Note: This post was first published on Truth on the Market and is re-published here with permission. The post summarizes the findings of a paper published in Volume 21 of the Federalist Society Review. The paper was co-authored by Dirk Auer, Geoffrey A. Manne, Julian Morris, & Kristian Stout. It uses the analytical framework of law and economics to discuss recent patent law reforms in the US, and their negative ramifications for inventors. The full paper can be found on the Federalist Society’s website, here.
Property rights are a pillar of the free market. As Harold Demsetz famously argued, they spur specialization, investment and competition throughout the economy. And the same holds true for intellectual property rights (IPRs).
However, despite the many social benefits that have been attributed to intellectual property protection, the past decades have witnessed the birth and growth of an powerful intellectual movement seeking to reduce the legal protections offered to inventors by patent law.
These critics argue that excessive patent protection is holding back western economies. For instance, they posit that the owners of the standard essential patents (“SEPs”) are charging their commercial partners too much for the rights to use their patents (this is referred to as patent holdup and royalty stacking). Furthermore, they argue that so-called patent trolls (“patent-assertion entities” or “PAEs”) are deterring innovation by small startups by employing “extortionate” litigation tactics.
Unfortunately, this movement has led to a deterioration of appropriate remedies in patent disputes.
The many benefits of patent protection
While patents likely play an important role in providing inventors with incentives to innovate, their role in enabling the commercialization of ideas is probably even more important.
By creating a system of clearly defined property rights, patents empower market players to coordinate their efforts in order to collectively produce innovations. In other words, patents greatly reduce the cost of concluding mutually-advantageous deals, whereby firms specialize in various aspects of the innovation process. Critically, these deals occur in the shadow of patent litigation and injunctive relief. The threat of these ensures that all parties have an incentive to take a seat at the negotiating table.
This is arguably nowhere more apparent than in the standardization space. Many of the most high-profile modern technologies are the fruit of large-scale collaboration coordinated through standards developing organizations (SDOs). These include technologies such as Wi-Fi, 3G, 4G, 5G, Blu-Ray, USB-C, and Thunderbolt 3. The coordination necessary to produce technologies of this sort is hard to imagine without some form of enforceable property right in the resulting inventions.
The shift away from injunctive relief
Of the many recent reforms to patent law, the most significant has arguably been a significant limitation of patent holders’ availability to obtain permanent injunctions. This is particularly true in the case of so-called standard essential patents (SEPs).
However, intellectual property laws are meaningless without the ability to enforce them and remedy breaches. And injunctions are almost certainly the most powerful, and important, of these remedies.
The significance of injunctions is perhaps best understood by highlighting the weakness of damages awards when applied to intangible assets. Indeed, it is often difficult to establish the appropriate size of an award of damages when intangible property—such as invention and innovation in the case of patents—is the core property being protected. This is because these assets are almost always highly idiosyncratic. By blocking all infringing uses of an invention, injunctions thus prevent courts from having to act as price regulators. In doing so, they also ensure that innovators are adequately rewarded for their technological contributions.
Unfortunately, the Supreme Court’s 2006 ruling in eBay Inc. v. MercExchange, LLC significantly narrowed the circumstances under which patent holders could obtain permanent injunctions. This predictably led lower courts to grant fewer permanent injunctions in patent litigation suits.
But while critics of injunctions had hoped that reducing their availability would spur innovation, empirical evidence suggests that this has not been the case so far.
And injunctions are not the only area of patent law that have witnessed a gradual shift against the interests of patent holders. Much of the same could be said about damages awards, revised fee shifting standards, and the introduction of Inter Partes Review.
Critically, the intellectual movement to soften patent protection has also had ramifications outside of the judicial sphere. It is notably behind several legislative reforms, particularly the America Invents Act. Moreover, it has led numerous private parties—most notably Standard Developing Organizations (SDOs)—to adopt stances that have advanced the interests of technology implementers at the expense of inventors.
For instance, one of the most noteworthy reforms has been IEEE’s sweeping reforms to its IP policy in 2015. The new rules notably prevented SEP holders from seeking permanent injunctions against so-called “willing licensees." They also mandated that royalties pertaining to SEPs should be based upon the value of the smallest saleable component that practices the patented technology. Both of these measures ultimately sought to tilt the bargaining range in license negotiations in favor of implementers.
The developments discussed in this article might seem like small details, but they are part of a wider trend whereby U.S. patent law is becoming increasingly inhospitable for inventors. This is particularly true when it comes to the enforcement of SEPs by means of injunction.
While the short-term effect of these various reforms has yet to be quantified, there is a real risk that, by decreasing the value of patents and increasing transaction costs, these changes may ultimately limit the diffusion of innovations and harm incentives to invent.
Despite these initiatives, the fact remains that there is today a strong undercurrent pushing for weaker or less certain patent protection. If left unchecked, this threatens to undermine the utility of patents in facilitating the efficient allocation of resources for innovation and its commercialization. Policymakers should thus pay careful attention to the changes this trend may bring about and move swiftly to recalibrate the patent system where needed in order to better protect the property rights of inventors and yield more innovation overall