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December 23, 2007

Proposed Patent Reform and the Market for Ideas

Dictatorial_democracy.jpg Back in September, Dennis Crouch published a good summary of the patent reform legislation.  In an earlier post, I described how the Internet, by reducing the transaction costs associated with identifying valid patented technology, is facilitating an emerging market for ideas.  Patent reform legislation obviously has the potential to either promote or destroy this emerging market.  Here are a few thoughts on how the specific proposals for patent reform would affect the emerging market for ideas.

First to File System

This change would promote the emerging market for ideas by reducing the wasteful costs associated with Interference proceedings, which are an historical artifact of our well-intentioned but ill-executed attempts to reward patent rights only to the first to invent.  In some cases, Interference proceedings do reallocate patent rights to inventors who were first to invent but slower to file.  But are the particular circumstances of these inventors really worth the millions of dollars in government and private money spent on Interference proceedings -- not to mention the negotiating chips we lose in every new IP treaty to keep our idiosyncratic system in place?  Probably not.  And I don't believe the argument that independent inventors and smaller companies will be at a disadvantage because of such a change.  If anything, independent inventors and smaller companies can be more nimble in response to a rule-change that would put a higher priority on getting disclosures filed early.

Damages Apportionment

This change would be disastrous for the emerging market for ideas.  In a free market, price is an extremely compact indicator of underlying, intrinsic economic value.  The asking prices reflect value to current owners.  The bidding prices reflect value to others in society.  Whenever the two can meet, and free exchange occurs, society benefits because both bidder and asker are better off through the trade.

But authorizing judges do damages apportionment gives bidders another option.  Instead of paying the current owner's asking price, bidders can pay legal fees (only some of which they bear -- the rest are borne by taxpayers and the other party) and get the judge's asking price.  In cases where the judge sets the asking price the same or higher than the current owner did before the lawsuit (i.e., when the bidder loses), this won't matter (except for the costs wasted in the lawsuit).  But in cases where the judge sets the asking price lower than the current owner, then society loses even more because resources are being transferred from a higher-valued user of the technology to a lower-valued user.  These costs could far outstrip the costs of the lawsuit.

Some are going to object to this analysis on the grounds that asking prices of some current owners (e.g., patent trolls) are made artifically high, reflecting not the true value of the technology, but rather the opportunity cost to the bidder of designing around a bad patent.  It is true that we need a judicial system to deal with fraud in the form of bad patents.  But damages apportionment is the crudest and most error-prone way to handle bad patents.  Better to focus on the requirements of anticipation, obviousness, enforceability, and 112 than to let a judge hold her thumb up to a market and say, "This part of it is due to this idea."  That's what CEOs are paid (or fired) for.

Search Reports

Probably a minor detriment to the market for ideas.  Ideally, applicants could decide for themselves how much scrutiny they wanted for an application.  For fundamental ideas, applicants should voluntarily submit plenty of prior art to bulletproof their patent.  For minor (but nonobvious) followons that might or might not have commercial value, a serious search might be overkill.

Treble Damages

Probably a minor benefit to the market for ideas because it further limits this remedy.  To an economist, the idea of punishing "willful infringement" would seem strange, since a willful infringer is more likely to be the higher valued user of a technology, and the opportunity cost to the current owner (of selling or licensing to someone else) is a more efficient measure of the value "lost" by the willful infringement.

Post-Grant Review and Open Examination

Probably a minor benefit to the market for ideas because it helps further reduces the costs associated with bad patents (by bringing a larger amount of information to bear on pre-issuance examination), and might help identify the highest-valued users of a technology earlier in the life of the patent.

Tax Methods

Although obviously not applicable to the entire market for ideas, eliminating these patents is probably beneficial to the market as a whole because these patents do not protect new technologies that create value within society.  Rather, they serve only to effect a redistribution from one set of taxpayers to another.  In general, "bad patents" serve only to redistribute wealth.

Venue and Jurisdiction / Patent Trial and Appeal Board

Probably beneficial to the market for ideas.  Forum shopping is inefficient for many reasons.  For one, having a diversity of judges deal with patent cases is beneficial to the patent law for the same reason that having a free market results in a more efficient price.  Why then should only one appellate court handle all patent cases?  The Federal Circuit was (and probably still is) necessary to maintain coherence in patent law doctrine for the same reason that the Supreme Court is necessary to resolve circuit splits in other areas of law.  Charles G. Koch in The Science of Success: How Market Based Management Built the World's Largest Private Company, analogizes the decision rights held by managers at each level of hierarchy within an organization to property rights in a market.  For a system of property rights to work, there must be a mutually agreed upon authority to whom market participants can appeal when disputes arise over their allocation.  Similarly, for decision rights to work, there must be a mutually agreed upon authority to whom decisionmakers can appeal when disutes arise over how decisionmaking rights are allocated.  Having a "free market" in decisionmaking rights benefits organizations (including our judicial branch of the federal government) the same way that a free market for property rights benefits society.  That's why we need a Federal Circuit but we don't need a single patent court of original jurisdiciton.

Interlocutory Appeal

This would benefit the market for ideas.  Since the Supreme Court decided Markman, there's been a problem for district court judges who know that their claims constructions will be reviewed de novo on appeal whereas most of their decisions are given more deference.  Claim construction is a Gordian knot that needs to get cut by someone, somehow.  Best scenario that's the bidder and asker in the market for ideas.  They know the most about the technology.  And unlike the rules of the patent system themselves, which come up over and over again, the facts of a particular case will probably never arise again.  So there is less benefit to an iterative process of decision, appeal, re-decision, re-appeal, then there is for the rules themselves.  If the parties can't decide it on their own, let one judge take a cut at it and then leave it alone.  District court judges should either get deference for or interlocutory review of their claim constructions.

Inequitable Conduct

Weakening this defense would benefit the market for ideas.  Inequitable conduct is necessary for dealing with fraud, but tightening up the rules for when and how it can be asserted would reduce its abuse by infringers that have no legitimate basis for refusing to pay fair value for technology.

PTO Regulatory Power

Too difficult to predict because the benefit or detriment will depend on what rule is being changed and how it is being changed.  In general, it may be detrimental, however, to the extent that large companies have a bigger influence on PTO regulations.

Study of Patent Damages

Very minor detriment.  Instead of giving the PTO the sole ability to do such studies, why not spend the money on making the information that the PTO would use for such studies publicly available to permit anyone who cares enough to do their own study?

Posted by Michael Martin at December 23, 2007 11:51 AM | The Patent System


My additional thoughts,

Search Reports. A major, not minor detriment. Section 123 with its Applicant Quality Submission (the new Document of Doom) in the new bill is loaded with problems (admissions about art and claim scope, inequitable conduct bases, etc.) as difficult to deal with as the ESDs. Submitting relevant art is one thing (I'm frankly to the point of favoring that Rule 1.56 and IDSs be ditched completely, like the rest of the world), but having to characterize that art is doing the patent examiner's function.

Post-Grant Review and Open Examination. Another potential major detriment, especially if the opposition period is open ended. What post-grant opposition says is that the initial examination process, but what you really need is to address the problems of the initial examination process (many of which could be addressed with "enlightened" leadership in the PTO which currently doesn't exist. And having some experience with EPO post-grant opposition, it won't be cheap.

Inequitable Conduct. Another major detriment. Inequitable conduct allegations are the bain of patent practice and litigation and are the source of problems with other aspects of patent practice (see comment on Search Reports above). Only litigators (and possibly judges) like this doctrine, but it distracts from the merits of patent litigation, namely is the patent valid and are the claims infringed. The current "intent deceive" standard is far too punishing and unrealistic, and should at least be a "deliberate intent to deceive" and not some unintentional faux paus or omission that get's mischaracterized in litigation. Also, why not make an unproven "inequitable conduct" allegation be the basis for recovery of attorneys fees by the patentee under 35 USC 285? That would at least give the litigating attorney representing the alleged patent challenger some pause before making unsupported allegations of "inequitable conduct" and to make sure there is a valid basis for what is an extremely serious allegation.

Interlocutory Appeal. This will be a major detriment potentially to timely resolution of patent infringement cases, and will create piecemeal appeals of such cases. Chief Judge Michel has already come out againts this provision (and rightly so in my opinion). Interlocutory appeals should be the exception, but with interlocutory appeals of claim construction, they'll become the rule.

My 2 cents for what it's worth.

Posted by: EG at December 24, 2007 6:30 AM

In the second paragraph, the second sentence should read as follows:

What post-grant opposition says is that the initial examination process didn't do the job, but what you really need is to address the problems of the initial examination process (many of which could be addressed with "enlightened" leadership in the PTO which currently doesn't exist).

Posted by: EG at December 24, 2007 6:37 AM

Thanks for a great piece on the implications of patent reform, point by point. I linked to your post from my blog at the Innovators Network.

I wonder if the USPTO will simply declare patent application bankruptcy someday in the near future as pendency grows to such levels as to make a patent passe by the time it gets on the dest of an examiner?

Anthony Kuhn
Innovators Network

Posted by: Anthony Kuhn at December 24, 2007 1:23 PM

Regarding apportionment:
Some are going to object to this analysis on the grounds that asking prices of some current owners (e.g., patent trolls) are made artifically high, reflecting not the true value of the technology, but rather the opportunity cost to the bidder of designing around a bad patent.

I think you are on firmer ground than you realize. There is no such thing as "artificially high."

Prices for everything take into account the existence of more or less perfect substitutes. For example, the price of broccoli includes the availability of, say, cauliflower. If someone is willing to substitute cauliflower (the work-around) for broccoli, then the broccoli-seller can't ask for a price too much higher than the price for cauliflower.

It is that whole elasticity thing that economists go on about -- and it applies directly here.

A "troll" can only "extort" as much money as the patent is worth -- that is, how much it'll cost the infringer to design a work-around. If it costs a bunch, then the patent is for a really good and valuable invention.

Posted by: Anon E. Mouse at December 26, 2007 5:44 AM

To Anon E. Mouse:

I'm with you to a point. The problem I have in mind is that occasionally the substitute is NOT inferior, but rather an obvious variation on the theme being practiced. In this case, the company is not paying for valuable technology, but rather to avoid incurring switching costs.

But as I said, other doctrines of patent law have been tailored to address these kinds of problems (e.g., obviousness).

Posted by: Michael Martin at December 26, 2007 10:11 AM