intellectual property and public policy. policy issues for both patent and copyright laws, the...

Intellectual Property and Public Policy

Policy IssuesPolicy Issues

For both patent and copyright laws, the central policy issue is whether existing intellectual property laws strike the right balance between providing incentives for innovation, and ensuring sufficient public access to those innovations

From an economic perspective, we also need to consider whether current law implements the right cost-benefit trade-off

Patent IssuesPatent Issues

Do patents foster innovation?Boldrin and Levine suggest they do not, but at the

end of the day, this is an empirical questionSome recent results due to Bessen and Meurer

(published in their new book Patent Failure) back up the Boldrin-Levine contention


Do patents foster innovation?Boldrin-Levine’s examples:

James Watt and the steam engineWright brothers and wing warpingAbsence of patent protection for software prior to the mid-

1990’sFirm surveys routinely find that patents are viewed as an

effective means of protecting profits from innovation only 35% of the time

Patent IssuesPatent IssuesDo patents foster innovation?

From Bessen-Meurer

Patent IssuesPatent IssuesDo patents promote economic growth?

Several observations from Bessen-MeurerPetra Moser, using information on inventions exhibited at the 1851 Crystal

Palace Worlds Fair, finds that only 11% of British inventions were patentedPark and Ginarte use cross-country data to examine the relationship between

patents and growth and find that the number of patents and rates of growth are not significantly correlated

> They do find that patents and R&D expenditure in wealthy countries are positively and significantly correlated

> But, they also find that lagged R&D expenditures are a significant predictor of current patents issued, which suggests that R&D causes patents rather than the other way around

Patent IssuesPatent IssuesDo patents promote economic growth?

As both Boldrin-Levine and Bessen-Meurer note, patent protection does seem to have a positive benefit in the pharmaceutical industry

Though historically, the chemical industry in Switzerland thrived without patent protection at the same time that rivals in Germany and France were being granted such protections


Two reforms with unintended consequences1982 creation of the Court of Appeals for the Federal

Circuit (CAFC)Removed judicial appellate review of patent cases from

the standard federal circuit courts and centralized review in a single court which specialized in patent matters

Meant to remedy inconsistencies in appellate rulings across different circuit courts, and to limit “shopping” for judges


Two reforms with unintended consequencesRestructuring of the US PTO in the early ’90’s

Congressionally mandated changes in the structure of fees charged by the PTO for patent review and processing

Changes in the financing of PTO operations designed to make the PTO a self-financing service agency

> This second change has since evolved into one in which the PTO actually contributes to the general budget of the U.S.

> PTO as profit center


Creation of CAFCIssue of inconsistency of appellate court rulings


Consequences“Regulatory capture”

CAFC has become much more inclined to rule in favor of patent holders



The conventional iron triangle



The CAFC-Patent bar triangle

Lobbying influence

Judicial appointment power


ConsequencesSignificant increase in the number of patents held to be valid

and infringed during appellate reviewThe CAFC has also strengthened the remedies available to

patentees whose patents have been found to be infringedDamagesPreliminary injunctions

Recent SCOTUS ruling allowing challenges to validity without requiring plaintiff to infringe the patent being challenged


ConsequencesDamages

Two ways of computing:> “Reasonable royalties”

» More conservative approach to computing damages> “Lost profits”

» Generally results in much larger damagesCAFC has made it easier for plaintiffs to receive large damages

> Allowing plaintiffs to charge interest> Encouraging the “lost profits” method of calculating damages


ConsequencesInjunctions

CAFC has reversed precedent in granting preliminary injunctions to patentees

> Legal sledgehammer A related issue is the CAFC’s willingness to grant

permanent injunctions after a finding of infringement> Issue of social harm> Blackberry case


ConsequencesCase: Polaroid v. Kodak

Background> Polaroid’s patents on instant photo development process> Kodak’s decision to enter this market> Polaroid’s subsequent patent infringement suit

The legal battle> 5 and a half years of pre-trial discovery> Initial trial lasted 75 days> An additional 3 and a half years passed before the judge in the case rendered a

ruling> Ultimately, Kodak was found to have infringed 7 patents



Effect of the changed legal environment becomes obvious in the penalty phase

Kodak argues that social harm would be great> 16 million instant cameras in the hands of consumers would be

rendered useless> Loss of 800 full-time jobs and 3,700 part-time jobs> $200 million investment in plant, property and equipment wasted> $150 million in rebate costs to customers

Lower court wasn’t swayed, and orders Kodak to exit the instant camera business



Kodak appeals verdict to CAFC, which refuses to stay the injunction pending appellate review, thus forcing Kodak to exit the business

CAFC subsequently upholds the lower court rulingSupreme Court in 1996 refuses to hear an appeal of the CAFC rulingPenalty phase decisions

> Lower court orders Kodak to pay $454 million in combined reasonable royalty and lost profit damages, plus an additional $455 million in interest

> More than 4 times the largest judgment in a patent case up to that time


ConsequencesKey economic consequence is that the overall cost of

innovation is increasedChilling effect leads innovators to seek out licenses for their

products regardless of the validity of patents held by other firms

Two problems associated with this> When firms pay royalties on invalid patents, they are rewarded less for

their own innovations> A decision not to fight an invalid patent imposes potential losses on

other peer firms in the industry, who may also end up paying “protection money”

» Public good aspect of contesting weak patents


ConsequencesOther consequences

Expansion of the number of topics that can be patented> Software

» Landes and Posner’s example of potential patentability of the Black-Scholes formula

> Business methods patents» Amazon.com’s patent on “one-click shopping”

> Overall effect is one of increasing the cost of doing business without providing significantly greater incentives to innovate, particularly when a patented business process is obvious



CAFC and the non-obviousness requirement> Supreme Court ruling of 1966

» Three considerations for determining whether a discovery is obvious: scope and content of prior art; differences between prior art and patent claims; and amount of average skill a practitioner in the area has

» Secondary considerations: whether the invention is commercially successful; whether others had tried and failed to undertake similar inventions; and whether the invention satisfied an unmet need



CAFC and the non-obviousness requirement> CAFC has placed much greater weight on the secondary

considerations, particularly the commercial success criterion> Result has been predictable

» A firm receiving a patent award approaches weakest rivals in the industry and demands royalties

» Weaker firms acquiesce since litigation is expensive» Patentee can then approach stronger firms knowing that if they

litigate, the licenses from the weaker firms will demonstrate the commercial success of the patent



CAFC has also encouraged greater reliance on jury trials for patent infringement cases

Previous policy was to rely on judges for decisions, since patent cases are technical and frequently not comprehensible to ordinary citizens

One study of the effect of jury trials found that of 300 cases tried by juries between 1989-96, patents were upheld almost two-thirds of the time. When judges ruled in cases over the same period, patents were upheld in less than 47% of the cases


Congressional changes in the operation of the USPTO

Beginning in the early 1990’s, in response to pressure for budgetary discipline, Congress required the PTO to set fees for patent applications in such a way that they would not only cover the costs of operating the office, but also contribute funds to the general operating budget of the U.S. government.


PTO as profit center


ConsequencesPatent review process distortions

Congressional transfers of resources out of PTO has resulted in a decline in the overall number of examiners employed and an increase in numbers of applications handled per examiner per year



Current review loads are high not only relative to U.S. historical standards, but relative to European standards.

In 2001, EPO had roughly the same number of examiners as USPTO but 54% fewer applications.

Problem occurs because of the disconnect in the way Congress sets the fees the PTO charges and the way it allocates resources for PTO operations


ConsequencesIncentive issues

Budgetary pressure makes it difficult for PTO to retain examiners

> Starting salaries for new examiners in 2002 were $53K> Salaries for examiners who have attained primary examiner

status – which typical takes 20 years – are capped at $100K> Experienced examiners can generally double their salaries by

leaving government and working for law firms specializing in patent law



Evaluation of examiners for compensation and promotion is also problematic

PTO uses a point system to determine productivity of examiners

> 1 point given for completion of initial review of an application> 1 point given for a final acceptance or rejection decision> Problem arises because applicants can modify and appeal an

application, leading to delay in awarding of second point and creating an incentive for examiners to approve the patent



Problems with focus of PTO management> “The Patent Business is one of the PTO’s three core businesses.

The primary mission of the Patent Business is to help customers get patents” (From PTO’s 2000 Mission Statement)

> After criticism of this statement, PTO management modified it to emphasize “enhancing the quality of our products and services” and “minimizing patent application processing time”

> Concurrent problems with mismanagement of modernization of information systems to facilitate search for prior art


ConsequencesResults have been predictable


ConsequencesSpecial problem for emerging industries

Inadequate search of prior art means PTO may be granting the wrong firms patents to new technologies

Since these technologies build – typically quite rapidly – on prior technology, patent policy can actually slow down the evolution of new technologies

The problem manifests itself particularly in industries affected by the CAFC’s rulings to allow patenting of business methods and software

Vergil Daughtery III case


Patent ReformBasic requirements to reform patent law have been

obvious for some timeThe CAFC’s “presumption of validity” makes challenging

patent validity in court very difficult and expensiveReform proponents have therefore proposed that the U.S.

adopt the pre-grant review model used in Germany, which allows outside parties to provide information about potential prior art or utility of an innovation to patent examiners prior to the patent issuing


Patent ReformU.S. reform attempts

1980 “re-examination” procedure> Allowed third parties to challenge novelty of a patent that had

already been issued by providing evidence of prior art in the form of existing patents, or published material on the innovation

Problems with the new procedure> Re-examination occurs after a patent has issued, giving

patentee options for challenging a negative review in court> Re-examination is handled either by the original patent examiner

or a colleague, either of whom has incentives not to reverse themselves


Patent ReformU.S. reform attempts

Problems with the new procedure> Limited role of third parties in the procedure> Restriction to novelty requirement; exclusion of contestability of

utility or obviousness> Limitation of filings to earlier patents or published material

1999 American Inventor’s Protection Act> Incorporated what were supposed to be fixes to the problems

with the 1980 law, but by the time the bill came out of the House-Senate Conference committee on the legislation, most of the changes had been watered down significantly.


Patent ReformBarriers to patent reform

Opposition to pre-examination review based on the fact that the patent application must be made public for this to work

> Denies patent applicant the option of trade secrecy in the event the pre-examination rejects application

> Argument ignores a number of important facts» Europe and other countries require pre-examination disclosure,

and very few patent applicants file only in the U.S.» Trade secrecy generally won’t be of any value if there is sufficient

prior art to reject an application pre-review


Patent ReformBarriers to patent reform

Problems of regulatory capture> The patent bar is a well-organized lobby that favors the current

complex and costly system> Use of emotionally charged arguments about the need to protect

“small investors”, despite the fact that very few patent applications come from individuals not affiliated with the research arm of a large company or academic environment

> Diffuse nature of the costs of not reforming on both firms and consumers

Copyright IssuesCopyright Issues

Key QuestionAs with patents, the key question for copyright law is what is

the optimal time span over which the copyright should hold?From a policy perspective, there has been a clear empirical

trend toward expanding the term of copyright1976 Copyright Law extended the long-standing term of 28 years with

an option to renew for 14 more years, to the life of the author plus 50 years

1998 Sonny Bono Copyright Term Extension Act modified the 1976 term to the life of the author plus 70 years

Both extensions were also applied retroactively, to existing works


Optimal durationAs we saw from our formal model of copyright protection, the

optimal duration depends on the relative costs and benefits of protection

The key benefit of protection is that it allows creators/innovators to recoup their fixed costs by excluding free-riders

The two most important costs of allowing copyright protection are

Its effect on restricting the public domain and the drag this imposes on the creation of new works

The incentives it creates for wasteful rent-seeking behavior


Optimal durationDirect evidence – whether empirical or theoretical – for what

the optimal duration of protection should be is hard to come byIndirect evidence is available, however, from data on copyright

renewalsCurrent copyright law sets a duration of 70 years beyond the death of

the authorUntil 1997, the law required that the copyright be renewed periodically

and that a small renewal fee be paidWhen we examine empirically the renewal rates, we find that they

were at an all-time low of 3% in 1904, and peaked in 1991 at 22%These low rates suggested that for most works, the commercial value

of extending the copyright for the fully permitted term simply isn’t worth the fees involved


Optimal durationThis empirical observation, together with our theoretical work

suggesting that for many works, the costs of creation can be recovered on the first sale, suggests that there might be real benefits from modifying the current system to allow an unlimited number of copyright renewals for limited time spans, coupled with a system of increasing renewal fees

Such a system would encourage allowing works in limited demand to enter the public domain after a relatively short period, while allowing owners of highly productive works to continue to maintain their copyright on these works


Optimal durationThe nature of the product being protected also has an impact

on the question of optimal durationFashion industry

Brands and logos trademarked, but designs are not protected1930’s Fashion Originator’s Guild

> Industry trade association attempted to enforce copying ban on fashion designs

> Supreme Court found this an antitrust violation in 1941> Industry currently operates without IP protection

Nature of fashion nevertheless allows for a vibrant industry> Annual cycle of design changes> Designers as bellwethers> Copying of hot new designs is optimal


Regulatory capture and copyrightRecent copyright revisions have generated several examples of very high-

level regulatory capture, with Congress itself being co-opted into modifying the copyright laws for the benefit of major copyright holders

In particular, the retroactive extension of duration in the Sonny Bono Act went largely unopposed by any of the relevant stakeholders

The economic distortion that retroactive application has is obvious: In the absence of retroactive protection, creators (Disney included) will

balance the benefits of increased protection against the costs of slowing the growth of the public domain

With retroactive application, the private benefit of added protection overwhelms the concerns about the public domain


Reform?As with patent reform, the prospects of major changes in

copyright law seem dim, given the entrenched and focused interests of copyright holders compared with the diffuse nature of the public interest

The one thing that does seem likely is that on-going evolution of technology for both the creation and distribution of creative content will continue to force changes in the nature of both patent and copyright laws

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