Protecting “The Progress of Science and Useful Arts.”

I. Introduction

 

Patents have recently received a great deal of attention as tradable commodities, attracting the attention of several hedge funds, and giving rise to investment firms that specialize in patent acquisition.[1][2] This aspect is not unanticipated, and in fact is on its face congruent with the original means for attaining the goals behind patent law – “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” [3] The idea behind providing this protection is simple: encourage innovation by giving the innovator certain property rights and protections under the law which in turn encourages market participation.[4] The ability to monetize innovation is the means by which the U.S. Constitution proposed to incentivize the research and distribution of innovations. Nowhere else has this been more relevant than in the “Technology Sector,” where patents can make or break market share, and mean big bucks for the holders of those patents.[5] With the increasing number of patents issued and the amount of money tied up in them, the amount of litigation regarding those patents has increased accordingly[6]. This paper will address some of the issues created by the right to in IP litigation.

Part II will outline a specific scenario which creates several problems in IP litigation, and discuss some of those problems in depth.

Part III will outline the need for alternative remedies in this scenario, and discuss some possible alternatives.

Part IV presents and conclusion that highlights the difficulties with current IP regulation and stress the need for alternatives to follow the goals illustrated in the constitution.

II. Discussion

 

Of the rights afforded to the patent holder (“Holder”) none is more powerful than the right to an injunction.[7] Injunctive relief allows the Holder to obtain a court order requiring the defendant to cease any infringement, thereby protecting the aforementioned monetary interests which incentivize innovation. In order to obtain this relief the Holder must show “(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.”[8]  The Supreme Court’s holding in eBay, which eschewed the matter of course right to injunctive relief in favor of the aforementioned four part test, followed traditional notions of equitable relief and was a crucial step towards a more logical application of injunctive relief in IP law.[9] [10] Injunctive relief achieves its greatest utility as a means protecting the interests of one market participant (“Producer”) against infringements by another. In this situation injunctive relief affords the Holder the ability to eliminate potential future losses, and the ability to protect their current market share. The utility of injunctive relief in this situation is further highlighted because it reduces the burden placed on the courts – an injunction allows the court to avoid costly damages calculations for future and past infringements.[11] A recent holding congruent with this theory can be seen where a Holder was found to be using the patent in question and thus granted an injunction.[12]

However, when reasonable royalties are the only damages claimed and the Holder shows little to no inclination towards market participation the utility of, and the rights protected by, injunctive relief rarely fit the purpose of “promot[ing] the progress of the arts and useful sciences.”[13] In this situation the right to an injunction does very little to increase the incentive to bargain, affords the Holder unfair bargaining advantages, and can cause a loss to society. The reason for the inefficiencies associated with injunctions in the aforementioned scenario stems from the fact that the possible desirable outcomes create more externalities under regimes with injunctions than without. It should be noted that the scope of this article is restricted to the scenario in which the Holder seeking reasonable royalties and an injunction is neither a market participant (“Producer”) nor an exclusive licensor, and a design workaround (“workaround”) is either excessively cost prohibitive, or unavailable to an Infringer– other scenarios are beyond the scope of this argument.

Firstly, the right to an injunction creates little additional incentive to bargain because it does not change the most desirable outcome (the outcome which both parties have the most incentive to achieve), but rather only affects the results when bargaining fails (the outcomes which both parties have more or the most incentive to avoid). The most desirable outcome in both schemes is for the parties to come to an agreement which reduces transaction, administrative, and social costs. The infringer wants to bargain because he can continue selling his product. The holder wants to bargain because a licensed patent generates more revenue than an unlicensed one. In fact, if the Holder’s only profit interest is royalty revenue their best goal would be to obtain as many licensing agreements as possible. By saturating the market with their idea the Holder would increase the volume of his profits, as well as hedge off any losses due to downstream market competition. Therefore, if both parties wish to maximize profits they will want to reach an agreement, preferably out of court to reduce transaction costs. An injunction would be the least desirable outcome for either party because it would decrease the total revenue each party would be able to obtain. If an injunction is granted the Infringer would no longer be able to sell its product, decreasing its revenue, which would in turn decrease the amount of reasonable royalties the Holder would be able to claim. Even if the parties fail to reach an agreement, it would appear that the most desirable outcome would be for the infringer to keep producing and selling such that the Holder could maximize its profits from the reasonable royalty damages obtained by a lawsuit.

Secondly, injunctive relief affords the Holder an additional unfair bargaining advantage because the only interest injunctive relief protects, beyond those protected by reasonable royalties, is the ability to leverage the potential losses against the infringer. When bargaining, each party has a certain threat value, or in other words the maximum price which a party is willing to pay to obtain a benefit, avoid a cost, or some combination of the two. An infringer in an injunction regime faces the additional threat of an injunction and in settling avoids a higher cost than he would in a regime without injunctions. Therefore the infringer in such a scheme is more inclined to pay a higher (or more burdensome) premium to avoid the additional costs of an injunction, which is typically quantified as an increased threat value. The Holder in this case, aside from lost reasonable royalty claims, suffers little potential damage as a result of an injunction when compared to the potential losses the infringer may suffer. Although a Holder may run the risk of losing potential royalties from the period of the injunction, the Holder’s ability to leverage the threat of a continued injunction allows them recoup or offset those losses should an agreement be reached. The threat of increased costs does not necessarily increase the incentive for the infringer to bargain, but rather it increases the amount the infringer is willing to pay. This cost is created regardless of the reasonableness of the infringers negotiations thus penalizing the unwitting infringer or potential licenser who attempts to reach a reasonable agreement. Furthermore the consumer and society has a high likelihood of bearing this cost because the additional value that the Holder is able to demand will likely affect the sale price of the finished product. If a particular product is in high demand the value lost by the producer because of an injunction will be greater, thus the price that can be leveraged by the Holder will increase. An excellent example in the similar area of copyright law is how Apple, in response to record label pressure, increased the prices on many of the most popular songs.[14] Because injunctive relief only affords the Holder the ability to leverage additional royalties created by potential costs associated with the threat of an injunction this relief should be avoided unless a significant showing congruent with the “Progress of Science and useful Arts”[15]

Thirdly, the consumer will be disadvantaged by no longer having access to the infringer’s product, creating waste and arguably slowing the progress of “Science and Useful Arts.”[16] If a preliminary injunction is granted and unsuccessfully appealed in this situation the results could have a dramatic effect on the market, and the ability of consumers to use certain products. Stopping new and useful technology from entering the stream of commerce could significantly slow the development of that technology, and interfere with the development of other technologies. Furthermore the damages to an unwitting infringer that would result from an injunction could be far in excess of the damages to the Holder as a result of the infringement. If the purpose of patent law is to “to promote the Progress of Science and useful Arts,” then the laws enacted should recognize that the dissemination of knowledge is the cornerstone of innovation.[17][18] Dissemination of knowledge or innovations “allows more people to enjoy [their] advantages [,]” this dissemination can lead to improvements of that specific knowledge or facilitate innovation in other fields, by the sheer fact of increased “static-efficiency” and exposure.[19]

III. Resolution

 

The right to Injunctive relief is generally best used as a means to give “Producers” incentive to innovate.[20] Injunctive relief gives “Producers” incentive to innovate because it allows them to invest the capital to do so with the security that their hard earned innovations will be protected and allow them to gain an advantage in the market.[21] If the Holder was a producer and did not have the right to injunctive relief he would lack an adequate remedy at law, and would stand a much stronger chance of showing irreparable harm. Injunctive relief is a fair and adequate solution in this situation because a bargaining or licensing agreement may never happen between a Holder who is a producer and any other party.

However, in the situation addressed in this article injunctive relief, in addition to reasonable royalties, protects little if any right which furthers the progress of “Science and useful Arts,” because the Holder in this situation still has revenue maximizing incentive.[22] Though it can be argued that the threat of injunction serves as a cheap and effective means of deterring willful infringement, the willful infringement doctrine takes care of this problem quite nicely by allowing the damages (which will already be calculated in this scenario) to be tripled.[23] Thus a willful infringer already risks significant damages and the remedy afforded to the Holder does not necessarily afford the Holder an unfair bargaining advantage.

In situations where a reasonable agreement between the Infringer and the Holder cannot be reached the court should strive to achieve a remedy that would put the Holder in a situation which he would have been in had the parties been able to strike a reasonable agreement. The doctrine of willful infringement can still apply in this scenario in order to deal with Infringers who are unreasonable in their dealings or obviously copied or stole the Holder’s innovation.[24] Furthermore the unwitting infringer should be afforded a similar mechanism to combat the problem of a Holder who holds a patent and waits to initiate a suit after an infringer has already begun production of a product in thereby increasing the Holder’s bargaining advantage. This practice “pejoratively referred to as ‘patent troll[ing]” has created many problems in its own right.[25] In the U.S., several companies, universities, and tech firms have founded non-profit patent acquisition firms to combat this practice.[26] Several legal systems have systems which combat this practice by affording infringers or potential infringers the ability to seek a compulsory license[27] Though the courts do not have to embrace this doctrine in its entirety the concept here could apply to function as a de facto non-exclusive license a finding for which could be supported by the Holder’s unwillingness to license his innovation for unreasonable means. Though this practice might be at “ tension with Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 422-430, 28 S.Ct. 748, 52 L.Ed. 1122 (1908),” it would provide a workable alternative to merely obtaining a permanent injunction. [28] In short the leverage created by the threat of an injunction (the current remedy) in this situation is created solely by the law; any future remedy (or alteration to the current one) should not force citizens to resort to private practices to protect themselves from oversight in policy.

IV. Conclusion

 

The rights afforded to patent holders are not the goal of patent but rather the means for lubricating “the Progress of Science and the useful Arts.” [29] The right of injunctive relief in the scenario discussed does not protect any right that furthers the constitutional goals of patent law. Minimizing the externalities created by these transactions is more important to the long term progression technology. The progress desired in the constitution relies as much on innovation as it does on the proliferation of and access innovation. Having access to new and useful technology allows society to function better as a whole, thereby increasing the likelihood of future innovation. The increased commoditization of patents needs to take this effect into account, many patent holders these days are not interested in developing and producing their items, but rather receiving money from someone who is willing to do it. Profit maximizing incentives that lubricate bargaining can be achieved through policy that does not impede the proliferation of innovation.

     



[1] Alamy, Trolls Demanding Tolls: Intellectual Property Comes of Age as an Alternative Investment, The Economist, Sep 10th 2009, available at http://www.economist.com/businessfinance/displaystory.cfm?story_id=14416641.

 

[2]See eBay v. MercExchange, LLC, 126 S. Ct. 1837 (2006).

 

[3] U.S. CONST. art. 1, § 8.

 

[4] See Robert Cooter and Thomas Ulen, Law & Economics  (Pearson Addison Wesley 2008).

 

[5] Alamy, supra note 1.

 

[6] U.S. Patent and Trademark Office, ELECTRONIC INFORMATION PRODUCTS DIVISION, PATENT TECHNOLOGY MORNITORING TEAM (PTMT), U.S. PATENT STATISTICS CHART CALENDAR YEARS 1963-2008, http://www.uspto.gov/go/taf/us_stat.htm (last visited Sep 12, 2009).

 

[7] eBay v. MercExchange, 126 S. Ct. 1837.

 

[8] Id.

 

[9] Id.

 

[10] Boomer v. Atlantic Cement Co., Inc., 257 N.E.2d 87 (N.Y. App. Ct. 1970).

 

[11] Cooter, supra note 4, at 105-07.

 

[12] John Timmer, Killing the cash cow: Microsoft ordered to stop selling Word, Ars Technica, Aug. 12, 2009, http://arstechnica.com/microsoft/news/2009/08/court-gives-microsoft-60-days-to-stop-shipping-word.ars.

 

[13] U.S. CONST. art. 1, § 8.

 

[14] Jay Wright, iTunes Raising Prices Next Month, Pollstar, Mar 29, 2009, http://www.pollstar.com/blogs/news/archive/2009/03/26/656962.aspx. (last visited Sep 13, 2009).

 

[15] U.S. CONST. art. 1, § 8.

 

[16] Id.

 

[17] Id.

 

[18] Cooter, supra note 4.

 

[19] Id.

 

[20] Id.

 

[21] Id.

 

[22] U.S. CONST. art. 1, § 8.

 

[23] See In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed.Cir.2007).

 

[24] eBay v. MercExchange, 126 S. Ct. 1837 (2006).

[25] Alamy, supra note 1.

 

[26] Ashby Jones, In Fight Against ‘Patent Trolls,’ a New Arrow in the Quiver?,  Wall St. J., Nov. 24, 2008, http://blogs.wsj.com/law/2008/11/24/in-fight-against-patent-trolls-a-new-arrow-in-the-quiver/.

 

[27] Cooter, supra note 4, at 133-34.

 

[28] eBay v. MercExchange, 126 S. Ct. 1837 (citing Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 422-430,  (1908)).

 

[29] U.S. CONST. art. 1, § 8.

 

 

 

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