Intellectual property (IP) leadership is critical to U.S. economic and national security. Patent leadership in emerging technologies depends on participation in standards set by international standards developing organizations (SDOs) and robust patent protections which, in turn, offer the incentives necessary to invite the significant, long-term, and risky R&D investments required to lead in these technologies.
For decades, the U.S. led the world in developing cutting-edge technologies due in large part to its strong patent protections and substantial contributions to SDOs. Some argue that over the past decade, a number of legal developments have arguably weakened patent rights in the U.S. and the incentive for U.S.-based firms to participate in SDOs, and the Biden Administration is proposing additional changes to guidance governing standard essential patents (SEPs). Some contend that this new regime favors China, whose innovation depends on state subsidies, while U.S. innovation depends on a strong IP system. These people believe these developments also benefit China both because China pays licensing fees to U.S. tech companies and because China hopes to dominate international SDOs—even exporting their own national standards to the world. Others argue that, while the patent system provides important incentives for innovation in many circumstances, it is not costless. Nor are its costs limited to the short-run welfare losses from diminished competition. By taxing follow-on innovation and implementation of standardized technologies, excessively broad patent rights and improper use of standard-essential patents can impair the innovation process and jeopardize the U.S.’s international competitiveness.
This webinar with Profs. Richard Epstein, F. Scott Kieff, Douglas Melamed, and Erik Hovenkamp will inform listeners about these legal developments and discuss how they may affect U.S. global technology leadership and national and economic security.
- Prof. Richard Epstein, Laurence A. Tisch Professor of Law, NYU; Peter and Kirstin Senior Fellow, Hoover Institution; James Parker Hall Distinguished Service Professor Emeritus and Senior Lecturer, University of Chicago
- Prof. F. Scott Kieff, Fred C. Stevenson Research Professor of Law and Director, Planning, and Publications, Center for Law, Economics, & Finance, George Washington University Law School
- Prof. Erik Hovenkamp, Assistant Professor of Law, USC Gould School of Law
- Prof. Douglas Melamed, Professor of the Practice of Law, Stanford Law School
- Moderator: Dean Reuter, Senior Vice President and General Counsel, The Federalist Society
As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.
Dean Reuter: Hello, and welcome to The Federalist Society’s Teleforum webinar as today, April 8, 2022, we discuss how patent law shapes US national and economic security. I’m Dean Reuter, Senior Vice President and General Counsel at The Federalist Society. My pleasure to welcome you here today. Thank you for joining us. As always, please note that all expressions of opinion are those of the experts on today’s call. Also, this call is being recorded and will likely be transcribed and put on our website for further use.
We’re very pleased to welcome four experts to our webinar today. We’re going to get opening remarks from each for about five minutes, after which I will ask a few questions, and we will undoubtedly get questions from the floor. So be thinking about those for when we get to that portion of the program. Today, we’re going to be using the Q&A function at the bottom of your screen. So feel free to submit your questions through the Q&A function.
We’re going to hear first from Professor Erik Hovenkamp. He’s the Assistant Professor of Law at the US Gould School of Law. Then, we’ll hear from Professor Scott Kieff. He’s the Fred C. Stevenson Research Professor of Law and Director of Planning and Publications at the Center for Law, Economics, & Finance at the George Washington University Law School. He’ll be followed by Professor Douglas Melamed, who’s the Professor of the Practice of Law at Stanford Law School. And finally, we’ll hear from Professor Richard Epstein, the Laurence A. Tisch Professor of Law at NYU, the Peter and Kirstin Senior Fellow at the Hoover Institution, and the James Parker Hall Distinguished Service Professor Emeritus and Senior Lecturer at the University of Chicago. I will now get out of the way and turn things over to Professor Erik Hovenkamp. Professor, five minutes.
Prof. Erik Hovenkamp: Great. Thank you, Dean. So part of the impetus for this panel is a recent about-face in a policy statement issued jointly by the Department of Justice Antitrust Division and the US Patent and Trademark Office. So these policy statements are about remedies for standard essential patents. Okay. So what does that mean? Well, when a standard-setting organization adopts a standard, which is a specification of a complicated technology, certain pieces of that technology are essential. You can’t go without them, and they’re all patented, for the most part.
And so, those patents are deemed standard-essential. Again, you can’t go without them. So the first policy statement was issued in 2013, and it said that injunctions are generally inappropriate in cases involving standard-essential patents. Then, in 2019, they reversed course. The new statement then said, “Well, no. The availability of injunctions should be no more limited in this context than in any generic patent case.” And most recently, in 2021, the statement reverted back to say, “Yeah. Injunctions really are inappropriate in most cases involving SEPs–” standard essential patents. Okay.
So I thought I’d start out by just describing some of the basic reasons why many of us think that it is problematic to award injunctions in these cases. Okay? So, at ground level, it really stems from a combination of three things. So the first is that it’s generally not possible to negotiate license fees before a standard is adopted. Okay? There are just too many patents. They’re too complicated to attempt to do that in practice. Okay. Second, once a standard is chosen, implementers are locked into it, more or less, and all of its essential technologies until the next standard comes along.
And then, third, a standard-essential patent does not cover a full product. It covers a tiny piece of a product. All right? So that’s true of almost all patents, in general. Okay. Now, to get a sense of the problem, imagine that you are a seller of smartphones. You design your own smartphones, but many -- a typical smartphone embodies more than a million patented technologies. And so, many of them are going to be -- the really important ones are standard-essential patents.
Now, let’s suppose that the owner of a standard-essential patent approaches you for a license fee. Okay. So, ideally, the fee that you pay this person will reflect just the value of the technology of that person’s patent -- covered by that person’s patent, and it won’t reflect the value of any of the other technologies in your phone. Okay. And that’s what would happen if you could bargain over license fees, ex-ante, before a standard is adopted, but remember that’s not possible in this context. So you are already locked into this technology. And now, the problem is that if injunctions are on the table, the patent owner can force you to pay far more than just the valve of its technology. Okay? If the injunction issues, you have to take your entire product off the market.
You can’t just get rid of the patent technology. It’s essential, after all. And so, what that means is that the patent owner can stop you from using, not only its own technology, but all of the other ones embodied in your phone, including, presumably, many you invented on your own. Okay? So, as bad as that is already, it gets worse when you consider that there isn’t just one essential patent under a given standard. There are many held by many different firms, all of whom could potentially try to overcharge you in this way. Okay. Now, this is an example of what’s usually called “patent hold-up.” Okay.
So this is a term that gets used, essentially, in any situation where a patentee acquires some kind of leverage that allows it to charge significantly higher license fees than you would ever agree to pay in an arm’s length bargain, meaning a bargain in which you aren’t all ready on the hook for something. Now, to help address -- let me back up one second. So injunctions are not the only mechanism that drives hold-up concerns, but they are one of the biggest ones. Okay? And it’s a concern that arises even outside the standard-setting context. Now, to help address concerns about hold-up, standard-setting organizations often require owners of standard essential patents to license them on FRAND terms. Okay. That means fair, reasonable, and non-discriminatory.
Now, the precise meaning of FRAND is a complicated subject, but suffice it to say that for FRAND to help prevent a serious hold-up problem, as intended, we really have to take the position that a FRAND-encumbered patent is generally not entitled to injunctive relief, at least absent some kind of extreme circumstances, meaning, to my mind, either the implementer is just refusing to pay anything, or the implementer is making some objectively baseless claims about what he owes, something along those lines. Okay. So therefore, damages -- outside of those circumstances, damages are really the appropriate remedy in this context. So then, when I think about undermining America’s ability to compete internationally to be productive, I think that to allow for injunctions, widespread injunctions in this context could only hinder our ability to be competitive internationally. So I’ll stop there and hand it off to Scott.
Prof. F. Scott Kieff: Excellent. Thank you so much, everyone. And thank you so much, Erik, in particular, for the great intro as well as the handing off and the discussion. So let me just check in with the organizers. Are we sending the focus where we want it? And if so, that’s fine. I’ll just move on. I’m --.
Dean Reuter: Yeah, I think we’re on the right track here, Scott. I’d like to hear your views on national security. I mean, what are the stakes here? I’ve heard—and maybe want to address this—that damages -- a patent holder without the right for an injunction is basically -- holds a right without a remedy and that, in any event, the remedy he might be entitled to would be something along the lines of the original valve of the patent license. So what are the incentives for the infringer? But --.
Prof. F. Scott Kieff: Sure. So I think one of the things that may help to set the baseline is to imagine there’s this beautiful part of the country kind of towards the middle. I used to teach at WashU in St. Louis. It’s not really the middle, but a lot of people call it flyover country. You go right across the river from St. Louis. There are some hills called Cahokia Mounds. What does that have to do with anything?
Well, this is a part of North America that, from 1000 AD to 1350 AD, had a massive population. This was the biggest city in North America, and it was basically bigger than London at the time. It basically took until Philadelphia in the late 1800s before you had a bigger city in North America. So let’s just imagine a Native American descendant of this tribe walks onto Cahokia Mountain, and she digs down into the earth, and she pulls up some stuff. And this is her ancestral ground, and she’s an Indigenous person, and she’s got really pretty good, clean title to the stuff that she’s pulled up. And then, she assembles this stuff into a device, and she saves somebody’s life with this device.
And she does this without any awareness. She’s certainly not copying somebody else’s patent. She may not even know what a patent is. In the United States, since the country was founded, we would call that patent infringement. And the red herrings here, to keep in mind, is -- but, to the tangible stuff she was using, she had the cleanest title possible, a fee simple absolute. She didn’t know about the patent.
She blundered right into it. She certainly was not a copyist. There might even be a better, true owner to the patent. But, of course, since Roman law, certainly throughout American law, the kind of argument, “There’s some better title holder—”the so-called jus tertii defense—we’ve long rejected. We don’t let that be an obstacle to asserting a property right. Here’s another red herring -- but I’m a good faith purchaser for value.
Maybe she bought some of the stuff, or maybe she purchased instructions from someone else. You see, the thing, though, is, in a recording act property system, you’re not a good faith purchaser for value if the asset’s ownership has been recorded. And what if she asserts a general liberty interest? “I should be free. I should be able to do whatever I want.” Well, you know, law restricts freedom. And we want a rule-of-law-based system.
And what if she says, “Well, fine. I’m okay with the tangible stuff. It’s these intangible property rights that really gum up the works for me.” Then, we might ask, “Well, how do we feel about mortgages and easements and covenants and stocks and bonds and all of the other intangible property rights we enforce in our system without the same concern that we seem to have here in this setting, just because of, for example, a numerosity problem.” I’m calling into this from my law school office. There are vast numbers of entitlements, permission slips we need from the mayor’s office and lots of other people to build these buildings. And we assemble these permissions. We negotiate in these markets hugely imperfectly, except they get done pretty well.
So there are a lot of baselines here. And one of the other baselines to keep in mind is that the birth of antitrust in the United States—early 1900s, late 1800s—it was a great innovation to have an antitrust system. And I think we could have, let’s call it, more robust enforcement of patents and still keep an antitrust system operating at the interface with a patent system. So the question is not do we have any patent or any antitrust. I think we seem to agree we want some combination of both. And then, the harder questions become, “So, then, what are going to be the rules that will cabin patent enforcement, patent remedies? And what are going to be the rules that cabin antitrust enforcement and antitrust remedies? And is the invocation of one or the other an always, ‘Yea’ or an always ‘Nay.’” And I think it’s -- in the follow-up discussion, I think we can locate ourselves in this middle gray comfortably, keeping in mind what are not the corners. So let me pause there and invite in Doug Melamed.
Prof. Douglas Melamed: Thanks, Scott. I haven’t been in St. Louis in many decades, and I’m not going to go there this morning. I want to talk at a little more concrete level, perhaps, about some of the current disputes because I think there’s no dispute, I think—at least from where I’m coming from, and I doubt there is on this panel—that patentists can very valuable and do some standard innovation. Innovation’s extremely important to economic wealth and progress. But, by the same token, excessive patent rights and excessive patent remedies can impose an unfortunate drag on the economy—deadweight loss, excessive prices, diminished use of patented technologies, and attacks on and reduction in follow-on innovation. So what we’re looking for, and I think Scott suggested, is what I think of as the Goldilocks Solution.
How do we get to the right point the appropriate compensation takes into account competing interests? Now, there’s a hold-up problem that Erik talked about. I want to talk about the other end of the story, which a lot of the -- those who believe that patent holders, SEP holders, should have a general right to an injunction talk about. And that’s the problem with so-called hold-out. Now, to put this in context, I want to reiterate something that Erik said. The patent disputes we’re talking about involve implementers of the standard that have already begun using the patented technology.
They’re like these Native Americans in the hills near St. Louis, I guess. But that’s a good thing because when you take my cell phone and you imagine and you understand that there are literally hundreds of thousands of technologies there that are claimed by different patents, you realize that expecting an implementer of the standard to preclear all of those claims on those technologies would take years or decades and would significantly postpone the implementation of the standard and defeats the purpose of standard-essential. So we want implementers to implement and then deal with the multitude of patents that they have to deal with. Now, once the implementer begins implementing the standard, he needs continued access to the technology, without which you’ll lose your investment and the standard and the standard-compliant devices and, of course, all the profits that might have been available.
And this is a critical point. At that point, the implementer is an alleged patent infringer. She has a potential liability to the patent holder. I say, “potential,” because there may well be a dispute about the validity and infringement questions. Or, in any patent infringement cases, I’m sure most of you know, approximately half of the litigated patents wind up being found not to be valid and infringed. In any event, the combination of the accrued liability and the lock-in by the implementer has a number of important implications.
One of the most important is that there cannot be a true market bargain in which both parties can walk away. Instead, what there is is a settlement of an actual or potential legal claim by the patent holder. License negotiations in this context are conducted in the shadow of litigation. They are, in substance, settlement of a legal claim. Now, hold-out, in this context, is just a fancy way of saying that sometimes the implementer of a standard has decided not to settle the dispute and, instead, to force the patent holder to litigate. In this respect, the implementer’s no different from any other alleged debtor who might be willing to settle -- unwilling to settle a legal dispute.
And the legal and policy issue is how to address the hold-out and hold-up problems. This specific issue, as Erik explained, focuses on the Biden administration’s reversal of the Trump administration’s reversal of the prior agency policies and the Biden administration embracing the notion that injunctions should rarely be available in disputes involving a standard-essential patent. And I think the Biden administration got it right. And let me explain why and the context of this hold-out argument. SEP holders voluntarily agree to license all of commerce. It’s a commitment made in order to be able to license the entire industry. The patent holder has no interest in actually barring any one from using the technology claimed by his patents.
Now, clearly, he has the right to exclude. If the patent holder wants to have -- be the only implementer of the technology, but that’s not what happens in the –standard-setting context when the patent holder has made a decision, “I want the whole industry to implement my technology.” So for him, a monetary remedy is plainly adequate. Under the law, under eBay, it is a matter of economics. But the patent holder does have an interest in using the threat of an injunction to extract an excessive royalty from the locked-in implementer. So far, no interest is served by letting the patent holder threaten to get an injunction.
But the critics say some of the implementers are not willing to negotiate a settlement in good faith, and the patent holder needs this threat of an injunction to bring them to the table. There are several problems with this argument. I’m going to mention just three. One, the SEP holder has a legal right to royalties. The implementer is a potential debtor. We generally rely on the threat of burdens from litigation to bring parties to the table to instead -- to settle a dispute instead of litigating.
There’s no empirical basis to think their hold-up is -- hold-out is a serious problem and certainly no empirical basis to pre-accept implementers differently from other potential debtors. Two, at most, implementers are only a small -- I’m sorry. Holding -- implementers who hold out in this way are, at most, only a small percentage of the allegedly infringing implementers. Only a small percentage play this catch-me-if-you-can strategy. Yet the remedy—let the SEP holders seek injunctions, even if the implementer is acting in good faith—permits the SEP holder to use that threat to extract excessive royalties from all implementers. The remedy does not fit the problem. It’s like penalizing everybody in the area because of bad conduct, [inaudible 00:20:27].
And third, even if catch-me-if-you-can concerns—which is what I think we’re talking about here—were well-founded, the injunction remedy is asymmetric. To get an injunction, the implementer is faced with the possible loss of everything. The threat of an injunction, therefore, gives a patent holder tremendous bargaining leverage in negotiating a settlement of the dispute. But, if they don’t agree and they go to court, the worst that can happen to the SEP holder is that he gets a reasonable royalty order ordered by the court, which is all he’s entitled to in the first place. So you have the possibility of the SEP holder getting what he’s entitled to versus the implementer getting nothing.
The effect is to skew the remedies to excess. If the hold-out problem were actually shown to be serious, the appropriate response would be a symmetrical alternative that induced settlement but did not skew royalties one way or the other. Here’s one possibility—a lot of problems with it, but you get an idea of what I mean by symmetric. Suppose you have a rule that said, “If the implementer does not act in good faith, the SEP holder gets in injunction. But, if a SEP holder does not act in good faith, by, for example, making plainly unreasonable patent demands, then the implementer gets a royalty-free license.” That would be symmetrical—sort of a baseball arbitration approach. There are other problems as well, but I’m going to stop there because I think my time’s up and turn it over to Richard.
Prof. Richard Epstein: I’m a little bit puzzled about what the nature and the direction of this particular debate was. If I heard it correctly, Dean, you were trying to talk about national security. Right?
Dean Reuter: Well, I think national security in terms of setting the stakes.
Prof. Richard Epstein: Okay. Well, then, let me --.
Dean Reuter: I think everybody’s, apparently, in agreement that innovation is important to the --
Prof. Richard Epstein: Yeah.
Dean Reuter: -- economy and to national security, so we’ve gotten there, so we can --.
Prof. Richard Epstein: Okay. Well, that’s great, but I have a slightly different view. I mean, I tend to, by and large, think that the system has worked pretty well as it was with the injunctions. And I think that, by and large, the notion that there was somehow rather huge degrees of exploitation, when you look at the cost of patents in a cell phone and so forth, are overstated. Alex Galetovic and Steve Haber have written, I think, pretty well on that. But I’d actually like to talk a little bit about the national security issue in a more direct fashion because I think it’s actually an extremely difficult one. I agree with everybody that trying to get the optimal system with respect to patent innovation is going to be something which will help the American position in so far as we have to deal with international markets, but that doesn’t tell us which of these solutions is right or wrong, and there’s nothing about the international focus of this debate which changes the kind of arguments that you would make if you were just doing this as a traditional debate in a national compass.
But when you’re starting to talk about the international area and national security, I think there is a really difficult kind of issue that I would like to elude to, and maybe it will come up again in the discussion, which is exactly what degree of freedom does an American patent holder of sensitive technology have with respect to those transactions that they wish to act in in international trade. As a general postulate, with respect to international trade, we’re all in favor of freedom of exchange, and we’re all aware of the fact that you can take national security and use it as an effective bar against genuine threats to this country or as an abusive practice designed to encourage various kinds of protective terror.
So I remember many years ago, when I was at Stanford, I attended a conference, which was run by the National Security Office, trying to figure out how it is that they were going to start to deal with the licensing question. And the major issue that they had with respect to this is that patented technologies would fall into the hands of the wrong people, who could then use it for the wrong purposes. This became an incredibly difficult problem because you then had to define which kinds of technology, those things that have military significance and which do not. And it turns out that the obvious thing is your next [inaudible 00:24:16], your jet pilot, and so forth. But if it has a chip which is faster than the military services than anything in the civilian services, there’s going to be a question if you’re going to allow that chip to be sold, even if it’s not part of a piece of military equipment, on the grounds that it could be installed by somebody else in a piece of military equipment and to work in that way.
And so, what happens is you get this enormous public apparatus trying to figure out what kinds of things you could give to what people. What makes this even difficult in the international context is all technologies turn out to be completely transferrable. And so, if you start to give something to a very good ally and they decide to sell it to somebody who’s not as good, it turns out, by indirection, you can arm your enemy—or somebody who’s not quite a reliable ally—with technologies that you would want them to bear. So I thought, when I signed on to this particular panel, what we were going to do is to try to figure out how it is that you deal with these things. Having listened several days to the way in which this went on, I came to the following conclusion: that the issue is very big, that the ability to find obvious cases in both directions was easy, but there was an enormous middle ground.
So the kinds of objections that you have is when Donald Trump, God bless his memory as a president, decides that we have to control the admission of aluminum sheet metal into the United States as a national security issue. You can see that’s an obvious abuse. You can see the same thing happening with respect to the licensing of American technology overseas. Now, to make things even more complicated is that there are other governments who specialize in stealing stuff from the United States. The espionage issue with respect to trade secrets, in particular, is an enormous difficulty. It’s part of intellectual property.
And we tend to be very strong in trying to make sure that foreign nations don’t do this. It’s also clear that any time we give any technology of any sort to the Chinese, they will always take it from the firm that you’ve given and use it as other kinds of breaches and systematic. So I think that this is a major kind of controversy. And so, all I’m going to say is I think, then, if we’re trying to talk about the national security issue, as such, what happens is we have to talk about the important national security exception to free trade and the very difficult way of its implementation. And I would say again, on the domestic debate where there’s obviously a disagreement between us, Scott and I have tended to be on the strong side, and God knows that Erik and Doug have tended to be on the other side.
But that debate is not going to change one way or another if we add an international element to it, whereas this other debate will, in fact, have some very important consequences, depending on how broadly or narrowly defined national security. Anyone who has spent, as I have, time at the Hoover Institution with all these generals and colonels and so forth floating around in the place realize that the military is a huge world unto itself and that it is only part of the national security system, which even extends beyond those rather capacious limits. So, as being somewhat a barren speaker, I think we’ll now open it up to comments or discussion.
Prof. Douglas Melamed: Can I ask Richard a question?
Prof. Richard Epstein: Go ahead.
Dean Reuter: Yeah, please. And before you do that -- before you do that, Doug, let me just remind the audience to use the Q&A function at the bottom of the screen if you have questions, if you want to join the conversation. But Professor Melamed, go ahead.
Prof. Douglas Melamed: Yeah. So, Richard, I think there’s no question that there’s some very difficult national security questions. We have a regime of export controls, but it’s very imperfect, as I’m sure you appreciate, probably better than I. But what I don’t understand is whether that’s just a technical problem that smart people should sit around the table and try to settle or whether you see that as -- I think you hinted at the end of your comments -- as somehow dividing the strong patent group—if I can use this as a shorthand—that you and Scott are in from the less strong patent group that Erik and I are in.
Prof. Richard Epstein: No, I don’t think it has anything to do with that dispute.
Prof. Douglas Melamed: Okay. Okay. Just wanted to make sure.
Prof. Richard Epstein: I think what happens is that it is an enormous dispute that we have to deal with, and, certainly, having sat in on one or two of these kinds of discussions in my life and having watched the way in which the national security exception has played out in free trade, generally, that the different definitions are going to have enormous consequences, that I think, in many cases, what happens is that national security, as it was done by Trump, under circumstances, becomes a rather thin reed for protectionist sorts of behavior, which I think we should all deplore. Whereas, in other cases, I think it’s enormously important that we make sure that these technologies do not move freely with respect to interstate commerce. And what impressed me most about all of this is, when I went to the debates, is that I realize that this sort of military exception subject is a huge qualification of a general principle and that, generally speaking, people who do economic work on this stuff tend not to focus on military weaponry and the like. And so, the treatments, if we tried, then you get a bit too sunny and optimistic. And this is from somebody who regards himself as a devout free trader. Right?
So I was just trying to say that I think intellectual property is, in many ways, more dangerous, in terms of international security stuff than particular thing because if you send a plane, it’s just one plane. If you send the plans to the plane, they can build an entire armada or fleet coming out of that stuff so that what intellectual property does is essentially amplifies the size of the dispute so that the value of the particular thing, in terms of market value of the patent, is not an accurate reflection of the kind of risk that it has when you start to deal with these international markets. And I really think that it’s the kind of question that people who are interested in patents and intellectual property have to focus on, but I don’t think the hold-out versus hold-up problem that we were talking about here has much to do with what I regard as the very, very high stakes. And, so, what I thought I would do is just sort of introduce that because I -- we’ve gone over these over items before.
So I’ll just ask all three of you, is there anything about this argument that starts to change when you throw national security into the issue? Because the obvious point is, if you got the optimal solution, the United States now has a bigger battalion. And bigger battalions are generally useful in war. So, then, we just go --.
Prof. F. Scott Kieff: Richard.
Prof. Richard Epstein: What?
Prof. F. Scott Kieff: Yeah, may I try to answer that for you?
Prof. Richard Epstein: Yeah, absolutely.
Prof. F. Scott Kieff: And again, obviously this is just one guy’s view, but I have spent time as a commissioner running a trade agency and as a senior executive in the defense intelligence community, and I have thought a lot about these interstitial, interfacing issues. And I really don’t pretend that I’m about to say anything brand new, but it is new to this particular discussion today, which is that I do think that the -- let’s call it to -- let’s use the Calabresi-Melamed language of property rule enforcement in this space. So let’s call it, “more robust remedies.” I do think that that can have a big effect, and the big effect can be in a way that significantly increases diversity in firm size in the market. So that is to say it increases the ability of small and medium-sized businesses to coexist alongside large businesses. That’s not a statement that big business is bad. It is a statement that only -- that a market that essentially precludes small and medium-sized business is bad. And what is worth noticing is that during the time when politically diverse administrations—Carter and Reagan, Democrat and Republican—advocated for the stronger property rule enforcement in this space, the more antitrust skeptical in approach.
That’s not zero antitrust but more limited antitrust. That was a time when, as you, Richard, correctly point out, Steve Haber and Alex Galetovic and others have shown no evidence of the kind of concerns that we all share but turned out not to find in the way the market evolved. We saw declining prices and lots of entry into the marketplace, which are both hugely inconsistent with hold-up. So, while hold-up is possible, it wasn’t happening in a way that was impacting the growth and diversity of the economy. And that diverse set of firms in the economy turns out to be really important for national security in two concrete ways. One, we, then, no longer are putting all of our eggs in one basket, so when our international competitors in the economic and military sense go to pilfer our baskets, they have to look in many more places to find many more things. And that’s because even standards, while they may be awesome, compete with each other.
There are multiple standards and multiple standards entering and exiting the market, as well as multiple standards contemporaneously in the market. So, yes, these patent things are, in fact, only of practical property value to the extent they give some power over price, but that’s not enough to simply say, “some power over price is, therefore, worth modulating and monitoring heavily through the antitrust system.”
Prof. Richard Epstein: Yeah, but you’re doing exactly -- you’re making the argument that I agree with, that the effort to cut back on the current system in the Biden administration is a mistake. But if that’s right, its right for domestic reasons are exactly the same as international reasons. Diversity and firm size really matters in both. And I happen to think that’s true, but I -- the question is, is there some independent concern that we have that we have to deal with on this subject? And I think that is much more an issue of international licensing. And sharing of technology is a very exclusive and direct feature for which the first debate doesn’t give us a lot of instruction. So the issue is to how you solve this last one.
I mean, just having done a little bit on this stuff, what I realize is it turns out -- whereas the injunction issue, you can think your way through it at the wholesale level. I’ve always said on that that the greatest blunder in history was the Calabresi and Melamed paper when it put the two things as opposite ends to one another, when the remedies have always been treated as compliments. And so, the right questions to figure out: how much do you install with an injunction, and when do you switch to damages rather than having it an all-or-nothing subject matter? That, I think, is okay. But this other thing, I don’t think you can solve this at the wholesale level. I think you have to solve it at the retail level—that is, somebody comes up with an airplane or a technology and so forth, and you have to make an independent review of the way in which it goes. And I would hope on those things that these political divisions would not matter.
Prof. F. Scott Kieff: Well, so -- but I’m curious. So I don’t want to pretend that invoking the phrase, “national security,” should drive the outcome in every case or in a debate that has shadows in other areas. But I would suggest that there are some concrete things we could do in this space, like provide courts and agencies as fora for adjudication of consequence inside the United States rather than forcing that to occur outside of the United States. That would, I think, significantly increase the comfort that both sides of the V have in disclosing all sorts of their trade secrets in order to litigate a patent case. And simultaneously, while the -- for example, the Chinese courts have become very professional and very fair as between Party A and B in adjudicating a dispute. They all work for a central military-civil-fusion-oriented state, where they are vacuuming up the trade secrets of A and B and depositing them with both the PLA military apparatus as well as commercial champions of the Chinese State. So that is a significant national security risk about how you structure enforcement in a global system and why you want to have stronger enforcement in our domestic system.
Prof. Richard Epstein: I agree with that 100 percent. I’m just curious what Erik thinks.
Prof. Douglas Melamed: Let me jump in, if I can. I want to say that -- personal thank you, Richard. I didn’t know I ever contributed anything that was number one on anybody’s list.
Prof. Richard Epstein: Well, I’ve said this to you before. This is not new.
Prof. Douglas Melamed: I want to emphasize what Richard said about the importance of what he called “retail solutions.” I think these high-level arguments -- for example, the Haber and Galetovic --.
Prof. Richard Epstein: Galetovic.
Prof. Douglas Melamed: Just a second. I have one of these motion things that turns the lights on or off.
The Haber-Galetovic work -- it doesn’t really prove anything for lots of reasons. Galetovic’s really flawed. It doesn’t even take into account cross-licenses and the like. And the Haber work -- the problem with that is, yes, it shows where the flourishing industry but doesn’t show how much more the industry would have flourished if the rules had been a little bit different. But what we need, therefore, is retail.
Whether we’re talking about an export control problem, an issue of IP theft in China, or an issue of policies towards standard-essential patents -- by the way, I don’t think either Erik or I is arguing for antitrust enforcement in this area. There are appropriate roles, but that’s not what this issue thus far is about. We’re talking about appropriate patent law, and we’re talking about it a retail level. How do you get the right incentive for the right patent royalties in the context in which you have a standard and an implementer? Or you want to turn -- or we could turn to the national security question and say, “Now, how do we protect intellectual property and the innovation in the United States from foreign threats?” But I think we have to get down to the weeds.
We can’t do it with these high-level metaphors or discussions of, “Oh, gee, industries flourished under Reagan and didn’t flourish under Carter,” because it’s, obviously, too many changes.
Prof. Richard Epstein: I disagree with that, and let me explain why. I think the importance of the Haber and Galetovic data and so forth is that you see this huge downward movement, which is not something that you would predict to the extent that you thought that hold-out and hold-ups were serious kinds of problems. And so, I think, an effect of treating the whole standard-essential patent issue is an issue, in and of itself, discussed the way we did it is perfectly appropriate. It is this concentrator between implementers and innovators and how we do it. And Kayvan Noroozi and I wrote an article on that. And we did not think it was necessary to go there.
But with respect to the technical stuff that Scott’s talking about, here you get a transponder, which allows you to figure out what incoming missiles are going to your airplane. And do you allow that to go over in what form to the Saudi Arabians, the Israelis, the Japanese, and so forth? I don’t see where there is a wholesale solution. And that was the thing that most impressed me when I went to these conferences is that every person who seemed to be in the room were trying to figure out what the standards were to figure out, “Well, there’s a trade-off. How much national security did we get by arming our allies? How much weakness do we get if they betray our secrets to a third party that’s hostile to us?” That’s a different kind of trade-off.
So I think they are relatively distinct issues. As I said, we can argue until the cows come down about how good the data is on the international stuff, but there’s nothing about the data set that we are dealing with on the standard essential patent system, which plays out differently because we have international trade. What Scott said is absolutely critical. Where you try these cases, who gets this side of information. I mean, to give you how serious it is, I once had a client, and the question was, “You have a very good technology for separating copper from dross. And would they license this to the Chinese?” And they said, “No.” I said, “Why not?” “Because, if we license to the Chinese, they’ll keep it, give it to all sorts of other firms, and never pay us a dime in royalties.”
I mean, so that’s a serious international problem because you don’t have reliable trading partners. And it’s a contract problem. And it’s a risk problem. And it’s even greater when you get to national security than you got with copper separation because the consequences are more [inaudible 00:41:10]. So that’s the way I understood Dean is facing the problem.
And I still don’t do it. I think, by the way -- we are peculiarly unable to solve the particular problems ourselves because we just don’t have the technology. My view is that the lawyers in this thing are sitting second fiddle in the thing, trying to correct people on technical stuff, but we’re not the decision-makers on this. We are the guardians of trying to organize the process so it gets more intelligent stuff. Anyhow, I should --.
Prof. Douglas Melamed: Richard, I had a different understanding—and maybe this is why we’re talking past each other—of Dean’s references to national security. I thought the concern went something like this: we’re facing countries, like China, that are subsidizing R&D and innovation, and we need to have cracker jack innovation policies in order to compete against them and preserve our preeminence as the technology center of the world. And I think that sounds fine so far. My answer would be, “Right. We need to find a system that optimizes incentives for patent holders, doesn’t exaggerate those incentives.” That is what I thought we were talking about here.
Prof. Richard Epstein: I mean, but that’s true, even if we didn’t have a Chinese competitor. We’d still want to have the best situation going on optimally. So I am trying to figure out, essentially, what is the international dimension on this. And you could add other situations—cross-licensing agreements, the interaction between TRIPS and this, international enforcement of general patents. One of the other things that Erik and Scott may know about is -- I gather it is now a practice of the Chinese to issue worldwide injunctions to prevent anybody else side of there, from dealing with this. And I think that has serious national security issues. And I don’t know that much --
Prof. F. Scott Kieff: Yeah, so --
Prof. Richard Epstein: -- what? Go ahead.
Prof. F. Scott Kieff: -- so to just build on that, so --
Dean Reuter: Scott, can I --
Prof. F. Scott Kieff: Yeah.
Dean Reuter: -- Scott, can I hit the pause button?
Let me just put one more question on the table here. As you respond to that, you can take this, if you like. And I don’t know if the panelists can see these questions. This one’s from Dr. JD Golub (sp). It’s a little bit long, but I’ll read it quickly. “Would not the overlay of national security defense and protection override or trump the patent protection that a domestic US patent owner would expect to have protected and enforced, especially where the product is injected into the stream of commerce of countries, such as China, Russia, Iran, etc.? Accordingly, is not the retail solution one in which the Executive Branch must interject itself and scrutinize international commerce and trade agreements? For example, US government intervention and prohibition of a merger or takeover of a US chip tech company by a Communist China-based company.” So, Scott, go ahead and say what you were going to say, and if you want to absorb that question, do so as well.
Prof. Richard Epstein: Exactly right.
Prof. F. Scott Kieff: Sure. I’ll try to integrate it. I mean, I think one of the things I want to try to highlight for the audience is the dynamic interaction among arguments about -- let’s call it, “patent validity,” “patent infringement,” “the scope of a remedy,” and then “the scope of antitrust, or regulatory, concerns about the remedy being too strong, conveying too much market power, or causing too much hold-up.” And I think it is a feature, not a flaw, of a professional adjudication system if it encourages those four topics to be on the table at the same time because then the so-called plaintiff in the case and the so-called defendant in the case each have countervailing, powerful pressures about the kind of arguments they’re going to make. And it disciplines the argument that each side makes. If the patentee says, “My claim, like a balloon, can be blown up and seen to cover the world,” that makes that claim very strong on offense and very weak on defense, subject to invalidity attack. That makes the remedy very powerful on offense and the antitrust risk very strong, as well, because it’s got lots of market power.
And that means that both the patentee and the alleged infringer know that they have these countervailing arguments -- sorry -- countervailing incentives to make less hyperbolic arguments. When you isolate out just the measure of damages or just infringement or just validity or just antitrust risk -- when you isolate out any one of these arguments, they become quite subject to two bad things: one, hyperbolic arguments by the advocates and, two, political responsiveness by the adjudicator. And so, I think it is, therefore, not an accident that in Europe and in the United States, the tribunals that litigate all four of these topics at the same time—like, for example, the courts in the US, the International Trade Commission in the US, the European Court of Justice in the EU—those tribunals come to these very middle-ground solutions about both hold-up and hold-out risks in the standard-essential patents space. And those middle grounds are nowhere near the highly politically responsive parts of the government in, for example, DG Competition or the Department of Justice Antitrust Division, or the Federal Trade Commission, all of which are designed structurally to be highly politically responsive, or the Patent Office, a core Executive Branch agency designed to be politically responsive.
Those are parts of the governments—plural—where you get these very hyperbolical arguments, and they’re very responsive to politics. But at the ITC and the ECJ, you get these approaches to standard-essential patents that look at the retail level, at the behavior of the parties in the negotiations, at the content of their offers and their counteroffers to see whether, in fact, there is negotiating. And I think that that kind of retailed, detailed professional focus on the advocates and the adjudicators is what’s going us a lot of traction here at both the “How do our economies grow?” question and “How do our economies stay safe?” question.
Prof. Douglas Melamed: I really appreciate that endorsement of the administrative state—the need for experts to resolve issues, rather than political agencies. But I must say, I think the particular application of that wise principle is flawed in some respects. I don’t know how you can say the ITC is less intended for political sensitivity than the FTC. They’re both independent agencies. And DOJ --.
Prof. F. Scott Kieff: Oh, but they’re structured radically differently. But I can answer that, if you like. Go ahead.
Prof. Douglas Melamed: Let me finish. But DOJ—where I had a lot of experience, both as a practitioner and as an official for some years—at least, until a few years ago, after the Nixon controversies, has really been apolitical. It was home-alone time when we were there. So I think the idea that that’s a political body like, for example, the Patent Office, which is a special industry sectoral regulator and, therefore, a subject of capture -- it just doesn't fit the facts. So like I said, it doesn’t fit the facts.
Dean Reuter: So let me -- yeah, I’ll go to you, Professor Hovenkamp, in just one second. I want to hear -- my understanding of ITC is it’s balanced, basically, left and right. And the chairmanship alternates in a way that forces -- but go ahead, Scott.
Prof. F. Scott Kieff: Yeah. I mean, it’s just a very different structure on purpose. It’s not an accident, and it’s not a small detail. Five commissioners with a majority in the President’s party and a chair removable and put in place by the President, that’s the FTC. That means a lot of political line up among the Executive in the White House, the chair at the Commission, and the majority voting with the chair at the Commission. At the ITC, it’s an even number of commissioners required by statute. The chair is required by statute to rotate person and party every two years, regardless of what the President wants. So that -- you get a radically different incentive structure inside the building. Rules, in fact, matter.
Dean Reuter: Professor, Hovenkamp, you had --.
Prof. Erik Hovenkamp: So I guess, first, I just want to make a general comment about the theme of the panel, which is that I agree with Richard that, when it comes to just international competition, that, really, most of the debate doesn’t seem to change at all. When it comes to other questions about national security, I just -- it’s hard for me to accept the idea that patent remedies would be the right policy lever to address some of these concerns about international security. So, to me, it’s not clear how we would factor that into litigation and individual cases, so I’m not sold on the idea that, without at least some intervention from the Executive Branch or something to guide us, that patent courts are the right parties to deal with that problem. I think that, when it comes to the agencies’ views and their constitution, that, ultimately, these policy statements are nonbinding—that we still have to just get to this same old debate about what we want to do when a patent owner wins a case. And I think, to me, it’s -- I just want to echo something that Doug mentioned earlier, which is that parties always negotiate in a shadow of litigation.
And therefore, if you have some remedy that is intended to be, perhaps, disciplinary—foreign cases of bad behavior by implementers—that will make a difference at the ex-ante licensing stage as well. But it need not be the most extreme remedy possible—an injunction. Okay? So I think the most obvious alternative would just be enhanced damages. We can already get treble damages in cases of willful infringement. That may not be exactly what folks who -- that what Richard and then Scott would like, but I do think that some increase in damages is capable of solving these problems in cases of severe misconduct without giving an injunction, which, again, is too strong. It’s too severe a remedy. And so, I guess, I’m -- that’s my take on the overall issues we’ve been discussing here.
Prof. Richard Epstein: Let me comment on both points. One of the things on the international dimension, which I think is extremely important, one of the notes in the chat raised the question of, “Do we allow foreign acquisitions of American technological companies by China or anybody else?” And that strikes me as being a very serious antitrust issue, to be sure, but even a more serious national security issue because the flow-through of information from one to the other and its transfer out of that means that either you stop this ex-ante because there’s no way you’re going to do it otherwise. So I think that’s a serious kind of issue that we have to face. And the general promerge of policy that I would take with true domestic corporations would differ in that case anywhere else.
On the other point, just very briefly, I think the objection I’ve always had to the Calabresi-Melamed argument is they treated the injunctions and the damages as strict alternatives. Whereas, in practice, they’ve always been complimentary. And so, if you just cut back a little bit on some of the injunctive relief—you deferred a little bit of time; you subjected it to conditions and so forth; you exempt from an existing stock; and then you supplemented with damages—it becomes much less clear whether that mixed solution is going to be better or worse than the pure damage solution escalated, as Erik said. I tend to think that that kind of a situation would be better. But again, that has nothing to do with the international debate, and what we’re doing is we’ve now isolated licensing agreements, sending over [inaudible 00:54:02] technology, adjudication in independent forms, merger policy, and so forth are at least three major areas in which we are going to have to confront the national security kind of issues, coupled with all the abuses by claiming national security for things that are unrelated to it.
And interestingly enough, material goods and intellectual property probably come out raising the same sort of conditions on the international debate, where the greater importance of the international -- of the intellectual property is its free replicability, so they could always use it on a mass scale, which is why, in many kinds of situations when you license intellectual properties, like Liszt and so forth, you always manage to limit the frequency of their use so as to make sure that the buyer does not get the same thing—you can’t sell a telephone service where you pay the same free for one -- fee for one telephone call as you do lifetime usage. And that’s the risk that you face if somebody can steal somebody’s trade secrets. So I do think they’re two separate debates, and I think it’s really important we do it. I think the intellectual property community has, generally, been relatively indifferent to one that’s very important. And Scott is an exception to this because he worked on the International Trade Board. Right?
Dean Reuter: Yeah. We’ve got about four minutes left. I think one minute each for a final statement as you think -- and we’re going to go in the same order we started in. As you think of that, I’m wondering about, as a novice, whether our entire system handicaps American businesses any way that leads to national security implications. And regardless of what you think about injunctions, does it create business uncertainty that leads to problems when you say, with regard to injunctions, “No,” “Yes,” “No,” Maybe yes in the future?” What are the implications of all that, if you want to address that in your closing minute? With that, Professor Hovenkamp, your thoughts.
Prof. Erik Hovenkamp: Certainly, it’s better not to waffle than waffle. It would be better if we, I think, stuck with the 2013 guidelines. But it is a complicated issue. I’m not surprised that there has been a bit of waffling. I think that, as with this panel, it almost always comes back to the same old debates that we’ve been having for a long time. And at some point, I think we need to really pick a side. So far, it seems like the courts are mainly in line with the view that Doug and I take, that injunctions should usually not be available. And I think probably private parties focus more on what courts are saying than what agencies are suggesting.
Dean Reuter: Professor Kieff.
Prof. F. Scott Kieff: I thank you, and I really appreciate everybody’s contributions from the audience as well as the panel and the Society for bringing us together. And we’ll just say that I think that it is not an accident that a politically diverse group of presidents and judges and thought leaders in our country over the last hundred years, from President Carter to President Reagan to Learned Hand to Giles Rich to Jerome Frank, have collectively spoken at exactly this patent antitrust interface on exactly the other side of the current fashion trend. And I think that they did so in good faith, and they did so correctly. Reasonable minds can disagree. We have two great reasonable minds on this panel who disagree. But just because it’s popular today doesn’t mean it’s right, and a very politically diverse group of very serious thinkers addressed exactly this question many times over the last hundred years and came out exactly the other way at times when our national security and national economy really needed it. And it really served our national security and our national economy both really well.
Dean Reuter: Professor Melamed, if you could, 60 seconds.
Prof. Douglas Melamed: Sure. Look. These really important issues, both national security and domestic economic interests, depend on optimal policies with respect to intellectual property—in fact, all kinds of property, antitrust, and everything else—clarity, certainty, clearly better than the opposite. But these are tough issues. If we agree on the objective, which is to maximize the ability of the patent system to contribute to economic advance, the useful arts, innovation and the like, then we have a serious of technical problems—what I think should be looked at as technical problems—where we’re searching for the optimal solution, not too little protection and incentive, not too much. And I think we’ll find enormous parallels between the optimal rules for intellectual property and the optimal rules for all sorts of property -- I mean to say all kinds of property.
Dean Reuter: Professor Epstein, 60 seconds.
Prof. Richard Epstein: Yeah. Taking up on that last situation, no question that the dominant rules respect the physical property has been the presumption award of an injunction in various kinds of nuisance cases, all with limitations at the edges, rather than damages with only occasional injunctions. I think that’s probably the correct type of solution in these circumstances. I also think that the question about how we deal with empirical stuff gives rise to a very interesting debate. My view about something is, if you don’t find any major sign of distress or breakdown, you don’t change a basic system. And so, when I see prices consistently dropping, I never asked a question that Professor Melamed asked, which is, “Would they drop even faster if we did my way?” I’m just happy to say, “Well, if I get a 15 percent decline annual in this stuff, I don’t want to go for 17 percent at the risk that I’ll turn this thing over on the opposite direction.”
So I think, in effect, the question is, “Do you follow the following maxim: ‘If it ain’t broken, don’t fix it.’” I am inclined to do so. And on the areas that I have worked in over the years, I have almost always discovered that the call for reform is far more powerful and potent if you can show a particular case in which something has really broken down. So you think of thalidomide or you think of some of these other cases with public health disasters. Intervention becoming, then, is much more credible. But I don’t believe, for the most part, that one should deviate from voluntary solutions that are created by contract in the absence of that kind of showing. And so, I will then hoist out my banner, saying freedom of contract tends to dominate, the exception, of course, being national security.
Dean Reuter: Well, thank you, all. I think it’s been a fascinating discussion. I appreciate your time. We’re a minute or two over, so thank you for your indulgence. I want to thank the audience, as well, for Zooming in, I guess, is the case. And a reminder to the audience to check your emails and monitor the website for our next upcoming event. But until that next event, we are adjoined.
Prof. Richard Epstein: Bye, bye.
Dean Reuter: Thank you very much for coming.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.