Scherer on Compulsory Licensing

In 1977, noted economist F.M. Scherer wrote a monograph entitled “The Economic Effects of Compulsory Patent Licensing.”  At that time, there was pending legislation on compulsory licensing of nuclear technology.  In some ways, Scherer’s analysis thirty years ago can serve as the starting-point for determining whether to issue an injunction in our post-eBay environment. Specifically, Scherer argues that compulsory licensing should not be favored when any of the following are true:

  1. The patent holder’s share of the product market averaged less than 20% over the preceding five years; or
  2. The patent holder’s total sales of related products during the past five years as well as the reasonably anticipated sales over the next five years are less than ten-times the patentee’s R&D budget; or
  3. The patent holder exercised extraordinary creative initiative or extraordinary technical and financial risks in its innovative effort.

Scherer was concerned that injunctive relief was most important for small and especially micro-sized firms whose barriers to entry and lack of non-patent competitive advantages increased their relative valuation of patent importance.

19 thoughts on “Scherer on Compulsory Licensing

  1. Having once worked for Reynolds Metals before it was gobbled up by Alcoa, I’d love to know what a fatal aluminum foil accident is?

  2. This thread is one of the best we have had since I started regularly visiting this web site.

    Let me propose a scenario of my own:

    An inventor develops a breakthrough technology that quadruples battery power density and life. The inventor, having been diagnosed with severe paranoia, never files for a patent. The inventor dies six years later in a fatal aluminum foil accident (trust me, you do not want to know about a paranoid individual and aluminum foil) and the invention goes into the trash along with significant piles of other perceived trash.

    Twenty seven years after the dead paranoid inventor developed the high density, long-life battery, Duracell finally comes up with a similar process and patents it.

    Now, was it better for society that the original inventor did not patent because he did not trust anyone, or would society have benefited from a patent that would have expired twenty years after filing?

    This scenario is the reason for the patent system. People once regularly hid their inventions rather than placing them in the public domain in exchange for a limited monopoly. While there are patent horror stories, the system has worked in the past. We can make it work again.

    Oh, and I am not anonymous because I figure I should only say things on this web site that I would say to your face.

  3. Thanks for the thoughtful replies to my comment, and the further discussion.

    I work in the software/electronics/sensors area. I have two patents, have sued and been sued, have successfully and unsuccessfully worked to raise money for startups, have licensed patents from and to universities, and am currently being presonally pressed for 100′s of thousands of dollars of license fees due to my hobby. I’m not a lawyer, but I’ve seen many of them in action in the IP arena.

    I value all your expertise and passion, but have regretfully come to the conclusion that somewhere along the way the patent system has become adrift from it’s original goal. I’m not entirely sure whether this is due to the poor quality of patents that are being issued, or the extreme difficulty of correcting that situation once it’s happened, but it seems to me that in the last 10 years or so the patent system has gone from protecting and fostering innovation (which is good) to being a tool for blocking and distorting innovation (which is bad).

    I can point to patents that were recently issued on 20-year old technology that are now preventing other advances, but where none of the people who want to build related products have can accept the monetary costs, engineering time or risk to defeat the patents. Oh, well, two new products lost to the public, because of the patent system.

    I can point to very talented people who have chosen to leave the field of innovation because dealing with threats from the holders of bad patents is just too much personal risk.

    And I can point to _lots_ of articles where large and small companies and individual developers say that the current handling of patents in the computing/software industry is causing uncertainty and cost in excess of the benefit. I agree with them.

    I’m not sure what the right solution is. “Better patents” is too simple; legal structures have to be consistent with reality, and the only way to better patents is via a better examination system. But what would that look like? I don’t know. I’ve never been a patent examiner. But I have been involved in getting my two patents, and I know two things: (a) Patent examiners don’t, and probably can’t, know what practitioners know, and (b) applicants have too much influence in explaining the current state of the art to the examiners.

    One of my colleagues argues that, in addition to examination, the PTO should have a _prosecution_ arm; mistatements to the examiner should be a crime that the government prosecutes. After all, some applicants do commit “fraud” in the pure legal (not patent) sense. This would greatly level the playing field, just as moving criminal prosecution from “individual retribution” to a “king’s right and duty” 100′s of years ago stabilized society.

    I’m quite certain that I don’t know all the issues, and can’t individually point to a better system. Finding the right improvements will take the work of a lot of people. But, at least in my area, many people do agre that the system _is_ broken, and that we have to find a way to improve it.

    It would be best if the patent-prosecution industry came along on that quest for improvement. Saying “no, we’ve got it right” isn’t going to cut it in the long run.

    Bob

  4. B.E. Burdick wrote:


    The focus should be on promoting progress and rewarding the inventor, not on the patent owner (if different) …. ”

    I am afraid that you are missing a basic point of economics – rewarding the non-inventor patent owner DOES reward the inventor. The non-inventor patent owner provides a vehicle for inventors to monetize their invention (thereby, encouraging them to invent). If you eliminate or reduce the ability of the non-inventor owner to enforce patents (i.e. to enforce the right to exclude), non-inventor owners simply will not buy patents, or will pay to inventors much less, thereby reducing the actual reward to inventors, thereby reducing the incentive for inventors to invent and disclose (after all, inventors are NOT idiots, and if they can not make $$$ inventing or disclosing, they will engage in other more lucrative activities).

    I also submit that after e-Bay, VCs may be more reluctant to fund many start-ups (e.g. start-ups with “good” technology and “weak” business resources) if the start-up’s IP is now less enforceable against large corporations.

    I wonder how many of the academics assaulting the patent system have ever tried to raise money for a start-up – it is HARD, precisely because it is so easy (and common) for richer, more entrenched players to simply “steal” the technology and use their superior marketing resources. After they steal the technology, the deep-pocketed corporations merely tells the exasperated inventor or start-up “go-ahead, sue me.” (many readers are familiar with the infamous case of the patent on rain-controlled windshield wipers ). All too often, the only chance that the inventor’s threat to sue will NOT be an idle threat (i.e. the only time when there IS an incentive for infringing corporations to respect the inventor’s right to exclude) is when the inventor can sell the patent and/or certain rights associate with the patent.

    Often, $$$$ is raised by a start-up after a patent application has been filed, after novel technology is at least somewhat mature, but before the fledgling corporation has developed appropriate marketing channels. Often, during investment negotiations between start-ups and VCs, VCs reason that even if the risky marketing plans do not pan out, they can always sell-off the technology and recoup some or all of their investment – this minimizes the risk for the VC, and may be an important factor in a given VC’s decision to invest and reward the inventor. Threfore, I contend that the patent system reduces the “cost of VC capital” to the inventor/start-up.

    Weakening patents (i.e. by overthrowing the almost 100 year precedent of automatic injunctions for valid, infringed patents) only provides more of a disincentive for VCs and others to risk their capital and invest in start-ups – therefore, this raises the cost of capital to inventors/start-ups.

    Everyone agrees that start-ups are a major engine of technological progress (and economic prosperity, especially in the USA).

    I submit that weakening enforcement of patents (for example, via the e-bay precedent) impedes progress (i.e. by raising the cost of capital to inventors, maybe prohibitively) rather than promotes progress.

    Now, of course, many may counter this argument by contending that the floor has not dropped in the VC industry in the past several months. I respond that it may take a certain amount of time for the “new reality” to sink in, and, eventually, investment capital seeks the greatest reward for the least risk – whether that be in developing new technology, or in real estate, or in opening a new McDonalds. If there is less of a reward associated with funding new technologies, investment $$$$ (which, in all-too-many cases, drives the development of the new technology in the FIRST place – talk to any independent inventor – especially one just starting out) will eventually shift to where opportunities are better.

    Of course, try explaining this to any one of the amicus-brief-happy law-school professors who never had to actually raise $$$ (i.e. to convince a VC to take on Micosoft or Intel, etc) for a start-up with the ‘disruptive technology’ that our pundits routinely and correctly praise.

    Moshe

  5. Nice thread with thoughtfully worded posts.

    It seems to me that the present law handles the situation properly. If the inventor publishes, the damages can include reasonable royalty retroactive to publication date, assuming a published claim (policy-to prove constructive notice)and a valid issued claim are infringed. So, an inventor IS potentially punished for not publishing. That is one of the incentives to publish in the current system.

    Now, as to injunction or not…it seems hypothetically that the law should allow a Court to make an equitable determination as to whether or not (a)the infringer began the infringement without actual or constructive notice of the existence of a pertinent patent claim of the patentee, and (b)if the reward/incentive to the inventor will be greater if an injunction is not issued. If no to either, injunction. If yes to both, it seems that the incentives for promotion of progress of the useful arts would be best served by NOT issuing the injunction. Then the Court would need to issue an order implementing steps to assure (b) that the incentive will, in fact, be greater to the inventor by not issuing the injunction.

    I don’t see the extent of infringement being any excuse for denying an injunction unless the incentive to the inventor is greater by not issuing the injunction. The focus should be on promoting progress and rewarding the inventor, not on the patent owner (if different) or the infringer since the Constitution has already made that the focus, i.e. the determination that Congress can pass laws securing to the inventor the exclusive right for a limited period to the inventor’s discovery in order to promote the progress of the useful arts and sciences.

    Again hypothetically, if the progress of the useful arts and sciences will clearly be better served by denying the injunction, then it seems that Congress might pass a law under the commerce clause to that effect. However, in the absence of such a law, it seems the Court might make a determination to that effect and on equitable principles determine that the framers intended that promotion of progress in the useful arts and sciences was the objective and that patents were secondary as a means to that end and thus, where the patent serves to retard such progress, determine that progress required no injunction or even no reward to the inventor. The Constitution does not say Congress MUST provide a patent, only that it may do so. Likewise, the Constitution does not say other means of promotion of science and technology are prohibited, and clearly they are not. Otherwise, how could the various science grants and science supportive agencies such as the National Science Foundation, the Smithsonian, and the like be Constitutional? So, it would seem that a Court is not Consitutionally bound to patent injunctions unless Congress so specifies. Where a patent injunction retards Scientific progress, there is an argument that the Court should be allowed to rule in equity that, Constitutionally speaking, progress trumps patents and that reasonable exceptions must be possible where the Court can fashion relief that promotes scientific progress, particularly where the inventor can be rewarded sufficiently by the relief to reasonably assure incentive to future invention.

  6. How about another hypothetical situation. Independent inventor comes up with new circuit and wants to use it in integrated circuit form in products his fledgling company manufacturers. Inventor obtains NDA from IC manufacturer who also does custom ICs, gives design to IC mfr. and asks for quote on custom IC. IC mfr. “no bids” the custom design but a year later comes out with the inventor’s IC as their own product. IC is wildly successful and used by Inventor’s competitors in their products. Inventor puts IC mfr. on notice. IC mfr. enters into mutual defense agreement with their customers (inventor’s competitors) and files DJ action against Inventor. Inventor counterclaims for infringement and damages of reasonable royalty based on value of IC to Inventor’s competitors which use IC. Court throws out Inventor’s damages claim and rules Inventor is only entitled to reasonable royalty from IC mfr. based on the price of the IC. Inventor drops damages claim against IC mfr. (wanting to save that for future actions against his competitors) and asks only for injunction. Is the Inventor entitled to an injunction?

  7. Raison d’Etre – The fundamental reason for a patent system is that the ability to copy other people’s inventions is a massive disincentive to innovation. Without a patent system some of those who founded technological corporations might have gone into another field altogether, like real estate, for example. What the patent system does is strike a bargain where you have to describe your invention and you get to keep the rights for a set period of time.

    Terms – I don’t know the old patent law of Venice myself, but the 2nd oldest patent law is the English Statute of Monopolies, passed in 1624 (bear in mind that English patents existed before that, by royal prerogative). It set patent terms of 7, 14 or 21 years, but failed to indicate how it was decided which term you got, and that is a mystery to me, but may have remained a matter of royal prerogative. Later English laws settled on the in-between term of 14 years, later increased to 16, and the US had a 17 year term at one time in the recent past. More recently, most countries (including the US, although lagging bahind) adopted a term of 20 years from filing, but all previous terms had been worked out from the date of the grant. IOW, the 20 years from filing is not an increase, but is longer to allow for it being calculated from an earlier date. The old patent terms calculated from grant were generally between 14 and 18 years, but in some cases 20 years from filing cut years off the term. The effect of calculating from filing is to cut the patent term down if you delay. This means that the strategy of keeping an application alive and not allowing it to be granted while waiting for someone who you can sue is largely dead, and hence irrelevant to any sensible discussion. It also means that paetnt terms haven’t really increased.

    Rights – In most countries there is a right to exclude and a provision for compulsory licences for non-working. The US has never had the latter, although it has often been debated. Now, eBay v MercExchange has effectively introduced it by the back door. Two sections of the law, 35 USC 154 and 283, contradict eachother anyway. s154 gives the right to exclude, and s283 says injunctions should be decided on principles of equity. eBay v MercExchange decided that s283 invokes the four-factor test that goes back to the dim and distant past in English law, and certainly is unquestionned in all other areas of the law in the US, whereas all previous courts had given a virtually automatic injunction, since essentially nothing else could ever be consistent with s154. Probably the statute is fatally flawed. Arguably, though, the construction is correct, as s283 is under ‘remedies’, and hence more specific than s154 (the principle being that the more general clause gives way to the more specific one).

  8. A reasonable royalty under Georgia-Pacific doesn’t have to be fair market value, which presumes a willing buyer and a willing sellera where neither is under any particular compulsion to act. The availabilty of non-infringing alternatives (e.g., the need to design around or not) is a specific factor to be considered. This is the same as taking less for your old house and paying more for your new house if you have to move on short notice.

    Whether an application is or is not published shouldn’t be much of a factor, if at all. (If it is, we should make publication mandatory, not punish those who don’t publish.) Does anyone really believe the length of time it takes for a patent infringement suit to be decided is not a long enough time for the audio supplier and/or car maker to have designed around the invention and/or chosen another non-infringing alternative? Do they now get a compulsory license for less because they lost the litigation gamble AND save the costs of designing around?

    I’m starting to look at this situation not so much as compulsory licensing, but as a new species of intervening rights. It is bizarre to me that the fact and extent of infringement may give the infringer the right to continue infringing.

    Regarding Congress’ right “to Promote the Progress of Science and the useful Arts,” the ONLY means by which Congress may do so is “by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” I find it very curious that the Supreme Court in E-Bay has not only read “exclusive” out of the statute, it did not cite the Constitution.

    The fact that a few patents may not benefit the general public until the patent expires does not mean progress is not being promoted in general or even relative to those few patents for which the benefit comes after they expire. Progress and public benefit are not synonymous. (If one considers such delays a problem, a much stronger case can be made with respect to copyrights, where the lifetime of the copyright which will virtually always exceed the lifetime of anyone alive when the work was created.)

  9. Bob,

    I hear what you’re saying, but there are a number of ways that pure licensing companies can promote progress, which I agree is the policy to keep focused on. Here’s the theory.

    One idea is that a licensing company may be a small inventor’s best chance of monetizing his genuinely novel and non-obvious invention. The licensing company may serve as a broker in a sense for various inventors. Another possibility that reflects promotion of innovation is that some licensing companies, or companies that do a lot of licensing, evolved from companies that either tried to sell products related to the licensed patent/patent portfolio or had problems cross-licensing other patents to sell products or had other business and legal problems that prevented them from selling their own patented products or services. Their patents may be important, but it may be impossible legally or economically to exploit them directly.

    And if they can’t convince other companies to license, they sue. As is their right under the patent laws. On the remedies side, that obviously will also affect the incentive to invent and disclose, and to the degree that licensing companies serve some function to bring patentable inventions to the public, they should have access to remedies in court. Which means cash.

    So, even if what I wrote above has to be verified empirically to see what’s really going on, we have to be careful with generalizations about the companies that are typically labelled as “trolls” with respect to promoting progress.

  10. I have yet to find empirical evidence that patent laws are necessary to “promote the arts and sciences.” On the other hand, there have been studies showing the opposite effect. Please enlighten me. Even if there are studies that show patent laws promote innovation more than stifling it how do we determine the optimum patent term? If I am not mistaken when the first patent laws were enacted the patents were given a shorter life.

  11. Bob, I wonder if you could say more about your point of view. In your comment, you seem to indicate that a true inventor should have some lofty goals of bettering humanity, and only then should a patent be granted or enforceable.

    From an economic perspective, there is no need to grant patents to individuals who would invent anyway (because of their generous humanity or for whatever reason)

    Rather, the patent system is here to provide an economic incentive for innovation. Using money to incent invention goes way back — at least to the 1400′s when Venice enacted the first known patent statute. The following is from the preamble:

    “We have among us men of great genius, apt to invent and discover ingenious devices; and in view of the grandeur and virtue of our City, more such men come to us every day from divers parts. Now, if provision were made for the works and devices discovered by such persons, so that others who may see them could not build them and take the inventor’s honor away, more men would then apply their genius, would discover, and would build devices of great utility and benefit to our commonwealth.”

  12. Bob, Great comment — I also wish that I knew who posted on the blog. I have found, however, that anonymous comments are necessary to spur debate.

    On that note, in case you have not read the “terms of use” for Patently-O, the blogging software does provide me with the IP address of commentors. I wouldn’t release any particular information about you without pressure from a court of law, but I might use the information in some publishable statistictal analysis of blog activity.

  13. I really wish I had some statistics on who wrote the comments to Patently-O. As a group, you seem to have lost sight of the purpose of patents, which is “To promote the Progress of Science and useful Arts”.

    Discussions of patent policy should go back to that. It’s not about who most deserves to get rich, and who doesn’t.

    For example, “Patent troll” might not be a legal term, but it does refer in common usage to somebody who’s more interested in extracting royalties than in “promoting the Progress of … the useful Arts”, at least as experienced by the rest of the populace. Maybe it’s not a legal term, but the patent legal community rightfully gets abuse from the public when you stand behind that as a reason for defend the “troll’s” actions.

    Many people on both the producer and consumer side of the “useful Arts”, including me, think that the current patent system is seriously broken, is causing a significant amount of harm to the “promot(ion) of Progress”, and needs some big changes.

    Bob

  14. Alan wrote, “Should the independent inventor be entitled to royalties based on an inflated value of the threatened injunction and its resulting shutdown of vehicle production?”

    The value of license to a patent includes (1) the value of the ability to use claimed features and (2) the value of not having to design around the patent.

    Almost no one disputes that a licensor is entitled to charge for the first.

    But what about the second?

    Certainly, some patents are difficult to design around because they’re broad. But assuming that the broad patents are valid, I don’t see anything wrong with a licensor merely leveraging a broad patent.

    Other patents are difficult to design around because of the licensees’ poor design decisions. If the licensee merely made a poor design decision that unnecessarily entangled the claimed functionality with a larger system, I think the licensee should pay for the value of avoiding the design-around process.

    However, some patents are difficult to design around because of their inherent (or commonly designed) interelationship with other components. In this situation, I think the licensee should not have to pay for the value of avoiding the design-around process because the licensor could have chosen to publish his application, but didn’t. Unfortunately, unless courts are willing consider the applicant’s decision not to publish as an equitable factor, the licensee will likely have to pay for the value of avoiding the design-around process because the threat of injunction will be stronger.

  15. I am wondering why nobody calls IBM a “patent troll” ?
    IBM owns 40,000 patents, many of them of very questionable quality…
    Just read their recent “cross-licensing proposal” for start-ups: lets cross-license out patents, and you should also pay us some money (not the other way around)
    How is that for fairness ?

  16. The irony of Scherer’s analysis is how it favors injunctions precisely in circumstances in which it’s a small entity that owns the patent in question.

    How different must have been the zeitgeist of that era as opposed to that of today’s. Somehow, somewhere, the notion has intruded into our culture that it’s the big companies that need protection against the depredations of the small ones. Big companies, it seems, can’t be evil patent trolls, only small ones, and the ultimate weapon of an injunction should be readily available only to the big, ergo good, companies.

    How did we get here from there, I wonder?

    Could it be the Borg of the Open Source community that’s paved the way?

  17. “1. Should the independent inventor be able to get injunction to stop production, knowing that it will take a full model year to design the radio out of the car model and the injunction will effectively stop production of the vehicle?”

    Oh the humanity! What will people do without fancy new volume control on their car radios??!?!? And that poor poor poor automobile manufacturer. The CEO may have to sell one of his yachts. What a terribly tragedy for humankind.

    “3. Is the independent inventor a “patent troll”?”

    Is that a legal term?

  18. Your “hypothetical” almost never happens nowdays
    (Forget about Lemelson – it’s history now)
    Most often independent inventor shows his invention to some industry player at some trade show or under NDA (after filing for a patent) only to see his invention immediately stolen and implemented in commercial products without license.
    His only recorse then is to wait (3-4-5 years) until the patent issues and sue the manufacturer for willful patent infringement.

    This is how it works in the real dog-eat-dog corporate world out there.

    If you don’t believe me, just try it once for yourself :-)

  19. I love to do hypotheticals:

    Independent inventor invents improvement to car radio volume control, files patent application and keeps it pending without publication for several years.

    Audio supplier to car manufacturer comes up with same idea and car manufacturer implements it in first year of what will be a 6 year model run in an audio system for a hi-tech vehicle consisting of AM-FM-XM radio, Bluetooth wireless connectivity, iPod input, 6 CD changer, rear DVD player and voice activated GPS mapping.

    Independent inventor, seeing improvement in new model, allows his patent to issue, sues car maunfacturer, seeks injunction and damages based on the value of the entire audio system.

    1. Should the independent inventor be able to get injunction to stop production, knowing that it will take a full model year to design the radio out of the car model and the injunction will effectively stop production of the vehicle?

    2. Should the independent inventor be entitled to royalties based on an inflated value of the threatened injunction and its resulting shutdown of vehicle production?

    3. Is the independent inventor a “patent troll”?

Comments are closed.