What Ifs? Keynote storyteller

Mark A. Lemley, Stanford, Ignoring Patents

2.5 million patents have issued in the last 20 years, over 1/3 of the total number issued in US history. Many are in the information industries. And these are component industries: to make and sell things, you have to put together a bunch of components. The patents generate royalty stacking and holdup concerns, not just in theory but in practice. Microsoft owes 1.2 billion for one invention used in Windows, $500 million for another. Then add in willful infringement and treble damages, as well as the outrageous cost of patent litigation -- $4.5 million to pay your lawyers, win or lose.

And yet – the anticommons hasn’t disabled any of these industries. People are running their businesses notwithstanding the patent shadow.
Why? Because people ignore patents all the time, especially in component industries. This may not be true in the pharmaceutical industry, but he’ll talk about that in a bit.

Scientists, engineers, software writers don’t read patents to gather information. Even if they thought it was a good idea, the business and legal types are telling engineers: whatever you do, don’t read patents. Don’t put us on notice.

Similarly, companies don’t engage in prior art searches before filing for patents or before making products. Not surprisingly, once that happens, they get threat letters. The received wisdom in Silicon Valley is that you always ignore the first threat letter you get. Sometimes they go away. Only if they’re serious do you start evaluating.

When you’re sued for patent infringement, you never stop making the product pending the outcome of the litigation. You always roll the dice, even if you’re also trying to design around the patent just in case. The Blackberry is an example of this, settling for $613 million rather than implementing a workaround.

What if we took seriously the idea that patents are just like real property? Nobody would build a house without being sure they owned the land. If it were a shopping mall and needed to aggregate land to create it, you wouldn’t start building in the hopes that you wouldn’t get sued or the plaintiff would turn out to have a defect in title. Even if you did, no one would loan you the money to do so. In real property, we’ve got to be sure, at least to a high degree of certainty.

Analogously, Intel couldn’t design a new chip until it had cleared all the possible rights. You’d need patent title insurers who’d spring up to clear the rights. In the university setting, scientists would investigate patents before starting research.

Lemley thinks this would be a disaster. The benefits: patent owners would get paid more. The subset of patent owners in competition with accused infringers, and who want to use patents to exclude competitors, would benefit tremendously. Filing a lawsuit would deter people from entering the market.

Research and product sales would be delayed by years, even decades, in every industry. Cost would be the least of the problems – patent applications may be sought, or may have claims that differ when they’re issued. And because of continuations, you can’t identify all the claims until 20 years after the filing date. Even once you’ve identified a patent owner, you don’t know what the patent covers. 46% of patents litigated to judgment are ultimately held invalid. Given the 40% reversal rate on Markman hearings, you don’t know what a patent means until after Federal Circuit review. And there are many, many patents out there. Third-generation wireless – one bit of your cellphone – is covered by nearly 7000 “essential” (self-identified) patents.

This is more than a problem of layering. If I must buy and aggregate rights from a bunch of people, we can’t expect those individuals will set an efficient systemwide price. If one voluntarily reduces price, others will charge more and they’ll be the suckers. This creates a real risk of bargaining breakdown. The real property rule presupposes the absence of bargaining breakdown.

Systemic problems: consumers would lose the benefits of competition, in situations where the patent would be held invalid or not infringed. And patentees only win 25% of their litigated cases – 75% of the time you’re sued, you’re right to refuse to pay. And that helps consumers get the benefit of the product during the period when the patent’s validity and scope are uncertain. Competitors and innovators generally would lose the benefits of going ahead without waiting for approval from patent owners. Design-around efforts would wither. If competition is a better spur to innovation than monopoly, then we’d lose out in innovation as well.

In the pharmaceutical industry, we have a world in which patent owners all neatly list their patents in one place, the Orange Book. The FDA and Hatch-Waxman rules restrict generic entry when there is an Orange Book entry. If you certify that you don’t infringe or the patent is invalid, the patent owner can sue you and get an automatic 30-month injunction. Even after those expire, as they’ve started to do, generic companies are mostly afraid to enter at risk. They act like real property owners.

Does this system work? Pharma is different – Lemley thinks we need stronger patent rights because of the cost and delay of the regulatory environment needed to guarantee safe and efficient drugs. So the benefits are a lot stronger in pharma. Correspondingly, the cumulative innovation that drives software and semiconductors is a lot less important. Discovering a new blockbuster is correspondingly more valuable than improving on the dosage system of that blockbuster. Moreover, there are fewer patents – by orders of magnitude – in the industry, and the claims are a lot clearer. Chemical patents don’t have huge Markman problems the way other patents do, for example when they specify the high-level functional characteristics of a computer program.

Nonetheless, there are problems even in pharma: Evergreening – listing as many patents as possible on the Orange Book, even if they’re obviously bogus or unrelated to the underlying drug. Product-hopping to game the FDA approval system – changing products just as a generic is about to enter the market. Exclusion payments: paying generic competitors to stay out. The result is surprisingly little generic entry while patents are in force and even a number of years after the original patent expires.

Second what-if: What if we wanted to create a robust market for patent license, which wasn’t the current “ignore patents” world but also wasn’t the sclerotic world of land rights? That would require really radical changes to solve the problem of uncertainty early on in the development process. Requirements: much better review of applications, which would have costs of its own; early publication, possibly on the date of application; ban continuations; allow post-grant oppositions; other mechanisms for collecting information before a lawsuit began; a prior user or independent invention defense, since we shouldn’t make people buy rights for things they’ve already invented, or at least change the rules for willfulness when people look at patents; and change remedies to limit the holdup problem – ban injunctions and make royalties reasonable in line with the actual technical contribution of the patent. Only in those circumstances should you make people enter into search and negotiations before they developed new products.

My Q: This sounds like the trademark system, except for the prior user part and the remedies.

Lemley: Yes, it sounds similar, but the market for patents he’s interested in imagining would be fundamentally different – he doesn’t want a market for licensing trademarks because that would cause consumer confusion. (Though Lemley doesn’t believe in licensing rights for TMs generally, at least not for communicative/secondary products.)

Q: What about penalties for wrongly putting a patent in the Orange Book?

A: We might see fewer evergreening problems.

Q: Are there industries in the middle ground between IT and pharma?

A: We need more research! Biotech may be different from classic chemicals, though his guess is that it’s close because of the FDA regulatory background.

Q: Would more third-party involvement help?

A: Interpleader might be helpful – if we could bring all the patent owners together, that might help solve problems and make clear that a single inventor’s claim for “just 1%” of royalties would quickly make a product like a cellphone noneconomic. The difficulty would be patent applications in the pipeline.

Q: When you sit down to create something artistic, you ignore copyright because you assume you’re making an independent creation (wow, this questioner’s experience of creation is very different from mine), so copyright is a good comparison for ignoring patents. In a world with a de facto independent invention defense, do we get all the results you want? Can you have a property right with injunctive remedies and still do well for efficiency?

A: He’s not necessarily advocating independent invention as a defense. Rather, if you wanted to move to a market model, this would be one of the requirements. Copying is difficult to prove or disprove. With copyright, we can usually distinguish between people who copied, though they say they didn’t, and people who didn’t copy. That’s much harder when it comes to a DNA sequence or other more basic concept, like a cheese slicer with a wire that works with a slicer. (I’m not convinced by Lemley’s distinction – the rule works pretty badly in music copyright, especially given that copyright recognizes “unconscious copying” as sufficient.)

Q: What about the potential that people are both plaintiffs and defendants?

A: True for the big guys, who don’t sue each other – enter into cross-licensing or just leave each other alone on a mutually assured destruction theory. Non-practicing entities (e.g., patent trolls) have nothing to lose from Intel’s 10,000 patents. They account for a substantial number of the cases that are actually filed.

Q: Would liability rules mean people would still ignore patents?

A: It’s a system design question. We could still create incentives for people to do deals outside the legal system instead of inside. But perhaps patent challenges are undersupplied – a property system could heighten this problem. If we really had a market system, he’d want a search obligation and an obligation of entering into good-faith negotiations. If you don’t do that, you should pay penalties, but if you do, you should be able to take your chances if you conclude that the patent is invalid or the price too high and not be penalized.

Q: Are patents for outsiders worth it?

A: Intel and others might tell you that they’d be happy with unilateral patent disarmament. But patents might still encourage innovation by people who can’t get into the market, e.g., for chip design. The problem now is that the legitimate small-inventor patent gets lumped in with the general “ignore patents” trend. Also, major companies get a return from innovation because their patent portfolios entitle them to participate in industry oligopolies – though that might not be necessary.

Q: This is a caricature of property law. Every issue beyond 7-8 core cases involves substantial indeterminacy within property law. Everything from adverse possession to easements to equitable servitudes – you don’t know what the answer is until the judge rules. When you step outside the commercial context, indivdual landowners are less likely to review all necessary rights – banks give conditional loans even when people discover easements on their lands. Trespass may be determinate, but not the rest of the property law.

A: Agrees that there is indeterminacy; this is why we can spend a year teaching property. But there is not the same level of indeterminacy in the average real property case. It’s not the case that 46% of real property deeds are invalidated. It’s not the case that people always fight over the boundaries of real property, as they do in every case after Markman. Add to that the hundreds to thousands of potential claimants in patent, which is unusual in real property. It’s true that individuals don’t read their title insurance or loan documents. But the banks generally do, and that’s why there’s title insurance.