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Monday, November 27, 2017

The future of intellectual property and the administrative state: Oil States v. Greene’s Energy (Guest Post)

The following guest post is by my FIU colleague Hannibal Travis, Professor of Law at FIU College of Law and this semester the Irving Cypen Visiting Professor of Law at University of Florida.

The Future of Intellectual Property and the Administrative State: Oil States v. Greene’s Energy

Efficient dispute resolution is something of a Holy Grail in intellectual property (IP).  Several of the major innovations in the field over the past two decades chased it: WIPO domain name dispute resolution, the statutory license process for webcasters and digital downloads of cover songs, the introduction of an theory of induced infringement into copyright jurisprudence affecting online intermediaries, the evolution of copyright filters such as ContentID and Audible Magic CopySense, and the America Invents Act of 2011.  The results have been mixed in many cases. 

The question being presented to the Supreme Court this week is whether the Constitution limits the trend towards dispensing with the trappings of federal civil procedure in certain IP disputes.  The Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (PTO) has been considering more than 1,000 petitions per year, on average, for inter partes review (IPR) of patent claims that were not novel or that were obvious considering the prior art.  Patent law specialists comb through voluminous filings citing often obscure technical publications and foreign patents in a way that would be too time-consuming and expensive if done for each of the 500,000 patent applications submitted annually.

While the cancellation of an improvidently issued patent is a relatively narrow issue, the broader questions of when an Article III court should review the validity of rights underlying a claim for money damages, and when a jury trial is available as of right for such a claim, will have broader implications.  Most notably, the Court’s opinion in Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, will affect the default judgments that are likely to multiply in copyright cases if small claims legislation is passed to reduce the cost of enforcing copyrights.

Many years ago, the Federal Circuit resolved a constitutional challenge to the system of reexamining issued patents whose validity would traditionally have been handed to a jury for resolution.  The court began with the principles that patents are property rights protected by the Fifth Amendment from deprivation without due process and from takings without just compensation and public use.  It emphasized that a patent is a right to exclude granted to generate value through licensing, and to encourage risk-taking that will advance the useful arts.  Prior to a 1980 statute, which became effective in 1981, Article III courts handled the cancellation of issued patents’ claims.  The plaintiff in the challenge had been issued patents in the late 1970s based on an application from 1959, but on the eve of jury trial in 1982, the case had been continued pending a reexamination under the new statute.  The Federal Circuit rejected the plaintiff’s Fifth Amendment, Seventh Amendment, and Article III claims against the Commissioner of Patents and Trademarks, holding that patents are “public rights” dependent on a government grant under Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).  The Court in Northern Pipeline looked for a textual commitment of a class of cases to the executive branch to limit the Article III power, or a comparable “historical understanding” that executive officials could decide certain matters.

The basic premise of Northern Pipeline and its predecessors is somewhat problematic.  The fact that England had certain practices does not necessarily make them compatible with the Bill of Rights.  The Seventh Amendment and Article III Judicial Power were intended to protect life, liberty, and property from the executive and legislative branches, which could “overwhelm[]” the British judiciary.  Even Northern Pipeline distinguished territorial courts, courts-martial, and other traditionally non-“judicial” forms of dispute resolution from Congress enacting legislation to assign issues to Article I courts under an Article I power such as the Commerce Clause or the Copyright and Patent Clause.  As the Civil Jury Project at NYU argues in its amicus brief, the exemption of “public rights” from the Seventh Amendment lacks “support in the amendment’s history or text, and if interpreted too broadly would empower Congress to sidestep civil juries altogether.”  Justice White articulated better and more manageable distinction between public rights and private ones in 1977, in holding that the Seventh Amendment is not violated when Congress “created a new cause of action, and remedies therefor, unknown to the common law….”  Causes of action known to the common law are different, this theory would suggest. 

The Solicitor General of the United States and the PTO point out, as do many amici, that the Supreme Court adopted a seemingly broad standard for public rights in 2015, that bills seeking to cancel a patent were historically equitable in nature and therefore not subject to jury trial, and that the Privy Council--an entity linked to the English Crown--could void patents based on lack of novelty or filing by someone other than the true inventor.  The executive branch frequently strips individuals of their property rights, and IPRs are an easier way to do so, they claim.

The Obama administration defended the AIA as alleviating “problematic” aspects of patent litigation by enabling or accelerating post-grant review of issued patents.  It criticized the court system as allowing “legitimate innovators” to be “tied up” in litigation.  Some innovators even had to settle cases, the administration lamented.

In the New York Times, Eduardo Porter argues that drug prices will be lower under the AIA, and that there is no evidence that a “stringent” patent system helps the economy in any event.  The first point seems to be undermined by evidence that pharmaceutical prices have risen more rapidly under the AIA regime, reaching an annual percentage rate of increase in 2015 that was double the rate in 2010 (p. 29 of the link).

A better argument is that the PTAB will save potential infringers litigation costs.  Perhaps this argument proves too much, however.  How would many of the companies seeking to preserve a low-cost way to invalidate patents feel about low-cost methods to uncover accounting irregularities, wage and hour violations, or unpaid copyright royalties to musicians?

Another interesting question is whether the AIA will reduce prices, which are kept high by patents.  Professor Porter links “stringent” patents to research claiming that there has been a “drastic increase” in pricing power – or markups (roughly sales minus cost of goods sold) – among all publicly-traded firms, and also among the larger set of all IRS tax filers.  Interestingly, the trend line on markups starts to change dramatically in about 1980, just before efforts to strengthen U.S. patentholders’ positions.

Again, there are reasons to doubt this claim. 

First, the research on markups attributes the enhancement of pricing power to a broad array of intangibles, which have increased in number and in strength alongside patents: copyrights, trademarks, franchises, and other intangible assets.  Starting with brand value alone, it reached the impressive level of $790 billion in 2017 at 10 companies alone, including $184 billion for Apple and $48 billion for Facebook’s.  Patents like those on the iPhone interface can be invented around without too much difficulty many times, even when they aren’t canceled under the AIA, but brand value is elusive.  Trade secrets can also be quite valuable, as Alphabet’s Waymo alleges in its lawsuit against Uber.  Perhaps trade secret theft does not cost the economy $300 billion annually, as an advocacy group asserts, but trade secrets in aggregate may be worth tens of billions of dollars.  Disney’s effort to take in 65% of the revenue from screenings of next month’s The Last Jedi illustrates how copyrights can drive markups, especially after a transaction like the $4 billion deal for Lucasfilm.  Intangibles other than trademarks, copyrights, and trade secrets have also proliferated, such as the millions of derivatives contracts on five U.S. banks’ balance sheets, bearing a notional value of more than $220 trillion.   

Second, the most patent-intensive products see some of the most remarkable declines in price despite increases in quality.  This contrasts with books, for example, which are sold today at quality levels often no better than those our forebears had access to, but at prices two to 15 times what they would have paid.  The very rich in the 1970s or 1980s might have paid millions of dollars for an iPhone, but it could not be had at any price.  Another interesting example is the PlayStation 2, presumably another “victim” of patents due to the many overlapping rights implicated by its games processor and graphics synthesizer chips, possibly including Nintendo’s 3D image processing patents.  The PS2 fell in price from $299 at launch to $99 in 2009, before the AIA was passed.  The Playstation 3, which had more than 100 times the power of the PS2, fell in price by Cyber Week 2012 to less than the PS2 at launch, or $219.

Third, the decline of startup activity that is supposed to be the mechanism for high markups – because large firms increasingly lack vigorous competition from newcomers – could just as easily be blamed on weaker patents as on “stringent” protection of patents.  The research in this area points to “transformational” entrepreneurs who want to revolutionize a product category or service sector, and who account for a disproportionate share of growth within industries.  Like many famous inventors who go on to become billionaires, such entrepreneurs may seek patent protection.  The PTO released a working paper in 2015 finding that among thousands of startups that went public or were acquired, those that had a patent application approved were 53% more likely to obtain venture capital or similar investments.  The National Venture Capital Association argues that patents “are the main way in which potential investors, namely venture capitalists, can assess whether a company has … a unique advantage.”

In any event, the AIA would not be the only or even the most efficient way to address high drug prices, even if that had been the goal of Congress or the White House.  The Patent and Trademark Office could simply issue a memorandum suggesting that examiners reject the sort of patents found invalid by the PTAB for combining existing dosing methods with expiring chemical compound (or drug) patents.

Turning to the issue of whether Oil States could help reign in a “stringent” patent system that is unhelpful by academic consensus, the system may be no stronger than years or decades ago, even as we learn more about its potential economic benefits.  The median patent damages award in 2016 was $6.1 million, down from 1997-2006.   Moreover, nearly two-thirds of patent holders are unsuccessful in court, not counting settlements, and only 2% of cases result in a damages award.  Recent research into innovation suggests that most significant inventions were not patented, and that Switzerland and the Netherlands were as innovative without patent systems as other countries with them were.  Even this work, on the other hand, emphasizes that correlation studies indicate that patentability is a “primary driver of innovation.”   For example, a study of inventions originating in 27 countries showed that the number of patent applications from a given country in the United States is strongly correlated with research and development investment by private industry in that country.  Brazil, China, India, and Russia have seen innovation and foreign investment increase markedly after providing stronger patent and trademark protection.  Global research and development spending has doubled in a 25-year period.

Critics of the PTAB suggest that it often comes out with conclusory and arguably wrong decisions.  So-called “objective evidence” that an invention is not obvious, for example, is typically downplayed by the PTAB, even though the Federal Circuit calls such evidence “critical.”  Vital discovery into documents probative of this issue is often denied to patentees.  Moreover, the PTAB arguably misapplied the definition of a “covered business method” from the American Invents Act in at least two cases.  It is possible that PTAB judges whose firm represented a party on a related matter more than one year prior to the institution of IPRs could decide IPRs in which the party is involved.  Finally, the pharmaceutical industry argues that IPRs have an “extraordinarily lopsided track record” and that “the PTO has admitted to reconfiguring panels to alter outcomes,” threatening due process.  While appeal to the Federal Circuit can and should cure most errors, the practice of summary affirmances undermines this safeguard.

Looking to the future, there are several ways in which a decision favorable to the PTO could affect the copyright system.  Congress might be encouraged to pass small claims legislation, and even to make it mandatory rather than voluntary subject to a potential default judgment, as current drafts envisage.  Although an action for damages involving copyright infringement is distinguishable from cancellation of a patent, which has more obvious equitable analogues, many of the arguments in Oil States point more broadly to considerations of deference to Congress, expert panels, cost reduction, and comprehensive statutory schemes.  If accepted by the Supreme Court, these theories may apply to a Copyright Claims Board staffed by copyright experts and handing out awards of up to $30,000 per proceeding, plus up to $5,000 in attorney’s fees against defendants who maintain unreasonable defenses.  The Copyright Office has even asked for comments as to whether injunctive relief should be included in such a regime.  Like the PTAB, such a regime might accelerate the process of dispensing with probing examinations of applicable arguments, and their submission to civil juries, in favor of fast and cheap decisions.

Posted by Howard Wasserman on November 27, 2017 at 09:31 AM in Civil Procedure, Intellectual Property | Permalink

Comments

Interesting post, one can reach the Oil States v. Greene’s Energy , here :

http://www.scotusblog.com/wp-content/uploads/2017/06/16-712-petition.pdf

Posted by: El roam | Nov 27, 2017 11:32:05 AM

Good post, except why on earth does it say that the question is whether "whether the Constitution limits the trend towards dispensing with the trappings of federal civil procedure?" The objections are over the lack of an independent, life tenured judge overseeing the proceedings as the Constitution requires for judicial matters and over the lack of a jury deciding the facts. I think those are more than "trappings of federal procedure."

Posted by: biff | Nov 28, 2017 6:27:20 PM

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