Tag: innovation

Categories
Biotech Gene Patents Innovation Intellectual Property Theory Inventors Patent Law Patent Litigation Patent Theory Patentability Requirements Supreme Court Uncategorized

Federal Circuit Threatens Innovation: Dissecting the Ariosa v. Sequenom Opinion

By Patent Publius

Earlier this month, the Federal Circuit issued its opinion in Ariosa v. Sequenom, a closely-watched biotechnology case with significant repercussions for patent-eligibility analysis generally. Unfortunately, the Federal Circuit misapplies the Supreme Court’s analytical framework from Mayo v. Prometheus, striking down Sequenom’s important innovation for the prenatal diagnosis of fetal abnormalities. The shame here is that the Mayo opinion itself was unnecessarily broad, and the Federal Circuit has now interpreted it to be even broader.

Section 101 of the Patent Act provides that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter . . . may obtain a patent therefor,” but there are judicial exceptions for “laws of nature, natural phenomenon, and abstract ideas.” Those exceptions are relevant here, where the Federal Circuit considers whether the claimed method of using cell-free fetal DNA (“cffDNA”) to make diagnoses is patentable subject matter.

In the Mayo opinion, the Supreme Court established a two-step analysis for determining whether method claims merely “set forth laws of nature” or instead apply those natural laws with “additional features” so as to become patent-eligible processes. The first step looks at whether the claims are directed to a patent-ineligible law of nature, and the second step looks at whether additional elements “transform the nature of the claim” into something that amounts to more than a claim on the law of nature itself.

Applying Mayo to the case at hand, the Federal Circuit’s analysis of the first step is perfunctory:

In this case, the asserted claims of the ‘540 patent are directed to a multistep method that starts with cffDNA taken from a sample of maternal plasma or serum—a naturally occurring non-cellular fetal DNA that circulates freely in the blood stream of a pregnant woman. . . . It is undisputed that the existence of cffDNA in maternal blood is a natural phenomenon. . . . The method ends with paternally inherited cffDNA, which is also a natural phenomenon. The method therefore begins and ends with a natural phenomenon. Thus, the claims are directed to matter that is naturally occurring.

The Federal Circuit’s conclusion that the method “begins and ends with a natural phenomenon” tells us very little of how this principle is to be applied generally. Certainly, the method begins with a biological sample of maternal plasma or serum that contains paternally-inherited cffDNA, and it makes sense to say that it begins with a natural phenomenon. Of course, everything begins with a natural phenomenon, so this is hardly instructive.

But it’s inaccurate to say that the method simply ends with cffDNA. The method itself takes the miniscule amount of cffDNA found in the sample and exponentially amplifies it to detectable levels. The resulting substance, unlike the beginning sample, gains significant and new utility from a diagnostic perspective. What comes out of the process is an artificially-enriched substance that, unlike the maternal plasma or serum fed into the process, can be used for many diagnostic purposes. That is, the method ends with a substance that is anything but a natural phenomenon.

Applying the second step of the Mayo framework, the Federal Circuit finds that Sequenom’s claimed methods are not significantly transformative:

Like the patentee in Mayo, Sequenom contends that the claimed methods are patent eligible applications of a natural phenomenon, specifically a method for detecting paternally inherited cffDNA. Using methods like PCR to amplify and detect cffDNA was well-understood, routine, and conventional activity in 1997. The method at issue here amounts to a general instruction to doctors to apply routine, conventional techniques when seeking to detect cffDNA. Because the method steps were well-understood, conventional and routine, the method of detecting paternally inherited cffDNA is not new and useful. The only subject matter new and useful as of the date of the application was the discovery of the presence of cffDNA in maternal plasma or serum.

The last sentence is the most perplexing: The “discovery of the presence of cffDNA in maternal plasma or serum” is what sets Sequenom’s method apart from that which was “well-understood, routine, and conventional activity in 1997.” The problem here stems from the Federal Circuit’s failure to consider the claimed method as a whole, as it purportedly sets out to do: “[W]e next consider the elements of each claim both individually and ‘as an ordered combination’ to determine whether additional elements ‘transform the nature of the claim’ into a patent-eligible application.”

Undoubtedly, some parts of Sequenom’s method were already well-known. No one denies, for example, that some of the techniques involved in amplifying and then detecting cffDNA were, in their general features, already conventional activity in the field (e.g., PCR). What makes the Sequenom method patentable is the sum of its parts, that is, the method as a whole that the Federal Circuit acknowledges to contain the new and useful discovery of cffDNA in the maternal plasma or serum.

This is the principal feature of Sequenom’s claimed invention and its central argument throughout the litigation. Yet, the Federal Circuit relegates it to one of “Sequenom’s remaining arguments” and addresses it in a brief paragraph near the end of the opinion, where it inexplicably claims: “This argument implies that the inventive concept lies in the discovery of cffDNA in plasma or serum. Even if so, this is not the invention claimed by the ’540 patent.” On the contrary, this discovery is anything but conventional, and the method as a whole transforms a natural phenomenon into something both artificial and patentable.

Overbroad (and Dangerous) Principles

The overbreadth of the Federal Circuit’s analysis threatens diagnostic methods across the board. If a method of detecting a natural phenomenon is always “directed to” that natural phenomenon, as the Federal Circuit suggests, then all such methods are prima facie patent-ineligible under the first step of the Mayo framework and must fight the uphill battle under its second step. This is particularly troubling since virtually all diagnostic tests detect natural phenomena. Moreover, the Federal Circuit’s application of the second step of the Mayo framework looks at each part of the method individually, ignoring the claimed method as a whole.

Not only is this principle breathtakingly broad in the damage it could cause to the diagnostics industry, it is neither required by, nor even consistent with, the controlling case law. Only claims to natural phenomena are per se patent-ineligible; however, applications of natural phenomena are generally patentable. Detecting a natural phenomenon is not the same thing as the phenomenon itself. It is instead a specific application of that phenomenon. While the Federal Circuit states that applications of natural phenomena are patent-eligible, it quickly proceeds to categorically suggest a principle under which all diagnostic inventions may have one foot in the Section 101 grave.

Another overly-broad principle from the Federal Circuit opinion comes from this statement: “For process claims that encompass natural phenomenon, the process steps are the additional features that must be new and useful.” This may at first seem obvious and uncontroversial, but in the context of the rest of the opinion, it proves quite problematic. The Federal Circuit cites Parker v. Flook as support: “The process itself, not merely the mathematical algorithm, must be new and useful.” But note the subtle distinction between the two quotes. The Supreme Court discussed the “process itself,” while the Federal Circuit discusses the “process steps.”

This distinction has two important effects. First, it is one of many signals in the opinion that demonstrates the Federal Circuit’s improper dissection of the claimed method into its components parts. Rather than consider whether the “process itself” is “new and useful,” as the Flook opinion had done, the Federal Circuit analyzes each step individually. There’s no consideration of how the steps integrate into the process as a whole, and there’s no mention of whether that entire process claims something other than the natural phenomenon itself.

Second, the Federal Circuit looks at each step in a very general way and ignores the details of the steps that confer patent eligibility. For example, the opinion spends much time discussing how routine the PCR method was at the time of filing. But Sequenom never claimed the PCR method itself. The Federal Circuit fails to address Sequenom’s central argument: The claimed method is a new process of detecting cffDNA by devising a novel sample source from which to extract it, namely, maternal plasma or serum. The application and adaptation of known techniques in this inventive way to a newly-discovered sample source is not conventional.

Finally, the most problematic and new principle that may emerge from this opinion is a subtle, yet very significant, extension of Mayo to invalidate claims directed to routine and conventional applications of natural laws. Mayo teaches that the mere addition of what is purely routine and conventional at the time of filing cannot save a claim directed to a law of nature: “In particular, the steps in the claimed processes (apart from the natural laws themselves) involve well-understood, routine, conventional activity previously engaged in by researchers in the field.”

The Federal Circuit appears to exclude from the patent system a routine application of a law of nature, rather than, as Mayo requires, a law of nature to which merely routine activities have been appended. That is, if one skilled in the art could, after being informed of a newly-discovered law of nature, use routine skill to arrive at the claimed invention, then that claimed invention may be invalidated under the Federal Circuit’s reasoning.

This is contrary to Mayo, and it could conceivably invalidate huge swaths of meritorious inventions. Once the principles underlying a new method are known, application of those principles to devise that method will very often be obvious. The Supreme Court has been very consistent in saying that applications of laws of nature are patent-eligible, including those applications that would have been obvious in view of newly-discovered laws of nature. It is a subtle, but important, point to recognize that Mayo did not say the opposite, as the Federal Circuit now interprets it.

The Preemption Question

One potential bright spot in the Federal Circuit’s opinion is its treatment of preemption. Instead of being a test for patent eligibility, preemption is properly understood as being solely a policy underlying eligibility exclusions. It can at most serve as an after-the-fact check on whether an already-reached conclusion of eligibility is consistent with this policy. The Federal Circuit here mostly validates this position:

The Supreme Court has made clear that the principle of preemption is the basis for the judicial exceptions to patentability. Alice, 134 S. Ct at 2354 (“We have described the concern that drives this exclusionary principal as one of pre-emption”). For this reason, questions on preemption are inherent in and resolved by the § 101 analysis. . . . Where a patent’s claims are deemed only to disclose patent ineligible subject matter under the Mayo framework, as they are in this case, preemption concerns are fully addressed and made moot.

This may ultimately be a hollow victory, however. The Federal Circuit also says: “While preemption may signal patent ineligible subject matter, the absence of complete preemption does not demonstrate patent eligibility.” The problem here is that it is impossible to ever show complete preemption because it is impossible to know at the time of filing whether something outside the claims could also be conceived. Inventions are, by definition, unforeseeable.

Moreover, allowing anything less than complete preemption to be sufficient to invalidate a claim threatens to invalidate far too much subject matter. By their very nature, patents are preemptive. Allowing courts and patent examiners to freely draw the line between allowable and prohibited levels of preemption invites unpredictable and arbitrary decisions based on personal value judgments. That very problem arose here, where the district court held the claims invalid, at least in part, because they covered what the judge deemed to be “the only commercially viable way of detecting” the embodiment of the law of nature.

The Promising Potential in Judge Linn’s Concurrence

Judge Linn’s concurrence is promising, but it falls short of its full potential. Judge Linn does a better job than the majority in recognizing and understanding the legal significance of the important facts of this case:

[N]o one was amplifying and detecting paternally-inherited cffDNA using the plasma or serum of pregnant mothers. Indeed, the maternal plasma used to be “routinely discarded,” . . . because, as Dr. Evans testified, “nobody thought that fetal cell-free DNA would be present.”

It is encouraging to see that a Federal Circuit judge has finally gone on record to point out the problems caused by ever-broadening applications of Mayo:

I join the court’s opinion invalidating the claims of the ‘540 patent only because I am bound by the sweeping language of the test set out in Mayo Collaborative Services v. Prometheus Laboratories, Inc. . . . In my view, the breadth of the second part of the test was unnecessary to the decision reached in Mayo. This case represents the consequence—perhaps unintended—of that broad language in excluding a meritorious invention from the patent protection it deserves and should have been entitled to retain.

Judge Linn errs, however, in his acquiescence that Mayo requires the majority’s conclusion. Judge Linn’s concurrence generally reads more like a dissent, but he undercuts his own criticism of Mayo and its effects by calling his opinion a “concurrence.” As he laments:

The Supreme Court’s blanket dismissal of conventional post-solution steps leaves no room to distinguish Mayo from this case, even though here no one was amplifying and detecting paternally-inherited cffDNA using the plasma or serum of pregnant mothers.

But the second half of this sentence shows the critical distinction that makes Sequenom’s claims patent-eligible, even in view of Mayo. Unlike the claims analyzed in Mayo, Sequenom’s process is new and not routinely engaged in by researchers in the field. Judge Linn even states the point better elsewhere in his own concurrence:

Unlike in Mayo, the ‘540 patent claims a new method that should be patent eligible. While the instructions in the claims at issue in Mayo had been widely used by doctors—they had been measuring metabolites and recalculating dosages based on toxicity/inefficacy limits for years—here, the amplification and detection of cffDNA had never before been done.

Judge Linn should be praised for critiquing Mayo as bad law that has led to the invalidation of untold meritorious patent claims. Unfortunately, however, he may have unintentionally contributed to the expansive scope of Mayo about which he complains by failing to factually distinguish (and hence cabin) the Supreme Court’s opinion when presented with such a good opportunity to do so.

All told, the Federal Circuit’s opinion in Ariosa v. Sequenom is a predictable, yet unfortunate, application of the Supreme Court’s disastrous reasoning in Mayo. The unintended consequences of the Supreme Court’s opinion have been further realized in the Federal Circuit’s denial of Sequenom’s innovative claimed method for diagnosing fetal abnormalities. Only time will tell how many other innovations will suffer under the Supreme Court’s careless expansion of Section 101’s patent eligibility analysis.

Categories
Commercialization High Tech Industry Innovation Intellectual Property Theory Internet Inventors Law and Economics Patent Law Patent Licensing Patent Theory Software Patent Uncategorized

The Commercial Value of Software Patents in the High-Tech Industry

In CPIP’s newest policy brief, Professor Saurabh Vishnubhakat examines the important role patents play in commercializing software innovation and supporting technology markets. He explains how a proper understanding of this commercial role requires a broader view of patents in software innovation than the all-too-common focus on a small handful of litigated patents and legal questions of patentability and patent quality. He concludes that the flexibility and efficiency of the patent system fosters the emergence of new markets for the exchange of technology and knowledge.

Read the full brief: The Commercial Value of Software Patents in the High-Tech Industry

Categories
Commercialization Copyright Copyright Licensing Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Internet Law and Economics Uncategorized

Copyright’s Republic: Promoting an Independent and Professional Class of Creators and Creative Businesses

By Mark Schultz and Devlin Hartline

The following essay is the first in a series of CPIP essays celebrating the 225th anniversary of the Copyright Act by recognizing the rich purposes, benefits, and contributions of copyright. This series of essays will be published together in a forthcoming collection entitled “Copyright’s Republic: Copyright for the Last and the Next 225 Years.”

The current academic and policy discussion of copyright focuses on balancing the gross economic benefits and harms of copyright. A more complete understanding of copyright can account for both the needs and rights of individuals and the public good. Copyright is important because it helps creators make an independent living and allows them to pursue and perfect their craft. In short, it enables a professional class of creators.

The creative industries benefit from this independence too. They must find a market, but they are not beholden to anybody but their customers and shareholders in choosing what creative works to promote. This enables a richly diverse cultural landscape, with movie studios, television channels, record labels, radio stations, and publishers specializing in vastly different types of material.

To understand the importance of a professional class of creators, it’s helpful to understand the paradoxical role of money in creativity. While some are quick to say, “It’s not about the money,” in some essential ways, it really is about the money. Certainly, for some creators, the proposition is straightforward. As the eighteenth-century poet Samuel Johnson famously and cynically proclaimed: “No man but a blockhead ever wrote, except for money.” For countless others, however, creative endeavors hardly bring riches. And even commercial creators frequently leave money on the table rather than do something they find distasteful. Nevertheless, money is important.

This seeming paradox can be resolved by considering the role of money overall in creative work. We can take creators at their word: There are many nonmonetary factors that influence and incentivize creativity, such as love, independence, curiosity, and passion. In fact, thinking about the money can hurt the creative process. But while creators may not “do it for the money,” the money is what makes it possible for them to spend their time honing skills and creating high-quality works. The money endows a professional class of creators and the various creative industries and channel partners that support them. This vibrant ecosystem – empowered by copyright – generates a rich diversity of cultural works.

Creative individuals, like every other human being, need to eat, and, like most of us, they need to work to eat. The real question is, what kind of work are they able to do? Some notable creators have worked in their spare time, but many of the greats thrive most when they can merge their avocation with their vocation. They get better at creating when their work is creation.

There is, of course, more than one way to fund professional creation – patronage, tenured university teaching, and commercial markets founded on copyright are notable ways to do it. One of the virtues of a commercial property rights system is that it fosters creative independence.

The independence afforded by a commercial system based on property rights is highlighted by contrasting it with the greater constraints under other systems. Before the first modern copyright statute passed nearly three centuries ago, many creators depended heavily on the patronage system. Wealthy patrons funded creative efforts by either commissioning works directly or employing creators to staff positions where they were given time to develop new works. To be sure, many great works were produced under this system – the musical compositions of Johann Sebastian Bach and Joseph Haydn stand testimony to this fact.

However, the economic benefits of patronage often came at the expense of the personal autonomy and integrity of these creators. As the old adage goes, “he who pays the piper calls the tune.” Sometimes these constraints were quite direct. When Johann Sebastian Bach attempted to leave the service of one of his patrons to go work for another, the former patron refused to accept his resignation and briefly had him arrested.

More important, patrons had tremendous say in the work of composers. They could decide what and when the composers wrote. They might not appreciate the value of the works created for them. For example, Bach’s Brandenburg Concertos are now recognized as works of genius. Unfortunately, the noble to whom they were dedicated, Christian Ludwig, the Margrave of Brandenburg, was apparently indifferent. The score sat on his shelf, unperformed and unappreciated, for decades. The concertos were not published until nearly 150 years later, after being rediscovered in an archive.

For these reasons, many composers dreamed of financial independence. For example, the composer Joseph Haydn once celebrated leaving behind the patronage of the Esterhazys, which was rather secure and relatively undemanding. Haydn moved to London, where he became the eighteenth-century equivalent of a successful rock star – in demand for his services and making lots of money. London had a private market – not yet so much supported by copyright and publishing as by private commissions and paid performances. In any event, Haydn prospered. In fact, at one point he wrote letters urging his friend Mozart to join him in London as soon as possible, unabashedly rhapsodizing over the money to be made there.

Still, he was now on his own, earning his own pay rather than being kept by a patron. For Haydn, artistic independence trumped economic security:

How sweet this bit of freedom really is! I had a kind Prince, but sometimes I was forced to be dependent on base souls. I often sighed for release, and now I have it in some measure. I appreciate the good sides of all this, too, though my mind is burdened with far more work. The realization that I am no bondservant makes ample amend for all my toils.

Haydn, Letter to Maria Anna von Genzinger, September 17, 1791

The modern copyright system, beginning with the English Statute of Anne in the early eighteenth century, freed creators from the restrictive patronage system. Like patronage, copyright offered creators the financial support they needed so that they could devote themselves to their craft. Unlike patronage, however, it gave them much-needed personal autonomy and artistic independence.

Beethoven, a young contemporary and student of Haydn working at the end of the patronage era, was able to support himself. His facility at performing his own difficult work helped him make a living. But he also used and supported copyright. He would often publish his works first in England to ensure that they received copyright there. He also lobbied the German states for a copyright law.

For Beethoven, too, money was important for the artistic independence it provided:

I do not aim at being a musical usurer, as you think, who composes only in order to get rich, by no means, but I love a life of independence and cannot achieve this without a little fortune, and then the honorarium must, like everything else that he undertakes, bring some honor to the artist.

Ludwig van Beethoven, Letter to publisher, August 21, 1810

The era of patronage was long ago, but human nature has not changed in the decades and centuries since. Creators still face the dilemma of trying to support themselves while maintaining independence. Every economic arrangement imposes some constraints, but some impose more than others.

A good example of how modern copyright enables individual creators to enjoy independence while supporting themselves is provided by the career of photographer Michael Stern. Stern is a hard-working creative entrepreneur – one 30-minute video he made required 103,937 photographs and 900 hours to produce. Stern doesn’t depend on subsidies or grants; rather, he values the independence he gets from being self-employed. He explains:

“The real benefit of being a self-employed photographer,” he says, “is that I can move through life on my terms and do what I want in the way I want to do it. That freedom drives me.” But, it’s not for everybody, he warns. “Nobody loves you like your mother, and even sometimes not even her. So ya gotta do it for yourself. If you don’t, you won’t have the drive needed to reach your goals.”

Instead of creating works that conform to the limited demands of their patrons, creators supply their works to the marketplace, where the demands of consumers are far more diverse. This proves beneficial to creators and society alike. Creators from all walks of life and with all sorts of interests can find the market that will support them, and this fosters a rich cultural landscape encompassing multiple political and social views.

Copyright fulfills its constitutional purpose of promoting progress by incentivizing creators through the grant of marketable rights to their works, but these rights do more than simply lure creators with the hope of economic benefits. Just as crucially, these rights endow creators with substantial personal autonomy while respecting their individuality and dignity. This fosters a creative environment conducive to the creation of high-quality works with enduring social value.

Copyright is a market-based system that supports a professional class of creators who rely on the value of their rights in order to make a living. These marketable rights have also given rise to entire creative industries that lend critical support to professional creators, and through the division of labor these industries enable professional creators to accomplish great feats that would be impossible if they worked alone.

The numbers testify to copyright’s success in helping to create a professional class of creators in the United States. As a recent report on the creative industries enabled by copyright found, there are 2.9 million people employed by over 700,000 businesses in the United States involved in the creation or distribution of the arts. They accounted for 3.9 percent of all businesses and 1.9 percent of all employees.

This creative ecosystem enables professional creators to produce the sorts of high-quality works that society values most. The popularity of these works in the marketplace makes them commercially valuable, and this in turn compensates professional creators and the creative industries that support them for creating the works that society finds so valuable.

This virtuous circle benefits creators and the public alike – just as the Framers had envisioned it. Copyright is not only doing its job, it is doing it well. The number of works available in the market is incredible – certainly more than anyone could ever possibly consume. And the diversity of voices able to connect with audiences in the marketplace makes our cultural lives all the more fulfilling.

Categories
Commercialization Copyright Copyright Licensing Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Internet Law and Economics Uncategorized

Copyright’s Republic: Copyright for the Last and the Next 225 Years

By Mark Schultz and Devlin Hartline

This past Sunday marked the 225th anniversary of the first U.S. Copyright Act. As we move well into the twenty-first century, a claim that copyright no longer “works” in the “digital age” has become commonplace – so commonplace, in fact, that it’s arguably the dominant cliché in modern copyright discussions. Like many clichés, it contains a tiny grain of truth wrapped in a huge ball of glib, unhelpful, and even harmful generalizations.

Before one can understand what the future of copyright and the creative industries could and should look like, one should first appreciate what the first 225 years of copyright has given to the United States. Copyright laid the foundation for, and continues to support, the largest, most enduring, and most influential commercial culture in human history. That commercial culture is uniquely democratic, progressive, and accessible to both creators and audiences.

Could the Copyright Act profitably be revised? In theory, perhaps, and thus there is a grain of truth in the clichés about modernizing copyright. The 1976 Copyright Act and many of its subsequent amendments are overburdened with detailed regulatory provisions contingent on outdated assumptions about technology and business. They also sometimes embody political compromises that reflect circumstances that have long since passed. However, we should pause before hastening to replace yesterday’s contingencies with those of today. And we should also pause – indefinitely – before overturning the entire enterprise on the grandiose assumption that the Internet has changed everything.

Before we can understand what the future of the creative industries could and should look like, we need to appreciate what we have achieved and how we achieved it. The American creative industries are everything the Founding generation that drafted the 1790 Copyright Act could have dreamed – and so much more. Through its press, news media, and publishing industries, the U.S. has perpetuated the spirit of the Enlightenment’s Republic of Letters, with lively, reasoned, and sustained public discussions and debates about values, science, and politics.

The U.S. has produced a creative industry that enlightens and edifies while also diverting and distracting billions of people with its cultural products. This vast commercial creative marketplace allows professional writers, artists, musicians, actors, filmmakers, game designers, and others to make a living doing something that fulfills them and their audience. The U.S. has achieved much based on the twin foundations of free expression and copyright, securing the right to express oneself freely while securing the fruits of the labors of those who craft expressions.

The past thus has much to teach the future, while inevitably yielding to change and progress. Copyright should continue to secure the many values it supports, while being flexible enough to support innovation in creativity and business models.

On this occasion of the 225th anniversary of the first U.S. Copyright Act, the Center for the Protection of Intellectual Property (CPIP) is recognizing the essential contribution of copyright and commercial culture to the United States. To that end, CPIP will be publishing a series of essays highlighting the fact that, contrary to the facile narratives about copyright that dominate modern discussions, copyright isn’t simply a law designed to incentivize the creation of more creative stuff. It has much richer purposes and benefits. Copyright:

  • Supports a professional class of creators.
  • Enables a commercial culture that contributes to human flourishing.
  • Serves as a platform for innovation in both the arts and sciences.
  • Promotes a free republic.

U.S. copyright law has achieved these lofty goals for the last 225 years, and it will continue to do so—but only if we let it and help it do so. In many important ways, U.S. culture and politics has been so shaped by the commercial culture created by copyright that it rightly can be called Copyright’s Republic.

Part I: Copyright Promotes an Independent and Professional Class of Creators and Creative Businesses

Categories
Copyright Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Law and Economics Patent Law Patent Litigation Patent Theory Statistics Uncategorized

Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong

By Mark Schultz & Adam Mossoff

A handful of increasingly noisy critics of intellectual property (IP) have emerged within free market organizations. Both the emergence and vehemence of this group has surprised most observers, since free market advocates generally support property rights. It’s true that there has long been a strain of IP skepticism among some libertarian intellectuals. However, the surprised observer would be correct to think that the latest critique is something new. In our experience, most free market advocates see the benefit and importance of protecting the property rights of all who perform productive labor – whether the results are tangible or intangible.

How do the claims of this emerging critique stand up? We have had occasion to examine the arguments of free market IP skeptics before. (For example, see here, here, here.) So far, we have largely found their claims wanting.

We have yet another occasion to examine their arguments, and once again we are underwhelmed and disappointed. We recently posted an essay at AEI’s Tech Policy Daily prompted by an odd report recently released by the Mercatus Center, a free-market think tank. The Mercatus report attacks recent research that supposedly asserts, in the words of the authors of the Mercatus report, that “the existence of intellectual property in an industry creates the jobs in that industry.” They contend that this research “provide[s] no theoretical or empirical evidence to support” its claims of the importance of intellectual property to the U.S. economy.

Our AEI essay responds to these claims by explaining how these IP skeptics both mischaracterize the studies that they are attacking and fail to acknowledge the actual historical and economic evidence on the connections between IP, innovation, and economic prosperity. We recommend that anyone who may be confused by the assertions of any IP skeptics waving the banner of property rights and the free market read our essay at AEI, as well as our previous essays in which we have called out similarly odd statements from Mercatus about IP rights.

The Mercatus report, though, exemplifies many of the concerns we raise about these IP skeptics, and so it deserves to be considered at greater length.

For instance, something we touched on briefly in our AEI essay is the fact that the authors of this Mercatus report offer no empirical evidence of their own within their lengthy critique of several empirical studies, and at best they invoke thin theoretical support for their contentions.

This is odd if only because they are critiquing several empirical studies that develop careful, balanced and rigorous models for testing one of the biggest economic questions in innovation policy: What is the relationship between intellectual property and jobs and economic growth?

Apparently, the authors of the Mercatus report presume that the burden of proof is entirely on the proponents of IP, and that a bit of hand waving using abstract economic concepts and generalized theory is enough to defeat arguments supported by empirical data and plausible methodology.

This move raises a foundational question that frames all debates about IP rights today: On whom should the burden rest? On those who claim that IP has beneficial economic effects? Or on those who claim otherwise, such as the authors of the Mercatus report?

The burden of proof here is an important issue. Too often, recent debates about IP rights have started from an assumption that the entire burden of proof rests on those investigating or defending IP rights. Quite often, IP skeptics appear to believe that their criticism of IP rights needs little empirical or theoretical validation, beyond talismanic invocations of “monopoly” and anachronistic assertions that the Framers of the US Constitution were utilitarians.

As we detail in our AEI essay, though, the problem with arguments like those made in the Mercatus report is that they contradict history and empirics. For the evidence that supports this claim, including citations to the many studies that are ignored by the IP skeptics at Mercatus and elsewhere, check out the essay.

Despite these historical and economic facts, one may still believe that the US would enjoy even greater prosperity without IP. But IP skeptics who believe in this counterfactual world face a challenge. As a preliminary matter, they ought to acknowledge that they are the ones swimming against the tide of history and prevailing belief. More important, the burden of proof is on them – the IP skeptics – to explain why the U.S. has long prospered under an IP system they find so odious and destructive of property rights and economic progress, while countries that largely eschew IP have languished. This obligation is especially heavy for one who seeks to undermine empirical work such as the USPTO Report and other studies.

In sum, you can’t beat something with nothing. For IP skeptics to contest this evidence, they should offer more than polemical and theoretical broadsides. They ought to stop making faux originalist arguments that misstate basic legal facts about property and IP, and instead offer their own empirical evidence. The Mercatus report, however, is content to confine its empirics to critiques of others’ methodology – including claims their targets did not make.

For example, in addition to the several strawman attacks identified in our AEI essay, the Mercatus report constructs another strawman in its discussion of studies of copyright piracy done by Stephen Siwek for the Institute for Policy Innovation (IPI). Mercatus inaccurately and unfairly implies that Siwek’s studies on the impact of piracy in film and music assumed that every copy pirated was a sale lost – this is known as “the substitution rate problem.” In fact, Siwek’s methodology tackled that exact problem.

IPI and Siwek never seem to get credit for this, but Siwek was careful to avoid the one-to-one substitution rate estimate that Mercatus and others foist on him and then critique as empirically unsound. If one actually reads his report, it is clear that Siwek assumes that bootleg physical copies resulted in a 65.7% substitution rate, while illegal downloads resulted in a 20% substitution rate. Siwek’s methodology anticipates and renders moot the critique that Mercatus makes anyway.

After mischaracterizing these studies and their claims, the Mercatus report goes further in attacking them as supporting advocacy on behalf of IP rights. Yes, the empirical results have been used by think tanks, trade associations and others to support advocacy on behalf of IP rights. But does that advocacy make the questions asked and resulting research invalid? IP skeptics would have trumpeted results showing that IP-intensive industries had a minimal economic impact, just as Mercatus policy analysts have done with alleged empirical claims about IP in other contexts. In fact, IP skeptics at free-market institutions repeatedly invoke studies in policy advocacy that allegedly show harm from patent litigation, despite these studies suffering from far worse problems than anything alleged in their critiques of the USPTO and other studies.

Finally, we noted in our AEI essay how it was odd to hear a well-known libertarian think tank like Mercatus advocate for more government-funded programs, such as direct grants or prizes, as viable alternatives to individual property rights secured to inventors and creators. There is even more economic work being done beyond the empirical studies we cited in our AEI essay on the critical role that property rights in innovation serve in a flourishing free market, as well as work on the economic benefits of IP rights over other governmental programs like prizes.

Today, we are in the midst of a full-blown moral panic about the alleged evils of IP. It’s alarming that libertarians – the very people who should be defending all property rights – have jumped on this populist bandwagon. Imagine if free market advocates at the turn of the Twentieth Century had asserted that there was no evidence that property rights had contributed to the Industrial Revolution. Imagine them joining in common cause with the populist Progressives to suppress the enforcement of private rights and the enjoyment of economic liberty. It’s a bizarre image, but we are seeing its modern-day equivalent, as these libertarians join the chorus of voices arguing against property and private ordering in markets for innovation and creativity.

It’s also disconcerting that Mercatus appears to abandon its exceptionally high standards for scholarly work-product when it comes to IP rights. Its economic analyses and policy briefs on such subjects as telecommunications regulation, financial and healthcare markets, and the regulatory state have rightly made Mercatus a respected free-market institution. It’s unfortunate that it has lent this justly earned prestige and legitimacy to stale and derivative arguments against property and private ordering in the innovation and creative industries. It’s time to embrace the sound evidence and back off the rhetoric.

Categories
Commercialization History of Intellectual Property Innovation Patent Law Patent Licensing Patent Litigation Uncategorized

Guest Post by Wayne Sobon: A Line in the Sand on the Calls for New Patent Legislation

On June 9-11, the IP Business Congress sponsored by Intellectual Asset Magazine (IAM) hosted a debate on the resolution: “This house believes that the America Invents Act should be a legislative line in the sand and that no more reform of the US patent system is needed.” The debate was moderated by Denise DeFranco, a partner with the Finnegan law firm.  Arguing on behalf of the resolution were David Schwartz, Associate Professor of Law at Chicago-Kent College of Law, and Wayne Sobon, Vice President and General Counsel of Inventergy, Inc.  Arguing against the resolution were Michael Meurer, Professor of Law at Boston University School of Law and Dan Lang, Vice President, Intellectual Property, Cisco.  

With Mr. Sobon’s permission, we are publishing here a slightly modified version of his opening statement at the IP Business Congress debate. Mr. Sobon spoke for himself and not on behalf of his employer or any other institutions.

A Line in the Sand on the Calls for New Patent Legislation

Wayne Sobon
Vice President & General Counsel, Inventergy

With the June 4, 2013 announcement by the Obama Administration of a new set of legislative priorities to change our patent laws yet again, bolstered by a chorus of academics and interested corporations, there are now four separate bills in Congress (with more coming) proposing a wide range of changes to the patent system. Fresh from the seven-year battle that concluded with the America Invents Act of 2011, we once more face a highly emotionally-driven campaign to alter the rules of the field, replete with name-calling (“trolls”).

But just as with our personal conflicts, the best way forward usually comes once we let emotions cool and we dispassionately take a longer view.

We just spent the better part of a decade — following significant research, public hearings, the reports of the National Academies of Science and the FTC, and the testimony of a wide variety of NGOs, corporations, and private inventors and citizens — debating and then approving the most significant changes to our patent system since the 1952 Act.  The America Invents Act of 2011was argued in forums like this and on the floor of our Congress as the needed corrective for poor-quality patents, claimed by so-called “trolls” to hold up and oppress innovative companies.

Various companies such as Cisco testified before Congress that the sweeping collection of provisions that make up the AIA were necessary to achieve these policy goals.  When it was enacted, it was heralded as “the most significant reform of the U.S. patent system since 1836.” Yet the ink is barely dry, and the voluminous regulations implementing the AIA have barely been set in motion, when the same group of academics and industry players are once again demanding sweeping new changes to the patent laws.

The United States intellectual property system is a precious resource.  Indeed, the Founding Fathers saw a unified, national regime of patent laws as so crucial to our democracy that they enshrined it as one of the key powers of Congress.  Unanimously and without debate, they passed Article 1, Section 8, Clause 8 of our Constitution.  One of the first acts of the first Congress was to pass the Patent Law of 1790.  That law has only been significantly amended five times in the last 220 some years.  Five times.  1793‎, 1836, 1870, 1952 and 2011.

One genius of our patent system has been an implicit recognition that since its underlying subject matter, innovation, remains by definition in constant flux, the scaffolding of our system and the ability of all stakeholders to make reasonably consistent, prudent and socially efficient choices, should remain as stable as possible.  But now these latest moves, demanding yet further significant changes to our patent laws, threaten that stability.  And it is in fact systemic instability, from whatever source, that allows the very parasitic behaviors we have termed “troll”-like, to flourish.

It is silly and blindly ahistoric to lump anyone who seeks to license or enforce a patent right, but who does not themselves make a corresponding product, as a “troll.”  Many arguments about Non-Practicing Entities (NPE), Patent Assertion Entities (PAE), Patent Licensing Assertion Entities (PLAE) — the various formal names and acronyms for the more commonly known epithet, “patent troll” — include an implicit and often explicit emotional condemnation of any patent holder who either did not invent or does not manufacture the patented products.  The President’s statements unfortunately are replete with such derision of people or firms who “don’t actually produce anything themselves.”

Yet, from the very outset, our American patent system distinguished itself from its English predecessor, by establishing the unfettered sale in the marketplace of patent rights, precisely because patents are private property rights (see here, here, and here).  In England, patent monopolies were still mostly creatures of the Crown — personal privileges. See B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (Cambridge University Press, 2005), pp. 36-38.  The United States patent system, based upon objective criteria for inventiveness and established in freely-alienable property rights, was as significant a revolution in the commercial sphere as the federalist structure was in the political.  Id., pp. 49-51, 60-62. And it’s hard to argue against the unprecedented success of the American economy based on the patented innovation protected by these laws.

And indeed, it might come as a surprise, that many of the inventor giants we hold in such high regard today in fact never manufactured the products covered by their patents.  Elias Howe did not make sewing machines.  Rather, having invented the hugely important lock-stitch technology, but being poor himself, he assembled financing, using then novel securitization of patents, and then licensed his patent to others (and famously, fought the equivalent of our smart phone wars, against Singer). Charles Goodyear never manufactured any rubber; he licensed his vulcanization process to others.  Thomas Edison also received third-party financing to operate his famous invention factory in Menlo Park, and he licensed his patented inventions to other companies for manufacture and sale in the marketplace, such as his invention of the first electric pen.  And when the unscrupulous refused to pay licenses, each of these inventors of course moved to enforce.

Rather than focus on practicing vs. non-practicing, as manufacturing and licensing are both equal rights in practicing a property right, let’s focus instead on parasitic behaviors. Let’s respect the genius of our Founders, and make few if any changes to the structure of our system.  And let’s focus on specific, targeted interventions that can actually cut off the systemic rot upon which parasitic behavior thrives.

Here are two important areas that could benefit from targeted interventions: (1) the high costs of litigation for all participants, and (2) the rampant and extended uncertainty of patent disputes.  Both of these interventions rest soundly in the discretion of our Federal Courts.  We already have the tools to bring down discovery costs (I’d argue we need less discovery than what we spend so much time, money, energy and emotion on to yield valid, fair results).  And as noted by now-former Chief Judge Randall Rader in his many public comments, judges already have the legal and procedural tools to cull sham lawsuits from the courts.  It just requires exercising judgment, as they ably can and do.  That’s why they’re called judges.

We do not need yet more statutory changes, changes that will engender more uncertainty and another decade of resulting litigation, to achieve the particular policy goals here.  We simply need our judges and our existing system to do the job they already have.