The Story of Congressional Patent Reform: When Mancur Olson Happens to Good Ideas

1. The Story of Congressional Patent Reform: When Mancur Olson Happens to Good Ideas

2. Splitting the difference between narrow interest groups does not produce good social policy

3. Current State of Play • H.R. 1908: passed by full House • S. 1145: different bill voted out of Senate Judiciary Committee • Senate now working on trying to avoid Conference Committee

4. Why Patent Reform? • Strong sense that low-quality patents have been (are being) issued, particularly in IT • Hierarchy of harms • Extraction of licensing revenue (not just nuisance value to avoid litigation but also public good problem associated with challenge) • Extract huge sums through hold-up (Blackberry) • Seriously threaten new entrants (e.g. Vonage and VOIP)

5. Low-Quality? • No great objective measures • But examination is an ex parte proceeding • Lack of examiner resources; examiner incentives to issue patents (and possibly favor unlimited continuation apps) does suggest low quality • Jensen et. al (2006): EPO grants patents in only 72.5% of cases where USPTO grants; JPO in 42.5%

6. What To Do? • Not cost-effective to examine all patents intensively • Administrative opposition proceedings brought by private sector competitors could target important patents (essentially, formal adjudication) • $100,000 vs. millions in court adjudication • Low cost also mitigates public good problems associated with patent challenges in litigation (essentially expensive win is shared with the world; expensive loss is challenger’s alone; incentive to license bad patents and “pass through” fees to users) • Also under admin law deference principles, losses and wins are shared with world

7. (Original) Patent Reform Act of 2007 Administrative action to challenge patent validity -- within 12 months of grant -- notice of infringement -- consent Done in 1 year; so presumably judicial challenge would await administrative determination of validity (and give deference thereto) Avoid juries! Preponderance of the evidence standard

8. IT vs. biopharm • Biopharm: no second window • Has better patents, fewer of them; needs early certainty • But IT still has good argument – many patents not worth opposing until asserted • Creative compromise could have involved self-selection into rigorous proceedings (with attendant deference to results) • Instead, House bill eliminates second window • Current Senate bill retains it but with bizarre set of evidentiary standards (clear and convincing as to veracity of evidence; preponderance otherwise)

9. Rulemaking Authority: Another Olsonian tale . . . • Currently, very limited (and even that is being challenged, Tafas v. Dudas) • Original bill would have provided enhanced authority • Full rulemaking not necessarily a good idea • But lack of policymaking apparatus in system is a problem (even agencies that do limited rulemaking ex ante e.g. FTC/DOJ have agenda setting power because they bring antitrust cases) • No interest group in support; biopharm opposed • Nothing in bills addresses longer term policymaking questions

10. Circumventing the Logic of Collective Action? • Recent Supreme Court interventions (KSR, EBay) • KSR: may give more power to PTO, lower courts to reject (some) bad patents • But doesn’t deal with PTO’s structural issues • Fate of Tafas v. Dudas quite unclear (will Court be interested?) • EBay: liability rules may address huge overpayments due to hold-up (Blackberry) • But won’t address public good problems that lead to undue licensing of bad patents (and dynamic incentives to then file even more bad patents!) • Liability rules assume judges, juries do reasonable job of valuation (contra current evidence, hence wrangling in Congress over “reasonable royalty” damages) Supreme Court can not be the patent policymaker of first (and last) resort