Upcoming lecture on the comparative law and economics of standard essential patents and FRAND royalties

I'll be taking a little hiatus from blogging over the next couple of weeks.  If any of my readers happen to be in the Munich area in early July, however, they might be interested in attending the lecture I will be giving at the Max Planck Institute on the evening of July 8 for the the Munich Intellectual Property Law Center Lecture Series.  My topic is "The Comparative Law and Economics of Standard Essential Patents and FRAND Royalties."  Details can be found here.  

Recent French case on invalidation actions

As I mentioned in this post last week, in many countries, including the U.K., Germany, China, and Japan, anyone can initiate an action to invalidate a patent.  (I'm not talking here about oppositions, but rather about nullification or invalidation actions which can be commenced after the time for filing an opposition has passed.)  As I also discussed, U.S. practice is more restrictive, though not quite as restrictive as it was prior to the Supreme Court's 2007 decision in MedImmune.

French law lies somewhere in between these two models, as I discuss in my book at p.278 n.220.  A person may file an action to invalidate a patent if he can demonstrate that the patent is capable of harming him, by reason of either his actual or potential activities.  A recent case on point--too recent to make its way into my book--is Sebban v. Barilla France, Cour d'appel de Paris, Mar. 6, 2013, PIBD No. 983, III 1150.  Barila sought to invalidate two patents owned by Alain and Claude Sebban.  The court of first instance held that Barila had standing and declared one claim of each patent invalid for lack of novelty.  The Court of Appeals reversed, stating inter alia that a nullification action may be brought by any person having a direct and personal interest in proceeding (intérêt à agir) in the sense of article 31 of the Code of Civil Procedure; that a competitor may proceed if it has an interest in freeing up a use similar to that of the patented technique; that Barila neither established nor alleged the existence of preparatory acts or serious projects for implementing a technique close to that of the challenged patents; and that the patentees had never invoked an identity, real or supposed, between the patented invention and the object exploited by Barila.  The case report in PIBD also includes an editor's note on other cases discussing what sort of an interest suffices, including the Omnipharm case that is mentioned in my book.        

Monday miscellany: Some items worth reading

The U.S. Supreme Court's decision on gene patents isn't the only patent-related item in the news these days.  From around the web, here are a few recent items relating to patent remedies:

1.  Over at PatLit is a write-up on a May 17 decision of the Court of Appeals for England and Wales in Novartis AG v. Hospira UK Ltd., stating the law regarding interim injunctions pending appeal, where the party requesting the injunction was unsuccessful at first instance.

2.  At Patently-O and at Essential Patents are write-ups of the June 14 decision of the U.S. Court of Appeals for the Federal Circuit in Robert Bosch, LLC v. Pylon Mfg. Corp., holding en banc that the court has jurisdiction to entertain appeals from determinations of patent infringement liability, even though a trial on damages and on willfulness has yet to occur.  As I have noted in a previous post, bifurcation is common in many countries, less so in the U.S.  There are advantages and disadvantages to both rules.

3.  At Kluwer IP is a brief discussion of the CJEU's October 25 decision in Folien Fischer AG v. Ritrama SpA.  Fischer (a Swiss company) filed an action in Germany for a negative declaration that its patent licensing practices with respect to Ritrama (an Italian company) did not violate EU competition law.  Ritrama then filed an action in Italy, alleging that Fischer was in violation of E.U. competition law.  The German court dismissed the action for the negative declaration, on the ground that it lacked jurisdiction under Brussels Regulation article 5(3) (relating to actions in tort) where the party seeking the declaration was trying to establish that no tort had actually occurred.  The CJEU reversed, holding that "point (3) of Article 5 of Regulation No 44/2001 must be interpreted as meaning that an action for a negative declaration seeking to establish the absence of liability in tort, delict, or quasi-delict falls within the scope of that provision."  It would seem that this decision disposes of one possible means for fending off so-called torpedo actions, for discussion of which see my book at pp. 250-55.  Page 255 n.156 referenced the then-pending decision in Folien Fischer. 

And this just in:  Though not directly related to the subject of patent remedies, the U.S. Supreme Court just held in FTC v. Actavis that so-called reverse payments or pay-for-delay settlements of patent infringement actions between brand-name and generic pharmaceutical companies are not presumptively unlawful, but are to be evaluated under antitrust law's rule of reason.  I've written a lot on this issue in the past and will be spending the morning reading the decision, which appears to be 5-3 with Justice Alito recusing himself.    

Thursday Miscellany: Some New Works Worth Reading

In the Wall Street Journal this morning is a story about the $2.15 billion settlement of patent infringement litigation between Pfizer and Takeda (plaintiffs) and Teva and Sun (defendant generic drug companies).  The damages trial had begun on Monday.  See also coverage here.

I've been working my way through a stack of materials on patent remedies, FRAND, and related issues, some of which I have been accumulating since my book came out.  Here, in no particular order, are some items worth taking a look at:

 1. Saisie-Contrefaçon (Pierre Véron ed., 3d ed. 2012).  Véron et Associés was kind enough to send me a copy of their edition of this treatise on the saisie-contrefaçon, an pretrial order used in France to obtain evidence of infringement (briefly discussed in my book at p.230).  The treatise provides a wealth of detail on the use of this procedure in various types of cases, along with statutory and case law annexes.  Anyone interested in IP enforcement in France will want to have this book as a reference.  In French.

2.  Tom Carver, UK Patent Disputes:  Damages, China IP, Jan. 2013, available here.  A good overview of relevant legislation and case law in the U.K.

3.   The Exercise of Essential Patents for Standards, 21 IIP Bulletin 1 (2012), available here.  This is "an English translation of the summary of a FY2011 Institute of Intellectual Property (IIP) research study report" on issues relating to standard essential patents (SEPs) in Japan, including whether a FRAND commitment constitutes a binding contract for the benefit of third parties and whether SEP owners should be able to obtain injunctions.  I hope that some of the articles summarized, in particular those by Ryuta Hirashima, Sadao Nagaoka, and Yoshiyuki Tamura, will be at some point be translated in full.

4.  Marc Grunwald, Der Kartellrechtlichte Zwangslizeneinwand:  Muss der Lizenzangebot einen Kündigungsvorbehalt für den Fall enthalten, dass der Lizenzsucher das Klagepatent angreift?, Mitt. Heft 11/2012, 492.  In German, obviously.  My translation of the title:  "The Competition Law Compulsory License  Objection:  Must a License Offer Include a Cancellation Provision in the Event the Prospective Licensee Challenges the Patent?"  The question is whether the Orange-Book-Standard defense requires the prospective licensee of a standard essential patent to agree not to challenge the patent.  The author argues to the contrary.  In somewhat the same vein, also worth looking at is Daniel Hoppe-Jänisch's commentary (also in German) following the excerpt from LG Düsseldorf, Decision of Mar. 21, 2013, 4 b O 104/12, 2013 GRUR-RR 196, 200 (the case referring questions about the Orange-Book-Standard framework to the CJEU).

5.  I haven't read this yet, but the idea sounds interesting:  an article by Jonathan Masur and Anup Malani, forthcoming in the Georgetown Law Journal, arguing for higher penalties for the losing party (plaintiff or defendant) in patent litigation.   Professor Masur's guest post on the Written Description blog summarizes the paper, which can be downloaded from ssrn. 

6.  Roger G. Brooks & Damien Geradin, Interpreting and Enforcing the Voluntary FRAND Commitment, 9 Int'l J. IT Standards & Standardization Res. 1 (2011), available here, and Dennis W. Carlton & Allan L. Shampine, An Economic Interpretation of FRAND, available on ssrn.  Two different and interesting perspectives on how to interpret FRAND commitments made to SSOs.   

And this just in:  U.S. Supreme Court holds that isolated DNA is not patentable subject matter, cDNA is.  Here's the opinion in Association for Molecular Pathology v. Myriad Genetics, Inc. 

Federal Circuit Affirms Judgment of No Jurisdiction to Consider Declaratory Judgment Action Against Monsanto

On June 10, the Federal Circuit in Organic Seed Growers and Trade v. Monsanto Co. affirmed a judgment that there was no justiciable "case or controversy" in an action filed by "a coalition of farmers, seed sellers, and agricultural organizations" seeking declaratory judgmentsof non-infringement and invalidity with respect to 23 Monsanto patents relating to technology for genetically modifying seeds.  The plaintiffs expressed concern that they could be accused of inadvertent infringement if their crops "become contaminated with transgenic seed."

For those of you who aren't familiar with the U.S. law of declaratory judgments, here's a little primer.  Article III section 2 of the Constitution states that “The judicial Power shall extend to all Cases, in Law and Equity, arising under . . . the Laws of the United States . . . to Controversies to which the United States shall be a Party . . . [and to Controversies] between Citizens of different States . . . .”  The federal Declaratory Judgment Act, in turn, states that  “In a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party."  In determining whether a federal court may entertain a petition for declaratory relief, then, the question “’is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.’”  MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007).  So you can't just go into court and ask the court to declare a patent invalid, as is the practice in some countries (e.g., the U.K., Germany, Japan, China) in relation to nullification actions (as described in my book at pp. 212, 278-79, 329, 361).  In Organic Seed Growers, Monsanto had refused the appellants' request for a written covenant not to sue, but it had referred them "to a statement posted on its website" stating that "It has never been, nor will it be Monsanto policy to exercise its patent rights where trace amounts of our patented seeds or traits are present in farmer’s fields as a result of inadvertent means."  The  Federal Circuit held that "Because Monsanto has made binding assurances that it will not 'take legal action against growers whose crops might inadvertently contain traces of Monsanto biotech genes (because, for example, some transgenic seed or pollen blew onto the grower’s land),' and appellants have not alleged any circumstances placing them beyond the scope of those assurances," there was no justiciable case or controversy."   

Aside from the interesting questions of substantive law suggested by the facts, the difficult question from the standpoint of remedies/procedure is how difficult should it be to challenge patent validity or request a declaration of noninfringement.  One risk of making it very easy to challenge validity is that it renders patent rights more vulnerable and hence less valuable; there is a cost to defending even a nonmeritorious challenge.  The obvious drawback to making it difficult to challenge validity is that you can wind up with lots of invalid patents never going challenged.  Many other factors, including the error rate in granting patents, the availability (or not) of other avenues for challenging validity (including oppositions and raising invalidity as a defense in infringement litigation), and whether the patent validity defense if available operates to cancel the patent altogether or is merely a personal defense, are also potentially relevant.  Given this complexity and interdependence, I find it difficult to conceptualize what an optimal system for challenging validity would look like, but it is an interesting problem. 

For more on declaratory judgments of noninfringement under U.S. and German law, see my post of May 21.  For an interesting paper discussing, among other things, the now-obsolete common law writ of scire facias, which long ago in the U.K. and the U.S. permitted anyone to mount a patent validity challenge, look for Mark Lemley's forthcoming (not yet publicly available, I don't think) article "Why Do Juries Decide if Patents Are Valid?"

 

A Simple Economic Model of When Courts Should Award Permanent Injunctive Relief for Patent Infringement, and When They Shouldn’t

I have argued elsewhere that the principal economic justification for awarding permanent injunctions in patent infringement cases comes down to information costs:  in other words, that the parties are in a better position than is a court to determine what the patent is worth in terms of how much it is likely to contribute to the infringer’s ability to increase profits or reduce costs.  (Note that when the infringer is a less efficient user of the invention than is the patentee, you wouldn’t expect the parties to reach any agreement.  The patentee would simply exclude the infringer, which is the correct outcome assuming that we want to preserve the patent incentive.  In such a case, an adequate alternative to an injunction would be a court-ordered royalty that would exceed the amount the infringer would be willing to pay.  When the infringer is more efficient, you would expect the parties to bargain toward a license following entry of the injunction, if they haven't done so already.)  Thus when courts award ongoing royalties they may generate two costs that otherwise would be avoided:  the adjudication costs incurred as a result of having to litigate the amount of the royalty, above what would have been incurred if the court had awarded an injunction instead; and error costs resulting from the court setting the amount of the royalty too high or too low.  Those error costs would take the form of either unnecessary deadweight loss if the royalty is set higher than what the parties would have agreed to, or the social costs of whatever consequences follow from setting the royalty too low and thus potentially undermining the patent incentive.  We can denote adjudication costs with the letter A and error costs with the letter E.

On the other hand, there is also a social cost to entering an injunction.  One possible cost is that an injunction will limit access to some product that is necessary to public health or safety, and it is this cost that might justify compulsory licensing in some cases, but I will put that matter to one side for now and focus instead on the cost that is more likely to arise in a broader range of cases, namely patent holdup.  The touchstone of patent holdup is that the patentee can use an injunction to extract a royalty that reflects not only the ex ante value of the patent but also the ex post costs that the infringer would face in trying to design around (or, to put it another way, some of the value of complementary technologies with which the patented invention interacts).  I view this as a social cost because it results in greater deadweight loss than is necessary to preserve the patent incentive; the patentee winds up getting a royalty that is higher than the value of the patent’s contribution to the state of the art.  Let’s call the costs arising from patent holdup H.

If my analysis is correct, then courts should award the prevailing patentee a permanent injunction when A+ E > H, and they should deny an injunction when A + E < H.

To be sure, no one can quantify these variables; but I think we can draw some inferences as to whether A + E is likely to be greater or less than H in a large number of cases.  First, there are likely to be cases where the cost of holdup is small.  A principal example would again be when the patentee would not agree to any royalty because the patentee is the more efficient user and therefore prefers exclusion to licensing.  There’s no holdup because the patentee will not be extracting any future rents from the infringer.  Second, while traditionally some analysts have believed that what I am calling A and E are high, that may not always be the case.  In particular, where the court is awarding past damages that provide a basis for calculating a future royalty, A may not be all that significant.  While some might express concern that courts are more likely to undervalue than overvalue the patent (so that error costs will be potentially large and will undermine the patent incentive), I’m not sure that’s necessarily right.  In cases in which courts grant compulsory licenses (say, for drugs), that may be a risk, because the whole point of that type of compulsory licensing is to make the invention available at a below-market price.  If we exclude those cases from our consideration and focus on more common examples, I’m not sure there’s any theoretical reason to expect awards systematically to be biased one way or the other.  I suppose that if infringers can somehow calculate that they will negotiate when a court is likely to award an overcompensatory remedy and to infringe when it is likely to award an undercompensatory remedy, self-selection would lead to systematic undercompensation.  But that seems to require a good deal of foresight on the part of infringers, as well a willingness to ignore the high cost of attorney fees and the risk of enhanced damages if the defendant knowingly infringes.  If anything, the risk of overcompensation might be higher if courts award ongoing royalties based on a higher royalty rate than they use to calculated damages for past infringement, which (unfortunately) is the current U.S. practice.  Third, courts can look for indicia of when holdup risk is substantial, based on whether the infringing product incorporates numerous patents, whether the patented invention would be easy to design around, and so on.

Thus my own view is that in cases in which holdup risk is large, courts should generally deny injunctions based on the above analysis.  When holdup risk is not so high, which I think would be the majority of cases, I’d be willing to assume that A and E are large enough to militate in favor of injunctive relief, though ultimately I suppose the magnitude of those variables is an empirical question.

Attorney fee shifting in patent litigation

Section 285 of the U.S. Patent Act states that courts "in exceptional circumstances may award reasonable attorney fees to the prevailing party.”  Case law establishes that the moving party must establish exceptional circumstances by clear and convincing evidence;the district court then determines if fees are appropriate, and if so in what amount.  The amount is reviewed on appeal under the abuse of discretion standard. Only a limited number of circumstances justify fee awards in patent cases, however, including  “inequitable conduct before the PTO; litigation misconduct; vexatious, unjustified, and otherwise bad faith litigation; a frivolous suit or willful infringement.”  Wedgetail, Ltd. v. Huddleston Deluxe, Inc., 576 F.3d 1302, 1304 (Fed. Cir. 2009).  As I discuss in my book (see pp. 209, 276, 328, 360, 370, 372), although attorneys' fees are not often awarded in China and Taiwan, the limited availability of attorneys' fees in U.S. law differs from practice in many other countries (including the European nations, Canada, Australia, and Japan), which award attorneys' fees to the prevailing party--though often not in the full amount that the prevailing party actually incurred. In Japan, for example, parties don't always request fees, and when they are awarded, they often are set at 10% of the damages recovered rather than based on an hours-worked basis.

Recent proposals, however, may indicate some changes coming to U.S. law.  President Obama's recent recommendations to Congress, for example, include "providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases)."   On Wednesday, Chief Judge Rader and Professors Colleen Chien and David Hricik published an op-ed in the New York Times stating that "fees were shifted under Section 285 in only 20 out of nearly 3,000 patent cases filed in 2011," but arguing that judges could and should award fees more frequently. And there are some proposals pending in Congress that might make it easier for courts to award attorneys' fees.  The Essential Patents Blog has links to the pending bills.

I've long suspected that awarding attorneys' fees to the prevailing party, not just in cases involving abusive or frivolous litigation but as a general policy, would be a good idea because it would internalize an externality caused either by the infringement or by the patentee's prosecution of an unsuccessful suit.  As I discuss in my book (see pp. 148-49), however, law and economics scholars are not of one mind on this issue; according to some of the models, routine awards of attorneys' fees may decrease the likelihood of settlement, for example.  It would be great if there were some way to rigorously test the various hypotheses, but the multiplicity of potentially relevant variables makes this is a daunting task.  As the physicist Sean Carroll recently observed in another context we “make progress by considering all the hypotheses, and working hard to bring them into confrontation with the data. Use philosophical considerations all you want to inspire you to come up with new and better ideas; but it’s reality that ultimately judges them.”  In the social sciences and law, unfortunately, that’s often a tall order.