Trolling around the patent-antitrust interface: the roots of the NPE challenge and the role of antitrust in patent reform.
Key words: patent, antitrust, patent-antitrust interface, non-practicing entity (NPE), patent assertion entity (PAE), patent troll, patent reform
Over the past decade or so, patentees known as nonpracticing entities (NPEs), patent assertion entities (PAEs), or--pejoratively and colloquially--"patent trolls" (1) have attracted a great deal of attention The strategic and tactical techniques that these entities deploy in monetizing patents have begun to draw scrutiny and criticism from comers rarely concerned with intellectual property (IP) issues. (2)
Specific complaints against NPEs have focused on a disparate array of behavior Perhaps the most common complaint, and the one most resonant with a broad public, concerns the broadcast of vague "demand letters." (3) NPEs deploying this strategy compile a lengthy list of companies whose products or services bear some tenuous connection to the NPE's patents--perhaps nothing more than a shared keyword--and then write letters containing nonspecific claims of infringement and offering licenses for far less than the cost of litigation Given that the cost of litigating a patent suit fully often runs into the millions of dollars, nuisance settlements can sustain a sizable NPE business At perhaps the opposite extreme of sophistication, some nonpracticing companies that employ only engineers and lawyers develop large portfolios of cutting-edge patents, and then participate in industry-wide discussions concerning the adoption of standards. (4) After securing a place in the standard for their technologies--thereby locking many companies into their patents--these unscrupulous NPEs reveal previously undisclosed information about the IP rights they control, placing the locked-in companies at a severe negotiating disadvantage in their attempts to secure the patent rights needed to field commercially viable products that adhere to the standard.
Numerous other NPE strategies exist, only some of which are even arguably objectionable, and any discussion of NPEs must recall that not every inventor can launch a company implementing patented technology. The participation of nonpracticing inventors, their legal representatives, and their successors in interest are critical to the proper functioning of the patent system; without them, patents would be little more than tools that the government grants to large, powerful incumbents seeking to extend and expand their monopolistic or oligopolistic positions. Some of the more Draconian reform proposals seem oriented toward curbing NPE activity in general rather than merely selected abusive practices. (5)
The realization that both selected NPE practices and selected proposed reforms can harm competition shifts the discussion of nonpracticing patentees from the comfortable confines of patent law and innovation economics to the interface between patent law and antitrust law. A policy concern that started with a desire of portions of the patent community to rein in selected abusive practices is widening to incorporate concerns from across the policy spectrum, explicitly including those of antitrust lawyers and economists. And while the antitrust community has long been interested in the sophisticated use of deception in standard setting, it has only recently broadened its focus to the full array of NPE strategies.
Antitrust inquiries into allegedly abusive NPE strategies have been relatively few and far between. To date, NPEs have raised more antitrust questions than answers. It is thus far too early to provide a full discussion of the antitrust implications of NPE behavior .This article intends instead to set the stage for a discussion that is currently just beginning. It does so by reviewing the history of the patent-antitrust interface, showing the relationship between these two bodies of law and general economic thought, and demonstrating the ways in which the--generally positive--recalibrations of their interface in recent decades have created many of our current challenges. In particular, it focuses on the creation of our contemporary system of very strong patent rights and the ways in which these rights have proven to be so strong that they are subject to abuse.
With that goal in mind, section II provides additional background into the current perception of NPEs, the challenges they pose, and the antitrust inquiries now beginning. Section III provides the historical review. The discussion of both patent strength and the patent-antitrust interface begins in the Lochner era of economic thought that dominated early 20th century jurisprudence, then moves into the New Deal thinking that proved dominant during the century's middle decades. The history then shifts into the dawn of the modern "strong patent" era in the early 1980s, and the varying forces that helped shape our contemporary system over the following quarter century. Section IV addresses the present trend--begun subtly less than a decade ago and just now gaining clarity--toward reining in patent rights that many perceived as having become too strong to promote optimal innovation or economic growth. The trend is manifested in two distinct venues, first internal to the patent system and then at the patent-antitrust interface. Section V looks at some very recent developments, many of them still pending and thus subject to reversal before this article appears in print, that define the nascent antitrust inquiry into broad NPE behavior that motivated the entire article. Section VI provides some concluding remarks and ties the discussion to a similar--and much longer--review of the patent system and patent-antitrust interface that I wrote in 2006, on the cusp of the trend identified in section IV. (6)
NPEs first broke into full public consciousness around 2005, when an NPE called NTP Inc. (NTP) nearly forced Research in Motion (RIM) to shut down its BlackBerry network. (7) Thomas Campana, an engineer who had pioneered the integration of e-mail and wireless communications, and his patent lawyer, Donald Stout, had founded NTP years earlier precisely to monetize Campana's patents. But when the inventor died and his lawyer took over, any sympathy that NTP might have garnered evaporated. When NTP sued RIM for patent infringement and demanded far more money than RIM was willing to pay, RIM faced the prospect of an injunction that would have deprived millions of users of their BlackBerries.
The press had a field day Fortune asked: "What would Osama bin Laden give to be able to knock out every BlackBerry in America and achieve an instant, sweeping disruption of commerce?" (8) Forbes cautioned: "Sorry, BlackBerry addicts. Despite what you may have heard, the strange and sickening saga of NTP v. Research In Motion isn't over just yet." (9) That NTP prevailed on most of its claims, thereby establishing the legitimacy of its suit, (10) swayed few outside the courtroom. When RIM and NTP reached a $612.5 million licensing deal in March 2006, (11) the matter faded quickly from the front page and almost as quickly from memory.
What did not fade, however, was the public's distaste for NPEs NPEs have since evolved in the popular imagination from an occasional scare story to a specter haunting the entire American economy. (12) President Obama captured this strand of public opinion perfectly in
February 2013 when he described NPEs as folks who "don't actually produce anything themselves. They're just trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them." (13) A month later, the Subcommittee on Courts, Intellectual Property and the Internet of the House Judiciary Committee held a hearing on Abusive Patent Litigation: The Impact on American Innovation and Jobs, and Potential Solutions, (14) a title that left little room for doubt as to congressional feelings about NPEs. Not to be outdone, the White House released a white paper on Patent Assertion and US Innovation in early June 2013. (15)
Not surprisingly, the proposed remedies exhibit a common feature: They would limit some right, or prohibit some activity, that the patent system currently allows. (16) Even some large companies maintaining sizable patent portfolios have joined the chorus calling for a weakening of patent rights--always tied to one NPE anecdote or another. (17) NPE litigation also provided a large part of the impetus behind the America Invents Act of 2011--among the most significant revisions to statutory patent law in over sixty years. (18) It played an even more significant role in 2013's Innovation Act, which sped through the House with a huge bipartisan majority and may (though probably will not) be law by the time this article appears in print. (19) In short, it is hardly news that those who see themselves as victims of NPE litigation--and their lobbyists--have joined forces with the patent community to seek significant and rapid patent reform. (20)
Within the antitrust community, roughly nine months after the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) cohosted a December 2012 public workshop on PAEs, (21) the FTC announced its plan to launch a "6(b) study" of PAEs "and their impact on innovation, competition." (22) Because section 6(b) of the FTC Act authorizes the FTC "to conduct wide-ranging economic studies that do not have a specific law enforcement purpose," (23) this study need not bear any direct relationship to antitrust (or to consumer protection, the FTC's other enforcement authority, for that matter). Still, it is hardly surprising that an antitrust authority--whose longstanding primary interest in intellectual property is the way that it interfaces with antitrust law (24)--is focusing its investigation on questions that relate directly to its own areas of enforcement jurisdiction.
The engagement of the antitrust community in a debate over patent reform is but the latest reminder that "[t]he intersection of antitrust law and patent policy has proved to be a source of perpetual confusion and controversy since the passage of the Sherman Act." (25) The shifting balance of power between the two bodies of law throughout that entire history has mirrored the broader debate over economic policy. Given that nearly all antitroll voices blame the problem on a combination of bad patents (26) and overly strong patent laws, and the historic role that antitrust has played in curbing overly strong patent laws, the more interesting question may be why it has taken the antitrust community so long to approach the issue.
Occam's razor provides a likely answer: Antitrust enforcement may be a poor solution to the NPE litigation practices attracting so much attention. Though the goal of antitrust law may be to protect the competitiveness of the American economy, its fairly blunt toolkit was assembled to address only certain types of threats. For the most part, antitrust law seeks to prevent and deter companies from achieving and exploiting dominant market positions using illicit means. By definition, an NPE doesn't participate directly in any product or service market that the patent covers (or arguably covers). In order to exert influence on those markets, the NPE must enforce (or threaten to enforce) its patents against participants whose products or services combine to represent a significant market share. For such influence to prove illicit, the enforcement must either exceed the scope of the patent or breach some general legal obligation like good faith, fair dealing, or fiduciary responsibility (for example, by fraud or deception). To trigger antitrust scrutiny then, an NPE must (at least attempt to) enforce its patents against a significant share of a market sufficiently removed from the patent such that it could not represent a good faith attempt at patent enforcement--yet simultaneously close enough to the patent for the threats to bear fruit. While some of the strongest antitroll voices contend that this confluence of events describes the activities of many trolls, (27) the challenges of showing bad faith, effectiveness, and sufficient market share may suggest that actual antitrust liability would attach far too infrequently to solve a general and widespread problem.
In addition, the harshest antitroll critics outside the antitrust community tend to focus more on extortion than on foreclosure. The common complaint about abusive litigation is essentially an extortion tale; only the complaints about deception during standard setting truly implicate foreclosure. Under the extortion story that attracts much more public attention, NPEs drive industry costs upward without seriously reducing competition--and again, even those price increases are problematic only if the patents that impose them are either invalid, otherwise not enforceable, or not really infringed. Taken together, an antitrust approach to the broad issue of NPE litigation, and specifically to the problem of abusive litigation, will likely require novel theories of market definition and anticompetitive effects before even arriving at the patent law interface--where the antitrust theories will then have to explain how to differentiate between legitimate and illegitimate behavior among the possessors of presumptively valid patents forwarding colorable infringement cases.
Furthermore, the dispute over NPE litigation is not as one-sided as the antitroll activists might want it to seem. Many patentees who do not practice their patents, including but not solely small inventors and universities, contribute greatly to both the promotion of innovation and the broader economy. (28) Their representatives help them secure in practice the very rewards that the patent system provides them in theory, thereby motivating precisely the effort and disclosure that patents are designed to motivate NPE activity also enhances the liquidity of the patent system and thus the likelihood that a small inventor will see at least some return on his investment in innovation. In addition, even taking as a given that some unscrupulous NPEs do abuse the patent litigation system to extort unearned fees, it is far from clear that the best solutions lie anywhere other than in litigation reform--effectively relegating patent reforms to second tier concerns and antitrust scrutiny to a minor afterthought.
Finally, it is always important to remember that people place their own interests ahead of industry-wide or public policy concerns. Large incumbents, including those with sizable patent portfolios, might want to limit the influence of small, nonpracticing potential entrants for reasons other than sound public policy.
The FTC appears to be exercising caution in defining the terms of its 6(b) study. It carefully defines PAEs as "firms with a business model based primarily on purchasing patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technologies." (29) This definition omits the numerous NPEs with whom the public is most likely to sympathize in a clear attempt to narrow its inquiry to problematic trolls. The FTC also limited its substantive inquiries: It intends to gather information from approximately twenty-five PAEs in an attempt to better understand how they organize their corporate legal structures and patent assets; how they acquire patents, and what sorts of relationships they maintain with prior owners; and the nuts-and-bolts of patent assertion, including methods, costs, and revenues; and to effect a case study of PAEs in the wireless communications sector. (30) Yet caution notwithstanding, and despite its broad statutory authority, the FTC also announced the relationship between its anticipated findings and its primary mission: "The FTC is conducting the study in order to further one of the agency's key missions--to examine cutting-edge competition and consumer protection topics that may have a significant effect on the U.S. economy." (31)
The FTC's careful definition raises a critical preliminary issue. Any inquiry into the propriety of NPE behavior, much less the potentially anticompetitive effects of that behavior, must begin with some definitions. Just who--or what--are patent trolls? As a technical matter, the owner of any given patent, at any point in time, is either incorporating the patented claims into a product or it is not. Because companies with sizable patenting departments (and thus sizable patent portfolios) secure patents on inventions that arise in the course of contemplating next-generation products, nearly all such companies employ only some of their patents in the products that they actually field. As a result, these large "entities" with large product lines are "nonpracticing" with respect to all patented technology not incorporated in their products--and thus NPEs with respect to those patents.
Few of the complaints emanating from large technology companies or their lobbyists intend that comprehensive and technically accurate definition. Rather than complaining about NPEs on a patent-by-patent basis, they prefer to apply the label on an entity-by-entity basis--much as the FTC has done. Under this less formal definition, an NPE is an "entity" that holds one or more patents but does not employ patented technology in its primary business.
This definition is problematic for a number of reasons, not the least of which is the way that it encompasses both entities for which there is broad public sympathy (such as universities and small inventors) with entities for which there is little public sympathy (such as contingency fee law firms). (32) The operative colloquial definition of patent trolls thus tends to be uselessly informal: A troll is a patentee that behaves in a troll-like manner. To qualify fully, a patentee must both produce nothing of value and engage in abusive behavior intended to extract unearned transaction costs from productive economic contributors. (33) In the words of Rep. Bob Goodlatte (R-VA), author of the aforementioned Innovation Act, for example,
A patent troll is someone that makes their money by filing frivolous lawsuits against companies, with the hope that these companies will pay a fee to settle rather than going to court. They don't manufacture anything, they don't create jobs; instead, they're siphoning money from companies that do. It's nothing more than legalized extortion. And they're having an increasingly destructive impact on the American economy. (34)
Cast in these terms, it is hard to imagine anyone defending the trolls.
Nevertheless, even informal definitions generate additional questions. How do we know if a lawsuit is frivolous? What sorts of behavior qualify as extortion? Consider the case of a patent holder many steps removed from the original inventor who sends an identical demand letter to dozens of companies insisting that they take licenses to an attached patent or face the threat of litigation. Does such behavior qualify? What if the patentee eventually lands in court, litigates validity and infringement, and wins on all counts? Such behavior, while undoubtedly unwelcome to the recipients of such letters, is the essence of the patent system: A patentee is entitled to secure either license fees or litigation damages--if not to enjoin further use--from every infringer, even if there are dozens of them, and even if those dozens define an entire industry that was unaware of the infringement.
A patentee thus cannot fairly qualify for full-blown troll status unless and until it has sought to exceed the bounds of its patents and extract unjustifiable fees from noninfringers--and even then, it is not clear why the legal treatment of such abuse should differ for practicing and nonpracticing entities. Furthermore, defendant protestations to the contrary notwithstanding, unjustifiability and noninfringement are merely opinions unless and until they are adjudicated (at which point they become opinions backed by the force of law).
Given all of that, why should the antitrust community exhibit more than a passing interest in patentees who choose to license, litigate, or sell their patents rather than to practice them? One possible answer derives from the inherent interest of antitrust in all forms of asset acquisition, whether or not constituted as a formal merger. Most NPEs, and nearly all (if not all) trolls, are not inventors but rather companies that acquired patents for the sole purpose of enforcing them. In a data-driven working paper analysis of such NPE activity, Morton and Shapiro note that "[s]ome of the economic effects of patent acquisitions--such as enhancing market power by consolidating ownership of substitute technologies--are familiar but appear with new twists. Others--such as evading a commitment to license on reasonable terms, or removing the ability of a patent defendant to counterattack--are more novel." (35)
A second possible answer derives from a difference in focus. Whereas the mainstream critique of NPEs tends to focus on practices involving vague demand letters, questionable lawsuits, and attempted extortion, (36) the antitrust critique (at least to date) has focused on the role of NPEs in the setting of industry standards: instances of NPEs deceiving, misleading, or defrauding industrywide standard setting organizations (SSOs) into incorporating patented technology into standards--only to spring surprising licensing terms, costs, or restrictions on locked-in market participants. (37) Such practices necessarily raise industry-wide costs, distort competition, and harm consumers--and thus necessarily implicate antitrust inquiries.
These two excellent reasons for antitrust interest notwithstanding, however, the quest for an antitrust inquiry directed toward the general extortionary troll model that has raised most public ire remains somewhat elusive. When several top antitrust economists and attorneys considered the potentially anticompetitive nature of patent trolling, they were hard pressed to find a concrete, broad antitrust angle. (38)
The likely--if subtle--reason for the growing antitrust interest in NPEs is that antitrust law and patent law are both critical components of American industrial policy. At least in theory, antitrust promotes economic growth by preserving competition, while patents promote growth by motivating innovation and disclosure. The two bodies of law collide whenever a patentee claims its rewards in a manner that forecloses some competitive activity. The location of the patent-antitrust interface at any point in time determines which such activities are legal and which are not. But that location hardly arises in a vacuum; it moves with the political and economic debates of the time, albeit with a bit of a lag. For the most part, political environments strongly protective of private property and individual effort also favor strong patent rights; those more conducive to government oversight and economic direction also favor expansive antitrust scrutiny. And legal environments favorably inclined toward governmental antitrust enforcement tend to view private antitrust enforcement just as favorably.
Any significant reform of the patent system will inevitably lead to a rethinking of the antitrust system--and vice versa. As a result, anyone interested in the future of either antitrust or patents should always keep one eye on developments in the other body of legal, economic, and policy thought. Thus, whether or not antitrust has anything directly substantive to say about reforming the patent system to address (at least) the most egregious troll-like abuses, the antitrust community should still recognize that changes to the patent system will affect the patent-antitrust interface and, through it, the role that antitrust plays in shaping our most innovative industries.
The recent rise in activity among those lobbying for patent reform--largely but not exclusively around the cause of slaying patent trolls--suggests that the patent world is nearing an inflection point If these reforms reach fruition, their effects will ripple through broader thinking about industrial organization. The history of the patent-antitrust interface provides an informative window through which to view the unfolding push for patent reform. The contours of the fight against patent trolls, in turn, provide a window on the nearterm future of antitrust.
III. THE PAST: STRONG TO WEAK TO STRONG PATENTS AND THEIR INTERFACE WITH ANTITRUST
A. Lochner and the New Deal
The need for a coherent interface between patent law and antitrust law is obvious. Statutory patent law provides patentees with the exclusive right to make, use, sell, or offer for sale a patented invention, (39) and to enjoin competitors who violate that exclusivity. (40) Statutory antitrust law prohibits monopolization, attempted monopolization, (41) and unfair methods of competition. (42) A patentee's exclusive rights thus permit at least some activities that antitrust law would otherwise prohibit, leading to a rule that is far easier to express than to apply: Antitrust law is inapplicable to patentees acting within the scope of their patents; patentees acting beyond that scope warrant no special antitrust consideration. Unfortunately, the line between "within the scope" and "beyond the scope" of a patent is not always easy to draw.
The Federal Circuit boiled the antitrust inquiry down to "a single critical question: What behavior by the patentee in procuring or in enforcing a patent can strip the patentee of antitrust immunity?" (43) If a patentee can show that it exercised "an appropriate attempt to procure a patent and an appropriate attempt to enforce a legitimately obtained patent," (44) the immunity holds and the antitrust inquiry is over. Only if the courts determine that a patentee either procured or enforced the patent inappropriately can antitrust inquiries come into play. (45)
The analogous patent law inquiry, asking whether or not a patentee "misused" its patent, may--or may not--be identical. According to the Seventh Circuit, "[i]f misuse claims are not tested by conventional antitrust principles, by what principles shall they be tested? Our law is not rich in alternative concepts of monopolistic abuse; and it is rather late in the day to try to develop one without in the process subjecting the rights of patent holders to debilitating uncertainty." (46)
The Federal Circuit registered a minor disagreement as a matter of theory; "misuse may arise when the conditions of antitrust violation are not met. The key inquiry is whether, by imposing conditions that derive their force from the patent, the patentee has impermissibly broadened the scope of the patent grant with anticompetitive effect." (47) As a practical matter, however, the Federal Circuit has never pointed to a concrete example of patent misuse that cannot be motivated using antitrust principles. (48)
The defining question of the interface is thus: Flas the patentee done anything to sacrifice or exceed the exclusive rights that the Patent Act grants? The answer has changed several times since the Sherman Act joined the Patent Act in American law. At different points since 1890, the patent system has been both revered and disfavored; antirust enforcement has been both oppressive and laissez faire. Moreover, the fates of these two bodies of law tend to follow opposing trajectories; one rises as the other falls, and vice versa. By and large, economic thinking has impelled each of these shifts in judicial, regulatory, and legislative attitudes.
The first full-blown conflict arose in the early 1900s. At the time, the Supreme Court still read the Constitution as highly protective of both private property and the freedom to contract--and was correspondingly skeptical of the government intervention and regulation then gaining political traction. This era in American jurisprudence and economic policy is typically called the Lochner era, known for a seminal case in which the Supreme Court ruled a state-regulated maximum workweek an unconstitutional restraint on the freedom to contract. (49)
The contours of that first conflict were straightforward. The A.B. Dick Co. sold its patented rotary mimeograph machine to Christina Skou, on the condition that she use only Dick's unpatented ink. Skou ignored the contractual requirement and purchased ink from Sidney Henry. Dick sued Henry; Henry responded (accurately if unpersuasively) that Dick was trying to extend its patent from mimeograph machines to ink. A divided Court upheld "the right of a patentee owner of a machine to license another to use it subject to any qualification in respect of time, place, manner or purpose of use which the licensee agrees to accept." (50) In other words, a patentee who is up-front and clear about the terms of sale can impose pretty much any condition to which he and the buyer agree--including conditions that leverage the sphere of exclusivity beyond the literal scope of the patent.
Two years later, Congress passed the Clayton Act of 1914, the second major American antitrust statute, which declared it "unlawful for any person engaged in commerce ... to lease or make a sale or contract for sale of goods ... whether patented or unpatented, for use, consumption, or resale ... where the effect of such lease, sale, or contract ... may be to substantially lessen competition or tend to create a monopoly in any line of commerce." (51) Clearly, Dick's licensing terms would have substantially lessened competition in ink. So when Universal soon argued that the Motion Picture Patents Co.'s attempt to restrict the sorts of movies that people could show on its patented projectors was anticompetitive, a divided Court overruled its precedent, pointed the law in the opposite direction, and introduced the concept that would become the patent misuse doctrine. (52) Such a restriction, the Court explained, "is plainly void, because wholly without the scope and purpose of our patent laws and because, if sustained, it would be gravely injurious to that public interest, which we have seen is more a favorite of the law than is the promotion of private fortunes." (53) The very next year, when the Wilson Justice Department sought to break up the United Shoe Machinery Co., in part for attempting to exceed the scope of its patents, the divided Supreme Court pushed back:
A patentee is given rights to his device, but he is given no power to force it on the world. If the world buy it or use it the world will do so upon a voluntary judgment of its utility, demonstrated, it may be, at great cost to the patentee. If its price be too high, whether in dollars or conditions, the world will refuse it; if it be worth the price, whether of dollars or conditions, the world will seek it. To say that the world is not recompensed for the price it pays is to attack the policy of the law, is to defy experience and to declare that the objects of inventive genius all around us have contributed nothing to the advancement of mankind. (54)
The Court did not, however, overrule the precedent of the Motion Pictures Patents case.
When the Supreme Court finally capitulated to "progressive" economic thinking in the face of FDR's 1936 landslide, antitrust scrutiny over patentees increased markedly and patent misuse emerged as a full-blown "doctrine." (55) By 1957, it had become, "of course, familiar law that the courts will not aid a patent owner who has misused his patents to recover any of their emoluments accruing during the period of misuse or thereafter until the effects of such misuse have been dissipated, or 'purged' as the conventional saying goes." (56)
Perhaps the most prominent single case demonstrating the weakened position of patentees during the middle decades of the twentieth century concerned the consequences of an improperly obtained patent. In 1943, the Food Machinery & Chemical Corp. had secured a patent on machinery useful for sewage treatment systems. Many years later--near the end of the patent's lifetime--Food Machinery sued Walker Process Equipment, Inc. for patent infringement. While litigating its defense, Walker Process discovered that Food Machinery had secured its patent by defrauding the Patent and Trademark Office (PTO) and counterclaimed that the use of a fraudulent patent to monopolize a market violated the antitrust laws. The Supreme Court announced a new rule: Patentees who use fraudulently obtained patents in an anticompetitive manner may have violated the antitrust laws--provided that the plaintiff can also prove all of the other elements of an antitrust violation. Thus was born the important Walker Process class of interface cases. (57)
The primacy of antitrust enforcement during this period was hardly restricted to court rulings, however. Nor, for that matter, was it subtle. By the 1960s, "the managers of the large corporations d[id] their business with one eye constantly cast over their shoulders at the antitrust division." (58) Proponents of such scrutiny noted "[t]he existing state of enforcement conforms to the state of the public mind, which accepts bigness but continues to distrust business morals." (59) Opponents argued that "[t]he entire structure of antitrust statutes in this country is a jumble of economic irrationality and ignorance It is the product: (a) of a gross misinterpretation of history, and (b) of rather naive, and certainly unrealistic, economic theories." (60) Though this oppositional critique may have proved unpersuasive when uttered, its implications to the FTC's imminent 6(b) inquiry into NPEs is profound. As we will see, the modern era of patenting intentionally created very strong patent laws--leading in turn to very strong patents, or patents capable of altering the behavior of accused infringers regardless of the quality of the patent. To the extent that antitrust remedies do appear warranted in the NPE context, they will necessarily serve as counterweights to government policies of the preceding decades. (61)
This mid-century predilection for strong and intmsive antitrust enforcement took its toll on patentees, who likely reached their nadir when Special Assistant to the Assistant Attorney General for Antitrust Bruce Wilson presented the Nixon administration's thoughts about patent licensing. (62) "We are not anti-patent," Wilson explained, immediately before outlining nine forbidden licensing practices--soon dubbed the Nine No-Nos. (63) His message to patentees was clear: Their status as possessors of a government-granted exclusive brought them no immunity from any anticompetitive behavior beyond the narrowly defined four comers of their patents.
Patentees faced numerous other difficulties well into the 1970s. Patent trials were notoriously dependent on location. Different federal circuits crafted different rules for the interpretation of both patent law and individual patents, simultaneously rendering it impossible for patent examiners to apply appropriate standards at the PTO and skewing domestic commercialization attempts by labeling products and activities that were permissible in some states as infringing in others. These regional differences motivated considerable forum shopping. (64) Innovation may also have suffered: "In such a legal environment, the promise of a patent could hardly be considered sufficient incentive to invest in research and development." (65)
The sad state of 1970s patent law dovetailed with the sad state of the 1970s American economy, widely perceived as lagging Japan, Germany, and other competitors in fielding quality products. The Carter Commerce Department's comprehensive 1978 Domestic Policy Review of Industrial Innovation asked what sorts of rules would motivate America's technology industries to expand in ways that would enhance both domestic employment opportunities and global leadership? Several of the key answers concerned restructuring the patent system so that patents could serve as reliable strategic tools in the drive toward rapid commercialization. (66) For perhaps the first time in fifty years, a government-sponsored inquiry determined that the remedy to an economic challenge lay in motivating private sector innovation, rather than in sponsoring another government program. The shift in economic thinking--and its consequent effect on patents, antitrust, and their interface--was both broad and deep. Between 1980 and 1984, three major legislative changes, two lines of Supreme Court rulings, and one agency announcement altered the contours of the American patent system almost beyond recognition. Inquiries into the best ways to enhance American competitiveness led to all six changes:
The Bayh-Dole Act allowed universities to patent inventions developed in whole or in part through federal research grants, and to retain the entire commercial benefits of those patents, as a way of motivating technology transfer and commercialization. (67) The Hatch-Waxman Act allowed branded drug companies to extend their patents to reclaim some of the time lost to review at the Food and Drug Administration, but eased the way for generics to launch competing products as soon as those patents expired. (68) The Federal Courts Improvement Act created the United States Court of Appeals for the Federal Circuit to eliminate inconsistency among the appellate courts, reduce the uncertainty in the patent system, and add coherence to patent law. (69) Meanwhile, the Supreme Court found representatives of two new patentable classes of inventions, laboratory synthesized microorganisms (70) and algorithms encoded as software. (71) These five solutions all proved to be significant, and all flowed from the dual goals of invigorating the patent system and liberalizing the economy.
The final critical reform was the 1981 repeal of the Nine No-Nos. Tad Lipsky, Deputy Assistant Attorney General of the Antitrust Division in the Reagan Administration announced:
For the better part of the last decade, Division enforcement policy toward patent licensing has been advertised using a list of forbidden practices commonly known as the "Nine No-Nos." Each of these practices is thought to be especially deserving of antitrust condemnation by virtue of some inherently anticompetitive feature.... [M]y predecessor identified "the most important single concern of the Antitrust Division in this area, namely, whether one or more licenses are being used as part of a broader conspiracy to restrain significant actual or potential competition among affected firms." I would enthusiastically endorse this last conclusion in particular. Where I depart from my predecessor, however, is in his assertion that the "Nine No-Nos" have much independent validity as economically rational antitrust rules ... When one makes the analysis, one finds that the "Nine No-Nos," as statements of rational economic policy, contain more errors than accuracy. (72)
These policy moves--part of a broad economic transformation away from planning and toward markets--had a profound effect. They helped paved the way for the resurgence of American commercialization into a position of world leadership--while directly defining the modem eras of patents, antitrust, and the interface between them.
B. The Federal Circuit and the Chicago school
While those changes were buffeting the patent world, the antitrust world was undergoing its own redirection. There was a growing faction arguing that "the general movement [of antitrust] ha[d] been away from ... the ideal of competition and toward the older idea of protected status for each producer, away from concern for general welfare and toward concern for interest groups, and away from the ideal of liberty towards the ideal of enforced equality," (73) and that antitrust "[t]hreatened to draw great quantities of resources into the struggle to prevent effective competition, thereby more than offsetting the contributions to economic efficiency promised by antitrust activities." (74) Adherents of this Chicago school (75) believed that the overwhelming majority of anticompetitive behavior is inherently self-defeating--and thus that antitrust enforcement is appropriate only in exceptional circumstances.
Perhaps the first subtle sign that antitrust was moving in their direction was a 1977 Supreme Court announcement that "departure[s] from the rule-of-reason standard must be based upon demonstrable economic effect rather than ... upon formalistic line drawing." (76) But the "repeal" of the Nine No-Nos brought Chicago school ascendance directly to the patent-antitrust interface; it demonstrated a newfound recognition that licensing constraints hamstring patentees, reduce patent value, and degrade the functioning of the entire patent system. (77) In 1988, DOJ incorporated those beliefs into guidelines adopting a rule of reason approach to patent licensing: All allegedly anticompetitive patent licenses were subject to a careful balancing test that recognized both the procompetitive effects of licensing and the potential anticompetitive effects in related markets. (78) The 1988 IP Guidelines effectively encouraged IP owners to maximize the market value of their IP by experimenting with new patent monetization strategies. (79) They also implied that at least as a matter of analytic methodology, patent law and antitrust law stood on equal footing, with the balance in each case determined by the specific facts in play. From the adoption of those 1988 Guidelines forward, only licensing practices that attempted to leverage patent licenses beyond the scope of the patent risked running afoul of the antitrust laws--and even those practices were subject to case-specific evaluation. (80)
The Chicago school's aversion to antitrust enforcement dovetailed neatly with the new Federal Circuit's penchant for patents. Between them, the first half of the 1980s ushered in an era of strong (that is, easily enforceable) patents and laissez faire antitrust specifically intended to reinvigorate patents as useful tools of business strategy and to motivate rapid commercialization. (81) The Federal Circuit issued its first statement about antitrust in 1983, as dictum in a case that did not involve antitrust:
Disclosure of an invention found to have revolutionized an industry is but a classic example of the ideal working of the patent system. If a patentee or licensee enjoys widespread sales, that too is but an example of the incentive-useful arts promoting element in the patent system. Patents and licenses are exemplifications of property rights. (82)
A patent, under the statute, is property. Nowhere in any statute is a patent described as a monopoly. The patent right is but the right to exclude others, the very definition of "property." That the property right represented by a patent, like other property rights, may be used in a scheme violative of antitrust laws creates no "conflict" between laws establishing any of those property rights and the antitrust laws. The antitrust laws, enacted long after the original patent laws, deal with appropriation of what should belong to others. A valid patent gives the public what it did not earlier have. (83)
As pure dicta, these statements had no bearing on either antitrust law or patent law--but they were indicative of the young court's sentiments.
The Federal Circuit's first actual antitrust ruling arrived five months later, in a Walker Process case notable mostly for its choice of law: While Federal Circuit law governed the determination of Patent Office fraud, regional circuit law governed the antitrust analysis. (84) For the next fourteen years, the Federal Circuit's consideration of antitrust was more-or-less restricted to a trickle of Walker Process cases. When it came to antitrust, the rules were simple: (1) patentees have a legal exclusive over the market that their patents define, whether or not the monopolization of such a market might otherwise violate the antitrust laws; (2) because defrauding the PTO works to the detriment of the patent system, a fraudulent patentee who monopolizes a relevant antitrust market is liable under the antitrust laws; (3) because antitrust issues are not unique unto the patent laws, regional circuit law governs all antitrust analyses; and (4) all attempts to leverage patents to monopolize markets beyond the patent's scope are subject to the same analysis as attempts to leverage any property right to monopolize a market--which at the time, meant relatively lax scrutiny and enforcement. In short, the patent court was a rather minor player in the antitrust world.
During those same fourteen years, however, the Chicago school's influence waxed and waned as the Clinton administration tempered the promarket tenor of Reaganomics and an emergent post-Chicago school sought to temper Chicago school permissiveness. Though the distinction may appear subtle, the shift from a Chicagoan belief that successful anticompetitive behavior is rare to a post-Chicagoan belief that successful anticompetitive behavior is merely unusual opened the door to yet another reassessment of antitrust policy.
Antitrust enforcement thus began to pick up steam in the early 1990s. Once again, the Supreme Court foreshadowed the shift. The first post-Chicago ruling arrived in 1992, when several independent service organizations sued Kodak for monopolizing the market for repairing Kodak copiers. The Supreme Court ruled that a single-manufacturer aftermarket could qualify as a relevant antitrust market (85)--a conclusion
at odds with Chicago school thinking. (86) By 1995, the DOJ and FTC had revised the IP Guidelines along post-Chicago lines, maintaining much of the Chicago school verbiage while nevertheless repudiating "the argument that the constitutional and statutory origins of intellectual property rights give them primacy over the antitrust laws." (87)
The Federal Circuit, however, was pushing in another direction. To pick an example of critical importance to the present patent debates, the Federal Circuit turned software patents from occasional oddities into critically important business assets. The Supreme Court had started the ball rolling with its 1972 announcement that "applied" algorithms were patentable, (88) and moved it forward in 1981 when it encountered its first patentable algorithm. (89) Nevertheless, it remained pretty hard to patent software until 1994, when the Federal Circuit accepted the patentability of innovations that applied algorithms to other algorithms, (90) and then further accepted the patentability of "business methods" in 1998. (91) Though industry observers had long questioned the relationship between the types of incentives that patents provide and the nature of software innovation and development, (92) this line of cases rendered the question purely academic. By 1998, for good or for ill, the matter had been decided: software was unquestionably patentable in the United States. (93) Many observers trace the current wave of bad patents, frivolous litigation, and other troll-like practices, to that decision. (94)
Also in 1998, in a unanimous en banc footnote, the Federal Circuit reversed its earlier rule deferring to regional circuit antitrust law:
An antitrust claim premised on stripping a patentee of its immunity from the antitrust laws is typically raised as a counterclaim by a defendant in a patent infringement suit. Because most cases involving these issues will therefore be appealed to this court, we conclude that we should decide these issues as a matter of Federal Circuit law, rather than rely on various regional precedents. (95)
The lone institutional holdout against the post-Chicago restoration of antitrust had thus reserved for itself the right to govern both sides of all disputes falling at the patent-antitrust interface.
The move was not well received in the antitrust community. Critics contrasted "a 'warming' trend in the relationship between the patent and antitrust laws ... evident in the Antitrust Guidelines and elsewhere" with "a 'warning' trend ... evident in a number of recent decisions by the Federal Circuit." (96) FTC Chair Robert Pitofsky told the post-Chicagoan American Antitrust Institute (97) that the Federal Circuit had upset the traditional balance between antitrust and IP "in a way that has disturbing implications for the future of antitrust in high-technology industries." (98) As he saw it, the emerging body of Federal Circuit antitrust law "could be read to say that the invocation of IP rights settles the matter, except in [some exceptional] narrow situations ... regardless of the effect of the refusal to deal on competition or the importance of the refusal to deal to protect incentives to innovate." He concluded: "That should not be the way these issues are addressed." (99)
The Federal Circuit gave its post-Chicago critics plenty of ammunition. At least three distinct issues at the patent-antitrust interface highlighted the split: refusals to deal, single-company aftermarkets, and the patent misuse doctrine. The controversial refusal to deal analysis arose in a complex multi-lawsuit battle between two chip manufacturers, Intel and Intergraph. In one phase of the battle, Intergraph, a "strategic Intel customer," sued Intel for patent infringement. Intel threatened to revoke Intergraph's strategic customer status. Intergraph added an antitrust claim. The district court agreed with Intergraph's antitrust suit and enjoined Intel from terminating their relationship. On appeal, the Federal Circuit agreed with Intel, noting that "the Sherman Act does not convert all harsh commercial actions into antitrust violations." (100) While conceding that "Intel's IP does not confer upon it a privilege or immunity to violate the antitrust laws," the Court also noted that "the antitrust laws do not negate the patentee's right to exclude others from patent property." (101) Meanwhile, in climes more amendable to post-Chicago analysis, the Pitofsky-chaired FTC filed its own suit against Intel for more-or-less the same behavior. (102) Intel settled with the FTC in 2000, (103) and eventually settled with Intergraph for a total of $675 million. (104)
On the aftermarket front, the dispute that raised post-Chicago red flags involved what many observers consider a circuit split. (105) On one side of the split sat Kodak, whose single-company repair aftermarket (as noted) had given post-Chicago antitrust its first victory in the Supreme Court. (106) Kodak lost the trial that the Supreme Court had ordered, and the Ninth Circuit affirmed. (107) On the other side sat Xerox, one of Kodak's larger direct competitors in the copier market, when it announced an identical policy shift and filed a patent infringement suit that invited an antitrust counterclaim. The Federal Circuit ruled in Xerox's favor. (108)
But perhaps the most glaring oddity of the Federal Circuit's interface jurisprudence was the apparent demise of patent misuse. The Court did uphold a finding of patent misuse in 1986--at precisely the height of Chicago school thinking. Congress responded by rewriting the Patent Act to include a clause incorporating double, triple, and quadruple negatives to explain what patent misuse is not (though not what patent misuse is). (109) Since then, the Federal Circuit has found no one "drawing] anticompetitive strength from the patent right" in a manner "deem[ed] to be contrary to public policy." (110) In fact, in 1992 the Court reasserted a pre-Lochner rule: "[W]ith few exceptions, ... any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the [patented] article, will be upheld by the courts." (111)
Taken together, these cases show that the Federal Circuit had become odd man out among the institutional players charged with considering innovation, competitiveness, and their complementary roles in economic growth. Perhaps alone among American institutions, it continued to elevate property and contract rights above the competition- and consumer-oriented concerns of antitrust law. Many commentators disapproved, (112) and their critiques gained salience only when the Court's rulings began to wend their way beyond the patent-antitrust interface and into the broad economy. The combination of software and business method patents that the Federal Circuit helped to unleash, the Court's apparently extreme deference to patentees, and its reluctance to import any meaningful limitations on patent licensing from antitrust law were giving birth to many of the troll-like business strategies that many now see as a fundamental threat to the American economy. Add the ease of filing a costly lawsuit on any colorable claim, and the critics' concerns seemed warranted. In the eyes of many, the Federal Circuit bears primary responsibility for the patent trolls now plaguing the American economy. (113)
At the same time, the Federal Circuit was not without its supporters Congress had created the Court to resurrect patents as useful tools of commercialization, capable of reinvigorating the American economy. Twenty-five years later, research, commercialization, and economic welfare had all soared. While patent law may have been but part of a broader successful economic approach, it was clearly an important part. (114) Furthermore, even in the narrow realm of NPEs, Federal Circuit rulings had promoted stability in the patent market, motivating more inventors to disclose their inventions. It was thus the success of the 1980-2005 patent system--not its failure--that sowed the seeds of the current challenges.
Either way, something had to give. As the Supreme Court learned following the 1936 election, individual American institutions cannot forever stand still in a changing policy environment. Over the past decade or so, the forces pushing to trim patent power have made considerable headway. The Supreme Court has shown intense interest in the Federal Circuit docket. (115) The Obama administration arrived in 2009, amidst a financial crisis and a public mindset less than completely enamored of markets, (116) with a view of the private sector far more skeptical than that of even the most antipatent post-Chicagoan. And for perhaps the first time, a group of large, technologically savvy patent-holding corporations aligned themselves with the antipatent camp, specifically to target the threats from NPEs.
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|Title Annotation:||non-practicing entity; I. Introduction through III. The Past: Strong to Weak to Strong Patents and Their Interface with Antitrust, p. 221-251|
|Author:||Abramson, Bruce D.|
|Date:||Jun 22, 2014|
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