PatCon 3: Plenary Session

By Jason Rantanen

I'm continuing to blog the presentations at PatCon 3.

Mark Lemley (Stanford)
James Malackowski (Ocean Tomo, LLC)
David Abrams (Penn)

Mark Lemley – Why Do Juries Decide if Patents are Valid?

In other areas of administrative law, we generally don't have juries review agency decisions.  Maybe, if you're a patent lawyer, you say "we've always done it that way."  But that's not really the case. Going to talk about this today. In the past, validity questions for jury were much more limited; juries involved more advisory opinions.

What about the 7th Amendment?  Turns out that it's unclear whether the 7th Amendment requires patent jury trials. Many factors go into deciding whether there is a jury right in a civil case.  But basic question is whether this is something that was tried before common law juries in England as of 1791. 

In England, traditionally, a patent was a legal right granted by the King.  Because it's a grant by the King, in English history only the King could revoke the patent.  The King didn't of course make the decision by the 1700's; instead, it was delegated to the privy counsel.  And until about 1753, if you wanted to revoke a patent in England, the only way to do it was to go to the privy counsel  Starting in 1753, the privy counsel granted the power to the courts to cancel a patent granted by the King.  This power was later granted not to the law courts but the chancery courts.  Called a scire facias action.

A scire facias claim was a claim in equity.  So most of the times in the 1700s when the English courts nullified a patent, they did so in chancery.  Because the chancery courts couldn't call a jury, sometimes the chancery courts sent the case over to the law courts, which would have a jury render an advisory opinion.

Another way a patent could come before the court: infringement.  Patent holders could choose law or equity, depending on whether they wanted damages or injunctive relief. 

In a law court, things that looked like invalidity were sometimes being argued.  These defenses were different from we think of as a modern jury right.  First, it was a personal right.  If you invalidated a patent in law court, that just meant you meant you yourself didn't have to pay damages.  It didn't mean that the patent was invalid as against the world.  Second, a patent in 1700's England was different from a patent today.  The patent holder showed up with his device and their short description of the device and the accused device.  So validity defenses were more limited.  First, something like written description and second, something like "you didn't invent it."  Thus, most of the things we think of as invalidity weren't things that were being argued before juries in 1700's England.

What happened in the US?  During the first 40 years, we see a lot of infringement suits brought at law and relatively few scire facias suits brought against the government to challenge the patent. Until about 1870, we're still seeing validity defenses primarily as personal defenses brought in law.

1870 Act – Brings injunctions and damages together in the same suit, but only for suits sitting in equity.  And if you sue in equity, no right to a jury trial.  So the jury trial basically disappears for the next 100 years.  This is right when we're seeing the big litigation over big inventions – telephone, etc.

1971 – Blondertongue: What used to be a personal validity defense in a legal or equitable proceeding becomes a ruling that's good with respect to the world.  This has a real impact on the Seventh Amendment issue because what we're now doing with invalidity is starting to look like a scire facias action to nullify a patent.

In the 1970's, patent holders rediscover juries.  Some circuits view the jury role as advisory on the overarching validity questions; others give specific factual disputes to the jury.  The 1982 sees the creation of the Federal Circuit – just as many of these jury cases are starting to show up.  They initially adopt the factual question approach.  But in 1995, in In re Lockwood, the Seventh Amendment question is presented for the first and only time to the Federal Circuit.  And the CAFC concludes that indeed, based on their reading of the history, there is a Seventh Amendment right to a jury.  But the Supreme Court later vacates the Lockwood decision due to mootness. 

And there we stand…But the result is that we assume that the world works in a certain way. 

IN his view, if this comes up before the Court, the modern invalidity proceeding looks a lot like the scire facias action, which was brought in equity not in law.  On the law/fact point, there's a lot of precedent that issues such as patentable subject matter, etc. are decided by judges.  And from an admin law perspective, the way that patent law works doesn't fit in well with how we treat other areas of admin law.

Is is a world without a jury deciding patent validity a good or bad thing?  Selection effects make juror bias hard to examine empirically.  Doesn't think that the sky will fall.  But he does think the world would change in substantial ways.  Might make some issues more amenable to summary judgment.  Might make the system look a little less like a gamble.

One concern with giving this issue to juries is the 'nose of wax' problem posed by bifurcated decision making.  But we're already on the road to that anyways.

What if he's wrong, and there is a strong right to a jury trial on validity.  under the seventh amendment?  Seems like there should also be a jury trial right in other circumstances – challenging inter parted review decision, for example, or whether pharmaceutical cases should be tried to a jury.

Ted Sichelman: if there's no jury right, should we look at the German bifurcation system? 

Mark's answer: One disadvantage of the German system is that the two layers aren't coordinated.  Then you might have the system that years after the infringement determination you have an invalidity decision.  So he's more nervous about administrative revocation of patents than by having a judge decide these issues due to the coordination problem.

James Malackowski – The Evolving IP Market.  How are wall street traders looking at these IP trends.

1) valuing the patent portfolio as primary security for the debt in that deal. Collateralizing IP. 

2) If you are a business that owns strong IP, such as patents, you're more likely to raise VC capital and are less likely to go bankrupt. So look at the IP portfolio of target corporations.

3) Shareholder activism in use of IP portfolios.  Example – Starboard AOL activism to encourage more aggressive use of IP portfolio.  Investors looking at the use of portfolios.

4) IP event trading – analysts trying to figure out who will win or lose an IP case and how dramatic the impact will be.  Simply knowing that there will be dramatic volatility offers an opportunity to make money.

5) Fundamental Long/Short trades – thinking about the investments one makes in term of where technology and IP will go. 

Conclusions: IP is driving business valuation across all industries.  They're able to predict which patent portfolios are more valuable. They look at renewal data in the patent office to help value portfolios. 

How did we get here? 
First stage – Congress's creation of the CAFC increased the predictability of intellectual property ownership.  This lead to more licensing.  Initially cross-licensing then a move to royalty licensing.

Second stage – Rise of the intermediary.  Separation of the intellectual property from the owner/creator.  Contingent counsel, web portals, patent pools, bowie bonds, and public auctions. 

Third stage – Age of the Golden rule: Those with the gold are beginning to rule.  Equity indexes, activities, IP Event trading privateers, and companies going private. 

What can we expect next? 
-Risk management: as more capital is pouring into IP, how do we manage the volatility? Concerns include the failure of risk markets to develop.  We have to be very careful of failure.  Example: Kodak valuation failure. 
-Parties are changing: rise of sovereign funding.  Governments are beginning to understand how IP can influence economic development.  Governments acquiring IP rights to support their local economies. From a US point of view, this isn't a game that we're participating in. Will be interesting to see if this develops into a cartel.
-Regionalization of technology – IP marketplace will be globalized, but around that centralized marketplace there will be regional centers of excellence and sophistication in certain technology areas.
-Changing numbers: accounting, taxation, damages.  Originally FASB 141/142; new evolutions in the use of patents in accounting practices. This shift is going to be huge; going to make the focus on IP even greater.  Which will increase the level of management attention on IP.  He would argue that this is just a natural evolution of the marketplace towards intangibles.

He thinks this will make it more difficult to make changes to the system and will also result in a more efficient marketplace. Part of this is the development of a US IP Exchange. What will show up on this market?
    -licensing technology: will be very similar to an IPO.  This will result in liquidity. 
    -development of a patent value index.  Futures market in patent value.

Audience question – What is a unit license?

Ans: A unit license right allows you to make one unit under that license.  It's a specific definition of a right to make one unit under that license. 

David Abrams – Understanding the Link Between Patent Value and Citation: Creative Destruction or Defensive Disruption?

How do we put a value on innovation? 
What proxies are used?
-patent count: intuition is that more innovation ->more patents
    -except, patents vary tremendously in value; have a fat tailed distribution.
    -only 10% worth the cost
-Citation-weighted patent counts: intuition is that patents that are cited more are likely to be more valuable.  This is the standard proxy that has been used for two decades
    -big problem: not much evidence for using citation-weights counts.

Until now: dataset with large N, many technology classes, and actual patent-specific revenues.

Results: mean citations vs. lifetime revenue – What we see is an upside u shape.  Up to a point there is a nice linear relationship between citations and revenue; after that point, there is actually a negative relationship: after that point, more revenue with the patent is associated with a decreasing number of citations. 

New model of patent citations that incorporates:
-Productive innovations: form of creative destruction, generates spillovers, results in many subsequent technological developments.

-Defensive innovation: produced by an incumbent, purpose is to defend earlier product patent.  Successful defensive patents make subsequent innovations more difficult.  Hence, negative relationship between defensive patent value and citations.  Successful defensive patents means that there will be less downstream innovation, and thus less citations.
    -idea is that incumbents can pay a fixed cost to obtain a defensive patent that will increase the cost of innovation for the subsequent innovators by some random factor m>1.  This will make the prior patent less vulnerable to competition; it will mean less competition and thus less citation to the original patent.

Summary of model: radical productive patents generate high market value and attract subsequent entry through spillovers; above a certain value threshold, however, incumbents find that it's worthwhile to invest in defensive patents that decrease citations to the radical productive patent. 

Predictions from model:
Theory predicts that the cost to attempt a defensive innovation is more easily borne by larger entities.  The data verify this prediction.

Theory predicts that divisional and continuation patents will be more commonly used for defensive purposes.  The data verify this prediction. 

The inverted U holds across technology categories.