Boston University School of Law
Welcome and introduction: Dean Maureen O’Roarke
New clinic w/MIT—representing MIT students who need legal/IP help. Searching for an exec. director now—encourages applications.
Stacey Dogan: Meurer & James Besson’s book on patents: pointed out that patent lacked clear boundaries as real property has; making true owners costly/impossible to identify. This conference focuses on notice issues across IP topics.
Michael Meurer – Bargaining Failure and Failure to Bargain
Tom Brady was a victim of notice failure, according to the judge who overturned the suspension imposed by the NFL for Deflategate.
Wants to distinguish between bargaining failure and failure to bargain ex ante. In law & economics we think a lot about why people who have a dispute fail to do the efficient thing, which is stay out of the courtroom. Should we reform IP law to encourage early bargaining?
Betamax example: ex ante patent cross-license; developed Betamax machine; then ex post copyright litigation. Why not resolve the copyright dispute ex ante? Sony could have made commercial skipping difficult; omitted recording feature. Macrovision could have been introduced early on; introduced later. Not suggesting this would have maximized joint value, but just that there was no opportunity for bargaining early on. Maybe they could have avoided a standards war between VHS and Betamax; hastened pre-recorded movie market for sale or rental. Hollywood was cooperating with videodisc manufacturers at the time to make titles available.
Sony knew where to find Hollywood just as they knew where to find Matshusita or Philips. Why didn’t they go bargain with © owners as with patent owners? Network effects favor early and rapid growth of market share. Plaintiff side free rider problem might diminish threat of © lawsuit. It will take those guys a while to get their act together. Reason for © owners to wait and have someone else shoulder the burden of providing the “public good” of new law favorable to © owners. Defendant-side free rider problem too—Sony would rather wait for Matshusita etc.
Antecommons problem for Hollywood: several different parties could veto sale of Betamax; could recognize that Sony wouldn’t want to bargain one by one. Did execs believe Betamax would work, be accepted by consumers, and create a significant infringement problem? Early bargains are rare b/c © owners see lots of starry-eyed entrepreneurs who think they have the next big thing.
What changes in the law could have nudged parties toward early bargaining? [I’m still not clear on why we would want to do that, especially if ‘we’ are happy with the outcome of Sony, which did after all provide a public good. There are positive externalities as well as costs to litigation.] Antitrust safe harbor for joint litigation and settlement negotiation on either side? Adjust remedies to reward early bargaining? Private ordering: ASCAP for video.
Descriptively: what causes IP litigation? Bargaining failure; also failure to bargain ex ante. Bargaining failure results from three asymmetries: asymmetric stakes (most important factor in patents: pharma and generics—pure bargaining failure; not much failure to bargain, because notice is super clear and early bargaining is easy—under Hatch-Waxman); asymmetric information (law & econ people think this is where most of the action is in terms of causes of litigation: asymmetric knowledge of info relevant to validity, value, design-around cost); asymmetric process (credible threat to impose big costs on defendant).
Failure to bargain ex ante: hidden patents, design patents, trade dress. Do the parties find each other? Search by IP users—but there’s a numbers problem/strangers out there. IP owners may hide or publicize their rights; neither side necessarily has good info and either side could invest in search and possibly match. Old-style Lemelson submarine patents are still possible in the design patent context. In utility patents: can change language as a patent is pending. Trade dress: we don’t require registration to get TM rights. Secondary meaning requirement is some limit (for product design)—the law is imposing an obligation on rights owners to publicize their product with the associated trade dress. Rounded edges of smartphone would require secondary meaning—but not with design patent. TM pushes to the bargaining table by letting people know the counterpart exists, but not design patent. Patents & design patents have numbers problems. In patent lawsuits, about ¼ time, parties in dispute aren’t really in the same industry—strangers. Compare nuisance: your neighbors are the ones who will sue, not strangers. Numbers and low quality compound the other issues; discourages search intensity.
IP owners sometimes have incentives to publicize rights: If I want to be bought out by Cisco or Johnson & Johnson. Other patent owners have no technology as such, only a veto right. They want to use that veto right for post-investment decisions by IP users: the holdup problem. The related tactics lead them to hide their rights.
Preference for ex post bargaining: Sony, Disney, and Universal could have found each other. Failure to bargain wasn’t a failure to match.
If we understand the causes of IP litigation: standard models say that if the size of the stakes increase relative to litigation cost, you get more bargaining failure. If you instead think of failure to bargain, the reverse would be true. My incentive to search goes up if the stakes of litigation go up. Possible to look to see what kind of litigation we actually have.
Number of IP rights: as number of patents goes up, shouldn’t impact number of lawsuits per patent (bargaining failure) but increases failure to bargain.
Chose this topic b/c frustrated with tone of patent reform debate. Litigation explosion was not about trolls; explosion predates significant troll activity. Trolls are bad b/c raise tax caused by patent law/litigation. But even without them there’d be too much patent litigation. Bottom feeder trolls are mostly cases of bargaining failure. Chem/pharma: no explosion, not much failure to bargain. Other industries probably both bargaining failure and failure to bargain. So we should think about core patent form, not just procedural reform.
Normatively: need to convince you there’s a benefit to early bargaining; need incentives to bargain in good faith; incentive to publicize IP rights and ownership; incentive to search for IP rights and their owners. Compare what private parties do to what some social planner would do—do private decisionmakers fully internalize the gains & costs a social planner would recognize? Where there’s a divergence, may need intervention to encourage increased search/early bargaining.
Early bargaining: avoids holdup costs, especially w/r/t/ standard-setting organizations. Want to encourage intermediaries and aggregators to work with IP owners on © and TM. There’s no benefit from early bargaining to the IP owner who only wants to exclude. W/a bargain, also, each side only captures some of the benefit of the match—a double moral hazard that decreases the incentive to invest in search.
User: too much or too little search? Too much search through private pursuit of stronger bargaining position. Too little search is more common: innovator doesn’t appropriate full social value from joint creation (double moral hazard). So we need public investment to make search easier; transparency to make search easier; fewer IP rights—each IP right generates notice externalities: burden of greater future search costs on others.
Policy levers: make injunctions contingent; aggregator liability can be affected by law of indirect infringement/safe harbors; declaratory judgment
Keynote response, Honorable William G. Young, U.S. District Court, District of Massachusetts
Almost impossible to overstate importance of notice & study of notice. In the wake of Twombly/Iqbal, problems of notice are vitally important.
Bargaining in good faith is good, but it is not a good. He would consider antitrust more of a problem in this area. If you think you can get safe harbors, Congress will be the entity to do that after Actavis. Maybe we ought to take more account of innocent infringement. Academics have the right and duty to express views about what the law should be. However, must also keep in mind that jurors and judges rely on the parties to give them the facts.
Calibrating remedies to bargaining/penalizing those who reject early bargains—opposed to that as a policy matter. Cost and delay are the real problems of adjudication today—including mediation, and TTAB, and PTAB, and all our other ways to resolve disputes. Don’t build in anything to make it worse, like a bargaining component. Requiring bargains also is destructive of personal/property rights: if he doesn’t have to bargain, he can choose not to do so.
Need nuanced view of litigation—not as ultimately leading to trials, appeals. In 38 years as a judge, we have utterly deconstructed the role of the trial judge and turned his role into an administrator of dispute resolution. The institutional judiciary is not much interested in trials.
Bargaining is good, but bargaining is itself not evidence of good faith. Bargaining to what end?
1/3 of pending cases are subject to multidistrict litigation orders, like a roach motel. Cases go in but none come out. The system overemphasizes settling. If you’re never going to get actual legal review, bargaining takes on a whole different context and economic power tends to predominate.
Mark Lemley: Meurer seems to be of the view that it’s better to seek permission than forgiveness, but the adage is the reverse for a reason. Suppose we had in fact had ex ante bargaining with © and Sony: we would never have had a VCR with a record button. The evidence comes from subsequent contexts with ex ante bargaining w/Hollywood for new digital music/video services. They all fail. The only ones that succeed launch first and resolve disputes after. His preferred framework seems to presuppose both a legitimate number and scope of rights, and that’s not the world we live in for either © or patent. To say “bargain” puts the cart before the horse; efficient ex ante bargaining requires reasonable number and scope. In second-best world we might not be best off encouraging bargaining ex ante.
Meurer: fair points. I was being an economist and assuming that rational people would bargain. But optimistic that people if they do meet early will often find ways to create value. Despite what Valenti said, Hollywood was already seeing the viability of getting titles onto videodisc; might have found it mutually beneficial to speed the tech. But we might not have gotten the record button initially; somehow that would come along. (RT: Through someone acting and then waiting to be sued, I take it?) Consumers would want to make copies of their wedding videos.
Oren Bracha: One kind of notice failure is whether something is w/in patent entitlement; another kind is whether there is an IP right or whether there’s an owner. Betamax is about notice failure about the law. Not a matching problem. Other examples are about both legal entitlement and more factual details. Another positive externality that we lose if we push people to bargain is that a court of law tells us what the law is! W/o Sony we wouldn’t have a record button, and we also wouldn’t have Sony v. Universal’s rule.
Meurer: Yes, I acknowledge there are tradeoffs, and law is a public good. It’s underprovided b/c it’s a public good; yes, I am advocating further discouraging some of that. Maybe it wouldn’t have been so bad, given that Euro. jurisdictions were also litigating the issue. Euro. courts found that the Betamax was infringing, so be mindful of that. In the American arena particularly, we should have less litigation/earlier bargaining. (And deprive the world of the American example?)
Notice means many different things in the law. Failure to bargain/bargaining failure as distinct varieties.
Wendy Gordon: many property rights have conditions. Why not have a condition that the right be exercised in a socially beneficial way, which might include a bargaining requirement if we so decided?
Judge Young: true, he was trying to characterize what he understands as our system.
Bob Bone: Having a bit of trouble distinguishing bargaining failure and failure to bargain. Understands the matching problem—but once I find a match, there are reasons I might have not to bargain with a party, or not to reach an agreement when we’re at the table, and he’s not sure there are differences between them. Trolls are a special problem; we handle it as a targeted issue. Then, it’s not clear that it’s more efficient to tinker to create search incentives ex ante versus allowing ex post rights assertion. If it’s more efficient to have ex ante search, that will be so contingent on context he’s not sure we can say general things about it.
Meurer: He’s working on the generalities issue. When I’m sued, I know I’ve matched. Bargaining failure thus involves no matching problem. But matching is a pervasive problem in patent law, predating the appearance of trolls.