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Monday, March 5, 2012

Gugliuzza on Creation Without Restraint

Posted by Paul Gugliuzza

Introduction

In their thoughtful and engaging book, Creation without Restraint, Christina Bohannan and Herbert Hovenkamp seek to reorient intellectual property law to its core purpose—promoting innovation. They define the concept of innovation broadly, as “human idea[s] that add[] something important to what we already have” (p. ix). To encourage these new ideas, they offer an extensive list of proposals to reform patent and copyright law, many of which make good sense. The centerpiece of their agenda is an “IP injury” requirement. This proposal draws upon the well-known antitrust injury requirement, which requires a Sherman Act plaintiff to prove not just any injury, but an injury of the type the antitrust laws were intended to prevent—that is, injury from a loss of competition. Similarly, the IP injury requirement would require an infringement plaintiff to prove an injury consistent with the purpose of the patent and copyright laws—that is, an injury to the ex ante incentive to innovate (p. 51).

As I discuss in the first section below, this sensible approach could easily be imported into our current legal regime and, in fact, is actually reflected in recent Supreme Court decisions in the field of patent law. I then consider two limitations on the promise of an IP injury requirement. First, I contemplate whether the requirement would help courts resolve the most vexing problems in patent law today, such as the scope of patentable subject matter. And, second, I consider whether the institutional structure of the patent system—particularly the presence of the Federal Circuit—might impede the reformative capability of the IP injury requirement.

Justifying the IP Injury Requirement

You need not be an intellectual property scholar to know that IP laws are in crisis. The crisis in patent law has inspired dozens of books, exponentially more news stories, and even an episode of NPR’s This American Life. Things are apparently so bad Congress could agree that patent reform was needed; it passed the America Invents Act. On the copyright side, as Bohannan and Hovenkamp explain (ch. 6), the primary concern is interest-group capture. In particular, capture of the legislative process by content owners (e.g., movie studios and record companies) at the expense of users (e.g., consumers, educators, and other artists).

The authors propose to solve many of these problems by requiring infringement plaintiffs to show, as part of their claim, that their ex ante incentive to innovate has been reduced (pp. 58-59). As a matter of existing law, it would be easy to justify this IP injury requirement. Much easier, in fact, than the antitrust injury requirement is to justify under the Sherman Act (p. 50). The Constitution explicitly tells us the purpose of the patent and copyright laws: “To promote the Progress of Science and useful Arts.” In other words, to promote innovation. The Sherman Act, by contrast, says little about its broader purpose. Section 1, for example, simply prohibits “contract[s] . . . in restraint of trade.” And Congress passed the Sherman Act under its constitutional power to “regulate Commerce . . . among the several States,” which tells us little about the purpose of laws passed pursuant to that power. Nevertheless, the Supreme Court has, since 1976, required private antitrust plaintiffs to prove that their claimed injury stemmed from lost competition.

Not only does the Constitution provide a justification for an IP injury requirement, the federal patent and copyright statutes are built for purposive interpretation. Although recent legislation has added considerable length and complexity to both statutes (see p. 44), relatively sparse provisions govern the core requirements of patentability: patentable subject matter (§ 101), novelty (§ 102), nonobviousness (§ 103(a)), and sufficient disclosure (§ 112 ¶ 1). And while statutes like the Digital Millennium Copyright Act contain important and detailed provisions, relatively malleable concepts like fair use provide courts with significant interpretative leeway in copyright cases.

In the field of patent law at least, some of the Supreme Court’s recent decisions already reflect the innovation-focused approach that Bohannan and Hovenkamp urge. For example, in KSR v. Teleflex, the Court rejected the Federal Circuit’s rigid teaching, suggestion, or motivation test for obviousness, and instead emphasized the importance of non-patent incentives—particularly market incentives—as a spur to innovation. In addition to KSR, Supreme Court decisions curtailing the availability of injunctive relief (eBay v. MercExchange) and expanding the grounds for standing to bring a declaratory judgment action (MedImmune v. Genentech), can be read to reflect concerns about whether the law is sufficiently protecting ex ante incentives to innovate (see pp. 63, 78-79).

IP Injury and Hard Cases

In the areas where the insights of an IP injury approach have taken hold, the innovation consequences of the legal rules seem relatively clear. For example, eBay limited the ability of non-practicing entities (pejoratively, “patent trolls”) to obtain injunctions. This rule should benefit innovation because it ensures that innovative products that lack competitive substitutes will generally remain on the market, even if they infringe. But, as Bohannan and Hovenkamp recognize (see, e.g., ch. 9), innovation effects are not always so easy to predict or measure. Consider some examples from perhaps the most contentious area of patent law today: patentable subject matter under § 101 of the Patent Act. The IP injury approach can no doubt provide useful guidance in some § 101 cases. For example, as Bohannan and Hovenkamp show (pp. 118-19), the Supreme Court’s decision in Bilski can be understood through the lens of IP injury. The patent in that case claimed a generic method of hedging commodity price fluctuation risk that could have applied in any industry. As a consequence, the patent had poorly defined boundaries. The lack of notice provided by such vague boundaries makes it difficult for potential market entrants to judge whether they infringe and enables patent holders to spring infringement suits on unsuspecting innovators (pp. 129-30). All of this uncertainty reduces ex ante incentives for innovation and discourages market entry. But innovation consequences become more complex outside the realm of abstract business method patents. Take, for example, the Mayo v. Prometheus case that is currently pending before the Supreme Court. The patent in that case claims a method of (1) administering a certain drug to persons with gastrointestinal disorders and (2) determining whether, based on observed metabolite levels, the dose is too small or too large for effective treatment. Does allowing such a patent harm incentives to innovate? Unlike the patent in Bilski, the boundaries of the patent in Prometheus are fairly clear. The potential problem with the Prometheus patent is its breadth. It claims, on the defendant’s reading of the patent at least, all mental observations of a natural phenomenon: the biological correlation between metabolite levels and patient health. Such a broad patent might hinder further improvements upon the basic principles claimed in the patent. On the other hand, personalized medicine is an emerging field. Invalidation of patents like Prometheus’s might make commercialization more difficult, and thereby deter further innovation.

None of this is to say that the basic idea of an IP injury requirement is flawed. In fact, the authors acknowledge the difficulty in constructing metrics and predictors of innovation (see, e.g., p. 242). But the limitation of the IP injury requirement in hard cases highlights the need for future work that refines the authors’ proposal so as to aid courts in solving the most vexing problems in patent law.

IP Injury in the Federal Circuit Putting aside the difficulties patent courts might have in measuring and predicting innovation effects, the institutional structure of the patent system could also present a barrier to the explicit adoption of the authors’ proposals for reform. As Bohannan and Hovenkamp explain, antitrust law once faced its own crisis. By the early 1970s, the Supreme Court, largely at the behest of the executive branch, had condemned various practices that would today be considered pro-competitive (or at least competitively neutral), such as tying arrangements by firms with no market power (pp. 35-37). As the authors explain, the movement toward a competition-protective antitrust law began in academic literature, and then moved into the courts (pp. 37-39). This revolution took hold because of two important and related characteristics of the field of antitrust. First, increasingly sophisticated economic analyses created a broad degree of consensus among scholars, judges, and politicians that antitrust law should be reoriented to focus on protecting competition (p. 38). And, second, this consensus became ensconced in the case law because antitrust law remained largely free from special interest influence (p. 44). This analysis raises an important question for those who would like to see patent law refocus on its core purpose of promoting innovation: Does the institutional structure of the patent system facilitate a judicial approach that explicitly focuses on innovation consequences? As Bohannan and Hovenkamp show, the IP laws have been heavily influenced by special interests. As I have argued elsewhere, one effect of this influence was the creation of the Federal Circuit in 1982. This centralized court for patent appeals has been relatively protective of the validity of patents (see p. 61). The result of adopting many of Bohannan and Hovenkamp’s proposals, however, would be a system with fewer patents being issued and a weakened bundle of accompanying rights. Moreover, an approach to patent law that requires explicit consideration of innovation concerns will likely meet the usual objection from some Federal Circuit judges that “policy” is irrelevant to their work. And the Federal Circuit highly values its prestigious and nearly exclusive jurisdiction over patent cases, so it seems unlikely the court would embrace an approach that may lessen the importance of patent rights.

Of course, like the antitrust revolution, a spur to reforming patent law could come from outside the court system. But it is not immediately clear who could provide that impetus. In antitrust law, the executive branch wields a great deal of influence through the enforcement powers of the Federal Trade Commission and the Department of Justice. In comparison, the agency charged with administering the Patent Act, the Patent and Trademark Office, is relatively weak. It lacks substantive rulemaking authority in most areas, and the Federal Circuit has refused to give most of its decisions the deference commonly afforded to other administrative agencies.

The best audience for Bohannan and Hovenkamp’s thoughtful proposals might actually be the Office of the Solicitor General. As John Duffy has shown, the Solicitor General has had enormous influence over the Supreme Court’s patent decisions throughout the last decade, with the Supreme Court adopting the Solicitor General’s views on the merits in nearly every case. Moreover, many recent Supreme Court cases have involved core issues of patent law (e.g., patentability (Prometheus, Bilski, KSR), infringement (Festo), and remedies (eBay)), and similar cases in the future would permit the Solicitor General to argue that harm to innovation incentives is a definitional aspect of an infringement claim. For example, in an appropriate case, the Solicitor General might urge the Court to adopt Bohannan and Hovenkamp’s proposal to limit damages for infringement when the patent holder is unlikely to enter a market (p. 56). Such a holding would dramatically change the patent litigation system, and the Office of the Solicitor General may be the only entity with sufficient credibility to advance such a pathbreaking approach. Again, the potential institutional barriers to reimagining patent law do not undermine the authors’ basic thesis: that there needs to be a closer nexus between patent law and its constitutional purpose. I highlight these possible obstacles simply to advance a conversation about how we might operationalize the authors’ thoughtful reform agenda.

Conclusion

Can the crisis in IP law be solved? Bohannan and Hovenkamp certainly think so, and adopting some of their eminently reasonable proposals would be a good step. Without a doubt, change is afoot. Consider, for example, the widespread outrage over the Stop Online Piracy Act (SOPA) and the Protect IP Act—a surprising and crushing legislative defeat for IP owners, who had controlled the legislative process for a decade or more (see ch. 6). Consider also the American Invents Act. While this new statute likely will not solve all of patent law’s problems, it increases the rights of third parties to challenge patents at the PTO, an important aspect of Bohannan and Hovenkamp’s roadmap for reform (p. 397). And, as discussed above, the Supreme Court has recently taken an active role in realigning patent law with its innovation-promoting purpose. If Congress and the Supreme Court find a sustained interest in IP law, we should hope that they continue to embrace ideas proposed in Creation without Restraint.

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