Patent ( Re)Think ? (AIPLA 16 October 2009)

Patent (Re)Think?(AIPLA 16 October 2009)
F. Scott Kieff Professor George Washington University Law School Ray & Louise Knowles Senior Fellow Stanford University Hoover Institution

Patent (Re)Think? With almost every aspect of the patent system in flux today Some might think we need to completely rethink our approach As an academic, I should tell you I figured out great solutions But I didn’t – many who came before did Indeed it turns out none of the hot issues today is new, either We’ve tried playing out each side, several times And if we heed lessons from the past our changes today are in the wrong direction Bottom line: property rights in patents are important for increasing access, competition, and economic growth

www.innovation.hoover.org (copies of work available here for free download)

Modes of Action (www.innovation.hoover.org)

Property Rights in IP as Keys to Innovation and Competition Increase innovation Not just incentives to invent Get inventions put to use By facilitating coordination among complementary users of the invention (investors, managers, marketers, laborers, owners of other inventions, etc) The D part of R&D Help new companies compete Anti-monopoly weapons Vital slingshot for David against Goliath History, with political common ground Judge Giles Rich,1952 Patent Act – don’t focus on inventing! Also see both Judge Learned Hand and Judge Jerome Frank Federal Circuit signed into law by Reagan, after months of hard work by Carter eBay coalitions of Roberts & Ginsburg v. Kennedy & Breyer

Mechanism of Good Coordination (Kieff, 56 Emory L.J. 327 (2006), Kieff, 117 Yale L.J. Pocket Part 101 (2007))(Smith, 116 Yale L. J. 1742 (2007)) Beacon effect, not control – start conversations Bargaining effect – get deals struck Helps all in the deal to appropriate the returns to (rival) inputs to developing and commercializing innovation—labor, lab space, and so forth—without the law having to trace the relative contributions of these multifarious inputs Compare liability enforcement rules They reduce everything to money, but money cannot buy unique assets They help achieve bad coordination (“Keiretsu effect”)

Mechanism of Bad Coordination: “Keiretsu Effect” Consider how big players play with and against each other They’d love to talk directly But face two key problems: trust, and antitrust What if every legal test turns on discretion? This ensures large numbers of low value IP assets Which helps them coordinate to keep out competition Mitigates trust problem: improves communication Decisions to push and yield transmit preferences Discovery ensures fidelity Mitigates antitrust problem: (blessed by Federal Judges) Insulates from scrutiny generally Mitigates chance of treble damages and jail time even if scrutinized Avoids slingshots from Davids

Popular View Today: Problems of Property Enforcement Rules for IP Hold ups – stop things from getting done Hold outs – extract too much, breakdowns, etc. Buzzwords: trolls, patent thickets, anticommons Government shutdown and economic collapse Blackberry’s given to VIP’s to pump brand and get hooked Then fears of violent withdrawal if crackberries enjoined for even a moment Our lives and way of life are at stake

RIM’s Reality: Failure in the Market for Corporate Control? Settled for ~$600 million Initially offered ~$6 million (1/100thx) Public estimated $1 billion (~2x) Private cash reserves $1.8 billion (3x) What if LBO with purchase price valuation at typical price? 52 week range in stock price: low 52, typical 63, high 88 Majority of outstanding shares (191 million) in public float (141 million) Put in $10 premium for about $1.4 billion Settle for $1 billion, pay total fees and other costs of $100 million $22 bounce back in share price to high makes about $3.5 billion On $2.4 billion investment that’s ~ 40% return

Example of an Institutional ChangeDesigned to Remove a Restraint A core problem motivating patent reformers is too many junk patents – they clog system and distract officials Prior art requires evidence But it’s hard to get the prior art, so just trust us to handle all those right

Patent “Reform”:Unintended Consequences? Problems of discretion – Flexibility’s Achilles Heel Influenced by political pressure and lobbying Big guys win, which turns a law designed to help competition into one that hurts competition

But Large Players Are at Risk, Too Flexibility and discretion are slaves to fashion Fighting “The Man” often is the fashion And it’s easy to call any big player “The Man” Intel calls for flexibility in the US for patents while complaining about flexibility in the EU for antitrust The EU favors flexibility for antitrust, but just issued a formal complaint against Thailand for being so flexible on compulsory licenses for drug patents As we avoid property in US, we give ammunition to calls for compulsory licensing abroad

Overlooked Problem:Transacting in the Shadow of“Liability” Enforcement Rules We call enforcement rules “property rules” when backed up by a right to exclude and “Liability rules” when enforcement only by a right to sue for payment of objective value Liability rules make transactions too forced and too frequent Some deals shouldn’t get done, and a forced “yes” is not a deal Intervention when disagreement encourages disagreement Harder for patentee to attract and hold constructive attention of a potential contracting party (can’t hold-in the counterparty) Removes patentee’s option to terminate the negotiations in favor of striking a deal with a different party (can’t hold-on to option) Hits small firms worse since big firms have easier time holding-in Have more $$$ to finance litigation Have leverage with reputation effects, relationships, bargaining power

Overlooked Problem:Transacting in the Shadow ofMandatory Rules for Contracts After Medimmune (2006) licensees can always re-negotiate while holding patentees to rest of deal Contract fixes like covenant not to challenge won’t work Likely invalid under Lear (1969) What would remedy be? Patentee wants licensee bound to all terms of original deal Structured deals with stock options like those offered by Sean O’Connor would help; but still don’t reach non-price terms Dividing deals may be only way to have enforcement (side deal for IP) After Quanta (2008) a license to one is now a license to all(same with a settlement or covenant not to sue after Transcore(2009)) Hits all firms who want to contract Hits small firms harder since now deals rest mainly on symmetry in leverage

Example of Serial Settlements Business line: 1B$ Infringement base: 10%, 100M$ Royalty base: 5%, 5M$ Probability of success: 50%, 2.5M$ Litigation costs: 2-5M$ So what about others? They argue: we do less business, lower base, etc

Problems of Transfer Pricing in Serial Settlements Teasing out internals requires patentee to give to infringer #2, internals from infringer #1 #1 hates this because of TS; or #1 & #2 love this because of collusion Problem may be worse when compelling strong form of RAND/FRAND on price Compare non price terms?

Conclusion A well functioning patent system is critical to our economy Fosters innovation, jobs, and capital investment But a patent system can also be plagued by frivolous suits, unending process, and extreme uncertainty We now see intense lobbying with curious political alignments Focusing on importance of strong patents were unions, Republicans, small business, and Big Pharma Focusing on the problems of over enforcement of patents were Democrats and the big business interests of High Tech Let’s focus on good ideas & practical problem solving, not compromise among loudest voices, Let’s blend: Predictable enforcement for patents With the flexibility for market actors to contract over them (while adding) symmetrical mechanisms to cabin abusive litigation and other legal process

Patent ( Re)Think ? (AIPLA 16 October 2009)