease. The U.S. Patent & Trademark Office initially found the claims to be unpatentable subject matter under Section 101; however, the claims were eventually allowed as new and unconventional applications of known laboratory techniques. Nevertheless, the district court held the claims unpatentable under Section 101, reasoning that they were ineligible under the Alice-Mayo test.

The amicus brief filed last week, written by CPIP’s David Lund and Adam Mossoff, points out that the diagnostic methods at issue are the very sort of innovations the patent system is meant to encourage. Moreover, given the factual conclusions that must be made in order to determine whether the claims are directed to a natural law or whether the laboratory techniques are routine and conventional, they argue that the procedural posture of the case—a motion to dismiss—precludes proper application of the Alice-Mayo test. They note that misapplication of the patent eligibility test continues to lead courts to reject patent protection for many meritorious inventions—as demonstrated in this very case. The amici urge the Federal Circuit to bring clarity and predictability to Section 101 doctrine by rejecting the district court’s conclusory assertions that were made without proper factual support.

The Summary of Argument from the amicus brief is copied below:

SUMMARY OF ARGUMENT

The district court’s decision in The Cleveland Clinic Foundation v. True Health Diagnostics, LLC, No. 17-cv-198, 2017 WL 3381976 (E.D. Va. Aug. 4, 2017), represents an improper application of 35 U.S.C. § 101. The parties address the relevant innovation covered by Cleveland Clinic’s patents, as well as the application of the Supreme Court’s and the Court of Appeals for the Federal Circuit’s § 101 jurisprudence; accordingly, amici offer additional insight concerning the legal and policy problems with the trial court’s decision: innovation in improving the assessment of a patient’s risk of developing cardiovascular disease is an invention that the patent system is designed to promote, and thus it should be eligible for patent protection. Barring a properly reasoned, factually-based determination that either a claimed method-of-treatment invention covers a law of nature or, under step two of the Alice-Mayo test, that it would be considered routine or ordinary by a person having skill in the art, a district court should not find claims to be ineligible subject matter under § 101 on a motion to dismiss. See Berkheimer v. HP Inc., __ F.3d at ___, No. 2017-1437 (Fed. Cir. 2018). The district court’s decision in this case conflicts with the Patent Act as an integrated statutory framework for promoting and securing innovation in the life sciences, as construed by both the Supreme Court and this court.

The Supreme Court has recognized that the plain meaning of the language of § 101 indicates that the scope of patentable subject matter is broad. See Diamond v. Chakrabarty, 447 U.S. 303, 315 (1980). This is why the Supreme Court consistently has held that “[t]he § 101 patent-eligibility inquiry is only a threshold test.” Bilski v. Kappos, 561 U.S. 593, 602 (2010). Accordingly, this “threshold test” is necessarily followed by the more exacting statutory requirements of assessing a claim as a whole according to the standard of a person having skill in the art as to whether it is novel, nonobvious, and fully disclosed as required by the quid pro quo offered to inventors by the patent system. Id.

Unfortunately, courts have been focusing on out-of-context statements in the Supreme Court’s recent § 101 cases that have led those courts to inexorably apply the two-step “Alice-Mayo test” in an unbalanced and legally improper manner. See Alice Corp. Pty. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014); Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 66 (2012). Courts are dissecting claims into particular elements and then construing these elements in highly generalized terms with no evidentiary support. Thus, as happened in this case, a district court all too often merely asserts a conclusory finding that the claim— actually, specific elements dissected out of the claim as a whole—covers ineligible laws of nature or abstract ideas.

This has led lower courts to create an unduly stringent and restrictive patent eligibility test under the Alice-Mayo test, as evidenced by the district court’s decision in this case. This contradicts the Supreme Court’s decisions in Chakrabarty and Bilski that § 101 is only a threshold inquiry identifying broad statutory categories of patent-eligible inventions. This improper application of the Alice-Mayo test inevitably leads to § 101 rejections of patentable method inventions, as the district court in this case rejected an innovative invention in the bio-pharmaceutical sector that the patent system is designed to promote.

Furthermore, the improper treatment of the § 101 inquiry as a pure question of law requiring no evidentiary findings whatsoever, especially when the parties expressly dispute as to what a person having skill in the art would consider routine or ordinary, conflicts with the Supreme Court’s and this Court’s decisions that the application of the patentability requirements in the Patent Act present questions of law with underlying questions of fact. See Teva Pharm. USA Inc. v. Sandoz, Inc., 135 S.Ct. 831, 838 (2015) (claim construction); KSR v. Teleflex, 550 U.S. 398 (2007) (nonobviousness under § 103); Berkheimer, __ F.3d at ___, No. 2017-1437 (Fed. Cir. 2018) (patentable subject matter under § 101); Akzo Nobel Coatings, Inc. v. Dow Chem. Co., 811 F.3d 1334, 1343 (Fed. Cir. 2016) (indefiniteness under § 112); Alcon Research Ltd. v. Barr Labs., Inc., 745 F.3d 1180, 1188 (Fed. Cir. 2014) (enablement under § 112). This has sowed indeterminacy in patent eligibility doctrine, as inventors and companies in the innovation industries are left with little predictability concerning when or how courts will dissect claims and make conclusory assertions that they are patent ineligible under § 101.

To read the amicus brief, please click here.

Categories
Innovation Patent Law

CPIP Scholars File Amicus Brief Urging Supreme Court to Fix Section 101

dictionary entry for the word "innovate"On December 4, 2017, CPIP Founder Adam Mossoff and CPIP John F. Witherspoon Legal Fellow David Lund filed an amicus brief urging the Supreme Court to grant certiorari in RecogniCorp. v. Nintendo. The amicus brief was joined by several law professors, including Richard Epstein and Michael Risch, as well as CPIP Senior Scholars Chris Holman, Kristen Osenga, Mark Schultz, and Ted Sichelman. Bob Sachs of Robert R. Sachs P.C. served as counsel of record.

The technology at issue involves a method of encoding and decoding composite facial images on a computer. The invention solved the problem of decreased image quality when such images are transmitted digitally. RecogniCorp sued Nintendo for patent infringement, and Nintendo challenged the eligibility of the patent under Section 101. Applying the Mayo-Alice framework, the district court held that invention was ineligible subject matter because it was directed to an abstract idea and lacked an inventive concept. Agreeing with that analysis, the Federal Circuit affirmed.

The amici argue that the Supreme Court should grant certiorari in this case in order to correct the continued misapplication of the Mayo-Alice test by the Federal Circuit, the district courts, and the Patent & Trademark Office. By breaking down claims into individual elements and then generalizing them in broad terms, the lower courts and the PTO are failing to properly consider the claimed invention as a whole.

The Summary of Argument is copied below:

SUMMARY OF ARGUMENT

This Court has repeatedly reminded the Court of Appeals for the Federal Circuit, district courts, and the United States Patent & Trademark Office (“PTO”) that § 101 of the Patent Act is a key requirement in assessing the validity of both patent applications and issued patents. In doing so, this Court set forth a two-part test for assessing whether an invention is patentable subject matter (the “Mayo-Alice test”). See Alice Corp. Pty. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014); Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (2012). These cases build upon prior cases such as Diamond v. Diehr, 450 U.S. 175 (1981), which held that a software-based method for operating a rubber mold is patent eligible under § 101.

Unfortunately, the lower courts and the PTO have misunderstood how to apply the Mayo-Alice test. Specifically, the lower courts and the PTO have adopted an indeterminate and overly restrictive approach, invalidating legitimate patented innovation under § 101 with little predictability for inventors or patent attorneys. This frustrates the constitutional function of the patent system in promoting the “Progress of . . . useful Arts.” U.S. Const. art. 1, § 8, cl. 8.

This case exemplifies both of these fundamental problems—indeterminacy and over-restrictiveness—because the lower courts held that a claim is patent ineligible as an “abstract idea” merely because the process was implemented through the use of computer software. These problems undermine inventors’ ability to use the patent system to protect computer-mediated processes that are exactly the kind of innovation that the patent system is designed to promote.

Petitioner details the substantial confusion in the application of the Mayo-Alice test in this case, as well as at the PTO and in the lower courts. Amici here identify a further key insight: when lower courts and the PTO apply the Mayo-Alice test to only individualized elements of a claim, generalizing these elements into a broad, categorical description and not evaluating the claimed invention as a whole, they are using a methodological approach that conflicts with this Court’s existing precedents on determining patent eligibility under § 101.

In this case, the Federal Circuit held that a software-based method of producing images of faces on a computer screen is an “abstract idea.” RecogniCorp, LLC v Nintendo Co., 855 F.3d 1322, 1327 (Fed. Cir. 2017). It reached this conclusion by dissecting the claim into its separate elements and ignoring other key elements, ultimately finding the claimed invention is ineligible under § 101. By reducing the claim to “encoding and decoding data,” the court ignored the invention as a whole that improves the way computers generate digital representations of faces for display.

This Court can easily remedy this problem by (1) recognizing the role of the patent system in protecting computer-implemented innovation, a key driver of modern technological progress, and (2) providing further instructions to lower courts and to the PTO that they should apply the Mayo-Alice test only to the claimed invention as a whole. This is a predicate legal requirement in assessing novelty under § 102 and in assessing nonobviousness under § 103 of the Patent Act. It is also a fundamental legal requirement for asserting patents for both literal and equivalents infringement under § 271. In all of these other patent doctrines, this Court has maintained the basic requirement of assessing patentability or limiting assertion of patents to the claimed invention as a whole, as this avoids the same policy problems of indeterminacy and over-restrictiveness (or over-inclusiveness, depending on the perspective) in these other patent doctrines. Thus, this Court should grant the petition for certiorari, reverse the Federal Circuit, and provide further instructions for applying the Mayo-Alice test only to the “claimed invention as a whole.”

To read the amicus brief, please click here.

Categories
Antitrust Innovation Patents

Foreign Antitrust Regulators Are Threatening American Innovation

By David Lund & Matthew Barblan

U.S. Capitol buildingAmerican businesses are suffering as foreign governments improperly use their antitrust laws to discriminate against American companies. Recently, the United States Chamber of Commerce assembled an International Competition Policy Expert Group to examine this problem. The Group released a report describing particular harmful and inappropriate uses of antitrust law and providing recommendations for U.S. policymakers to address these harms.

Although the report addresses foreign antitrust law abuses broadly, there has been a recent upsurge in the misapplication of these laws in the context of intellectual property. The report itself identifies several unique ways that innovative industries have been harmed by this unfortunate trend, noting that “legitimate IP rights are often not respected for their role in incentivizing investment in innovation that can have an enormously positive long term impact on competition.”

This is a critically important issue, and it is becoming increasingly relevant in DC policy circles. For example, later this week the House Judiciary Committee will be holding a hearing on Recent Trends in International Antitrust Enforcement, including testimony from Deborah Garza (Co-Chair of the Chamber’s International Competition Policy Expert Group) and Scalia Law’s Koren Wong-Ervin (Director of the Global Antitrust Institute), among others.

Over the next couple of months, CPIP will be writing a series of essays highlighting issues discussed in the report that are of particular relevance to the intellectual property policy community.

Industrial Policy Masquerading as Antitrust Law

By securing to innovators exclusive property rights to the fruits of their productive labors, intellectual property law incentivizes innovation and forms the foundation of the myriad partnerships and transactions that enable creators and innovators to commercialize their inventions. In theory, antitrust law is supposed to support the IP system by providing a fair marketplace where innovative companies thrive according to their own merit. The main thesis of the Chamber’s report, however, is that several countries are misusing their antitrust laws to pursue domestic industrial policy goals that allow the government to pick particular winners and losers. The report notes:

[Competition law enforcement] may reflect an effort to improperly discriminate against a U.S. competitor to further “industrial policy” goals, such as by favoring domestic commercial interests or state-owned enterprises over foreign competitors. Report, Page 24.

When antitrust law is used for industrial policy goals or simple political favoritism, it undermines the basic premise of the IP system. Often the selected winners are cherry-picked nationals of the countries at issue. This harms the ability of innovative American companies to compete in these markets based on the actual economic value of their products and IP. As the report states:

Commercial success may turn on political cronyism, rather than on the ability of a firm to efficiently provide the goods and services consumers desire at a competitive price (the result the consumer welfare approach to antitrust law is designed to foster). Report, Pages 20-21.

The misuse of antitrust law is particularly damaging in IP-intensive industries. IP incentivizes research and investment based on the property rights it secures to creators. These property rights are only valuable—and thus only function as an incentive—when IP owners deploy them in the marketplace without undue interference. When countries use antitrust laws to devalue the IP rights of foreign companies in order to favor their own local businesses, it undermines the purpose and function of the IP system as a whole.

Inconsistent Notions of “Fairness”

The Chamber’s report discusses several improper uses of antitrust law that undermine IP owners’ ability to freely deploy their property rights in the marketplace. One key problem is the inconsistent application of vague “fairness” considerations. As the report states:

Where competition rules include inherently subjective concepts such as substantive “fairness” (as is the case in many jurisdictions), for example, the legal treatment of business conduct may differ profoundly on a case-by-case basis, often driven by ad hoc political considerations. Report, Page 20.

“Fairness” may be an important value for children to learn, but when it is vaguely applied to a complex body of law it can result in inconsistent and even contradictory outcomes. The report highlights one particular dichotomy to show just how problematic vague conceptions of fairness can be: pricing. Jurisdictions have used antitrust law to scrutinize prices as being “unfair” both for being too high and too low. But high prices often simply reflect higher consumer demand for a better product. Conversely, low prices often reflect more efficient business practices, precisely the kind of improvements antitrust law is supposedly designed to promote.

Importantly, businesses have no way of knowing ahead of time whether a country’s antitrust regulators will find “fairness” violations for their prices. This prevents companies from taking affirmative steps to comply with the law, thereby increasing volatility, increasing costs to set up and maintain a business, and undermining sound business planning and investment.

Because subjective considerations such as “fairness” can easily be applied arbitrarily, the real-world application of these laws often brings in more nefarious purposes. When there is no objective guide or lodestar to the legal system, cronyism runs rampant. It no longer matters who is the most efficient producer or who invented the technology. What matters is who is friends with the antitrust law enforcement agency. As a result, subjective doctrines of “fairness” perversely create an unfair playing field, making it easy for foreign governments to discriminate against American businesses, even when it ultimately works to the detriment of consumers in their country.

IP-intensive industries are particularly subject to being victimized in the name of “fairness.” The business benefits that come from property rights in innovation can include the ability to set prices that far exceed marginal costs. This makes sense from both an economic and a moral standpoint—innovative companies routinely make millions (if not billions) of dollars worth of up-front R&D investments before commercializing their inventions. And the fruits of their labor are justly secured to them as their property in the form of IP. But from a antitrust law enforcement perspective, pricing far above marginal costs makes IP owners particularly vulnerable to claims that their prices are “unfair.”

Even though it makes perfect sense for an IP license fee to be high when the IP enables important functionality in a product, antitrust law authorities are adept at minimizing the economic value of the IP while criticizing the price of the license as unfair. This is particularly true in industries where American companies are leaders in researching and developing foundational innovations that foreign companies want to integrate into their products. As a result, IP-intensive American companies are particularly vulnerable to abusive and inconsistent antitrust law scrutiny under supposed considerations of “fairness.”

A Worrisome Lack of Due Process and Regulatory Humility

In another troubling trend for American IP owners, foreign antitrust authorities are increasingly pursuing investigations that go beyond the scope of any reasonable antitrust concerns. Despite being baseless, these investigations have serious negative consequences for the targeted firms, particularly in the case of innovative firms trying to license their IP or get their products to market while their patents are still in force and while their technology is still cutting-edge. As the Chamber’s report notes:

Enforcement activities may reflect local case law that allows an agency to exercise its powers of investigation and its decision-making authority in an expansive and highly discretionary way. Where this occurs, competition authorities can tend to discount the costs and disruption that their enforcement activities impose on legitimate business conduct, give too little weight the costs of wrongfully condemning conduct that is procompetitive, and exaggerate the likelihood and consequences of wrongfully exonerating conduct that might have anticompetitive impact. Report, Page 22.

In parallel with overly expansive investigations, many jurisdictions do not offer the basic procedural due process safeguards necessary for businesses to defend themselves. Once again, this effectively allows authorities to pick winners and losers based on political cronyism or domestic industrial policy goals rather than actually promoting competition. The report states:

[L]eading U.S. companies have complained that in certain jurisdictions they are subject to investigations and enforcement actions in which they are not given adequate notice or time for responses to questions; are not informed of the particular acts or practices which are a subject of concern; are not allowed to obtain from enforcers information about the theory of anticompetitive harm…. Report, Page 29.

The report further notes that IP-intensive industries suffer additional harms from poorly conducted enforcement activities because of their novel, complex, and dynamic nature. Unfortunately, the regulatory pendulum is swinging in the wrong direction. The report notes that some countries are considering creating liability simply for failing to license patents, including for failing to license outside of the country in question. This will create a whole new burden on IP owners that does not exist for any other industry.

How Should the US Respond?

The report provides several potential solutions to the harms it identifies, some of which will be familiar to the IP community. These solutions include actions that can be taken by the United States alone as well as actions that utilize international organizations. We will discuss these in more detail in a future essay, but two general points are worth mentioning here.

First, the report notes that Section 301 of the Trade Act of 1974 has expansive language that could be more widely used to “respond to unjustifiable, unreasonable or discriminatory practices of foreign governments that burden or restrict U.S. commerce.” The “Special 301 Report,” which names countries that are failing to live up to their IP law commitments, is the most widely known use of this section, but as the report notes, the Trade Act provides for much more.

Second, the report notes the possibility that existing mechanisms in the WTO or OECD may provide internationally-recognized means to examine the substantive and procedural aspects of antitrust law that may be in conflict with international agreements. Such recognition would be valuable to promote harmonization of antitrust law not just across jurisdictions, but also with the underlying principles of antitrust law itself.

The report provides an important examination of the harms caused by improper use of antitrust law across the globe. Over the coming weeks, we will provide more commentary on how this is playing out in particular places, for particular industries, and what the United States should do to fix it.

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Innovation Patent Law Supreme Court

CPIP Scholars File Amicus Brief Urging Consideration of Claimed Inventions as a Whole

U.S. Supreme Court buildingLast week, CPIP Senior Scholar Adam Mossoff and I filed an amicus brief on behalf of 15 law professors, including CPIP’s Devlin Hartline, Chris Holman, Sean O’Connor, Kristen Osenga, and Mark Schultz. We urge the Supreme Court to grant certiorari in TDE Petroleum v. AKM Enterprise and reaffirm that any analysis of an invention must be of the claimed invention as a whole.

Unfortunately, lower courts and the Patent & Trademark Office have been applying a test of patent eligibility that allows breaking up an invention into parts and then analyzing the parts separately. Sometimes, as in the case here, a court will completely ignore an element of the invention. This needs to be fixed. Any invention is defined by its entirety, not by its isolated parts.

As I discussed before, TDE Petroleum’s patent claims a method of operating an oil rig. Part of the method uses software. But as the claim discussed in our brief makes clear, the end result of the method is control of a physical well with a drill running inside the earth. However, the courts that have looked at this patent so far have only considered the function of certain software elements and pretend the oil rig is not important. Such unimpeded dissection of claims makes it easy to invalidate important patented innovation notwithstanding the contribution to the field.

The full amicus brief can be found here. In addition to showing that the claimed invention is a method of operating an oil rig, we show why the claim precisely parallels a claim to a method of molding rubber found patent eligible by the Supreme Court 36 years ago.