The Transformation of the American Patent System: Adverse Consequences of Court Decisions

By Neal Solomon
January 29, 2017

EDITORIAL NOTE: What appears below is Part 2 of a 3-part series on the transformation of the American Patent System. To read from the beginning please see The Disintegration of the American Patent System, published on January 26, 2017. 
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King crumblingThe U.S. patent system, which functioned well for over two hundred years, has been eroded in the period from 2006 to 2016. Patent critics from the left and the right have attacked the patent system. Patentability tests, patent validity reviews and reduction of remedies have combined to narrow the scope of patent rights and to dramatically increase transaction costs for patent holders. When combined with reduced rewards, increased costs show that patent holders are caught in an economic squeeze. The combination of these changes to U.S. patent law has markedly decreased incentives to innovate.

Activist Supreme Court decisions in the last decade have been principally responsible for these changes, stimulated by aggressive technology company incumbent lobbying. The combination of these decisions has had a far greater effect on the patent system and the economy than the Court originally intended.

The U.S. is now in a compulsory licensing regime in which large technology incumbents that control at least 80% of collective market share employ an “efficient infringement” model of ignoring patents and forcing patent holders to enforce patent rights in the courts.

There are several categories of change in the American patent system in the last decade, notably to patentability, patent validity reviews, patent remedies, compulsory licensing and perpetuation of PAEs. Rather than solve the problems of the patent system, judicial decisions and congressional actions have generally made the patent system worse for key stakeholders, imposing unexpected costs and risks.

Patentability Restrictions

Regarding patentability, the Bilski-Mayo-Alice and Myriad Court decisions have collectively raised barriers to patent eligibility. In the main, the Bilski-Mayo-Alice decisions on the abstract ideas exception to patentable subject matter have tended to affect software technologies by restricting patentability to a relatively primitive Nineteenth century test of linking an invention to a machine. Interestingly, the Court failed to define the term “abstract.” Hundreds of thousands of software patents have been effectively rendered worthless, including perhaps half of IBM’s and Microsoft’s patent portfolios. Since software is a key strategic technology, weakening patent rights is likely to adversely affect software investment as well as broader industrial growth. On the other hand, some tech incumbents will benefit from higher barriers to patentability in software. For the most part, it is far easier to free ride another’s software invention than to invent new technology. Nevertheless, the two-step test for patentability has been reasonably salvaged by subsequent Federal Circuit decisions requiring a technical feature or inventive step to satisfy the criteria of patentability involving an abstract ideas.

In addition to software, the medical diagnostics industry has been affected by these patent eligibility decisions. In addition, Myriad limited the scope of inventions beyond natural phenomena. This has had the effect of constraining the personalized medicine revolution. Discoveries of genetic material are insufficient to justify patentability in medicine, with an artificial man-made inventive step required. In addition, the Bilski-Mayo-Alice abstract ideas test affects patent claims involving medical diagnostics. These changes to patent law place a higher barrier to the medical diagnostics field, effectively impeding development of medical diagnostics during a new epoch of genetic discovery.

In both the software and medical diagnostics fields, there is likely to be less investment in new technologies, with substantially higher costs, since patents for inventions in these industries are harder to obtain and protect.

Patent Validity Reviews

The AIA instituted a new regime in the PTAB for patent validity challenges in Inter Partes review (IPR), post-grant review (PGR) and covered business method (CBM) review. The PTO has instituted a hostile approach to post-grant patent review by refusing to equalize PTO standards with the Federal District Court standards of review, including the Phillips standard for claim language interpretation or the clear and convincing evidence standard for an institution decision. When combined with a very loose interpretation of obviousness, from an abuse of KSR, the majority of substantive patent claims in which reviews are instituted are discarded. Consequently, the PTAB accepts an unusually high number of patent review institution requests and cancels an unusually high percentage of patent claims originally issued by the PTO. In effect, the AIA did an end run about the Supreme Court’s i4i decision which clarifies standards of patent review in light of the presumption of patent validity (282).

The consequences of post-grant patent reviews in this hostile patent review regime is to impose an undue burden on patent holders, dramatically increase transaction costs on patent holders, move to a guilty-until-proven-innocent system, ignore the presumption of patent validity, eviscerate due process for patent holders, delay enforcement in the courts, reduce a patent to a liability rather than an asset, delegitimize the PTO and create different fora for adjudication of patent validity with different standards of review. The Supreme Court refusal to address any substantive issue in Cuozzo or to accept Sequenom suggests a contradiction with the Court’s decision in i4i. Patents are now perceived by the PTO not as a property right but a public benefit, with a politicized administrative agency rather than an Article III court governed with adjudicating the patent right. The Court needs to sort out these contradictions and anomalies by restoring property rights and equalizing common-sense standards of review in the different fora.

Reduction of Remedies

A combination of Court decisions affects patent remedies. Starting with eBay, the court has limited remedies by substantially raising the bar for injunctions to protect the exclusive right in a patent. The only time the term “right” is referenced in the Constitution is in the IP clause that refers to an “exclusive right” to protect intellectual property for “limited times.” This limited duration feature supplies a constraint on exclusivity, suggesting that the Founders would only tolerate a monopoly for a limited period in order to provide a strong incentive to invest in solving hard innovation problems. This exclusive right for a limited time approach thus represented a compromise and supplies a crucial tension in patent law, the balance of which is undermined by the restrictions on supporting the exclusive right with an injunction. A patent only gives the patent holder the right to exclude by enforcing the patent in a court. Absence of an injunction eviscerates this crucial right and undermines the patent system itself.

One of the concerns the Court addressed in eBay is the application of injunctions for a small invention in a larger device or system. In these cases, the application of the exclusive right tends to benefit the patent holder at the expense of the infringer, thereby supplying an unfair advantage by enabling the patent holder to hold up a larger device or system. The solution to this problem is simple. Rather than focus on an injunction for an entire device, the injunction should be narrowed to focus only on the component to which the patented invention applies. The courts need to apply imagination to develop a narrow injunction to restore the exclusive patent right.

The combination of eBay and Halo supply limited remedies with a high bar for both an injunction and enhanced monetary damages until a finding of infringement. With reduced remedies for patent infringement, infringers have reduced incentive to negotiate licenses since they can free ride and wait to be sued, with the worst case typically being settlement of a license for a reasonable royalty that the parties would have selected in a hypothetical voluntary license. eBay, in particular, promotes the business strategy of “efficient infringement” since there is little risk of being blocked from infringing without an injunction and, even if there is enforcement at the margins, there is little chance of enhanced damages, supplying infringers with little incentive not to continue infringing behaviors. With the recent addition of Samsung (apportionment), there is even less incentive not to infringe since the monetary damages are likely to be nominal in the case of an invention on a small component of a larger system. It would appear that the courts are supplying an invitation, or a license, to steal.

In addition to eBay, Samsung, though only limited to design patents, institutes an apportionment approach to establishing patent damages. The problem with narrowing monetary damages to only a single component is that this view ignores the weight or value of the component in an overall system. Applying a narrow view of attacking patent damages to a small portion of a larger device can have substantial consequences in limiting patent damage awards. If patent awards for a small component of a device falls below enforcement transaction costs, there is no incentive to enforce the patent, which enables a free ride for infringers for patented technologies at the margins.

The combination of IPRs, eBay and Samsung suggest that cost barriers and time to enforcement are higher thereby markedly increasing overall transaction costs for patent holders. Taken together, the Court appears to be favoring infringers over patent holders in cases involving patent remedies, with an effect of disrupting incentives to invent.

When the limits on injunctions and increasing chances of apportionment are combined with limitations on enhanced damages that are only restricted to the most egregious cases of willful infringement in Halo, patent holders are likely to receive reduced awards.

Reduced patent remedies enables technology company incumbents or Asian manufacturers to free ride on patent holders since the bar to enforce patents are much higher. With a higher bar to enforcement with limited remedies, the “efficient infringement” model has emerged in which infringers infringe first and then wait years for an occasional enforcement and only pay a reasonable royalty that they might have paid in a voluntary licensing negotiation.

The combination of substantially higher costs for patent validity reviews and enforcement in the courts and reduced remedies suggest that patent holders are caught in a squeeze that adversely affects incentives to invest in innovation.

Compulsory Licensing

One critical effect of eBay was to eliminate access to injunctions to stop continued infringement of a patented invention. The imposition of a “four-factor test” was not perhaps originally intended to eliminate the vast majority of injunctions, but the Federal Circuit application of a strict interpretation of the test has had this effect since most patent holders could not establish a still undefined “irreparable harm” standard. Since an injunction is crucial to enforce an exclusive right, the property right in a patent was reduced in many cases to liability rules in which the only remedy was monetary damages. This supplies a perverse incentive for infringers to infringe, wait to be sued and then pay a nominal fee in a compulsory license. This logic leads to the phenomenon of “efficient infringement” and practically invites infringers to pirate patented technology, particularly from small entities.

The U.S. has therefore been in a compulsory licensing paradigm for the last decade. A compulsory license enables anyone to use a patented invention as it also blocks an inventor from licensing exclusively (or selling) a patented invention to a single party. The patent holder loses control of patent monetization. Without the ability to license exclusively, the prices for a non-exclusive license are decreased precisely because anyone can use the invention.

Compulsory licensing tends to reduce licensing rates since more than one party can use the invention. With reduced royalty rates (and high enforcement costs), only high quality technologies or technologies that apply to large and established markets are enforceable since they justify higher awards.

When combined with a high bar to show enhanced damages from willful infringement, the lack of an injunction supplies an incentive to ignore patents altogether since the only expected penalty is a nominal license. With the expectation of only a nominal license, combined with high transaction costs to enforce a patent in the PTAB and the courts, there is no reason for companies to negotiate licenses in a voluntary licensing market. As Judge Michel, former chief judge of the CAFC, has commented, the era of the honor system between companies is long gone. All deals are now driven to the courts, leaving the pecuniary undercapitalized inventor or small business typically outgunned and reinforcing the asymmetry of economic power between the large technology companies and market entrants.

Perpetuating PAEs

One of the Court’s main targets are business entities that acquire and assert patents with an aim to force quick patent licensing settlements with small companies by manipulating high transaction costs of patent litigation. Ironically, however, the combination of judicial decisions in recent years inadvertently appears only to have made the problem of patent abuse much worse. First, with higher transaction costs and lower patent damages, patents have generally been devalued, particularly for those without access of capital resources to apply to patent reviews or patent enforcement in the courts. This devaluation amid increased enforcement costs have forced inventors and universities to sell to or to partner with financial partners or (gasp!) “patent trolls” in order to realize any value for their work. Weakening the patent system has thus effectively transferred economic power from original inventors towards patent brokers and bad actors, precisely the opposite of the intended effect of judicial decisions.

By raising the bar to patentability and patent review, and limiting remedies, patent holders are put in a financial squeeze. The higher bar to enforce patents enables infringers are able to engage in efficient infringement without a risk of harm except for a few matters that meet a high threshold for enforcement. This forces matters to the courts, with high transaction costs. While large companies can bear the high transaction costs of patent infringement defense, for small entities, high enforcement costs require outside investors, which demand high returns on capital to cover their risks. In this way, the efficient market of a strong patent system and a voluntary licensing market turns into an inefficient market that benefits incumbents and harms market entrants.

Again, ironically, a limit of venue that benefits large incumbents will likely have the effect of enabling patent assertion entities to enforce patents against technology end-users, precisely the sort of behavior that further abuses the patent system. Although the FTC has sought to address these issues, there is no clear resolution to the problem.

The limited patent remedies and high enforcement transaction costs perversely force patent holders to partner with patent assertion entities to fund infringement enforcement despite the fact that the original inventors receive little benefits, technology end users are forced to pay for patented technologies for which large technology companies should be responsible, the funders receive the lion’s share of rewards and large incumbents must pay several times more than they would under a voluntary license because of the expenditure of high enforcement and defense costs.

By promulgating a patchwork of poorly thought out judicial decisions, the courts have inadvertently instituted a perverse system that increases inefficiencies, enables large technology incumbents to pirate with impunity and harms the original inventors that the system was originally intended to benefit.

TO BE CONTINUED… Up next is the final segment of this series, which will address the economic consequences of judicial decisions that have so significantly transformed the American patent system. 

The Author

Neal Solomon

Neal Solomon is CEO of Advanced System Technologies Inc. A prolific inventor of technologies involving semiconductors, communications, data management, imaging, robotics and healthcare, he holds degrees from Reed College and the University of Chicago.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 22 Comments comments. Join the discussion.

  1. Inventor January 29, 2017 2:59 pm

    Mr. Neal Solomon,

    Great respect!
    Very well said and it was needed.
    Part 2 is even better than part 1.
    Keep them coming.

    I would only haggle with you a bit about trolls. As I’m sure you are aware, not all patent assertions entities (PAE’s) use the mass mailing technique to attempt to intimidate small (really innovative) companies – as the main stream media has portrayed them.
    I can attest, that some PAE’s give the inventor a square deal, with upfront payment and a 50/50 share of any backend. So your conclusion that the original inventor gets little benefit, may be true when dealing with actual trolls. If so, I would have to say that all PAE’s are not trolls.

  2. Paul Morinville January 29, 2017 3:43 pm

    A troll is a cartoon character made up by those who wish to kill inventors. There is no such thing.

    The NY AG when investigating MPHJ found only 6 examples of nefarious demand letters. The story of trolls shaking down small companies is based on an almost nonexistent problem, which could have been easily handled under the current law at the time.

    Demand letters have never been a real problem except to large multinational infringers because they put them on notice and start a damages clock. And, not to surprisingly, those are the same large multinational infringes who created the mythical problem to begin with.

  3. David January 29, 2017 4:17 pm

    As long as patent validity remains a public right, the PTAB will continue to expand in terms of influence and power. The people who matter understand this.

    The only constitutional remedy is to reclassify patent validity as a private right. However, if reclassified, PTAB orders become merely advisory administrative opinions that require district court review and enforcement.

    The SCOTUS, for all of its grandiose talk about unwavering fealty to the separation of powers, is unlikely to recalibrate the PTAB in such a fashion.

    Take a look around at the industry – talk to some patent litigators – it’s already happening. The PTAB is taking over as the dominant patent litigation venue.

    It’s amusing in its own sad way. The prosecutors who got a head start start on defense side PTAB work are the new alphas. Former nobodies are now hosting panels with Morgan Chu.

    The smart patent litigators are already headed for the exits and/or diversifying their practices.

  4. Anon January 29, 2017 5:09 pm

    David,

    Are you forgetting that Congress has already directly spoken as to the nature of the patent right?

    One does not need a constitutional change here.

  5. David January 29, 2017 5:18 pm

    Anon – I don’t understand the point you are attempting to make.

    It is that the CAFC’s holding that “patents are public rights” is judicially meaningless given that “Congress has already directly spoken as to the nature of the patent right[?]”

    If so, I haven’t seen this argument made anywhere in any of the Art III challenges.

  6. Anon January 29, 2017 8:01 pm

    I have clearly not been a part of those arguments.

    But you should check the words of Congress in the statute.

    It is Congress that has authority to write the statutory law that is patent law, and not the judicial branch.

  7. David January 29, 2017 11:53 pm

    Yes, but the judiciary is empowered to determine whether something is or is not a public right. Please find me a case that says otherwise.

    And in any event, the public designation renders the claim purely administrative and hands it over to Congress in its entirety.

    So I think your argument actually supports the position that patents are public rights.

  8. FRANK LUKASIK January 30, 2017 6:05 am

    The Patent system was changed by the lobbying effort led by Google’;s Patent Counsel and her name was included in my petition to the
    U.S. Supreme Court (Lucree v. U.S.). The Corporations took the Patent System away from Independent Inventors with their First-To-File chamge.

  9. Anon January 30, 2017 7:18 am

    David,

    Yes, but the judiciary is empowered to determine whether something is or is not a public right.

    Not for the domain of patents, which – per the Constitution – the authority of writing the controlling statutory law is rested solely within one single branch of the government.

    That branch is not the judicial branch.

    (the key to remember here is the separation of powers doctrine)

  10. Anon January 30, 2017 7:19 am

    …and no, my argument does not support the public rights position, because Congress has already expressly stated the opposite.

  11. Ternary January 30, 2017 11:51 am

    The role of the independent American Inventor has been well documented and is now (like the cowboy of the wild-west) part of the American myth. The bright, determined American individualist who has an invention and makes it a success despite everyone and everything discouraging him or her is part of our legend. The independent inventor is almost exclusively an American symbol all over the world of independence, opportunity, perseverance and ultimate success. Even Disney felt the need to create a cartoon character that symbolizes the American inventor.

    The American patent system was held up as an example how “the system” helped the independent inventor to protect the inventor on a path to success. How many times would people say “you have to get a patent on that” when learning of somebody having a cool idea?

    Well, no more. The US patent system, like the European system is now intended for companies and institutions. Europe manages this exclusivity by price, we do it by way of law, regulations and courts and we will do it by price under the guise of improved quality.

    There is a belief now that inventions and R&D are largely a planned activity, best left to universities and companies. There is no fundamental role for independent inventors. Except for some ideological and sentimental reasons, there is no real support for independent inventors and it is reflected in our patent system. Our time is over (like the famous scene in Butch Cassidy and the Sundance Kid: “It’s over, don’t you get that? Your time is over ….”)

    While some aspects of the patent system are painful for companies and universities, they are disastrous for independent inventors. Looking back, it is amazing how interest groups have managed in less than a decade to basically kill off patents as a way for independent inventors to make money.

  12. Bemused January 30, 2017 12:45 pm

    Tenary, don’t give up, man. There’s too much at stake here. New administration may mean new leadership at the USPTO (stop for a moment and think what a Phil Johnson or Randall Rader-led USPTO would do to rein in the PTAB!) and will very likely mean a waning Google influence at the White House. I’m not saying that I know with certainty any of that will come true under this new administration but we shouldn’t give up now.

    B

  13. David January 30, 2017 1:01 pm

    Anon – yes, Congress has been imbued with the power to create all manner of law. However, some of these laws implicate private rights, and others public rights. If public rights, then they belong to Congress in their entirety.

    In the system of checks and balances, it is the judiciary that has the power to make the final call on the private v public right distinction. If Congress had such power, everything would be a public right and the judiciary would serve no purpose.

    The CAFC’s Patlex, Joy, and MCM opinions carry significant consequences for the patent system, and suggesting otherwise because of something Congress said is pure fantasy. If you were a lawyer, and you advised your client as such, you’d be committing malpractice.

    This argument of yours is a lot like the “AIA will collapse” argument — that is, it’s not just wrong, but it’s really wrong. You can lead a horse to water . . .

  14. Chris Gallagher January 30, 2017 4:15 pm

    Neal;
    This excerpt from your typically concise and accurate analysis is worth repeating.
    “While large companies can bear the high transaction costs of patent infringement defense, for small entities, high enforcement costs require outside investors, which demand high returns on capital to cover their risks. In this way, the efficient market of a strong patent system and a voluntary licensing market turns into an inefficient market that benefits incumbents and harms market entrants.”

    Efficient infringement is economically irresistible to incumbent aggregators who infringe under-resourced patent holders. AIA transaction costs and PTAB’s post-development nullification potential deter patent assertions by moderately-resourced firms. But efficiently infringing well-resourced component suppliers is more risky and therefor less “efficient”. It therefor calls for judicially inefficient but economically preferable damages apportionment,which may explain why Apple is suing Qualcomm .

  15. Ternary January 30, 2017 5:44 pm

    Bemused @12, rationally the opportunities to financially benefit from patents, without having a product to sell, have diminished dramatically as to become almost non-existent. On one of my inventions I had a discussion with a leading company. Their representatives told me that if they take a license, which they seldom do, they only pay very little money. They challenge you to sue them at tremendous cost or accept their low-ball figure.

    Besides being an inventor, I am also a patent professional who assisted in several patent litigation cases. Basically, infringers run out the clock and the budget of independent patent owners. Unless you have a clear case of infringement that covers a substantial market share and that can be handled on contingency basis there is very little chance that you get any substantial money out of your patent. I have worked with inventors who started with a belief of a strong patent, but gave up in disgust on the patent system as being rigged against them. And not just one or two. The patent system, though rational in its professed objectivity, is systematically so against patent owners that it is borderline irrational for an independent inventor to hope to be successful in asserting patent rights in view of the barriers that have been created. The discussion if a patent is a public right or private property is indicative of the value of a patent. As a student of the history of technology, I found that the system was never particularly pro-independent inventors, but it really never was this much against them.

    We may have to conclude that a patent in the US is no longer intended to benefit independent inventors. The system has decided it does not need independent inventors, it does not want independent inventors and it does not support independent inventors. It wants companies and jobs, but seems at a loss how to achieve that and falls back on old fashioned protectionism of interest groups. We are now at a stage where patents are deemed to hinder innovation. Any talk about “the importance of independent inventors” is empty ideological talk and lip service to a historical myth that sounds nice but is no longer pursued to be protected and stimulated in any politically meaningful way.

  16. Anon January 30, 2017 6:49 pm

    David,

    Except for the fact that my argument is not wrong, you might have had a point.

    As it is, you do not.

    Just because the courts have messed things up does not mean that I am not right. It only means that the courts have messed things up.

  17. Eric Berend January 30, 2017 11:17 pm

    Thank you very much, Mr. Solomon for another cogent and accurate analysis. I would submit that this is something of a dense read, precisely because the systemic aspects between the judicial decisions cited are rather intricate.

    One assertion that I would contest, is that the effects of these decisions on the individual inventor, are merely “inadvertent”. Such a conclusion, in my opinion, could not be further from the truth.

    Google/Alphabet and their ilk would no doubt enjoy stealing a march on their similarly-sized competitive entities; but it should be abundantly clear that these changes, on both a legislative and a judicial basis, are aimed squarely at the smaller entities in the invention space.

    With all due respect, this is squarely and deliberately aimed at “the little guys”; for whom the U.S. patent system was expressly established in the first place. That the notion of a “right” was explicitly stated in the Constitution in only one place, specifically for the benefit of “Author and Inventors” and the U.S. public interest (“Welfare”); these changes are SPECIFICALLY designed to abnegate these original precepts.

    The war on inventors, continues. The U.S. brain drain, beckons. The hatred of this Nation’s corrupt tech oligarchs, flares. The confidence in this once-great Nation as to prosperity, dies.

    Why not, go to China? The United States officially, legislatively, culturally and judicially, HATES and DENIGRATES individual inventors.

  18. angry dude January 30, 2017 11:53 pm

    Eric Berend @17

    the “little guys” are all guys (or small businesses) with net worth less than 2 mil so that they can’t risk burning their life savings on endless IPRs and litigation

    yeah.. it is that bad

  19. iwasthere January 31, 2017 6:59 pm

    https://www.wsj.com/articles/legislator-prosecutor-judge-and-jury-in-one-1485890517

    On point letter to the WSJ concerning the IPR starchamber

  20. FRANK LUKASIK January 31, 2017 8:29 pm

    I have contacted Sens. Marco Rubio, Orrin Hatch and President Donald Trump for help. No replies.. The Supreme Court “Dismissed” y Petition
    (Lucree v.U.S.).

  21. Joe Dohn February 1, 2017 1:42 pm

    So your thesis is: the patent system is a delicate balance. The balance existing before 2006 was a perfect god-given system that saw us through the late industrial age and therefore is perfectly tuned for the 21st century post-digital-revolution economy. The new balance is a cursed abomination that hurls patent owners naked into the street with weeping and gnashing of teeth.

    Or, to put it more simply: entrenched interests hate change, complain about new system. Truly a groundbreaking revelation. Well done.

  22. Anon February 1, 2017 10:24 pm

    entrenched interests hate change, complain about new system.

    Except, Mr. Joe Dohn, it was the entrenched interests that made the change (the new system) that everyone is complaining about.

    A small, but indeed critical difference.

    Well done indeed.

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