FTC Hearings #4: Patents, Intellectual Property, and Innovation

This post was first published on Patent Progress by Josh Landau. You can find our previous FTC Hearings recaps on Competition and Consumer Protection here.

Last week, the FTC held the fourth in its set of hearings focusing on “Competition and Consumer Protection in the 21st Century.”  The first day focused on a review of the current landscape of intellectual property and competition.  The second day featured a variety of panels focusing on the patent system, with panelists providing a wealth of important analysis.  

Key takeaways included the common opinion of a need for a pause in changes to patent law in order to provide time for the law to settle and the impacts to be fully understood.  When reviewing evidence of the impact of the changes to date, the conclusion is that the impact has generally been positive and hasn’t impacted operating companies at all, while having a more targeted impact on the exact NPEs intended to be targeted by these changes.  A few panelists tried to claim that the changes have had negative impacts, but did so either without any evidence or with false data.  Finally, the fourth and last panel of the day noted that the patent system is a balancing act—too strong is just as bad as too weak.

For more detail, you can read more detailed summaries of each panel below (and for much, much more detail, you can see my live-tweets of the conference. [][])

Panel 1: Emerging Trends in Patent Quality

Prof. Marco focused on ensuring that reforms to the patent system take into account examiner incentives, not just applicant incentives, and that they’re designed to produce “A+ patents, not just pass/fail patents.”  

Prof. Reilly pointed out that the Patent Trial and Appeal Board (PTAB) can be conceived of as reflecting a dynamic concept of patent quality—determining whether, if the PTO had known at the time of grant what it knows now, it would have issued the patent.

Prof. Vishnubhakat discussed the interaction between the PTAB and the courts, noting that some of the differences (e.g., standing) between the two don’t have substantive impact and thus raise no concerns while others might change the ultimate validity question and might be seen with more concern.  He also addressed the PTAB’s transition from a new administrative body to a more mature one and the concomitant higher level of scrutiny from the courts.

Prof. Wasserman described two important reforms she’s proposed—adjusting examiner time allocation and PTO fee structures.  (Patent Progress has previously covered these reforms [][]).  Going beyond applicant and examiner incentives, her work looks at the incentives on the agency itself.

In discussion, the panel addressed various aspects of PTAB behavior and made clear that—contrary to rhetoric from Director Iancu—comparing the PTAB to the courts isn’t particularly useful.  Instead, we should compare the PTAB process to other agency processes rather than the courts, and when you do, the PTAB actually abides by best practices for agency determinations. Prof. Vishnubhakat also made the point that the PTAB corrects for two types of problems—when the PTO erred in issuing the patent originally, and when intervening changes in law make an originally reasonable decision unreasonable.

Panel 2: Emerging Trends in Patent Litigation

Miller was accompanied by two of his research assistants (Josh Rosefelt and Rebecca Weires); together, they presented research on how recent legal changes have impacted the patent system and how they’ve differentially impacted PAEs.  Weires described how joinder changes under the America Invents Act (AIA) left operating company litigation untouched, but (when looked at as defendant-lawsuit pairs instead of raw lawsuits) PAE activity ceases to increase post-AIA.  Rosenfelt looked at the impact of the availability of the PTAB. He found that, post-AIA, there was a decrease in PAE lawsuits. The vast majority of PTAB challenges are high tech, and that appears to have dampened PAE lawsuits; there does not appear to be an overrepresentation of pharmaceutical patents in the PTAB process.  Finally, Miller looked at the impact of TC Heartland, showing that it had a small negative impact on the amount of PAE litigation but significant impact on where cases were filed.  (There was no impact observed on operating company litigation.)

Prof. Chien presented her research into the impacts on applications and lawsuits of the changes to the patent system in the 2014-2016 period.  Essentially, her research illustrated a “quantity to quality” shift—as these changes were emplaced, behaviors of litigants shifted away from raw numbers of assertions towards more careful assertion behavior.  Litigants became less likely to engage in mass campaigns, but no less likely to engage in smaller litigation campaigns. This is also reflected in a reduction in PAE litigation—a reduction that is less apparent for non-PAE NPE litigants like universities or individuals, and a reduction that operating companies have not seen at all.  Litigants have become more likely to include additional detail in their complaint (except in the Eastern District of Texas), and new patent applications in software-related arts have generally become longer, more detailed, and narrower in claim scope. (In other words, applicants are learning how to draft applications that meet the Alice standard.)

In discussion, Profs. Golden and Schwartz identified some areas for potential follow-up, ranging from impacts on small vs. mid-size vs. large operating companies to impacts on universities isolated from other NPEs.  Prof. Schwartz also noted that this type of data-driven analysis suffers from availability bias; most lawsuits have confidential settlements (and most pre-litigation demands don’t wind up filed as lawsuits) which limits our visibility into the system as a whole.

Another issue panelists had examined was home court bias in patent litigation.  In the wake of TC Heartland, companies have generally been happier with patent venue, but are there issues with small companies being forced to litigate away from their home court?  And does home court litigation have its own issues? (Miller is working on research that suggests the answer to the latter question might be yes.) And with respect to small companies, the data suggested that they didn’t tend to engage in opportunistic forum shopping and were often litigating against their neighbors, limiting the impact of venue changes.

Ultimately, Prof. Schwartz summed up one major feeling of the panel—there have been a lot of changes to patent law over the past few years.  As he put it, with Congress, the Federal Circuit, the Supreme Court, and the Patent Office, there have been “lots of cooks in a small kitchen in a short period of time.”  The patent system doesn’t change overnight in response to legal changes; it needs time for all of these changes to settle in order to see what the true impacts are. As Prof. Sukhatme noted, if you want reliability and predictability, constant changes aren’t the way to go about it.

Panel 3: Industry Perspectives on Innovation and IP Policy

The third panel featured CCIA’s [additionally a contributor for Project DisCo] Matthew Schruers , Tahir Amin of the Initiative for Medicines, Access, and Knowledge (i-MAK), Deputy General Counsel for Intellectual Property Hans Sauer of the Biotechnology Innovation Organization, Barbara Fiacco appearing on behalf of the American Intellectual Property Lawyers Association, and Patrick Kilbride of the U.S. Chamber of Commerce’s Global Innovation Policy Center.

Amin presented some of the results of his research on over-patenting in pharmaceuticals and the impacts of that over-patenting on access to medicine.  For example, Humira was the subject of 247 separate patent applications—50% of which were filed after the first Humira patent expired. Amin also noted that drug patents were significantly and increasingly less likely to be invalidated in IPR, findings that matched those of other credible researchers. [][][]

Sauer presented the drug industry viewpoint, focusing on the expense of the new drug pipeline and the low probability of any given drug being approved.  His presentation drove home how completely different the experience of patents is in the biotech industry compared to the high tech experience.

In discussion, all panelists noted that they represent significant users of the patent system—from CCIA’s representation of some of the top patent owners and litigants to i-MAK’s work on behalf of patients to BIO’s representation of large pharmaceutical entities.  (AIPLA represents patent lawyers, who also use the patent system, though in slightly different ways.) All agreed that they want a system that will reward innovation.

As Schruers noted, changes in recent years have improved conditions in the patent system, but more remains to be done.  IPR and Alice were warranted corrections to the patent system, yielding positive impacts on software R&D and the cost of patent litigation—but were also only some of the decisions that courts have reached.  Other decisions, such as SCA Hygiene, Halo Electronics, and Berkheimer, have had significant impacts in favor of patent owners.  The notion that the patent system has changed solely to harm patent owners simply isn’t reflected in data.

That’s not the only thing that fails to be reflected in data.  As Schruers also noted, commentators—including Kilbride—have reached false and misleading conclusions based on incorrect data about the U.S. patent system.

AIPLA and Kilbride attempted to defend the GIPC rankings, but failed to address the criticism that their rankings are based on incorrect data, not simply that the U.S. dropped in the rankings.  AIPLA and Kilbride also doubled down on the “serial petition” argument that has recently been circulating, despite the utter lack of evidence for this phenomenon. (In fact, after the panel I spoke briefly with a representative of a large and well known PAE who stated quite flatly that he had never encountered a serial petition problem.)

Kilbride argued that IPR was an over-correction—even though we’ve only come back down to 2008 levels of patent assertion, levels that were already high enough to cause Congress to consider legislative action.  He also argued that the changes to the system have dampened investment enthusiasm, even though Prof. Chien had just a couple hours earlier described how these reforms had made VCs feel much more comfortable investing since their companies were less likely to be threatened with baseless litigation.

Ultimately, this panel illustrated the basic gap between those who feel changes to the patent system have been beneficial and critics of the changes.  One side can point to evidence that the changes have had positive impacts. Those criticizing the changes simply can’t.

Panel 4: Economic Perspectives on Innovation and IP Policy

The fourth panel featured Prof. Richard Gilbert of UC-Berkeley, James Bessen of Boston University, Prof. Michael Frakes of Duke, and Anne Layne-Farrar of Charles Rivers Associates.  As economists, they perhaps unsurprisingly focused on economic aspects of intellectual property.  The ultimate question they sought to answer is “Do patent rights actually fulfill their function of promoting progress?”  

Prof. Frakes noted that we have some 19th century evidence they might, but that evidence may not apply to modern situations.  Bessen presented some evidence that modern technological investment doesn’t diffuse down from the top the way it has historically, which might lead us to question the patent rights story.  Initial innovations are important, but the innovations that follow on from those initial innovations, termed sequential or follow-on innovations, can have significantly more impact. Bessen pointed to evidence that PAE litigation reduces R&D expenditures. [].  He also noted that patents—especially in software areas—appear to reduce follow-on innovation.

Prof. Frakes noted that the evidence for this varies by industry; while human gene patents don’t appear to have a meaningful impact—positive or negative—on follow-on innovation, software patents appear to have negative impact on follow-on innovations.  In fact, he noted that one study found that in computers, communications, and medical devices, invalidation of patents tended to lead to increased follow-on innovation.

Criticizing the Kilbride and AIPLA testimony, Prof. Gilbert noted that the panelists had said that ‘the world would fall apart without strong IP rights.’  But, as he noted, there is good evidence that post-eBay, the raised injunction standard hasn’t had a negative impact on innovation.

At the end of the day, the economists agreed that patent rights have an innovation benefit, but that calibrating the scope of that right is important.  Too strong, and they’re as likely to have a negative impact as if they were too weak.