Monday, March 5, 2012

Mark Patterson on Creation Without Restraint

Posted by Mark Patterson

Christina Bohannan and Herbert Hovenkamp’s proposals for the reform of IP law are radical yet compelling. Although the proposals would dramatically remake the law, they have an air of, if not quite inevitability, at least common sense. They seem sensible in part, no doubt, because IP law offers so much room for improvement, but they do so also because the authors present them so clearly and convincingly.

I will consider here their proposal that IP owners be required to present proof of harm to innovation in infringement suits. Something similar to this proposal, I suggest, could be implemented through avenues that are currently available in patent law (and I will focus here on patent law, though some of my comments apply to copyright, too). This sort of tweaking of current law is the approach that the authors recommend in much of the book, but they propose a new rule in this instance. Comparing their proposal and the currently available alternatives offers the opportunity to consider how we view the goals of patent law.

Proof of Harm

The authors argue that we should allow remedies for infringement only in markets where “an innovator would rely on those royalties in deciding whether to create a work.” Andreas Heinemann and I, and perhaps others, have made similar proposals. See Andreas Heinemann, “Compulsory Licences and Product Integration in European Competition Law –Assessment of the European Commission’s Microsoft Decision,” International Review of Intellectual Property and Competition Law, vol. 36, p. 63 (2005); Mark R. Patterson, “Intellectual Property and Sources of Market Power,” in Inge Govaere and Hanns Ullrich, eds., Intellectual Property, Market Power and the Public Interest (2008).

It is not entirely clear whether the authors mean this standard to be applied on a case-by-case basis or whether they anticipate that the courts would develop general rules of thumb, perhaps based on market relationships. Some of the discussion suggests that the authors are proposing that each individual IP owner bringing an infringement suit should be required to show that the particular loss caused by the alleged infringement was relevant to its innovation incentives. A similar approach was proposed in the EC’s Article 82 Discussion Paper for evaluating refusals to deal in IP, but it seems problematic. On the one hand, it is not clear that an IP owner would typically have evidence regarding which markets it considered in making its innovation investments. On the other, there might be circumstances in which an IP owner did not anticipate profits in a market, but where profits should be awarded, perhaps because of possible future incentive effects.

Alternatively, the authors might be proposing a more categorical test, as suggested by their statement that litigation of this issue would “provide information about the kinds of infringements that actually diminish IP holders’ investment expectations.” Development of that sort of information could establish general rules about which markets IP owners are entitled to profit in. This would be more consistent with the antitrust injury requirement, from which the authors take their inspiration here, which is a test that generally turns on competitive relationships and is often (probably too often) decided with little factual development. It is possible, then, that the harm test could involve less emphasis on a patentee’s actual incentives and more, perhaps, on generalizations based on market relationships.

Depending on the particular form it would take, the proof-of-harm test could resemble some aspects of current patent law. For example, the “scope of the patent” test applied in the law of patent misuse for determining where patentees are entitled to seek profits, though it is typically understood to focus on the patent’s claims, would probably be related to the anticipated profits of the patentee. Patent damages rules are also likely related to the patentee’s incentives. Georgia-Pacific, for example, allows courts to limit the patentee’s damages based on “[t]he portion of the realizable profit that should be credited to the invention.” And Grain Processing allows courts to limit damages if alternatives to the patented invention were available, or even potentially available, to the infringer. In either case, if the patentee is seeking profits that do not derive specifically from its invention, the patentee probably did not, or should not have, relied on those profits in making its investment decisions.

Balancing Costs and Benefits

Whether IP law would best be brought under control by adopting a new requirement of proof of harm, as the authors propose, or by invigorating the misuse doctrine or damages rules is difficult to say. The answer may turn on what we want IP law to do. The analogy to antitrust law that the authors draw in advancing their proof-of-harm proposal is an imperfect one. In antitrust, we believe, or at least the law assumes, that a court can balance procompetitive and anticompetitive effects and reach the right answer. In contrast, intellectual property does not claim to be striking a balance in any particular case. Instead, it applies general rules, like twenty years of patent protection, and is content with hoping those rules approximate the right result on average.

That does not mean, of course, that IP law could not try to strike the right balance in individual cases, and the proof-of-harm proposal could be a step in that direction. But to adopt that proposal would be to make a very dramatic change in IP law. Moreover, it is not clear that it is worth it. So long as IP law is defined largely by arbitrary rules, efforts to achieve greater accuracy in particular areas might not provide sufficient marginal benefit to justify their additional costs. On the other hand, perhaps the benefits of the proof-of-harm rule would be exactly the corrective that is needed to fix the mismatches between rewards and investment that are created by patent law’s rough approximations.

So what do we want from patent law, and how do we achieve it? The general principle behind the proof-of-harm proposal seems exactly right. As the authors argue convincingly, we should be directing much more attention to matching IP remedies to the goal of creating incentives. Their proposal raises the question of how we should implement that goal. Should it be done through a general rule, like misuse, which focuses on claim scope or market relationships? Or should it be done through damages rules, which focus on product characteristics and alternatives? Or, as the authors propose, should it focus directly on incentive effects? And which is the right stage of litigation to address the issue: in proof of liability for infringement, in proof of damages after infringement has been found, or in a misuse defense? Finally, would implementing the proposal with existing rules be successful, or is adoption of a new rule necessary to focus courts on the issue? By bringing these issues to the fore, the authors have contributed greatly to intellectual property law.

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