OF PATENTS AND COBRAS:
CHANGING THE INCENTIVE STRUCTURE OF PATENT LAW
Katya Assaf*
ABSTRACT
Patent law provides the inventors of new, non-obvious, and useful technologies with
time-limited exclusive rights over their inventions. The idea behind this protection is
creating an incentive to innovate. The prospect of a profit associated with market
exclusivity is supposed to encourage private entities to contribute to technological
progress and development, thereby enriching our society. The Patent and Trademark
Office (PTO) examines patent applications and decides whether the inventions in
question fulfil the patentability criteria.
Yet, today the patent system does not seem to function as expected. The PTO
examination exhibits high error rates, so that at least half of the issued patents turn out to
be invalid in courts. In some fields of technology, the lax examination is abused by firms
that accumulate and enforce patents of questionable validity. As a result, these fields are
overcrowded with patents, which frequently cover trivial, already known, or anticipated
technologies. The presence of countless patents creates significant risks and costs for
productive firms. Contrary to the vision of patent law, this impedes and hinders
technological progress. This situation causes much concern to legal scholars, the
Congress, and courts. Many suggestions and attempts to improve the functioning of
patent system have been made, mainly focusing on enhancing the accuracy of the PTO
examination, and reducing the risks associated with patent infringement.
This paper proposes an alternative way of coping with the phenomenon of acquiring and
enforcing patents of questionable validity. It suggests changing the incentive structure of
patent law so that it does not only encourage the socially desirable behavior of genuine
innovation, but also discourages the socially harmful conduct of patenting trivial
technologies. To achieve this result, this paper recommends recognizing a patent owner’s
liability for damages in case its patent turns out to be invalid. If the owner of such a
patent has enforced its rights, preventing other firms from using the patented technology
or collecting fees, it should internalize all the social costs of its behavior. These costs can
include, inter alia, high market prices, lost profits, and deadweight losses associated with
market exclusivity. Recognizing liability for damages caused by an invalid patent will
create an appropriate incentive structure for firms: they will have an incentive to acquire
and enforce patents only when they strongly believe the invention to be novel, nonobvious, and useful.
*
Assistant Professor, Law School, the Hebrew University of Jerusalem.
1
TABLE OF CONTENTS
Introduction
I. The Incentive Structure of Patent Law
II. The Phenomenon of Weak Patents
III. The Power of Weak Patents
IV. The Risks Associated with Weak Patents
V. The Social Costs of Weak Patents
VI. Proposals and Attempts to Solve the Problem
VII. The Trouble with Patents – The Author’s View
VIII. Introducing Patentee’s Accountability for the Public Costs of an Invalid Patent
IX. The Public Domain as a Protected Property
X. Some Details of the Proposal
(A) Calculating Damages of an Invalid Patent
(B) Standing to Sue
(C) Who Will Be Liable?
XI. A Broader Outlook
Conclusion
2
OF PATENTS AND COBRAS:
CHANGING THE INCENTIVE STRUCTURE OF PATENT LAW
Katya Assaf
We cannot solve our problems with the
same thinking we used when we created
them.
Albert Einstein
INTRODUCTION
During the time of British rule in India, the British government grew concerned
with the great number of cobra snakes wandering in the streets of Delhi. To cope with
this problem, it offered a bounty for every killed cobra. At the beginning, this incentive
functioned as expected, encouraging the residents of Delhi to kill cobras. Yet, this very
incentive later gave rise to a new business of breeding cobras and killing them for the
governmental bounty. Occasionally escaping from their breeders, the bred cobras
ultimately enlarged the population of street cobras in Delhi. The governmental incentive
meant to solve the cobra problem thus eventually worsened the situation.1
Although the veracity of this famous story is doubted,2 it amply illustrates how an
incentive policy may go wrong. This paper will discuss a similar “cobra effect” in the
field of patents. Patent law is intended to spur technological innovation. It does so by
providing an economic incentive to innovate: inventors of new, non-obvious, and useful
technologies are entitled to obtain a patent. A patent provides its owner with market
exclusivity for the period of 20 years starting from the filing date of patent application.
Like the bounty for killed cobras, this incentive to innovate functioned quite well at the
start.3 Yet, in recent decades, things do not seem to go right.
The Patent and Trademark Office (PTO), which is responsible for examining
inventions to decide whether they are patentable, is overburdened with patent
applications. Patent examiners thus have very limited time to devote to each application.
1
2
3
3
Meanwhile, the new technologies demand increasingly specialized knowledge, which the
examiners frequently lack. In addition, the salary structure of the examiners encourages
issuing patents rather than declining applications. All these factors naturally result in a
great number erroneously issued patents. Indeed, patents turn out to be invalid in judicial
processes at least half of the time.
Patent validity is very rarely examined in a court though. The notoriously high
costs of patent litigation, coupled with the risk of an injunction or massive damages, lead
alleged infringers to settle with patent owners in an overwhelming number of cases. To
avoid the costs and the risks of patent litigation, firms frequently opt to pay license or
settlement fees, even if the validity of the patent is very questionable. Such “weak,” but
commercially significant patents thus typically stay alive for the entire protection term,
bringing profits to their owners.
Not surprisingly, this legal situation encourages firms to acquire patents on every
possible technology, however banal or obvious. The practice of obtaining patents has
gradually grown to become a common business strategy, especially in the fields of
computer software and semiconductors. For some firms, the business of acquiring and
enforcing patents is their main activity; for others this is a complementary income
avenue. Some firms acquire patents to be able to cross-license should a big corporation
sue them; others do so in hope to impress investors. The accumulative effect of these
business practices is clogging entire fields of technology with weak patents.
Notwithstanding their questionable validity, weak patents have powerful market
effects. In some technological fields, so many obvious technologies are covered by
patents that it is virtually impossible to develop a product that does not incorporate
numerous patents. Thus, the mere presence of countless patents creates significant search
costs and litigation risks for productive firms. Further, the need to obtain numerous patent
licenses, often from different companies, considerably complicates the process of product
development, and creates barriers to entry. Finally, the need to pay license and settlement
fees just to be able to develop and distribute a new product imposes significant costs on
inventive firms. All these costs naturally impede technological innovation and sometimes
discourage firms from developing new products altogether.
4
Like the bounty offered for killed cobras, in certain fields of technology, the
patent incentive does not function as expected. And just like with cobras, it achieves the
very opposite effect from the one desired. This situation raises much concern among the
legal community. Numerous academic articles have proposed various ways to improve
the functioning of the patent system. These proposals aim at improving the accuracy of
patent examination, enabling and encouraging administrative and judicial challenges of
patent validity, as well as reducing the costs and the risks of patent litigation. Some of
these proposals have been implemented in legislative and judicial reforms. Yet, no
significant improvement in the patent field has been observed so far.
Like Einstein’s quote at the beginning suggests, a problem cannot be solved with
the same thinking that created it. Accordingly, while attempts to improve the functioning
of the current system may ameliorate the problem, they will hardly bring about a major
change.
This paper proposes to make a fundamental shift in the legal patent thinking.
Instead of viewing patents as legal mechanisms solely conveying rights, I propose
conceptualizing them as institutions that create both rights and duties. A patent provides
its owner with market exclusivity. This position sometimes allows the patentee to make
significant profits, thereby imposing considerable costs on consumers and other market
players. According to the logic of patent law, when the patent is valid, these costs are
justified by the social benefits a novel technology brings. When the patent is covers
trivial or already known technology however, these costs constitute a pure social loss.
The damage is usually caused to the public at large and hence, unlike damage inflicted by
an individual, it does not evoke strong feelings of injustice. Yet, this is not a reason to
leave this damage uncompensated.
The lack of accountability for damages caused by invalid patents is the main
reason why weak patents have so powerful market effects. The legal reality of a patent
owner and an alleged infringer is constructed asymmetrically: a court decision holding
the patent valid and infringed has dire consequences for the infringer. Yet, a court
decision holding the patent invalid prevents the patentee from making further profits, but
does not subject it to any further costs. This asymmetry naturally gives patent owners
5
much bargaining power and allows them to reach lucrative agreements regardless of the
validity of their patents.
The fact that the patent system allows making significant profits at the public
expense naturally provides a great incentive to do so. Firms today have every reason to
patent every imaginable technology, since this profitable strategy does not involve any
serious risks. Fighting against the widespread patenting by measures such as improving
the accuracy of the PTO examination, while at the same time encouraging this practice by
letting an invalid patent’s owner to keep all the profits, is like pouring water into a
bathtub without a stopper.
The incentive structure of patent law should change so that it clearly distinguishes
between socially beneficial and socially harmful behavior, that is, between genuine
innovation on the one hand, and obtaining and enforcing patents of questionable validity
on the other. Under the current state of affairs, both these practices are similarly rewarded
– just like killing a wild and a bred cobra in colonial India. Establishing liability for the
damages caused by invalid patents will create an incentive structure that better aligns
with the public interest. Unlike today, a firm will be motivated to acquire and enforce a
patent only if it is convinced that its invention deserves the legal protection.
The patent applicant is in the best position to investigate the patentability of its
invention. Particularly, it usually has much more knowledge in its specific field of
technology than the patent examiner. Therefore, putting the burden of investigation on its
shoulders creates an efficient resource allocation. In addition, letting the patentee enjoy
the profits and the public incur the costs of an invalid patent is simply unfair. The
proposed solution is thus not only efficient, but also just.
My proposal is not as radical as it might sound. Consider that a bona fide
purchaser of land will have to return it to its owner, if there is a mistake in the chain of
title. She will also have to pay rents, profits, and compensate the owner for any damages.
The fact that the purchaser relied on the records of the land registry is no defense,
although these records are accurate most of the time. My proposal is nothing more than
recognizing a similar rule in the field of patents. Given that patents are mistakenly issued
at least half of the time, there seems to be no reason to protect reliance on a patent more
than reliance on the land registry. Moreover, as will be explained below, I suggest
6
imposing liability for damages only when the patentee either actively enforced its patent
or refused to give a permission to use the technology.
One may expect that, similarly to the field of real estate, the proposed rule will
encourage thorough private investigations of patent validity and the purchase of
insurances. Although this solution imposes significant expenses on inventors, these
expenses are justified. A patentee enjoying market exclusivity imposes substantial costs
on the public. Meanwhile, there is a high risk that the patent is invalid, the patentee
actually has no right to the exclusive market position, and the costs the public incurs are
in fact a pure loss. That is, a patentee enjoying market exclusivity actually takes a
significant risk of causing public damage. This risk justifies imposing the expenses of
investigation and maybe also insurance on patent owners.
This paper proceeds as follows: Part I discusses the incentive idea that stands
behind the patent law. It explains why the free market is believed to lack sufficient
incentives to innovate and how patents are supposed to solve this problem. Part II
describes the phenomenon of weak patents, referring to the reasons why questionable
patent applications withstand the PTO examination. Part III depicts the powerful market
effects of weak patents in terms of their ability to exclude firms from using the patented
technology, as well as in terms of their capacity to command high license and settlement
fees. This Part also explains why such patents are rarely challenged and even more rarely
invalidated in final judicial decisions.
Part IV inquires whether weak patent subject their owners to any risks. It
demonstrates that the risks such patents impose on their owners are insignificant. Part V
discusses the social costs of weak patents. It depicts the phenomenon of extensive
patenting and its market implications. Part VI discusses the main academic proposals, as
well as legislative and judicial attempts to improve the situation.
Part VII states the author’s view on the topic. It argues that the root of the
problem lies in the very incentive structure of patent law. Part VIII depicts the proposed
solution: establishing liability for the damages caused by an invalid patent. Part IX puts
the proposal into the framework of the legal discourse on the applicability of the
institution of property to Intellectual Property rights. I submit that not only patentee’s
rights, but also the public domain should be conceptualized as property, and entitled to
7
protection against damages. Part X elaborates on the proposed solution. It explains how
the damages of an invalid patent should be calculated, who will be able to sue for such
damages, and who will be the subject of liability. Part XI indicates broader contexts, in
which the proposal put forward in this paper may apply. A conclusion summarizes the
discussion.
I. THE INCENTIVE IDEA OF PATENT LAW
Patents are time-limited exclusive rights granted to inventors in their inventions.
The basic idea behind granting patents is spurring technological innovation. Inventions,
so the argument goes, are so-called “public goods,” which are characterized by nonexcludability. That is, once an invention is disclosed, the inventor is unable to control its
circulation and charge fees for its exploitation. When inventing is costly and copying is
cheap, the inventor will be unable to make a profit from her invention, and probably even
not to recover the costs she incurred. Since inventions enrich and benefit our society, this
situation creates a market failure: the market in its natural state fails to reflect the real
demand for inventions and to provide economic incentives for inventive activity.4
Insufficient incentives are associated with resource misallocation: being unable to make a
profit or even to recover costs, a gifted inventor will turn to other activities, which might
bring more profit to her, but less benefit to the society.
Patents are intended to solve these problems, providing incentives for invention
and thereby channeling human behavior towards this socially desirable goal. They do so
by providing the inventor with market exclusivity for the period of 20 years from the
filing date of the patent application.5 This mechanism should let the market tell apart the
important inventions from the insignificant ones: only a patent over a meaningful
invention will enable its owner to enjoy market power for the protection period. During
this time, the inventor will be able to recover costs and make profits.6 After the protection
period comes to an end, the invention falls into the public domain and can be freely
used.7
4
5
6
7
8
This solution naturally has its costs.8 Although only very few patents result in
monopolies in the antitrust sense, the market power of commercially significant patents is
associated with supracompetitive (monopolistic) prices and deficient supply. 9 Moreover,
consumers who would purchase the product for a competitive price might not acquire it
for the monopolistic price. Some of these consumers will simply refrain from
consumption, while others will opt for a cheaper, but a less satisfying article.10 Both these
types of behavior create net deadweight losses rather than a mere reallocation of
resources, since the damage incurred by such consumers is not matched by the profit
made by the patent holder.11 Supracompetitive prices and deadweight losses may
sometimes extend beyond the market of the patented product.12 Lastly, patent rights
restrict the possibility of using the invention for further research and innovation, thus
impeding technological and at times scientific development.13
The main goal of patent law is to promote the public interest by creating an
incentive for invention.14 Theoretically, patent law should provide the minimal level of
protection necessary to ensure a socially desirable level of innovation.15 Social price paid
beyond what is necessary to achieve this goal is a public waste. Yet, economists point out
that it is virtually impossible to estimate how much patent protection is enough, but not
too much, for ensuring the optimal level of innovation.16 Patent law currently assumes
that the social benefits of inventions outweigh, at least on average, the costs associated
with the 20-year market exclusivity as long as these inventions are new, non-obvious, and
useful.17 The Patent and Trademark Office (“PTO”) examines all patent applications to
make sure that only inventions that satisfy these criteria get patented. For the purpose of
this current debate, it will be assumed that inventions satisfying all patentability criteria,
and only such inventions, justify the social price of patent protection.
8
9
10
11
12
13
14
15
16
17
9
II. THE PHENOMENON OF WEAK PATENTS
Unfortunately, the mechanism of patent protection currently functions quite
differently than expected, causing much concern to legal scholarship, business
community, and the federal legislator. To start with, empirical studies indicate that 42 to
73 percent of the patents issued by the PTO turn out to be invalid when challenged in a
courts.18 Naturally, courts may also err, and some of the invalidated patents might have
actually deserved protection. Yet, the comprehensiveness and the thoroughness of the
judicial process give the basis to assume that courts’ decisions are on average much more
accurate than PTO decisions.
Indeed, it is widely known that each year the PTO issues a great number of
“weak” patents, which embrace trivial, obvious, already known, or anticipated
inventions.19 The PTO has been repeatedly criticized for the poor quality of its
examination.20 Famous examples of ridiculous patents include one on the process of
toasting bread, on a method for swinging on a swing, on an umbrella to protect beer cans
from sunlight, and on a method of exercising a cat with a laser pointer.21
Scholars name several reasons why so many weak patents withstand the PTO
examination. First, the examiner often lacks the expertise in the specific area of
technology, as well access to relevant information about the already existing knowledge.
This makes it next to impossible for him to conduct a meaningful search in the 15-20
hours he can devote to each application,22 especially given the increasing complexity of
patent applications.23
The applicant, who is usually much more knowledgeable in the specific field of
the invention, must disclose any prior art that might be material for its application and
risks penalties for failing to do so.24 Yet, the patent applicant is not required to conduct
itself a search for such prior art. It actually has every reason to refrain from looking for
18
19
20
21
22
23
24
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information that may undermine the validity of its application.25 Competitors, who often
possess the relevant knowledge and have the incentive to share it with the PTO, are not
part of the examination process.26
Second, the very incentive structure of the Office is predisposed towards granting
patents rather than rejecting applications.27 Many of the key issues in the examination
process are rebuttably presumed in the applicant’s favor.28 This presumption puts the
burden of proving why not to issue a patent on the shoulders of the examiner, making it
much easier for him to accept than to reject an application.29 Severe time constraints
press the examiner to issue his decision quickly, especially given his salary bonuses
system, which is based on the number of patent applications that he is able to process.30
Finally, while a decision to issue a patent is a simple one, a decision to reject must
be accompanied by a detailed justification of the examiner’s objections.31 And while
issuing a patent finishes the examination process, a decision to reject can be followed by
a request for reexamination, and then by a continuation application, which prevents the
examiner from receiving credit for this application.32 Given all this, it may hardly come
as a surprise that patent examiners tend to accept the vast majority of patent applications,
regardless of their objective quality.33
While all this explains the great number of weak patents issued by the PTO, it
does not explain why we should be concerned with these patents. An alleged infringer
can always challenge patent validity before a court. Consequently, one may argue that
competitors, who know better than the PTO which patents are genuinely novel, will opt
to infringe weak patents knowing they will prevail in litigation.34 Moreover, the patent
owner, who is also in a good position to evaluate the strength of its patent, is unlikely to
try enforcing a patent of a questionable validity. An owner of a weak patent will be
unable to stop a competitor from using the patented invention or to collect license fees.
25
26
27
28
29
30
31
32
33
34
11
Therefore, the argument might go, weak patents are not expected to have any significant
impact on the market and should be a no matter of concern.
This argument might be theoretically appealing, but the market reality is vastly
different from its predictions. There is much evidence that weak patents do have much
commercial significance. In fact, competitors take such patents very seriously doing their
best to avoid infringements, entering into license agreements that subject them to high
fees, and reaching settlements that oblige them to pay astronomical sums just to avoid or
stop an infringement suit.35 The next paragraphs will explain why weak patents provide
their owners with such strong power.
III. THE POWER OF WEAK PATENTS
As numerous scholars explain, avoiding patent litigation, even at very high costs,
constitutes a perfectly rational business behavior in most cases.36 A rational firm would
weigh its expected profits form a product infringing a patent against the possible costs of
the infringement.37 First and foremost, this firm will consider the notoriously high
litigation costs of patent cases – for instance in 2013, these costs ranged from $350,000 to
$5.5 million,38 sums which are in themselves often higher than what it would cost for the
firm to design a non-infringing product, to get a license, or to reach another settlement
with the patent owner.39 Indeed, there is much evidence that patent licenses and other
settlement agreements are frequently accepted regardless of the patent’s strength just in
order to avoid paying the astronomical litigation costs.40
But even if we put the litigation costs issue aside, it might still be perfectly
rational for a firm to do everything to avoid a patent infringement, even if it believes the
patent to be invalid. This is because patent cases are characterized by extraordinary
uncertainty.41 The increasing technological complexity of patent cases, coupled with the
35
36
37
38
39
40
41
12
vague doctrines of patent law, makes it very difficult to estimate the chances of proving
patent invalidity in a court.42
To make things worse, notwithstanding the great number of invalid patents
issued, a patent enjoys a statutory presumption of validity. This presumption may only be
rebutted by clear and convincing evidence rather than a mere preponderance,43 thus
putting a heavy burden upon the shoulders of a party attempting to prove patent
invalidity.44 It applies even to evidence that the PTO was not aware of during the
examination process.45 Although much criticized,46 the presumption of patent validity has
been recently affirmed by the Supreme Court.47
In other words, even if the alleged infringer is convinced that the patent in
question is invalid, it must be aware that a court might decide otherwise. This scenario,
whose probability is hard to appreciate, may be associated with disastrous perspectives
for the firm. First of all, the court may enjoin the distribution of its product. Prior to 2006,
courts issued injunctive reliefs almost automatically upon a finding of a patent
infringement.48 The Supreme Court overturned this line of precedent in its Ebay vs.
MercExchange decision, making it more difficult for patent plaintiffs to obtain
injunctions.49 This decision has sufficiently reduced the frequency of injunction reliefs in
patent cases.50 Nevertheless, this remedy remains very common in patent legal practice,
thus continuing to represent a real threat for a company accused of an infringement.51
Most firms do not consciously choose to infringe a patent, even a weak one, but
develop a product with the same technology without being aware of the patent’s
existence.52 This should not be surprising given that so many patents are issued on trivial
inventions.53 In addition, some fields of technology, most notably the software industry,
42
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44
45
46
47
48
49
50
51
52
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are so densely overcrowded with patents that it is very difficult to conduct a
comprehensive search and exclude the possibility of an infringement.54 Moreover,
sometimes it is utterly impossible for a firm to find a patent it may later infringe. Since
during the time of patent examination, the application is kept secret, a firm may develop
the same technology as the one specified in the patent application during its examination
period.55 When the patent is issued, its owner may threaten the firm with a legal suit.56 In
addition, sometimes patent holders purposefully create so-called “submarine patents,”
waiting until the invention establishes itself on the market, and only then starting to
enforce their rights.57
The threat of an injunction usually helps the patent holder to reach a lucrative
settlement with the alleged infringer of its weak patent. When a firm that already uses the
patented technology faces a suit, it is usually willing to reach a settlement reflecting the
prospective costs of switching to a new technology. These costs often greatly exceed the
value of the invention, that is, what the firm would have been willing to pay before it
developed its product.58 This is especially true if the technology has grown to be accepted
as an industry standard.59 If the allegedly infringing product is significant for the firm’s
business, a judicial order to withdraw it from the market may result in a serious reduction
of the firm’s value and even in bankruptcy.60 This naturally enhances the firm’s
willingness to settle.
The second threat associated with the possibility that a court will find the patent
valid and infringed is the notoriously high patent damages.61 Patent law provides that
damages should compensate the patent owner for lost profits, but should amount to no
less than a reasonable royalty.62 Both lost profits and a reasonable royalty are difficult to
estimate, especially when the patented element is only one component of a larger
54
55
56
57
58
59
60
61
62
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product.63 The intensive focus on the patented technology during the litigation leads
courts to overestimate its market importance.64 Scholars point out that courts
systematically
overestimate
patent
damages.65
Indeed,
patent
damages
reach
extraordinarily high levels.66 For instance, in 2012, Samsung was subjected to $1.05
billion damages for infringing an Apple's patent on smartphone technology.67 The
average damages rate issued as an estimation of a reasonable royalty is 13.13%, which is
much higher than the average patent royalties negotiated outside of court.68 Furthermore,
if the court finds the infringement to be willful, it may enhance damages up to three times
and force the infringer to pay the patent holder’s attorney fees.69
The threat of massive, possibly bankrupting, damages pressures the alleged
infringer to settle, even at a high price.70 No matter how weak the patent may be, the
stakes are simply too high to gamble.71 To make things worse, while establishing the
amount of damages, courts use license and settlement fees paid out of fear of litigation as
evidence of the market value of inventions, thus further elevating the damages standard.72
This practice has a circular effect, since the enlarged damages increase the negotiation
power of patent owners thus further boosting settlement awards, which are then used as
evidence of the market value of inventions.73
In addition to the risks associated with patent litigation itself, threats of such
litigation scare away potential consumers and investors, making it difficult for the firm to
get financing.74
Given the considerable disadvantages associated with a weak patent for potential
and alleged infringers on the one hand, and the high rates of court decisions invalidating
patents on the other, one might expect that (potential) technology users would undertake
63
64
65
66
67
68
69
70
71
72
73
74
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steps to invalidate weak patents. Invalidating a patent would enable the competitors using
the invention without fear of litigation. Yet, as a matter of fact, weak patents are very
rarely challenged in courts, and when this happens, parties usually settle leaving the weak
patent in force.75 Moreover, at times parties settle even after a court’s decision
invalidating a patent: in such cases, the parties ask the court to vacate its own verdict,
bringing the already invalidated patent back to life.76 This might seem puzzling given the
great benefits (potential) technology users may gain from invalidating a patent. The
answer to this puzzle is threefold.
First, according to a well-established precedent, a firm has standing to challenge a
patent in a court only if it has an objectively reasonable apprehension of an infringement
suit and has produced, or made meaningful preparations to produce, an allegedly
infringing product.77 The threat of litigation should be a real one: merely getting a ceaseand-desist letter will not do.78 That is, a firm may not challenge a patent in a court
without undergoing the risks associated with infringement litigation. These already
discussed risks pressure the majority of competitors to settle.
Second, even if the risks associated with litigation is relatively small for the
particular firm, there is a still a good chance that it will refrain from challenging the weak
patent. Because of the collateral estoppel doctrine, once invalidated in one suit, the patent
can no longer be enforced against any alleged infringers.79 That is, invalidating a patent
creates a public good – every firm on the market will be able to use the technology after
the patent is declared invalid. This situation creates a free-rider problem inherent to
public goods: since patent litigation costs are extremely high and the “freed” technology
will be enjoyed by everyone, usually no firm has sufficient incentive to bear the burden
of pursuing patent invalidation.80 Millions of dollars a firm has to spend to invalidate the
patent can hardly be recouped in a market where multiple competitors drive prices
down.81
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77
78
79
80
81
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Third, a judicial decision invalidating a patent deprives the patent owner of its
exclusive market position and, consequently, of its supracompetitive profits. Yet, since
the technology becomes free for everyone, the challenging company will only be able to
enjoy the lower competitive profits.82 Because of the gap between the prospective loss to
the patent owner and the prospective gain to the patent challenger, the parties have a
strong incentive to settle, so that the patent remains valid and they can share the
monopolistic profits.83 Such settlements may take the form of a license and sometimes
even the form of the patent owner paying to the competitor in order to prevent its patent
from being challenged or to vacate an already issued judicial decision declaring
invalidity.84 The practice of asking the court to vacate its own holding of invalidity has
become rather common,85 which is understandable given the mutual interest of the parties
to settle, and preserve market exclusivity.86 Courts grant vacatur motions in the vast
majority of cases where they are asked to do so as part of a settlement agreement.87
Sums paid to competitors for not challenging the validity of its patent, or for
asking the court to vacate its already issued decision of invalidity are called “reverse
payment settlements.” Such settlements are particularly common in the pharmaceutical
field,88 because the Hatch-Waxman Act grants the first challenger of a patent a 180-day
period of market exclusivity.89 The legitimacy of reverse payment settlements has
recently become questionable, as the Supreme Court recognized that may violate antitrust
laws.90 More to the point of our discussion, such settlements illustrate that even when
patent invalidation secures a market of only two competitors for half a year, the gap
between the competitor’s expected profits in such a market and the monopolistic profits
from a patent create a mutual interest of the parties to settle, even if the patent owner is
the one to pay.91
82
83
84
85
86
87
88
89
90
91
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IV. THE RISKS ASSOCIATED WITH WEAK PATENTS
As the previous section has demonstrated, weak patents impose substantial risks
on companies operating on the market, forcing them to settle with the weak patents’
owners. In order to gain a full perspective on the dynamics of weak patents, we should
next inquire whether such patents impose any risks on their owners. In other words, we
already know what one can gain from a weak patent, so now we ask what one can lose
form such a patent.
If a court finds a patent invalid, the patent may obviously bring no further gains to
its owner. Yet, the patent owner usually bears no additional losses. Particularly, patent
licensees have no right to recoup royalties they have paid believing the patent to be
valid.92 Moreover, if a licensee ceased paying royalties before the patent was invalidated,
the patent owner has a right to recover them.93 Only an affirmative action to question
patent validity releases the licensee from the duty to pay royalties if the patent is
ultimately invalidated.94 If the patent is challenged by a third party, the licensee must
continue paying royalties until a court declares the patent invalid.95
Similarly, if the patent owner and the alleged infringer reach a settlement prior to
a judicial decision declaring patent invalidity, the patent owner will keep the settlement
fee, large as it may be.96 Further, an owner of an invalid patent does not have to
compensate the competitor who stopped distributing a product because of a litigation
threat, the consumers who paid premium prices because of its exclusive market position,
or any other third parties who incurred losses because of its patent.
The only exceptions to this rule are recognized in cases of particularly wrongful
behavior on the part of the patent owner. Thus, a licensee is entitled to a restitution of its
royalty payments if the patent owner induced the licensee to enter the agreement by
fraud.97
The worst-case scenario for a patent owner whose patent has been invalidated is a
possible finding of antitrust liability. While patent protection generally provides
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immunity against antitrust claims,98 the legal practice has developed two exceptions to
this rule.99 The first is sham litigation, which requires a proof that the patent owner
pursued an objectively baseless lawsuit, with the knowledge of patent invalidity and the
intent to harm its competitor through the legal process rather than to succeed on merits.100
The second is Walker Process claim, which requires demonstrating that the patent was
obtained by willful fraud on the PTO, and would have not been granted in the absence of
such fraud.101
Sham litigation and Walker Process are the only real dangers an owner of a weak
patent faces. Indeed, antitrust damages may reach very high levels,102 and there is a
possibility to ask the court to enlarge the real damages up to treble damages. 103 Yet,
antitrust claims are irrelevant for most patents, since these claims can only arise when a
patentee sues for infringement.104 Meanwhile, most patents are respected by firms
without legal suits.105
In addition, antitrust liability arises only when the patentee acts with positive
knowledge of its patent’s invalidity. Yet, this is rarely the case. Patent applicants are
usually aware of their patent’s weakness, but rarely have affirmative knowledge of
invalidity. Just like the duty to disclose prior art,106 the risk of antitrust liability functions
as a disincentive to investigate the patentability of one’s invention.
And most importantly, an antitrust suit against a patent owner is extremely
difficult to prove. Obviously, merely bringing an infringement suit based on a patent that
turns out invalid is not enough to raise antitrust liability.107 While both sham litigation
and Walker Process require showing of bad faith, the patent owner enjoys a presumption
of good faith regardless of the validity of its patent. This presumption can be only
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rebutted by clear and convincing evidence,108 making the task of proving bad intentions
even more difficult.109
Moreover, even if the plaintiff accomplishes the challenging task of proving sham
litigation or Walker Process, this is just the start. The plaintiff will have to go on proving
“a substantive antitrust violation” according to the Sherman Act. Specifically, the
plaintiff will have to prove (1) a specific intent to control prices or destroy competition;
(2) predatory or anticompetitive conduct to accomplish the monopolization; (3) a
dangerous probability of success; and (4) antitrust injury to the plaintiff’s business.110 All
these requirements make proving antitrust violation by invalid patent enforcement next to
impossible. Unsurprisingly, such claims are very rarely successful.111 Therefore,
notwithstanding its grave consequences, the minuscule probability of success prevents
antitrust liability from becoming a serious threat for weak patents’ owners.
It is also noteworthy in this context that a competitor suing for antitrust violation
may only get a portion of the patent owner’s profits.112 Specifically, it may only obtain its
own lost profits, that is, what it would have gained in a competitive environment.113 This
amount, even post trebling, is usually much lower than the patent owner’s monopolistic
gains.114 The patentee will thus be able to keep a significant portion of the profits made
out of its invalid patent.115 At the bottom line, even in this very unlucky case for the
patent owner, the invalid patent ultimately brings more profits than losses.
Things are different when the consumers are the antitrust plaintiffs. Since their
damage consists of the higher prices they paid because of the patent monopoly, they may
get sums that amount to disgorgement of the plaintiff’s profits.116 In this case the patentee
will have to return all its profits. Yet, apart from litigation costs, even in this case the
patentee does not lose from its invalid patent more than it has benefited from it. In
addition, courts are split on the question whether consumers have standing to bring a
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Walker Process claim,117 and hence, the probability of this scenario is very small indeed.
The very distant possibility that the firm might have to return the profits it gained by an
invalid patent will hardly discourage it from acquiring and enforcing such a patent. All in
all, the risk of antitrust liability may hardly have any significant chilling effect the
practice of accumulating weak patents and making profits out of them.
V. THE SOCIAL COSTS OF WEAK PATENTS
As we have seen in the previous sections, an issued patent has a very good chance
to stay in force, regardless of its objective validity. Such a patent may bring many
benefits to its owner, securing an exclusive market position, and allowing to collecting
lucrative license and settlement fees. The risks associated with a weak patent are
insignificant. Not surprisingly, this reality stimulates companies to register patents on
every possible technology, however trivial.
As already mentioned, the practice of extensive patenting is especially pervasive
in the fields of semiconductors and computer software.118 In these fields, it is common for
a company to build “patent portfolios” for the products they develop, so that different
components of these products are patented separately.119 This practice creates so-called
“patent thickets”: a situation in which a single product is covered by hundreds, or even
thousands of patents and it is virtually impossible to discover all of them.120 Patent
thickets drive up search costs and increase litigation risks for productive firms, thus
hampering their business and sometimes deterring them from entering the market
altogether.121
A common strategy that enables companies to operate in a market saturated with
patents is building patent portfolios of their own and entering cross-licensing agreements
with other patent holders.122 While such “defensive patenting” is a reasonable and
virtually indispensable practice in certain fields of technology, it further increases the
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density of patents in these fields123, creating “royalty stacking” – a situation, in which a
company wishing to develop a product has to acquire patents licenses from numerous
firms.124 Royalty stacking considerably complicates the development process for
established companies and creates a significant barrier to entry for new ones.125
In this market reality, acquiring patents is not a choice, but a necessity. Patents are
essential to enter certain fields of technology and to continue developing products in
these fields. Companies that used to do without extensive patenting realized that this
strategy exposes them to lawsuits without the possibility to shield themselves by counterclaims of infringement and cross-licensing.126 Accordingly, they learned that they must
build defensive patent portfolios, too. Yet, once a patent portfolio is on hand, it provides
an opportunity not only for defense, but also for attack.127 Many companies that acquired
patents to defend themselves from litigation later used them to threaten their competitors,
forcing them to acquire licenses or exit the market.128
The practice of asserting patent rights is very profitable indeed, especially if the
asserting company owns a large patent portfolio. The already discussed costs and risks
associated with patent litigation multiply when a firm faces a prospect of being sued for
infringing dozens, or even hundreds of patents.129 The firm is thus put under a heavy
pressure to settle.130 The owner of a patent portfolio is thus able to collect royalties
without substantial efforts.131
In fact, the practice of enforcing patents is so profitable that it has evolved into a
business of its own. Non-Practicing Entities (NPEs) are companies whose only business
is collecting money from patent fees and settlement agreements.132 Not all NPEs are the
same though. Individual inventors unable to produce themselves, as well as universities,
also fall under the definition of a Non-Practicing Entity.133 Yet, the number of NPEs
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inventing nothing, but aggressively asserting their patent rights is significant. These
NPEs are more negatively referred to as “patent trolls.” Trolls either patent ideas that
require little research or acquire patents from other companies.134 Since they are not
involved in production in any way, trolls are not interested in cross-licensing, and the
only way to settle with them is paying money.135
Today, NPEs are very active enforcing their patents: many of them own extensive
patent portfolios, consisting of hundreds and even thousands patents,136 which they are
more likely to enforce than producing firms.137 NPEs are responsible for more than twothirds of infringement suits;138 they own the majority of the most-litigated patents;139
often, they sue simultaneously many of companies.140 When litigated all the way to trail,
suits initiated by NPEs fail in a vast majority of cases.141 Moreover, the already
mentioned Ebay decision of 2006 made it more difficult for NPEs than for practicing
entities to obtain injunctive reliefs.142 Thus, the risk of losing an infringement case to an
NPE is not high, the risk of an injunction even lower. Yet, because these risks are still
substantial, and because there is much to lose, and because litigation costs are so high,
nine out of ten NPE suits settle outside of court.143 Even if the asserted patent is clearly
invalid, a rational firm will be willing to settle for at least the expected litigation
expenses, which in many cases is a sum high enough to satisfy the NPE.144
Therefore, NPEs do not really care about the fact that most of their patents turn
out to be invalid in courts.145 The business model of aggregating many weak patents and
reaching multiple lucrative settlements proves to be very profitable.146 A study made in
2011 found that NPEs extract from other companies about $30 billion a year.147 In fact,
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the NPE business is so lucrative that large producing companies increasingly take on
NPE attributes, and some switch into the NPE model altogether.148
NPEs raise significant concerns among legal scholars, the government, the
legislator, and the press.149 NPEs have come under heavy fire for not producing anything
themselves but merely enforcing their questionable patents against genuinely innovative
and productive companies.150 NPEs do not take the risk of developing commercial
products and introducing them into the market. Instead, they wait until other firms make
the endeavor of commercializing a product and then threaten them with a legal suit.151 In
this way, NPEs are able to participate in the profits of productive firms without sharing
their risks.152 Scholars argue that NPEs impose a “hidden tax” on productive firms,
inhibiting innovation, preventing a large number of products from entering the market,
and ultimately undermining the incentives to innovate,153 contrary to the very raison
d’être of patent law.154 Worse still, NPEs do not significantly reward the inventors from
whom they acquire their patents. Functioning like intermediaries, NPEs keep almost all
the money gained from patent assertion activities to themselves.155
All in all, weak patents create very real barriers to entry, obstruct innovation, and
impose significant costs on productive firms. These are ultimately social costs: the
society is disadvantaged by impeded innovation, market concentration and increased
consumer prices. Since weak patents frequently cover obvious or already known
technologies that contribute little or nothing to the society, their high social costs are
unjustified and constitute a pure social loss. In other words, in some fields of technology,
the patent system is functioning very differently from its anticipated goal. Instead of
serving the public interest, it is abused in a way that puts a heavy and unnecessary burden
on the society.
VI. PROPOSALS AND ATTEMPTS TO SOLVE THE PROBLEM
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Concerned with the massive abuse of patent system, legal scholars have made
various proposals designed to ameliorate the problem. To reduce the number of invalid
patents issued, they have suggested improving the accuracy of the PTO examination.156
Some believe that this should be done by hiring more patent examiners, improving their
qualification, and allowing them to devote more time for each application.157 Others
object these proposals, arguing that since 95 percent of the issued patents do not have any
commercial significance, devoting so many resources to patent examination will be a
huge waste.158
Alternative proposals seek to improve the quality the PTO examination only for
commercially significant patents. One such proposal is increasing the PTO fees so that
they exceed a number of times average litigation costs in patent infringement cases. This
move will make the business of registering weak patents unprofitable: the settlement fees
companies will be ready to pay to avoid litigation will no longer justify patent
registration.159 Similar suggestions include introducing significant patent maintenance
fees160 and reexamining patents that turn out to be commercially significant.161 A more
radical proposal in this context is abandoning the PTO examination system altogether in
favor of an automatic registration system. Under the suggested regime, all patent
application will be automatically accepted. Competitors may later challenge them in
courts: in this way, only patents with commercial significance will ultimately be
examined.162
Other proposals for improving the accuracy of patent examination process include
abandoning the presumption of patentability and shifting the burden to prove patent
validity to the applicant;163 raising the standard of patentability;164 creating a possibility
to acquire a “Super Patent” that will be more rigorously examined and given more weight
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in a court;165 altering the salary bonuses system so that the examiners will no longer have
an incentive to issue doubtful patents;166 and creating a new bonuses system, based on the
error rate of the examination that will be checked by independent experts.167
Another vein of writing stresses that nothing will improve the accuracy of the
PTO examination like having interested third parties participate in the processes. Scholars
suggest allowing third parties to take part in the examination process through opposition
proceedings168 and to initiate reexaminations through revocation proceedings.169
Challenges before the PTO may provide a cheaper alternative to the costly litigation in
courts, they argue.170
Another group of scholars suggests ways of increasing patent challenges in courts.
They advocate abolishing the standing requirements and allowing anyone, including
consumers and public interest groups, to challenge patent validity.171 To make the burden
of challenging a patent lighter, some scholars, along with the FTC, suggest lowering the
standard of “clear and convincing evidence” currently applying to patent invalidity
claims in favor of preponderance of the evidence.172
In addition, recognizing the free-rider problem associated with patent
invalidation, they recommend establishing a system of bounties to reward successful
challengers.173 Referring particularly to the need to discourage fraud on the PTO, some
scholars advocate recognizing consumers’ standing to bring Walker Process claims. This
move will broaden the pool of potential plaintiffs174 and subject the wrongful patentee to
paying damages that amount to disgorgement the ill-gotten gains rather than merely
compensating the competitor for its lost profits.175 Another notable suggestion is to “raise
the stakes” in patent cases. According to this suggestion, a patent holder whose patent
turns out to be invalid will have to pay high penalties to the successful challenger. But a
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patent holder who prevails on trial will receive an extension of its patent term or a
monetary reward paid by the public.176
A further group of proposals focuses on diminishing the risks associated with
patent litigation and, consequently, the bargaining power of patent owners. Suggestions
include substantially limiting the patentee’s right to an injunctive relief; 177 allowing the
infringer time to design an alternative product before ordering to stop the production;178
requiring the patent owner to search for infringers and try to negotiate licenses with them
as early as possible;179 significantly reducing damage awards;180 abolishing altogether the
institute of treble damages for willful infringement;181 granting damages only in cases
when the patentee would not have made the invention absent the patent protection;182
and, finally, allowing a defendant who proved patent invalidity to recover litigation
fees.183
A final group of proposals suggests dealing with abusive patent practices more
directly. Some scholars in this group advocate establishing a right to remedies for patent
abuse, such as meritless rights assertion or engaging in “submarine patent” strategy.184
Others recommend setting restrictions on patent licensing and settlement agreements to
make sure that these agreements serve the public interest. Such restrictions should
prevent the parties form keeping weak patents alive and sharing monopolistic profits,
such as in the case of a mutual request to vacate a patent-invalidating court decision.185
Members of Congress show deep concern with the current functioning of the
patent system as well. They have introduced numerous bills proposing a variety of
reforms designed to cure its ills.186 These bills aim at improving the quality of patent
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examination;187 reducing the phenomenon of patent abuse;188 and introducing
mechanisms of fee-shifting.189
The most significant success of these efforts so far has been the Leahy-Smith
America Invents Act of 2011 (AIA).190 AIA introduced two new types of administrative
proceedings to challenge patent validity, eliminated standing requirements, and lowered
the burden of proof to preponderance of evidence for these proceedings.191 AIA offers
(potential) technology users a feasible alternative to costly and risky litigation; enables
firms that have not been accused of infringement and public interest groups to challenge
patents; and makes the task of invalidating a patent easier.192 Because of the short period
of its existence, it is still difficult to estimate its impact.
Courts also demonstrate awareness of the problematic situation in the field of
patents. In the last decade, they have introduced several significant reforms in patent
doctrines designed to alleviate the burden excessive patenting currently imposes on the
society.193 One of them is the already mentioned Supreme Court’s Ebay decision, which
made it more difficult for patent holders, especially if they are NPEs, to obtain injunctive
reliefs.194 Another turning point is the Seagate case, in which the Federal Circuit raised
the standard of proving willful infringement and, consequently, made it harder to obtain
treble damages.195 The most important change in patent law occurred in the KSR vs.
Teleflex, where the Supreme Court suggested that courts should not apply too rigid and
formalistic standards while examining patent invalidity claims.196 This decision made it
significantly easier to invalidate patents.197
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Notwithstanding these positive changes, the massive abuse of the patent system
persists.198 I believe that while the suggested reforms may further ameliorate the problem,
they can hardly bring about a major change. The next Section explains this position.
VII. THE TROUBLE WITH PATENTS – THE AUTHOR’S VIEW
In my opinion, the main trouble with patents does not lie in the deficient accuracy
of the PTO examination, the presumption of patentability, the high litigation costs, the
enormous patent damages, or injunctions. It is much more fundamental. The trouble lies
in the fact that the practice of acquiring and enforcing invalid patents pays off. The
current structure of the patent system thus incentivizes inefficient market behavior, that
is, it makes socially undesirable behavior privately profitable. Measures such as
improving the accuracy of patent examination, and facilitating patent challenges may
make the task of making profits out of a questionable patent more difficult. Reducing
damages and granting fewer injunctions may make this practice less lucrative. Yet, as
long as the examination process exhibits some inaccuracy, and the risk of injunction
and/or patent damages stays significant, invalid patents will remain profitable.
Suggestions to radically increase the PTO fees may naturally make the business of
invalid patents less attractive. Such a move will certainly discourage firms from
registering patents for commercially insignificant inventions. Yet, since invalid patents
may have great commercial significance just like valid ones,199 this move may fail to
screen them out. In addition, it might discourage patenting genuinely novel inventions
whose commercial success is hard to predict or whose expected profits are relatively
modest. Since our society may well benefit from such inventions, this result is hardly
desirable. The proposal to raise the stakes in patent cases increases both, the risks and the
gains of the patent game, and hence, its outcome on the dynamics in this field is unclear.
The main problem with the patent system lies in its incentive structure. Law and
economics teach us that people may act inefficiently when their behavior creates
substantial externalities, that is, has significant effects on others.200 Many types of human
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behavior create externalities, and this is not a problem in itself.201 Yet, externalities may
cause inefficacy when acting according to one’s private interest harms the others (or does
not benefit them) and this harm (or lack of benefit) is greater than the benefit (or cost
saving) the behavior in question brings to the actor.202 For instance, a factory may behave
inefficiently, creating more harm to the surrounding neighborhood through pollution than
private benefits through profits. This happens because it internalizes only the profits, but
externalizes pollution.203 A concern of this kind stands behind patent protection: the
inventive activity benefits the society. Because these externalities do not necessarily
bring significant profit to the inventor, she might have insufficient incentive to act in a
socially desirable way.
Economists suggest that the solution in such cases might be making the actor
internalize the external effects of her behavior.204 If the factory has to compensate for the
damages caused by pollution, it will choose to produce only if its production is overall
economically efficient, that it, only if its profits exceed the damages of pollution.205
Patent law has chosen a similar solution, allowing the inventor to make profit from the
demand for her invention, that is, to internalize some of the positive externalities of her
activity.206 Internalization is thus a tool that makes private decisions better reflect public
interests, ultimately resulting in welfare-maximizing private behavior.207
The various types of patent abuse described above are also instances of
inefficiency caused by large externalities: like polluting production, acquiring and
asserting invalid patents is privately profitable, but has a high social cost. Therefore, the
solution should be similar as well: patent law should make the owners of invalid patents
internalize the social harms they create.208 Just as patent law lets the inventor internalize
some of the positive externalities of her creative activity in order to encourage this
activity, it should make patent abusers internalize the negative externalities they create in
order to discourage such conduct.
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The main problem with patent law is thus its one-sidedness. A holder of a valid
patent whose rights have been violated is entitled to most intensive protection, which may
include an injunctive relief, massive damages, and sometimes even treble damages. On
the other hand, the only real danger a holder of an invalid patent faces is the possibility of
losing patent rights, and the ability to continue making profits out of the patent. A risk
that the patent owner will have to pay any type of compensation arises only if it has been
involved in particularly wrongful behavior. Even in such instance, the risk of legal
liability is exceptionally low. The outcome of this highly improbable scenario is usually
damages that only amount to a portion of the profits extracted from the invalid patent, so
that the invalid patent ultimately pays off. Only in rare cases, the patent owner will have
to return all its ill-gotten gains.
This highly misbalanced risk allocation is the chief reason for the widespread
practices of patent misuse. Put simply, the business of acquiring and enforcing weak
patents is associated with high revenues and involves very small risks. Hence, it
shouldn’t come as a surprise that this business is thriving. The only way to change this
reality is modifying the incentive structure of patent law so that it better aligns with the
public interest. The patent law should not only encourage the socially desirable inventive
activity, but also discourage the socially harmful business of acquiring and enforcing
weak patents.
My argument bears similarity to the point made by Abraham Bell and Gideon
Parchomovsky in their article “Givings.” The authors argue that the Fifth Amendment
only bans uncompensated takings, but there is no corresponding “Givings Clause.”209
Accordingly, while the government must usually compensate a person when its action
diminishes the value of this person’s property, it does not have to impose a charge on a
person whose property’s value increases because of a governmental action.210 Yet, the
concept of givings is a necessary complement to the concept of takings; any act of giving
to someone is simultaneously an act of taking from others: these acts are two sides of the
same coin.211
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According to Bell and Parchomovsky, givings don’t attract public attention like
takings do because they produce no identifiable losers.212 For instance, privatizing a piece
of land is a giving, and also a taking of this land from the public. The costs of the giving
are spread thinly over a large population and no individual suffers a significant loss.213
Hence, givings frequently fail to raise public awareness or trigger legal challenges.214
Yet, systematically disregarding givings leads to grave resource misallocations, imposes
high costs on the public,215 and leads individuals to make inefficient investment
decisions.216 In addition, overlooking givings is contrary to the principles of distributive
justice.217 Just like it is unfair to single out an individual to bear the burdens of social
needs, it is also unjust to let individuals enrich themselves at the expense of the public.218
Similarly, the costs of an invalid patent – high prices, impeded competition and
innovation – are spread thinly over a large number of consumers and producers. These
costs may be great, but since no single person or entity incurs significant damage, a
patent that turns out to be invalid does not provoke a public outrage. Just like in the case
of land privatization, the damage here is public and no one is bothered enough to insist on
a just compensation. Yet, legally disregarding the damages invalid patents cause
incentivizes firms to engage in the overall inefficient practice of acquiring and enforcing
weak patents. At times, firms even abandoning productive activities in favor of this
practice. That is, the current legal situation leads to a severe resource misallocation. In
addition, leaving the damages caused to the public by invalid patents uncompensated is
unfair.
VIII.
INTRODUCING PATENTEE’S ACCOUNTABILITY FOR THE COSTS
OF AN INVALID PATENT
The proposal of this paper is straightforward: recognizing the right to
compensation for damages caused by an invalid patent. This right should be granted to
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anyone who has suffered such damage, including competitors, other (potential) users of
the patented technology, and consumers.
The patent owner should naturally be able to stop its market exclusivity by
waiving its rights at any stage of the life of its patent. To further protect the patentee from
unexpected claims of damages, any entity planning to refrain from certain activity
because of the patent should notify the patentee about this intention. The patent owner
will then have an opportunity to state its position on the issue: should it permit the
activity in question, it cannot be later sued if the entity still opts to refrain from it. It
should be possible to sue a patent owner for damages only if it enforced its rights – inter
alia by sending cease-and-desist letters, granting licenses, or refusing to permit a certain
activity.
The proposed rule will create just the right incentives for a prospective patent
owner: while considering enforcing patent rights, the firm will weigh its expected profits
against the public costs. It will thoroughly investigate the patentability of the invention,
and decide to assert its patent rights only if it believes the invention to be genuinely novel
and non-obvious.
To be more precise, if a firm has an invention that has P probability of being
patentable, is expected to bring B benefits to the firm and impose C costs on the public,
than the firm will enforce a patent only if
P*B > (1-P)*C
Since monopolies create deadweight losses, that is, bring more public losses than private
gains, C would usually be greater than B. Therefore, if the firm believes that its invention
to as likely to be ultimately found patentable as it is to be found non-patentable, it will
refrain from enforcing a patent.
Deciding whether or not to enforce a patent according to the formula above
constitutes highly desirable behavior from the social point of view. Indeed, our society
has a strong interest that only patents whose validity is probable are enforced. Since the
patent owner is the best position to investigate the patentability of its invention, putting
this burden on its shoulders is efficient. This is exactly what the proposed rule does: it
makes an owner of an invalid patent liable for damages regardless of its awareness of the
facts that undermine the patent validity. In contrast to the current legal situation, this rule
33
incentivizes firms to undertake every reasonable effort to investigate the patentability of
their invention before asserting its patent rights.
For instance, under the proposed regime, a firm is likely to think twice before
sending a cease-and-desist letter that might cause the recipient to stop distributing a
product. The firm will take into account the probability that it might be found liable for
the damage the cessation of production will cause to the recipient and the consuming
public. Similarly, while considering threatening an entity that wishes to use the patented
invention for further research, the patentee will weigh the significant loss to the society
that stopping the termination of research may cause against the gains it is likely to bring
to the patentee. In short, the patentee is likely to act with great caution while asserting its
rights. In this way, the private and the public interest will essentially align.
In reality where a patent right means not only a chance of a substantial profit, but
also a risk of a no less substantial loss, patents will no longer provide their owners with
significant bargaining power. Firms accused of patent infringement may threaten the
patent owner with a counter-claim for damages. Both the patent owner and the alleged
infringer will know that a court will ultimately decide the dispute upon the question of
patent validity. Of course, the proposed solution cannot solve the problem of legal
uncertainty. Yet, under the proposed regulation, this uncertainty will affect both sides
equally rather than giving advantage only to the patent owner. Assuming that judicial
decisions possess certain amount of predictability, the bargaining power in this situation
will reside with the party that has better chances of proving its claim. This situation is
desirable: the patent owner will only be able to extract license and settlement fees if its
patent has a good chance to be found valid in litigation.
In addition, although litigation costs will likely remain high, this will no longer
allow patent owners to reach settlement agreements reflecting these costs. Since each
party will be in a position to sue the other, that is, to impose litigation costs on the other
party, these costs will cease to be a weapon enabling the patent owner to extract
settlement fees.
Moreover, under the proposed regime, the consumers will also have standing to
sue for damages. Hence, settlements with competitors will no longer constitute the
ultimate way of leaving a weak patent in force. This fact will naturally influence the
34
incentives of the bargaining parties. For instance, a patent owner will be interested in
extracting high license fees only if the validity of its patent is highly probable. Such a
license is likely to increase the product price, creating consumer costs and deadweight
losses. If the patent in question is weak, this licensing agreement will expose the patent
owner to a serious danger. Likewise, the patentee will hardly be interested in paying large
amounts of money to reach a settlement that vacates a judicial decision of patent
invalidity. Maintaining market power when a patent is very weak will be a very risky
business strategy, hardly worth pursuing.
The practice of accumulating patents of questionable validity will naturally lose
its appeal. Hence, the associated phenomena of extensive patent portfolios, patent
thickets, royalty stacking, defensive patenting, and patent trolls are likely to vanish. We
will likely witness a general decline in patent applications: because of the risks associated
with patent enforcement, a firm will be likely to file an application only when it believes
the invention to be novel and non-obvious. The reduced burden on the PTO might well
improve the quality of its examination, increasing legal certainty in this field.
One possible critique on my proposal might be the concern that it would
disincentivize inventors from applying for patent protection, and ultimately undermine
the very incentive to invent. I believe that this concern is misplaced. Today, the incentive
to patent is far greater than needed. A large portion of application is filed in relation to
inventions that should never be patented. It is true that my proposal is likely to
dramatically reduce the number of patent application, but this radical change is
indispensable to make the patent law mechanism function appropriately.
Of course, under the proposed regime, small firms might not be able to take the
risk of patenting an invention and asserting their rights. Should their patent ultimately
turn out to be invalid, the damages can be bankrupting. Yet, in fact, a firm that applies for
a patent wishes to take something from the public. Under the current legal regime, the
probability that it will be able to acquire an exclusive right over an already known or
obvious technology is high. That is, a firm applying for a patent undertakes a high risk of
unduly appropriating public resources. Under these circumstances, it seems reasonable
that only firms that are able to compensate the public in case this risk fulfills should
acquire and assert patents.
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In addition, since assertion of rights is a prerequisite for damage claims, a firm
will be able to postpone the decision whether it wishes to bear the risk associated with a
patent until it realizes whether its patent brings any benefit. The firm might thus opt to
patent an invention whose commercial success is uncertain. If the invention turns out to
be unsuccessful, it will anyway impose no costs on the public and, consequently, no risk
on the firm. But if the invention is a success story, the patentee should be aware of the
social costs associated with its market exclusivity. The market will likely develop
insurance institutions enabling successful patentees to cope with the risk of patent
invalidity and the associated liability for damages.
The proposed solution leads to an efficient allocation of resources. It imposes the
costs of ensuring the patentability of an invention on the most knowledgeable party, the
patent applicant. It shifts the costs of incorrectly issued patents from the public, which
could not have prevented the damage, to the patentee, who has substantial control over its
occurrence. This shift undermines the possibility to enrich oneself at the public’s
expense, which is currently provided by patent law.
The proposed solution also brings more justice to the field of patents. It is true
that the damages caused by an invalid patent to an individual consumer or competitor
might not be high. Yet, leaving these damages uncompensated, and letting the patentee
keep the benefits and ignore the costs of its undeserved market exclusivity is unjust.
IX.
THE PUBLIC DOMAIN AS A PROTECTED PROPERTY
This Section will put the proposal of this paper into the framework of the legal
discourse on property rights in the context of intellectual goods. Many scholars advocate
treating patents, and Intellectual Property (IP) more generally, as a species of property,219
arguing that the legal protection of tangible and intangible assets bears strong
resemblance,220 and concluding that rules found in the field of real property should
largely apply to IP.221 In most cases, the property rhetoric leads scholars to advocate
extensive protection of IP.222 Indeed, in our cultural and legal discourse, the term
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“property” powerfully connotes the notion of an absolute sovereignty over an asset. 223
Courts too frequently use the rhetoric of property. They compare IP cases with real
property settings, which usually results in greatly strengthening the rights of IP owners.224
This tendency has been severely criticized. Scholars point out that the nature of
physical and intellectual property is vastly different.225 Unlike physical property,
information brings more efficiency as a publicly available resource rather than as a
private possession.226 Scholars further argue that the extensive protection of real property
is inappropriate and undesirable in the field of intangible assets.227 They warn that the
trend towards “propertization” threatens to undermine the internal balance of IP laws
between the need to provide an incentive for innovation on the one hand, and the need to
leave enough free space, on the other.228 To function efficiently, the intellectual
environment, unlike the physical one, is crucially dependent on a large public space, they
explain.229 While the main goal of IP is enriching the public domain, the propertization
tendency does just the opposite, impoverishing our society and ultimately impairing
creativity and innovation.230 Accordingly, public domain advocates hold the view that IP
should not be legally regarded as property.231 They propose adopting alternative legal
frameworks232 or creating a special legal regime for IP.233
Yet, the property rhetoric does not have to result in an expanded view of IP
protection.234 First, real property rights also have limits and exceptions.235 Second, as
David Fagundes points out, the analogy to real property made by scholars and courts is
usually one-sided: only the private rights of IP owners are conceptualized as “property”,
but not the right of the society members to the public domain.236 That is, the problem is
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not the analogy to real property itself, but its incompleteness.237 But if we conceptualize
the public entitlement to free information as a mutually owned possession, the property
rhetoric will stop serving exclusively to expand IP rights.238 Notably, in the field of real
property, the notion of public ownership is well-established.239 Fagundes suggests that
the defenders of public domain should also employ the powerful rhetoric of property to
counteract the expansion of IP rights.240
In the same vein, numerous scholars have urged to recognize an affirmative
collective right of society members to the public domain.241 Courts also occasionally
envision the public domain as a right. Thus numerous decisions maintain that
manufacturers have a federally protected right to copy product features, which are not
covered by any IP right.242 On several occasions, the Supreme Court courts struck down
state laws restricting copying beyond the limitations provided by federal IP legislation.243
Nevertheless, while discussing the scope of IP protection, courts usually do not
present the case before them as a conflict between two concurring property rights.244
Rather, the discussion usually revolves around the IP owner’s property right, which, it
would seem, exists in vacuum.245 Unsurprisingly, this perception leads to an excessive
focus on the interests of IP owners and deficient attention to the public interest. This very
perception has led the legal system to largely ignore so far the enormous damages caused
to the public by invalid patents. This situation should change. The public domain should
be protected as strongly as the property rights of IP owners, and specifically patent
owners.
Note that in the field of tangible assets, most notably land, there is hardly any
vacuum in between property rights. Parcels of land not owned by any private party or
public entity are owned by the federal government. Such land is protected against
invention, occupation, and damage just like private land. A similar attitude should be
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adopted in the field of information. There is no special reason why we should see land
that does not belong to anyone as common property, but not apply the same vision to
information that does not belong to anyone. Just as land in common property greatly
benefits the society, so does information. Actually, protecting the collective right to
information is even more justified than protecting collective right to land, since unlike
land, information brings more benefit when it is freely available than when it is privately
controlled.246
According to a well-established rule of common law, an occupant of another’s
land has to pay the owner rents and profits, and compensate for any damage, regardless
of the good faith of the occupant.247 This rule applies to public lands248 and to occupants
who bona fide believe themselves to have a valid right over the land.249 Sometimes the
mistake is very hard to avoid, such as in the case when the land is acquired based on a
forged deed and later transferred to a bona fide purchaser.250 Courts hold the view that to
protect themselves from such risks, land purchasers should acquire insurances.251
This legal policy incentivizes land purchasers not to rely on the land registry, but
to hire experts, who perform independent investigations, and acquire insurances for the
case of mistake. There is every reason to encourage the same behavior among patent
applicants, especially considering that unlike land records that are correct most of the
time, patents are granted incorrectly at least 50 percent of the time. A patent owner thus
undertakes a much higher risk of appropriating public knowledge than the risk to
mistakenly occupy another’s land. Hence, great caution is in order here.
It should be admitted, however, that sometimes no amount of caution will suffice.
The field of patents suffers from extraordinary legal uncertainty, and sometimes it is
virtually impossible to know whether a patent is valid until a court’s decision.252 It might
thus seem problematic to impose liability for damages on a patentee who could not have
known that its patent was invalid. Yet, legal uncertainty should be no reason to exempt
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from such liability. Uncertainty is experienced by all market players in the field of
patents. Just like a patentee can never be certain about the validity of its patent, its
competitors can never be sure about its invalidity or its scope. 253 Yet, in spite of the legal
uncertainty, today patent infringers are fully liable for any damage caused to a patent
owner. At the same time, invalid patent owners normally bear no responsibility
whatsoever for the damages they cause. In other words, in a conflict between a patent
owner and an alleged infringer, the latter bears the risk of legal uncertainty alone.
Back to the real property analogy, in disputes over land boundary lines, the risk of
legal uncertainty is equally shared by the parties. Let’s consider, for example, A and B,
who are neighbors disputing over the correct place of the boundary line between their
land parcels. Let us assume that this specific dispute is surrounded by great legal
uncertainty. If A occupies the disputed strip of land, A takes the risk that a court would
later decide that the strip belongs to B, and A will have to compensate B for damages and
lost profits. B is in a symmetrical situation. Under this equal sharing of the uncertainty
risk, no party has an incentive to occupy the disputed strip of land unless it has a
significantly better chance to prevail in a court.
And now imagine what it would look like if one of the parties, for instance B,
were to bear the risk of legal uncertainty alone. That is, if B occupies the disputed strip
and A prevails in a court, B would have to compensate A for A’s damages. But if A
occupies the strip and B prevails, A will have to pay nothing. Under this asymmetrical
risk allocation, uncertainty disadvantages only B, while it actually favors A. This situation
actually incentivizes A to occupy the disputed strip of land and disincentives B from
doing so. It also largely discourages B from going to a court in the first place. B would
most probably refrain from occupying the disputed strip of land, and if such an
occupation mistakenly occurs, B would be willing to pay some compensation to A, even
if A’s chances to prevail in a court are small. A, on the other hand, will most probably
occupy the disputed strip of land and will be willing to pay nothing to B, even if B has
excellent chances to prevail.
Similarly, under the asymmetrical risk allocation in the patent field, uncertainty
disadvantages only potential infringers, while it actually favors patent owners. It creates
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an incentive to acquire and enforce weak patents. It discourages market players from
infringing such patents and from challenging them in a court. Putting the whole burden of
legal uncertainty on the shoulders of potential infringers creates a situation under which
even the slightest suspicion that one’s behavior might be infringing a valid patent is
enough to make the accused infringer willing to pay a settlement fee. In short, the
asymmetrical risk allocation lies at the very core of the ills associated with the current
malfunctioning of the patent system. Therefore, making patentees share the risks of legal
uncertainty is essential to create an appropriate incentive structure in the patent field.
X. SOME DETAILS OF THE PROPOSAL
This Section will present the proposed solution in greater detail. Specifically, it
will address three central questions: (A) how the damages will be calculated; (B) who
will be able to sue; and (C) who will be liable for these damages.
(A) Calculating Damages of an Invalid Patent
A firm enforcing a patent that later turns out to be invalid has inappropriately
taken knowledge from the public domain. Such behavior should be considered a tort.
According to the traditional view of tort law, the wrongdoer has to pay damages that
place the injured party in the situation it would have been absent the wrongdoer’s tortious
conduct.254 Accordingly, invalid patent damages should compensate for any loss caused
by the patent. This section will examine the question how this sum is to be calculated,
and the next section will address the question how the money should be divided between
the injured parties.
Naturally, not every invalid patent imposes costs on the public. If the patented
invention is commercially insignificant and the patent had no effect on the behavior of
any market player, the patentee will have to pay no damages. As already mentioned, the
patent owner should be liable only for damages caused by an active patent enforcement
or by a refusal to permit a certain activity. That is, a patentee who never charged anyone
for its patent, never attempted to prevent the use of its patent, and always gave a
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permission to use the patented technology, will not be liable for damages. The following
discussion thus refers only to enforced patents.
Damages of an invalid patent should first of all include all the profits attributable
to the market exclusivity associated with the patent, since all such profits were
inappropriately made at the expense of third parties. These profits include licensing and
settlement fees, and any other royalty paid to the patent owner by third parties. The
current rule that does not allow recovering licensing or settlement fees255 should be
abandoned. Every loss or cost caused by the invalid patent should be compensable.
If the patent owner distributed itself or through licensees a product incorporating
the patented invention, the court should estimate the amount of price overcharge
attributable to the patent-related market exclusivity. Methods to calculate the difference
between the charged price and the hypothetical competitive price already exist in the field
of antitrust,256 and should be applied here.
In addition to the profits, the patentee should also be liable for the deadweight
losses created by the patent. Although deadweight loss is not compensable in antirust
cases, scholars maintain that this loss is the central injury associated with antitrust
violation, and advocate its legal recognition.257 Literature has developed methods to
calculate deadweight losses associated with market exclusivity.258 These methods can be
used to calculate the damages caused by an invalid patent.
Further damages caused by an invalid patent include losses caused to parties who
stopped or refrained from distributing a product because of the patent. Such losses may
include forgone profits and financing opportunities, lost consumers, the costs of
switching to an alternative technology, lower profits from a less successful product, loss
of sales of complimentary products, reduced ability to compete, reduced market share,
and sometimes even loss of the entire business.259 Some of the techniques to calculate
such damages may be borrowed from the field of patent infringement260 and antitrust,261
others will have to be developed.
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Additional damages may include reduced competition and associated deadweight
losses in correlated markets,262 as well as social lost or impaired opportunities for
academic research263 or technological development264.
Like in the field of patent infringement and antitrust, the difficulty to quantify
damages should not circumvent the duty to compensate.265 Courts will not have to
establish damages with mathematical accuracy.266 They will be able to estimate and
approximate their amount, as long as these calculations rely on a reasonable basis.267
Courts should be careful to prevent double compensation for the same damage. In
addition, they should take into account a possible contribution of the patent owner to the
social welfare. As several scholars point out, patent law encourages not only innovation,
but also commercialization of the invention, that is, developing a product and making it
accessible for the consuming public.268 In some fields, most notably pharmacology,
distribution costs are the main expenses associated with a product. One has to invest
much efforts and money to turn a pharmaceutical invention into a marketable drug.269
Many inventions would stay out of the market without a significant effort to introduce
them to the consuming public.270 Moreover, some inventions might not be ever marketed
absent a patent right that makes the investment in commercializing them profitable.271
An owner of an invalid patent who puts significant efforts into the
commercialization of the invention is similar to a bona fide occupant, who makes
permanent improvements on another’s land. According to a well-established rule of
common law, such an occupant is entitled to offset the value of these improvements
against the damages demanded by the true owner for the wrongful land occupation.272
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Similarly, an owner of an invalid patent should be able to offset the social value of
commercializing the invention against the social costs of maintaining exclusivity over it.
Another point in this context is willfulness. To my mind, the questions knowledge
and intent should play no role in the field of patent damages. Because of the great legal
uncertainty that characterizes patent cases, one can never be sure about the implications
of one’s behavior. Under such circumstances, punishing willful behavior only
discourages investigation, since knowledge of certain facts or awareness of certain
opinions may later disadvantage the party.273 Hence, the liability in patent cases should
solely be based on objective behavior of the parties. In this way, each party will have an
incentive to acquire all the necessary knowledge and act according to the best possible
assessment of the legal situation.
That is, an infringer of a valid patent will have to compensate the patent owner for
its damages, but no more than the actual damage, regardless of the infringer’s subjective
intent. The patent law should give up the institution of treble damages.274 Similarly, an
owner of an invalid patent will have to compensate for any damage caused by the patent,
but no more, regardless of its state of mind. The proposal to impose liability for damages
on owners of invalid patents makes sham litigation and Walker Process claims redundant.
Yet, to the extent that these institutions offer an opportunity to request treble damages in
cases of bad faith in patent registration or enforcement, they should be abandoned.
(B) Standing to Sue
As described above, the right of standing to challenge patent validity in a court is
currently defined very narrowly.275 This right is basically restricted to alleged infringers,
whose motivation to sue is low.276 Since 2011, third parties have standing to challenge
patents in administrative proceedings.277 Yet, this possibility is limited in time and in
procedural terms.278 The constrained right of standing is thus one of the reasons for the
current proliferation of invalid patents.
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Under the proposed regime, this situation should profoundly change. The proposal
of this paper will function effectively only if damages of invalid patents are regularly
paid as a matter of fact. To create a balanced incentive structure, the risk of paying such
damages should be roughly as high as the risk of being found liable for patent
infringement. Hence, the right of standing to sue for patent damages should be defined
broadly.
The first group of potential infringers should include every entity patent rights are
asserted against. In contrast to the current rule, under which only an objectively
reasonable apprehension of an infringement suit grants standing,279 other ways of
asserting patent rights, such a cease-and-desist letter, or any other notification of patent
rights should suffice. Importantly, the currently existing licensee estoppel that prevents a
licensee regularly paying its fees from challenging patent validity280 should be
abandoned. Patent licensees, including research institutions, parties who have settled with
the patentee, as well as those who have been refused a permission to use the patented
technology – all should be able to sue.
A party may independently sue for patent damages of file a counterclaim while
being sued for patent infringement. It is interesting to note that the threat of such
counterclaims is expected to affect the arguments a patent owner is likely to raise before
a court. Patentees will hardly attempt to exaggerate the importance and the value of the
patented invention given that these very factors may significantly increase the amount of
damages should the court ultimately find the patent invalid. Hence, claims of patent
damages are likely to become more realistic and balanced. Accordingly, the current trend
of overcompensation for patent infringement is likely to cease.
A second group of potential plaintiffs should include consumers, who are affected
in any way by the patent. This naturally includes private and businesses purchasers who
have to pay premium prices for products embodying the patented invention. Further,
consumers who suffer because of the insufficient availability of the patented product
should also be able to sue. An example of such a consumer is a patient whose local clinic
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is unable to offer a patented test.281 Lastly, the right of standing should be granted to
consumers who are unable to afford the patented product and must resort for a less
satisfying option or give it up altogether. An example of such consumer is a patient, who
cannot afford a patented drug.
A final group of potential plaintiffs should consist of public interest organizations,
such as the Public Patent Foundation and the Consumer Watchdog. In addition,
governmental authorities, such as the Antitrust Division and the Federal Trade
Commission, should also have the power to bring such suits.282
Similarly to the judicial policy in the field of antitrust, courts should recognize
that the main goal of damages for invalid patents is to encourage private enforcement and
deter socially harmful behavior.283 Groups of consumers and business entities with
similar damages should be thus allowed and encouraged to file class actions.284
Representative plaintiffs initiating such actions and their attorneys should receive awards
large enough to motivate such suits.285 Courts should allow standing generously, even in
cases where a personal injury is hard to prove. The goal should be subjecting the owners
of invalid patents to all the damages their patents cause. These damages may later be
distributed among those who can prove their injury, and the rest may go to public interest
organizations, or to the federal treasury.286 The main purpose of damages for an invalid
patent will often be deterrence, rather than compensation.287
The best solution would be instituting a judicial procedure that would allow the
court to establish the total amount of damages resulting from an invalid patent and then to
decide how to distribute them. Such a framework would enable the court to impose the
entire amount of public damages on the owner of an invalid patent. Moreover, it would
prevent a double compensation for the same injury, which might occur if different
plaintiffs claim their damages in separate proceedings. In short, such a unified procedure
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would enable establishing just the right amount of damages, which is very important to
build an appropriate incentive structure in patent law.
(C) Who Will Be Liable?
The question of dividing liability between various parties who had some rights in
the invalid patent may sometimes be difficult to answer. In the simple case, where the
patent owner did not grant licenses, it will obviously be the only one to account for
damages its invalid patent caused. It should be noted that if there was a firm that
infringed the patent and could sell the product for relatively high prices because of the
limited market competition, this firm should nevertheless not be liable. Only market
players who assert exclusivity in the patented technology should bear responsibility when
the patent turns out to be invalid.
The case starts being difficult when the patent has been licensed. On the one hand,
the licensees should be able to get back the fees they paid to the patent owner, since there
was no basis to charge them with these fees. On the other hand, sometimes such licensees
enjoy themselves the exclusive market position granted by the patent. An exclusive
licensee may sometimes be the major beneficiary of a patent. In such case, allowing the
licensee to recover fees and not subjecting it to any responsibility would seem unjust.
Yet, not all the licensees are the same. Some of them pay license fees to avoid litigation
with the patent owner without enjoying any market exclusivity. In such case, allowing
them to recover those fees without subjecting them to any liability seems appropriate.
And there are surely many variants of licensor-licensee relationships that fall somewhere
in between.
The default rule should be imposing the liability on the party who actively
asserted patent rights. This will normally be either the patent owner or the exclusive
licensee. If the licensee was the one who asserted patent rights, it will have to bear the
responsibility for patent damages, but will still be able to recover the license fees. If the
patent owner was the one who asserted patent rights, it will still be able to prove that its
licensee also profited from the market exclusivity the patent provided. If so, those profits
may be extracted from the license fees the patentee has to return to the licensee. If the
profits attributable to the market exclusivity exceed the license fees, the licensee will
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receive nothing from the paten owner. Yet, no further liability should be imposed on a
licensee who did not assert patent right against other parties.
XI. A BROADER OUTLOOK
The incentive structure offered in this paper may be applied in additional
contexts. First of all, in the field of patent law, an owner of a valid patent who enforces
its rights beyond the patent scope should be liable for damages in the same manner as an
owner of an invalid patent. Patent owners, who assert their rights against non-infringers,
essentially obtain market exclusivity over the public domain. Such practice differs little
from asserting invalid patents, and should be treated similarly.
Second, other fields of IP suffer from similar problems as patents do. For
instance, trademark and copyright owners are frequently responsible for suppressing
entirely legitimate critique, reference, citation, and other types of non-infringing
practices.288 Such actions undoubtedly damage the public, and a solution similar to the
one proposed here might be appropriate. Yet, there are also important differences
between patents and other fields of IP. Thus, the damage caused to the public by a missed
opportunity to enjoy a trademark parody is significantly harder to estimate than the
damage caused by market exclusivity over technology. Similarly, a person who feels hurt
by a disrespectful reference to her writings and asks to stop its distribution is intuitively
different from a patent holder enforcing its rights. It seems undesirable to subject such a
person to liability for damages in case a court finds the reference in question to be noninfringing. Because of these and other differences between patents and other IP rights,
further research is needed to create a more nuanced analytical structure that would be
applicable to all types of IP.
Finally, conceptualizing the public domain as common property will have positive
effects beyond the prevention of abusive behavior on the side of IP owners. The Congress
and courts will probably be more cautious while deciding to expand IP protection, if they
perceive these decisions not only in terms of strengthening property rights of IP owners,
but also in terms of impairing the property rights of the public. This will likely prevent
legislation that merely aims at expanding the scope of existing IP rights without any
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benefit to the public.289 If such legislation is perceived as transferring property from one
owner to another rather than as merely strengthening the existing property rights, the
Congress will be more likely to seek for convincing justifications for such a move.
Similarly, conceptualizing the public domain as property will likely reduce the
much criticized judicial tendency to interpret IP rights ever broader.290 In addition, this
perception may persuade the judges of the need to create clear and predictable rules in the
field of IP. The legal uncertainty currently surrounding this field may seem less
acceptable when the vague rules do not merely define the scope of legal protection, but
determine the boundary line between two property rights.
CONCLUSION
This paper has offered a novel solution for the much-discussed problem of patents
on trivial technologies overcrowding certain technological fields. The proposed solution
is straightforward: the patent law should not only reward socially desirable behavior, but
also penalize socially harmful conduct. Going back to the example of cobras in colonial
India, imagine that the bounty is paid for every cobra, but afterwards an expert could
examine the cobra and tell with a rather high certainty whether the cobra was wild or
bred. This would be analogous to a patent that may bring profits regardless of its validity,
but can later be examined in a court. Imagine also that those who bring killed cobras are
usually not their killers – this would reflect the uncertainty surrounding the questions of
patentability.
Now imagine that if the killed cobra turned out to be a wild one, the person who
brought it might keep the bounty. That would be analogous to letting the patentee whose
patent has been found valid to keep all the profits. But if the cobra was found to be a bred
one, the person who brought it had to return the bounty, and pay a fine. This is roughly
analogous to my proposal to subject an owner of an invalid patent to liability for
damages. Such damages will usually exceed the profits made due to the exclusive market
position allowed by the invalid patent, making the business of acquiring and enforcing
such patents unprofitable.
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The hypothetical policy with cobras would have created the appropriate
incentives, encouraging people to kill wild cobras, but discouraging the business of cobra
breeding. It would also encourage people to investigate the source of the cobras they
bring to the government – a task that locals could accomplish much better than the British
government. Similarly, the proposal of this paper would encourage firms to patent new
and non-obvious inventions, while discouraging them from patenting trivial, already
known, or anticipated technologies. It would also incentivize firms to thoroughly
investigate the patentability of their inventions – a task that patent applicants can
accomplish much better than the PTO.
The patent law is a legal construct aimed at creating incentives for socially
desirable behavior. Therefore, when the patent system is used differently than expected,
we should first of all ask how the existing incentive structure may support such a use.
When firms acquire and enforce invalid patents, we should first of all ask how the patent
law unintendedly incentivizes such behavior. And that’s where we have to look for the
cure.
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