The American patent system represents a delicate balance. On the one hand, the patent system provides an incentive to invest in risky technical problem solving by giving an inventor an “exclusive right” for a limited time. On the other hand, from the time of the first Patent Act in 1790, patent critics have argued that patents block competition with a temporary monopoly. This tension has, nevertheless, enabled the rise of the U.S. as a major industrial economy, particularly after the Civil War. Optimally, the patent system encourages inventors to take risks to invent and disclose new and useful things by investing in ex ante costs before a later payoff. After a limited time of exclusivity rights, a patented invention falls into the public sphere, thereby providing a public interest in the long run. Economic and technological progress proceeds by building on previous inventions. Until about 2006, the U.S. patent system worked well, as evident in the development of the largest and strongest economy in the world.
It is indisputable that the U.S. patent system has been substantially eroded since 2006. The delicate equilibrium that had been maintained for over two centuries has become destabilized. Making sweeping changes to the patent system, Congress was motivated to pass the America Invents Act (AIA), by calls from large technology companies that the patent system was unfair. In addition, an activist U.S. Supreme Court supplied a series of decisions from 2006 to 2016 that substantially eroded patent rights. The sources of criticism in the patent system were generated from the margins on both the far left and the far right. Critics of patents generally ignore the ex-ante costs and risks of invention and instead focus on the intensity of property rights with which the system was intentionally endowed. These policy changes have disintegrated patent rights from property rules to liability rules. The effects of these changes have raised transaction costs, increased inequality with higher burdens to market entrants, decreased investment in innovation and provided a key source of declines of productivity growth and aggregate economic growth.
In a sense, the U.S. patent system is the economy’s immune system; when it is weakened, opportunistic viruses invade the economy. The patent system is crucial mainly to small entities that require property rights in new inventions to enter markets and compete with larger rivals. Since incumbents have large market share, the only way to compete is to maintain strong rights for novel innovations. Without this critical mechanism of instilling property rights in a new invention, small technology companies have impossibly high barriers to entry in markets that are protected by incumbent advantages. Consequently, when the patent system is destabilized, market competition is affected, with inherent advantages moving away from market entrants and towards market incumbents.
In the present market, there is a de facto three-tier patent system. On the top tier are operating companies that compete and are able to protect their intellectual property rights with remedies that include injunctions and damages for lost profits. In the middle tier are original inventors, small companies and university researchers that may not receive an injunction but may receive a reasonable royalty. At the bottom tier are companies that acquire patents and receive limited remedies. Patent rights are now allocated based on the identity of the inventor, with increased legitimacy provided not to the original inventor but to a mythical manufacturing nexus.
Market incumbents, typically large technology multinational corporations, could not be happier with the disintegration of U.S. patent law in the last decade since it enables them to free ride and to preserve extraordinary monopoly profits of typically $10B to $40B a year.
The technology market incumbents have invested heavily in lobbying to constrain patent rights in recent years with sophomoric, unilateral and unreflective arguments. They have persuaded Congress to pass the AIA, a one-way redistribution of rights from small entities to large entities. In addition, they have persuaded the U.S. Supreme Court to interpret statutes involving patents that, collectively, supply a sea change in patent jurisprudence. An activist Roberts Court has sought to micromanage patent law to correspond to the technology incumbent narrative, often in contradistinction with the facts and in complete ignorance of the aggregate consequences of its decisions. In effect, the activist Supreme Court is enabling and emboldening extreme marginal critics of the patent system by rewriting patent law.
On the left side of the Court, justices are motivated by naïve arguments about non-practicing entities and patents blocking innovation. On the right side of the Court, justices are concerned about an abuse of enforcement transaction costs to force unfair settlements by “undeserving” patent holders. Both sides, however, are patsies to the large technology incumbents that preserve enormous market power and monopoly profits from a compromised patent system. To apply an analogy, the Supreme Court is recommending the killing of the dog to solve the problem of a few fleas.
This is in contrast with the long history of strong patent rights. Historically, Republicans ought to prefer responsible agency, efficient markets and law and order that are optimized with a strong patent system. Democrats should want to help entrepreneurs by supplying strong patent property rights that level the playing field, reward hard work and ingenuity and promote democratization of patent opportunities. In the last decade, however, both sides have drunk the Kool-Aid of the incumbent anti-patent sophistry, yet without adequate evidence, which exposes a narrow and self-interested agenda. Multinational corporations have an incentive to protect their monopoly profits by constraining competition, while the political left demands patents are supplied to the public for free since they presumably adversely increase costs in the short-run. Consequently, both sides are left with irreconcilable contradictions. Ultimately, the political center was sacrificed by narrow arguments on the margins.
Market incumbents paint themselves as victims when in fact they are exploiting the transformed patent system for competitive advantage. Their hidden agenda is to attack the patent system itself, not the marginal problem of frivolous litigation, with an aim to limit patent eligibility, increase patent validity tests, constrain patent enforcement access, weaken remedies and drive up costs beyond a reasonable level to constrain competition from all but the largest rivals. For example, by apply the manufacturing nexus to patent enforcement, inventors are attacked for not making things themselves, despite the fact that ninety percent of the economy is non-manufacturing, thereby driving higher capital barriers. Thus, tragically, Asian manufacturers are tremendously benefited at the expense of original American innovators.
The consequences of a diminished patent system from the disintegration of patent rights have been profound, with dramatically reduced investment in innovation, particularly by small entities, free riding by large companies with a reduced incentive to invest in innovation, preservation of incumbents’ historic monopoly profits, wage growth stagnation, productivity growth declines, asymmetric trade with more productive trading partners and reduced aggregate economic growth.
Death by a Thousand Cuts
While the Supreme Court has reviewed dozens of patent cases since its 2006 term, about 18 cases are prominent. In 15 of these cases, the Court narrowed patent rights. When taken alone, these cases severely cabin patent eligibility, enforcement, validity and remedies. However, when taken together, the sum of these decisions represent a sea change in patent law that dramatically transforms the patent system.
The general consensus is that eBay v MercExchange (2006) was the case that started the trend to reduced patent rights. The decision instituted a “four-factor test” for eligibility of an injunction (35 USC § 283) to protect the exclusive right in a patent, with an implied emphasis on practicing (i.e., manufacturing) the invention. After this landmark decision, a number of seminal decisions flowed from the Court in the last decade, deciding a broad range of issues ranging from patentability (35 USC § 101), obviousness (35 USC § 103), indefiniteness (35 USC § 112), induced infringement (35 USC § 271), presumption of validity (35 USC § 282), enhanced damages (35 USC § 284), attorney fee awards (35 USC § 285), right to challenge validity and patent exhaustion. Please refer to U.S. Supreme Court Patent Cases: 2006 to 2016, which contains a review of these cases.
There are a number of unexpected effects of the combination of these court decisions.
First, there is effectively now no voluntary licensing market after MedImmune and Cuozzo. If there is a high probability of an Inter Partes review (IPR) [or post-grant review (PGR) or covered business method (CBM) review] in the Patent Trial and Appeal Board (PTAB) at the PTO with a low bar for institution of a patent validity review, why send a letter to an alleged infringer to plan to discuss a license since the alleged infringer will simply seek declaratory relief or a patent review in the PTO? Patent reviews impose a one-way burden on patent holders that attack their property rights. Consequently, without a voluntary licensing market, more cases are driven to the courts for enforcement, which substantially increase costs for all parties.
The combination of Alice and Cuozzo enable large technology companies and small technology companies alike to attack software patents. In addition, medical diagnostics patents are difficult to support. These patents are now easily attacked in the courts (35 USC §101) and in the PTO (35 USC §103) in a second window of review.
Patents are now easier to attack in IPRs at the PTAB, since Alice (35 USC §101), Myriad (35 USC §101), KSR (35 USC §103) and Nautilus (35 USC §112) supply numerous tools for infringers. When combined with Cuozzo, there is a low bar to institute a patent review, with significant limits to due process.
Although TC Heartland is merely pending, it is clear from the trend that when combined with MedImmune, a defendant unilaterally controls a favorable court selection, with the power to initiate patent validity challenges at a time and place of their choosing, imposing a high burden on a patent holder.
The combination of Alice and Octane Fitness supplies primarily one-way fee shifting in cases, particularly involving software patents, when a patent is enforced, despite the presumption of validity in a patent. Since software represents a major category of the technology industry, this phenomenon of testing software patents and enabling asymmetric punishments for enforcement presents a troubling turn that suppresses innovation in a critical area.
When Quanta and Samsung are combined, it is clear that patent damages are highly restricted to both a small component that is negligible to enforce given high enforcement transaction costs and to downstream users in a complex supply chain. Representing short-term thinking, these cases ignore the entire market value rule to establish value based on the weight of a component in a larger product as well as the reality of downstream components in larger products in a global economy. Both cases enable a free ride by infringers to cabin patent rights and narrow the boundaries of infringement.
A number of these cases are apparently intended to be narrow. For instance, in the Roberts Court’s premier year, the unanimous eBay decision was not intended to represent a sea change. However, the Federal Circuit’s inflexible application of a high standard of “irreparable harm” has restricted injunctions to almost all parties with narrow exceptions. Since ninety percent of goods are manufactured out of the U.S., enforcement of patents has shifted to the ITC to enable an exclusion order for importation of infringing products into the U.S.
Similarly, in the unanimous Samsung decision, the court spends pages explaining the meaning of word “article” from the Civil War to the present to justify their conclusion of implementation of patent apportionment limiting damages. The effect of this is to destroy incentives for small improvement inventions and virtually eliminate enforcement of patents in which the reward may not justify high enforcement transaction costs.
In sum, when taken together, these Court decisions represent a clear narrowing of patent rights. While taken in isolation, one or two decisions may have limited effects. However, taken as a group, these decisions have had a profound adverse effect on the economy, by substantially eroding patent rights, dramatically increasing transaction costs for market entrants that need patent rights most, harming competition and efficient markets and promoting monopoly power by market incumbents.
CLICK HERE to CONTINUE READING… In Part II, I will describe the effects of Supreme Court decisions on patentability, patent validity reviews, patent remedies, compulsory licensing and the perpetuation of PAEs. These arguments show that the aggregate Supreme Court decisions have made the problems that they sought to solve much worse.