“Despite hopes for improvement, our patent policy aimed to thwart a bad actor will inevitably fail and cripple our patent system, because it misidentifies the problem with our patent system and is inapposite to sound economic policy.”
In a July 2018 joint position paper entitled “Congress Must Remedy Uncertainty in 35 U.S.C. §101 and Return Balance to the U.S. Patent System,” the American Bar Association’s IP Law section, the IP Owner’s Association, and the American Intellectual Property Law Association contended the “Supreme Court’s jurisprudence has injected significant ambiguity into the eligibility determination . . . .” and there is now “[u]ncertainty about what types of inventions qualify at the most basic level for patenting.”
This ambiguity, however, may be a blessing in disguise. By creating demand for Congress’ intervention, we have an opportunity to change course from the patent policy that has resulted in this mess.
But to turn a corner, Congress needs to first understand the shortcomings of its and the Judiciary’s fundamental assumptions that have created this situation.
For more than a decade, both Congress and the Judiciary have approached patent policy from a foundational presumption: the inherent problem with our patent system stems from a bad actor.
Under a single-minded bad actor presumption, the Judiciary and Congress have framed our patent policy to increase roadblocks for this bad actor, to prevent it from taking advantage of the system.
But this presumption has spawned a policy that is contrary to economic principles, and it has systematically weakened and undermined the U.S. patent system.
Even if Congress manages to fix 101 law, if it fails to correct its and the Judiciary’s foundational shortcomings regarding patent policy for the past decade+, we’re doomed to repeat mistakes of the past.
If, on the other hand, we switch our patent policy principles to a rational actor model, we can begin to understand our patent system from a foundation rooted in economics. More importantly, we can use economic principles to improve our patent system.
Patent Policy Centered Around Deterrence of Patent Troll
Both Congress and the Judiciary have structured U.S. patent policy around one central idea: patent trolls are the root problem of our patent system, and to improve our patent system, we need to deter patent trolls.
According to common belief, patent trolls file lawsuits with no intent to test the merits of a patent, and instead settle a case early for something less than the cost of defense (called “nuisance litigations”). In its 2016 Patent Assertion Entity Study the FTC contended that “[n]uisance infringement litigation… can tax judicial resources and divert attention away from productive business behavior.”
Despite hopes for improvement, our patent policy aimed to thwart a bad actor will inevitably fail and cripple our patent system, because it misidentifies the problem with our patent system and is inapposite to sound economic policy.
Alice 101 Law: Case Study of a Bad Actor Deterrence Policy
The current state of 101 law is a result of patent policy focused on thwarting a bad actor.
101 law originated in the midst of heated anti-patent troll legislative proposals in the House and Senate in 2013. In 2013 alone, legislators in both the House of Representatives and Senate introduced 12 anti-patent troll bills (e.g., Patent Quality Improvement Act, Patent Abuse Reduction Act, Patent Litigation and Innovation Act, Stopping Offensive Use of Patents Act – see a full list here). The Innovation Act, proposed by Representative Goodlatte, even passed in the House in December 2013 by an overwhelming margin.
States even began implementing their own respective anti-trolling legislation. In 2013, Vermont became the first state to enact legislation aimed at combatting patent trolls (Vermont’s Bad Faith Assertions of Patent infringements law), with several others following, including Oregon, Nebraska, and Wisconsin.
At the executive level, President Obama even called for patent reform in his January 2014 State of the Union address, arguing that reform would “allow businesses to stay focused on innovation, not costly, needless litigation.”
Senator Leahy, who introduced the Patent Transparency and Improvements Act of 2013, gave his justification and goal for the anti-patent troll legislation:
Against this backdrop of anti-patent troll sentiment, in 2014 the Supreme Court attempted its own solution; the Justices decided Alice, giving judges greater discretion to render “abstract” patents ineligible under 35 USC §101. The Supreme Court didn’t define what was “abstract,” and instead allowed the lower courts to flesh out 101 law.
Alice 101 Law: A Failed Attempt at Bad Actor Deterrence
By any objective measure, the Judiciary’s attempt at patent reform with 101 law has failed.
After five years of 101 case law development we are left in a greater state of confusion and incoherency. To determine whether a claim is ineligible under 101, a judge strips the claims of its limitations, then determines whether the “gist” of the invention is “abstract,” which has yet to be defined. This is the first time in U.S. patent law in which a claim is evaluated without consideration of the actual claim limitations. Next, when a judge determines a “gist” is abstract, the analysis rests on whether the additional limitations are “conventional” (the “inventive concept” determination), which intermingles novelty, non-obviousness, and written description requirements into the patent-eligibility analysis.
The standards for 101 eligibility are so vague and inconsistently applied, even Federal Circuit judges have expressed the gravity of their concern regarding 101 law:
Systemic Policy Trend to Weaken Patent Rights
While the failure of 101 jurisprudence may be the hot-ticket item relating to legislative reform, it is the underlying policy trend behind 101 that is the real failure.
With the ideological belief that bad actors are the cause of our patent problems, both Congress and the Judiciary for more than a decade framed our patent policy as follows:
- A single-minded goal: thwart these bad actors from taking advantage of the system.
- The approach: systematically and substantially weaken enforcement rights for all patent holders.
- The rationale: create more enforcement hurdles for the bad actor, to deter the patent troll from taking advantage of the system.
The table below summarizes some of the decisions and legislation that have been implemented over the past decade+, to illustrate an overall, long-term policy to thwart a bad actor from taking advantage of the system:
The impact of this long-term bad actor deterrence policy has led to a systematic weakening of patent rights over the past decade+. It has simply made it prohibitive for patent holders to enforce their patents in the United States.
Patent holders now contend with serial IPRs and stays in District Court proceedings, inconsistent rulings from multiple judges, and various summary judgment hurdles that allow judges to prevent cases from reaching a jury. Even if a case reaches a jury, efficient infringers are willing to take their chances at jury trial, gambling a jury pool may be biased with the patent troll narrative. And when an infringer loses at trial, they have cover from the Federal Circuit, which has shown a tendency to protect infringers by reversing high damages awards (see VirnetX v. Apple — in Nov. 2019 the Federal Circuit reversed a $500M+ award on damages, which is one of numerous of reversals VirnetX has faced since its initial jury verdict in 2012 confirming infringement). And if a patent holder manages to win all the way through trial and appeal, an infringer still has an opportunity to attempt to reverse the ruling by filing subsequent IPRs (through third party proxies).
This systematic weakening of U.S. patent rights has become so substantial, many of the top law firms now rely on foreign venues to enforce patent rights. They simply won’t take a U.S. patent case without foreign counterparts to enforce in venues that provide injunctive relief.
By framing patent policy around deterring a bad actor, the Judiciary and Congress has engaged in a war of attrition on our patent system, which has undermined the integrity and confidence in U.S. patent law (see Finnavations Case Study).
Moreover, has this bad actor deterrence policy deterred “patent trolling”? In 2019 patent trolls (a.k.a. NPEs) were responsible for more than 58% of all District Court patent litigation, and the proportion of new litigation attributed to patent trolls increased from 2018 to 2019.
If Congress attempts to rectify 101 law but continues to single-mindedly frame our patent policy around the bad actor, it won’t help. Congress will instead perpetuate the problem, by continuing to implement a patent policy contrary to fundamental economic principles, i.e. one that increases enforcement hurdles for patent holders.
To Be Continued
In Part II, we’ll elaborate on the fundamental economic principles we can use as a framework for patent policy and provide an alternative from the bad actor ideology to a rational actor model, from which we can structure economically-sound patent policy.
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