Report On FTC Hearing on the Evolving IP Marketplace Held December 5, 2008

By James G. McEwen[1]

Introduction

On December 5, 2008, the Federal Trade Commission (FTC) conducted its first of multiple hearings to explore the continuing evolution of intellectual property marketplace and the effect of this marketplace on competition.  Entitled The Evolving IP Marketplace, the hearings are a continuation of the FTC work first published in To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy A Report by the Federal Trade Commission (October 2003) (hereinafter the “2003 FTC Report”), and to revise its findings in light of changes in law since 2003.  Of special interest, according to William Kovacic, Chairman, Federal Trade Commission, is to ensure that the FTC is able to obtain empirical solutions to IP marketplace issues as they affect competition law, and to determine the extent to which the theory meets practice in regards to optimizing the interface between IP and competition law.  As such, the December 5, 2008 hearing is only one of multiple planned sessions.  All materials presented, including transcripts and slide show presentations, are available on the FTC website at http://www.ftc.gov/bc/workshops/ipmarketplace/.

First Panel: Developing Business Models

The first panel dealt with the new business models being developed which are based upon “the buying, selling and licensing of patents.”  On the panel were Mallun Yen, Vice President, WW Intellectual Property, Cisco Systems Inc.; Peter N. Detkin, Founder & Vice Chairman, Intellectual Ventures, Inc.; Daniel P. McCurdy, CEO, Allied Security Trust; Chairman, PatentFreedom, L.L.C.; Raymond Millien, founder PCT Companies and CEO, PCT Capital, L.L.C.; and Brian Kahin, Senior Fellow, Computer & Communications Industry Association.  Peter N. Detkin and Raymond Millien generally represented the entities involved in the new business models.  Mallun Yen, Daniel P. McCurdy, and Brian Kahin generally represented the views of the established industry.

Starting off the panel, Raymond Millien gave an overview of the types of new business models which are based upon using existing patents.[2]  He began by noting that the US economy is increasingly being based not upon traditional physical assets, but on its intellectual property.  Patents are representing an increased percentage of property, and the new business models being created are a reflection of this reality.  Patents and intellectual property in general are increasingly being seen as a measure of wealth, and further, patents are being seen and utilized increasingly as a commodity which can bring that wealth to its creator.  Mr. Millien broke down and categorized the types of new business models aimed at maximizing this new phenomenon into seventeen (17) separate categories, ranging from Patent Licensing and Enforcement Companies (such as Acacia Research; Fergason Patent Prop.; Lemelson Foundation; LPL; NTP; Patriot Scientific RAKL TLC; TPL Group) to Patent‐Based Public Stock Indexes (such as the Ocean Tomo Indexes; Patent Board WSJ Scorecard).  Mr. Millien hypothesized that these categorized will soon further adapt to the commoditization of patents so as to allow for trading patents as an asset class, such as through traded exchanges, IP hedge funds, and urban IP zones.

Next on the panel was Peter N. Detkin, who provided a more detailed and spirited defense of the new business models.  Mr. Detkin began by emphasizing that the Constitutional purpose of patents is to ensure that inventors are rewarded for their innovation, which more closely tracks the language of Article I, Section 8 of the Constitution as compared to merely insuring innovation benefits in the abstract.  As such, he proposed that the key question is whether the new business models do a better job of benefitting and rewarding inventors, as is the Constitutional charge for patents, or whether the existing models are sufficient.  Mr. Detkin asserted that, under existing models, for an independent inventor to obtain the reward for a patented invention, the inventor needed at least 8-24 months for coming to a license, which is time the inventor is not inventing new discoveries but is instead locked in negotiations.  Citing a Small Business Administration report, Mr. Detkin stated that the small inventor is the largest generator of patents at 60%, whereas data taken from publicly available financial documents indicates that the small inventor gets less than 10% of patent royalties.

Moreover, corporations have large pools of unused patents and are unable to efficiently utilize these resources to obtain this reward since the patent marketplace is disorganized and requires diverting resources to enter into the 8-24 months of licensing negotiations.  According to Mr. Detkin, the larger corporations tend to benefit from the lack of organization since they are the largest user of patents, but do not need to pay for the use since the market is too chaotic to make enforcement practical.  At the same time, when an inventor does attempt to obtain a royalty, the royalty is generally inflated in order to account for the expense of the 8-24 months of licensing negotiations or litigation.  Thus, the royalties for specific patents tend to be disproportionate to the actual value of the invention due to the costs of enforcement and licensing.

Mr. Detkin highlighted specific problems, but noted that a great deal of uncertainty exists in evaluating the IP marketplace due to a lack of data.  He specifically requested that the FTC concentrate on gathering data on royalties, settlements, and damages since most studies in this area rely on anecdotal evidence.  All members of the panel agreed that this information is crucial in determining whether these new business models are beneficial.

Among the issues, Mr. Detkin noted that users of IP have problems due to the new technologies evolving in multiple fields, such that multiple sources of IP exist.  Moreover, there is a need to be able to efficiently use and share patents for purposes of interoperability and adoption of the new technologies.  In contrast, generators of IP tend to have a problem in that their property is illiquid and difficult to monetize, leaving patent portfolios underutilized due to the legal risks inherent in licensing and enforcement.  According to Mr. Detkin, the new business model resolves many of these issues by creating a marketplace which both rewards inventors and allows IP users to efficiently acquire needed patent rights at a more reasonable cost and with less risk as compared to the existing system.  Thus, Mr. Detkin believes that the problems can generally be resolved while still allowing the inventor to be rewarded as Constitutionally required by activating “free market forces (capital, information, liquidity scale, aggregation) to ensure fair compensation for inventors” and allowing patents to become an asset class distinct from capital.[3]

In response, Daniel P. McCurdy presented a view with an emphasis that the purpose of patents is really for the protection of innovation, and not merely the reward of inventors.[4]  In that vein, the emphasis on inventors has led to the growth of non-practicing entities (NPEs) acquiring and enforcing patents.  According to Mr. McCurdy, these NPEs represent the biggest threat to innovation and should not be classified or thought of in the same was as practicing entities, which actually developed the technology as opposed to purchasing the patent on the technology.  Moreover, NPEs do not use the patent itself since licensing is selling, not using.  As a non-user of the technology, NPEs are not restrained in choosing litigation targets as are the practicing entities, and NPEs are not deterred by the potential of the practicing entity filing a counter suit of patent infringement which otherwise reduces litigation between practicing entities.  As evidence Mr. McCurdy presented slides showing a sharp increase in instances in the number of practicing entities being defendants in litigation with NPEs between 2000-2008, whereas the number of practicing entities being plaintiffs in the litigation was relatively steady during the same period.   As a result, Mr. McCurdy asserted that NPEs raise the risk of operation for practicing entities and represent a competitive harm to practicing entities since they represent a barrier to entry to practicing entities.

In support of Mr. McCurdy, Mallun Yen also emphasized that weak patents harmed innovation.[5]  Specifically, taking time to respond to charges of infringement takes money away from R&D budgets and innovators away from innovation.  Ms. Yen noted that, from her experience, when Cisco is sued by NPEs, the NPEs have purchased the patents being asserted.  Moreover, citing AIPLA figures, the cost of defending baseless suits ranges from $4-5 million at the low end all the way up to $25 million.  Moreover, Cisco has seen a dramatic increase in suits against it, mostly starting in FY04.  The loss of budget and the time requirements imposed on Cisco personnel in having to defend against these increasing numbers of suits represent a loss of ability to innovate by a practicing entity, thereby harming innovation.  As such, Ms. Yen indicated that the use of patent as an asset in by NPEs also presents harm to innovation.

As the final panelist, Brian Kahin noted that patents and the IP marketplace present tension at a policy level.[6]  Specifically, Mr. Kahin stated that innovation is the goal of the patent system, and that the use of patents by NPEs does not further this goal.  Mr. Kahin contested Mr. Detkin’s and Mr. Millien’s premise that patents are truly assets since they are merely promises to sue.  Mr. Kahin also indicated that even Judge Giles Rich was mistaken about patents when he stated that patents are “not for exceptional inventors but for average inventors and should not be made hard to get for average inventors and should not be made hard to get” since if the invention is not commercially hot, the inventor’s monopoly is for something which has no value.[7]  Thus, according to Mr. Kahin, the use of patents as an asset is improper.

Also, citing a Carnegie-Mellon survey of manufacturing R&D managers from 1994-1995, Mr. Kahin noted that the popular view of patents is that they prevent copying.  However, Mr. Kahin indicated that this popular view is not valid in light of the NPEs.

Further, Mr. Kahin indicated that the use of patents by NPEs does not further innovation and instead represents an unfair ambush on practicing entities.  Specifically, Mr. Kahin asserted that the real problem is a patent ambush.  In such an ambush, a patent owner can hold back claims, wait for a product to emerge, and then add the claims so as to obtain protection covering the product with the practicing entity not having been able to design around the added claims to avoid the infringement.  This prospect does not promote openness since the patent holder will keep such patent claims secret until the last possible minute so as to ambush the practicing entity.

Mr. Kahin indicated a number of potential harms being caused by NPEs and the use of patents as assets which can be bought and sold like any other asset.[8]  Thus, he noted that the FTC should concentrate on bringing economic analysis as a consideration in patent policy making, which was also recommendation 10 of the 2003 FTC Report.  However, like Mr. Detkin, Mr. Kahin noted that there has yet to be made public good data needed to evaluate current patent policies and to actually apply the economic analysis to improve patent law.  Specific suggestions for improving the quality of the data included requiring registration of all licenses, and possible changes in SEC filings to require disclosure of licensing costs.  Whatever the source, Mr. Kahin indicated that additional data needs to be available which clarifies true patent ownership, the price of a patent sale, the price and circumstances of a patent sale (i.e., one way for money or cross license), and costs of settlements.

Keynote Address: Honorable Paul R. Michel, Chief Judge, Court of Appeals for the Federal Circuit

Judge Michel generally praised the work of the FTC as well as their work in creating the 2003 FTC Report.  However, he noted that much has changed in the law since 2003, and that this report is very dated in its recommendations in view of court decisions issuing since 2003.  He also highlighted that the biggest challenge for the FTC is to find what changes in the patent system will serve all inventors, all companies, and all technologies.  Lastly, whatever changes are proposed, there is the overriding need that the system be fair and efficient.

Panel 2: Recent And Proposed Changes In Remedies Law

The second panel dealt with the “proposed changes in remedies law, their impact on innovation.”  On the panel were Thomas F. Cotter, Briggs and Morgan Professor of Law, University of Minnesota Law School; John R. Thomas, Professor, Georgetown University Law Center; John Squires, Chief Intellectual Property Counsel, Goldman Sachs & Co.; Q. Todd Dickinson, Executive Director, American Intellectual Property Law Association; and Hon. Roderick R. McKelvie, Covington & Burling, former judge for United States District Court for the District of Delaware.

The panel started off with Mr. Cotter, who presented an overview of patent remedies in general, including both interim remedies and final remedies available for infringement.  He also indicated that it is useful to note that patent remedies can be expressed in terms of protecting patents as property rights or as liability rule entitlements.[9]  If thought of as a personal property right, the patentee and user are forced into private transactions to allow use of the property.  Moreover, as the user and patentee generally have the best information on the value of the patent as compared to a court, the parties are more likely to accurately estimate the value of the patent.  In contrast, where patents are not considered property but instead are liability rule entitlements, the public interest is more likely to be protected and the courts can act as a safety valve to protect the public interest.  An example he used was the use of 28 U.S.C. §1498 as a mechanism for the government to ensure patents do not prevent manufacture of essential medicine.  As such, where patents are liability rule entitlements, courts can protect against patent holdups (i.e., inadvertent infringement and surprise) to the extent that the holdup exceeds the inherent value of the patent.

Mr. Cotter noted that the rule post eBay v. MercExchange, 547 U.S. 388 (2006) is that permanent injunctions must satisfy a traditional balancing test.  However, such a balance does not inherently prevent NPEs from obtaining an injunction.  Moreover, he noted that lower courts, in deciding whether to impose a permanent injunction, should focus on whether the infringement has the indicia of patent holdups, whether a patentee has a legitimate business interest in exclusive licenses as opposed to non-exclusive licenses, whether voluntary licensing is otherwise possible, and whether the denial of a permanent injunction runs afoul of TRIPs article 28.[10]

Lastly, Mr. Cotter reviewed damages law and noted that “damages should render patentee neither better nor worse off as a result of the infringement,” but that “[d]epartures from baseline are sometimes necessary to avoid either under- or over deterrence.”[11] As such, courts apply reasonable royalty analysis generally, but will apply lost profits if needed to ensure that the patentee is put in the same competitive position it would have enjoyed without the infringement.  Where deterrence is needed in addition to traditional damages, courts should apply enhanced damages.  The problem is that such analysis can be distorted by using the entire market value rule, which tends to inflate damages by creating a large base against which even a small royalty rate can result in inflated damages.

Next on the panel, John Thomas generally agreed with Mr. Cotter’s summary, but noted that a problem that the courts face when attempting to craft appropriate damages is that there is no market against which to compare the proposed damage award.[12]  Moreover, he noted that it is not always clear whether the increased accuracy of finding the true market cost is worth the increased cost of obtaining that information.  Without this market, he indicated that courts have found an average reasonable royalty of 13.3% of the purchase price.  However, this rate may well exceed the profit actually enjoyed by the infringer.  As a result, such high royalty rates would indicate that the damages are acting as disgorgement since they likely exceed the profit margin of the infringing product, as opposed to merely representing the result of a true bargain between the parties.  Lost profits has a similar problem since such awards are likely to exceed the profit margin that the patentee would have enjoyed had the infringement not occurred.

An additional issue to affecting awards, according to Mr. Thomas, is that courts are not applying apportionment as required under the Georgia Pacific factors.[13]  Instead, the courts are applying the entire market value rule without accounting for the actual value of the infringed component to the overall apparatus.  As a result, he urged the FTC to ensure that they look at the theory of damages and study what is the proper goal for damages.

Following Mr. Thomas on the panel, Q. Todd Dickinson discussed the changes in law since the 2003 FTC Report which affect its prior recommendations.  Mr. Dickinson noted that the Supreme Court’s decision in eBay v. MercExchange, 547 U.S. 388 (2006) ensured that permanent injunctions are not required, which thus addressed a concern of the 2003 FTC Report that the threat of an automatic injunction created market distortion.  Further, the threats of business uncertainty by assertions of infringement have been somewhat ameliorated by the Supreme Court’s decision in MedImmune v. Genentech, 549 U.S. 118 (2007).  The result of this decision is that it is now easier for an accused infringer to bring a declaratory judgment to determine if there is infringement, thus allowing for greater business certainty and helping to prevent the distortions of concern in the 2003 FTC Report.

Mr. Dickinson also noted that there were concerns in 2003 that the threshold for finding willfulness was too low.  Thus, there were those in the user community who wanted a clearer notice standard for purposes of willfulness, as well as more good faith defenses to charges of willful patent infringement.   However, this concern has been somewhat addressed by the Federal Circuit’s decision in In re Seagate, 497 F3d 1360 (Fed. Cir. 2007) (en banc), which established an objective recklessness standard to find willful infringement and eliminated a duty of due care.  Such standard in later Federal Circuit decisions appears to increase the types of good faith defenses available to an accused infringer.  In view of these decisions, Mr. Dickinson indicated that the FTC should concentrate on and identify the following: “What are the remaining problems in need of solving? What is the best approach to solving these problems? In view of legislative stalemates on patent reform should the focus be on improving the USPTO and leaving it to the courts to further clarify the law?”[14]  Mr. Dickinson agreed that damages law should be reformed to focus more heavily on properly apportioning the true value of an invention within an infringing device, but indicated that the courts are in the best position to provide such guidance.  Lastly, he cautioned that legislative solutions should only be attempted in those areas of law where “change is needed that cannot be accomplished through the courts.”[15]

John Squires next addressed the impact of the Supreme Court’s decision in Quanta Computer Inc. v. LG Electronics Inc., 128 S.Ct. 2109 (2008) in further addressing certain concerns outlined in the 2003 FTC Report dealing with damages.[16]  Specifically, he noted that the Supreme Court’s decision in eBay not to make injunctions automatic upon a finding of patent infringement was important, but that there also needed to be clarification on the issue of exhaustion.  Specifically, NPEs are not deterred from bringing suit merely because there is a decreased likelihood of an injunction.  Instead, such NPEs are motivated by increasing the possible damages, and do so with the entire market value rule.  As an example, Mr. Squires presented a hypothetical in which a cell phone is sold for $10, and has four patented components each costing $2 but having a 10% patent royalty imposed on each component  ($2*10%*4=$0.80 per cell phone).  In contrast, if one of the components is evaluated using the entire market value rule, even at a reduced 5% royalty, one of the components has an effective royalty of 25% ($10*5%*1 = $0.50 for a $2 component).  This distortion due to the entire market value rule being selectively applied to the four patented components would reduce the return on investment for the overall cell phone from 12% to 9%.  This represents a chill on innovation and is solely due to skewed valuation caused during litigation and only aids the short term goals of NPEs without aiding commercialization.  It was Mr. Suires’ hope that Quanta will be applied to help decrease the ability of patent owners to effect control over related, unpatented items.

Last on the panel was Roderick R. McKelvie, who discussed the impact of In re Seagate on the law of willfulness.[17]  Mr. McKelvie began by noting that, at the time of the 2003 FTC Report, problems caused by the law of willfulness were perceived to be that the law discouraged researching patents, did not function to deter culpable conduct, interfered with lawyer-client relations, and spawned inefficiencies in patent litigation.  As such, the 2003 FTC Report indicated that willfulness should be limited to situations in which there is only copying or written notice of infringement.  The National Academies report, “A Patent System for the 21st Century,” proposed instead that the affirmative duty of care be abolished and that the trials be bifurcated on the issue of willfulness.  Since that time, the Federal Circuit issued In re Seagate in which it abandoned its holding in Underwater Devices, Inc. v. Morrison-Knudson Co. Inc., 717 F. 2d 1380 (Fed. Cir. 1983) that had established the affirmative duty of due care.  In rejecting Underwater Devices, the Federal Circuit replaced this affirmative duty of care with an objective test based upon recklessness.

After reviewing District Court cases since In re Seagate, Mr. McKelvie showed that District Courts have generally not granted summary judgment to remove the issue of willfulness (or at least stay discovery).  In contrast, his research indicated that post trial, District Court judges were likely to find no willful infringement in non-jury trials, and were also likely to overrule a jury on willfulness.  Moreover, his research indicated that willfulness is still pled in complaints at roughly the same rate as prior to In re Seagate.  As such, Mr. McKelvie indicated that the law of willfulness post In re Seagate has likely not resolved the problems of concern in 2003.  As possible solutions, Mr. McKelvie noted that the Federal Circuit could be helpful in encouraging resolving willful infringement issues at summary judgment, and that a legislative solution may be the best way to resolve the issues such as by not allowing willfulness to be pled until after infringement is established or by making the decisions on willfulness be decided by judges as opposed to juries.

Panel 3: Legal Doctrines That Affect the Value and Licensing Of Patents

The third panel dealt with the “changes in legal doctrines that affect the value and licensing of patents” as well as the “role of unpredictability and notice in the IP marketplace.” On the panel were John F. Duffy, Oswald Symister Colclough Research Professor of Law, George Washington University Law School; Joseph S. Miller, Associate Professor, Lewis & Clark Law School; Visiting Associate Professor, University of Georgia Law School; Michael Meurer, Michaels Faculty Research Scholar, Professor of Law, Boston University School of Law; Jeffrey P. Kushan, Partner, Sidley and Austin; and Duane R. Valz, VP & Associate General Counsel, Global Patents, Yahoo!.

Starting off the panel, Mr. Michael Meurer presented results based upon his book, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk Princeton University Press (March 23, 2008).  Among other results, Mr. Meurer noted that his research indicates that patents under the current state of the law are not functioning well as property with one exception: pharmaceutical patents.  He posits that the reason for this failure is the lack of notice as to the scope of the patented property.  In pharmaceutical patents, the claims refer to a defined chemical structure and the structural nature of the claims provides a possible infringer with notice of what the patent covers.  In contrast, in other technologies, the claims are described in functional terms which do not provide the requisite notice that allows potential infringers to know when they are using the patented invention.  As such, Mr. Meurer concludes that a change in law or procedure to require claims in more structural terms would help to ensure that patents function more as property.

These conclusions were challenged by other members of the panel partially on the grounds that structural claiming is not feasible in other technologies, and since certain of the numbers which supported Mr. Meurer’s conclusions could be explained due to other factors.

Next on the panel was John F. Duffy, who discussed the impact of KSR International Co. v. Teleflex Inc., 127 S.Ct. 1727 (2007) on patents.  Mr. Duffy noted that KSR stood for the proposition that the exclusive test for obviousness under 35 U.S.C. §103 was not the teaching-suggestion-motivation test as previous Federal Circuit decisions seemed to indicate, but was instead a broader inquiry into the facts and circumstances of the state of the art at the time of the invention.  However, Mr. Duffy acknowledged that the decision in KSR created a problem by adding uncertainty into the determination of validity, both during litigation and prosecution of patent applications.  This uncertainty will need to be resolved in order to provide stability in the valuation of patents.

Following Mr. Duffy on the panel was Mr. Miller, who presented information on the impact of MedImmune and its follow on cases on licensing and licensing strategies.[18]  Mr. Miller noted that, in light of MedImmune, licensors are more likely to include new clauses to attempt to mitigate the effect of the rule which allows licensees under contract to bring a declaratory judgment action.  Such clauses could be automatic license termination when the patent is challenged, license termination or royalty increases if the patent is unsuccessfully challenged, and requirements that the licensee pay the licensor’s legal fees during the challenge.  However, it is uncertain as to whether such clauses would be enforceable to the extent that the clauses interfere with the ability of the licensee to bring the declaratory judgment action within the spirit of MedImmune.  As such, Mr. Miller noted that license royalty rates may increase to account for the potential costs of a challenge.  However, Mr. Miller indicated that this increase should be small for a strong patent, which is likely to be held valid and thus less likely to be challenged, but larger for weaker patents.

Mr. Miller also noted that licensing strategies will be more strongly affected by MedImmune since potential licensees are going to be more difficult to approach.  Citing SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007), he noted that declaratory judgments can be brought even while negotiations are ongoing.  As such, any licensing approach which provides sufficient notice to give rise to liability under 35 U.S.C. §287 would also place the patent owner in jeopardy of a declaratory judgment action.

Moreover, Mr. Miller noted that in Micron Technology, Inc. v. Mosaid Technologies, Inc., 518 F.3d 897 (Fed. Cir. 2008), a declaratory judgment action was allowed merely because the patent holder was suing others in the industry and the plaintiff assumed that it was the next logical target.  Therefore, a licensing campaign can still be exposed to a declaratory judgment action even prior to notice sufficient for 35 U.S.C. §287 purposes.

As such, there is a temptation for potential licensing targets to jointly force a declaratory judgment action in anticipation of such a licensing campaign.  However, Mr. Miller noted that such joint defense agreements may expose the potential licensing targets to possible antitrust exposure.   Specifically, where multiple accused infringers use this expansion of declaratory judgment jurisdiction to collectively file suit using a joint defense agreement, a single patent owner may claim competitive harm as an impermissible group boycott of the patent license.  However, he concluded that such collective responses should not be considered an impermissible group boycott since the inquiry is not so much a boycott of the license but is instead an inquiry into information: whether a license is valid.  Thus, allowing joint defense agreements in the context of declaratory judgment actions have pro-competitive effects and efficiencies which should allow their existence without implicating antitrust concerns.

Next on the panel, Duane R. Valz noted that there was a need for certainty in the patent field.[19]  Specifically, the changes have occurred not by changes in statutory or regulatory law, but by the courts.  Further, despite such changes, the patent system is still out of balance.  As examples, Mr. Valz pointed to the continuing need to address the focus on litigation rather than value-promoting licensing, and he noted damages and venue reform are still lacking.  He noted that at the time of the 2003 FTC Report, there was a perception that patents were too strong and that new economy companies would be discouraged due to patent thickets or own too much of the public domain by patenting software.  Noting that start up companies still emerge and that open source is a viable option, these concerns have not come to pass.  However, the issue now is due to NPEs creating a secondary market to buy patents, and it is these NPEs which put the new economy companies on the defensive as opposed to the new economy companies consolidating excess power through patents.

Mr. Valz gave an overview of judicial decisions impacting patents, and noted that the general result has been to curb power of individual patents.  However, the question remains as to whether such reforms will encourage value-based licensing.  Citing In re Bilski, 88 USPQ2d 1385 (Fed. Cir. 2008) (en banc), Mr. Valz noted that the law concerning 35 U.S.C. § 101 is currently being applied very inconsistently.  Moreover, he noted that the holding in KSR was more appropriate in the litigation context where there is greater access to the facts relevant to this inquiry, but is not the standard which can be easily applied during the ex parte patent prosecution since those facts are not well developed or available, which also results in inconsistent application of the law of obviousness.  Thus, Mr. Valz argued that these court decisions need to be harmonized by the USPTO to provide certainty, and to ensure that there is also consistency with foreign patent offices.  However, Mr. Valz noted that these changes have not had much effect on the licensing of patents.

Moreover, while acknowledging that the decisions in In re Seagate and MedImmune had some beneficial aspects, Mr. Valz found that the practical result is that patent owners (and mostly NPEs) are more likely to go to court instead of first attempting to license their patents.  It is the litigation by NPEs which he believes are draining resources from the marketplace and otherwise suppressing value-added licensing.  Thus, Mr. Valz asserted that there remains a need to better calibrate the patent law and policy as well as trade law and policy, and that there remains a need for a legislative fix in the areas of damages and venue.

Last on the panel was Jeffrey P. Kushan, who argued that the impact of MedImmune has not been positive in regards to licensing.  Specifically, the relationship has become asymmetric with regards to licensees.  MedImmune allows the licensee to bring suit against the licensor during the term of the license, but the licensor cannot bring suit against the licensee during the term of the license.  Moreover, Mr. Kushan went on to discuss the impact of inequitable conduct on patent acquisition and enforcement, and noted that the doctrine has gone perhaps too far in finding inequitable conduct when there is little evidence of intent and little evidence that the prior art was truly material to an Examiner.  Almost any issue can be put forth as grounds for inequitable conduct, and is not limited to those that actually concern the Examiner.  By way of example, Mr. Kushan noted that court cases have found that by incorrectly claiming small entity status, a patent can be rendered unenforceable under this doctrine.  This issue is of great concern in bio, the practice in which Mr. Kushan is involved.  As such, Mr. Kushan would like the FTC to address this growing problem.

Conclusion

While nominally the hearings are related only to the effect of IP on competition law, which is the expertise of the FTC, the impact of the recommendations arising out of these hearings should not be underestimated.  The prior report, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, was widely distributed and used as a basis for multiple changes in rules, and in drafting the Patent Reform Act.  Moreover, this report was cited both in the dissent in Laboratory Corp. of America Holdings v. Metabolite Laboratories Inc., 548 US 124 (U.S. 2006) (Breyer, Stevens, Souter dissent) and in a concurrence in eBay Inc. v. MercExchange LLC, 547 US 388 (2006) (Kennedy, Stevens, Souter, and Breyer concurrence) as evidence of public sentiment and a need for judicial reform.  Moreover, more than one panelist, including former USPTO commissioner Q. Todd Dickinson noted the importance of this prior report.  Therefore, it is anticipated that the next report will form a further basis on which new patent reforms, including judicial reforms, will be based.


[1] The opinions in this article do not represent the official positions of Stein McEwen, LLP.   Special thanks to Nathan H. Cristler for his help in this report.

[2] A copy of Mr. Millien’s presentation, entitled The IP Marketplace Players, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/rmillien.pdf.

[3] Peter N. Detkin, To Promote the Progress…of Useful Arts: Investing in Invention, slides 9-10 (2008) (available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/pdetkin.pdf).

[4] A copy of Mr. McCurdy’s presentation, entitled, Unique Operating Companies Involved in Patent Litigation with NPEs; Patent Litigation Involving NPEs and Operating Companies, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/dmccurdy.pdf.

[5] A copy of Ms. Yen’s presentation, entitled Cisco Systems, Inc. FTC Hearing on the Evolving IP Marketplace, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/myen.pdf.

[6] A copy of Mr. Kahin’s presentation, entitled The Patent Ecosystem in IT: Business Practice and Arbitrage, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/bkahin.pdf.

[7] Quoting Giles S. Rich, The Principles of Patentability, 28 Geo. Wash. L. Rev. 393, 407 (1960), reprinted in John Witherspoon, ed., Non-Obviousness: The Ultimate Condition of Patentability, at 2:1, 8 (BNA 1980).

[8] These include uses which inhibit market entry with portfolios; present a hold up for complex products; ambush standards; exploit imbalance in litigation resources; portfolio evergreening; instill uncertainty in competitors’ customers; collusive settlements (suppress prior art, transfer patents); use of portfolios to defeat exclusive rights; use of RAND licensing to extract cross-licenses; temporary assignments (both offensive and defensive); assignments out of portfolios for surrogate attacks; situational assertions (IPOs, product launches); and track and capture standards.

[9] Mr. Cotter’s presentation is entitled Remedies for Patent Infringement: Theory and Practice and is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/tcotter.pdf.

[10] While not stated, it is noted that Article 31: Other Use Without Authorization of the Right Holder would seemingly also be applicable.

[11] Professor Thomas F. Cotter, Remedies for Patent Infringement: Theory and Practice, slide 7 (Dec. 5, 2008) available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/tcotter.pdf.

[12] A copy of Mr. Thomas’ presentation, entitled Patent Damages: Principles and Current Problems, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/jthomas.pdf.

[13] The Georgia Pacific factors are 15 factors set forth in Georgia-Pacific Corporation v. U. S. Plywood-Champion Papers Inc., 318 F. Supp 1116 (S.D.N.Y. 1970) aff’d with modification 446 F2d 295 (2d Cir. 1971).

[14] Q. Todd Dickinson, Federal Trade Commission Workshop: Recent and Proposed Changes in Remedies Law, slide 18 (Dec. 5, 2008) available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/qtdickinson.pdf.

[15] Id at slide 26.

[16] A copy of Mr. Squires’ presentation, entitled Patent Remedies: Can Quanta Finish What eBay Started?, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/jsquires.pdf.

[17] A copy of Mr. McKelvie’s presentation, entitled Seagate Plus One: How the District Courts are Implementing Seagate, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/rmckelvie.pdf.

[18] A copy of Mr. Miller’s testimony, entitled Testimony of Professor Joseph Scott Miller, Lewis & Clark Law School, is available at Testimony of Professor Joseph Scott Miller, Lewis & Clark Law School http://www.ftc.gov/bc/workshops/ipmarketplace/docs/jmiller.pdf.

[19] A copy of Mr. Valz’s presentation, entitled Yahoo! Inc- FTC Hearing on The Evolving IP Marketplace, is available at http://www.ftc.gov/bc/workshops/ipmarketplace/docs/dvalz.pdf.

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