The Fate of Intellectual Property Under Trump

Through protecting his brand and rights of publicity, Trump has accumulated more experience with IP than any other president. He owns more than 100 trademarks and has not shied from enforcing them. He’s also expressed concern about theft of trade secrets by China, referencing a study by the ITC that claims putting a stop to it would create two million jobs in the US. 1

Yet, Trump has said very little about IP, so after reporting the few facts known we can offer only informed speculation and discussion of new and preexisting reform ideas that face better prospects under Trump than they would’ve under Clinton.

The Trump Team Is Pro-IP Overall

IP runs in Trump’s family. His uncle, John G. Trump, was an MIT professor, physicist, and inventor.2 Trump’s eldest son, Donald Trump Jr., has a lot of experience with patent litigation. He was involved in a large number of suits filed by MacroSolve over a single software patent. He also wrote an article arguing that some NPEs (e.g., MacroSolve) are legitimate innovators who deserve their day in court.3 In addition, Trump’s daughter, Ivanka, has her own clothing line and is now witnessing a rush on her trademarks by squatters in China and other foreign countries.

The most pro-IP people on Trump’s team appear to be domestic advisor Ken Blackwell and chief strategist Stephen Bannon. In 2014, Blackwell authored The Conservative Case Against Patent Reform.4 As editor of Breitbart News, Bannon published articles arguing for a stronger patent system, including one by James Edwards declaring inter partes review a “killing field for patents.”5

Vice President Mike Pence also appears to be fairly pro-patent. As Governor of Indiana, he supported the effort by the state and its academic institutions to license out its patents. As a Congressman, he served on the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property, where he argued against diversion of PTO fee revenue and expressed reservations about patent reform though he ultimately voted for the America Invents Act.

The IP views of Trump’s new Secretary of Commerce, billionaire investor Wilbur Ross, are largely unknown or unformed. He has, however, expressed a need for zero tolerance for theft of intellectual property.6

Trump’s tech advisor, Peter Thiel, is the co-founder of PayPal and a well-known venture capitalist who’s invested billions in biotech and other high-tech industries.7 When it comes to NPEs, however, he may not be a big supporter of patent rights. In an interview, he referred to a particular NPE as a “parasitic tax on the tech industry.”8

Although not part of Trump’s team per se, it’s worth mentioning here that Issa (R-Calif.) is the IP point man in Congress. As chair of the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet, he has the most direct influence on PTO operations and all reform bills must meet his approval. Issa holds of dozens of patents on vehicle anti-theft devices and is generally pro-patent. However, he favors legislation to curb patent litigation abuse,9 which does not bode well for forum shoppers.

New PTO Director? Rader Throws His Hat Into the Ring

Reports in January indicated that Trump was keeping Michelle K. Lee on as Director, but now it appears that is a temporary measure. In February, Issa indicated that Lee may be moved to another role in the government, such as one involving trade or technology policy.10

In addition, the position is listed as “vacant” on the leadership page of the Commerce website.11 And the PTO, citing “unusual circumstances, requested an extension of time to answer a FOIA inquiry into whether Lee is and will remain Director. 12.

Meanwhile, a few potential candidates for the position have tossed their hats into the ring.13 The candidate with the most name recognition is Randall Rader, the gregarious former chief judge of the Federal Circuit. Rader is a longtime champion of patent rights and a critic of the high patent kill rates in inter partes review. If appointed, said Rader, he’ll work to “make patents great again.”14

The other well-known candidate is Phil Johnson who retired last month as chief of IP at the healthcare giant Johnson & Johnson. Like Rader, Johnson is known as a strong supporter of patent rights. 15 He was reported to be Obama’s initial pick for Director in 2014 but lost out after the tech industry’s campaign for Lee.16

Supposing we end up with a Director more pro-patent than Lee, what could that Director do? One thing is to exercise rule-making authority to tweak PTO operation to, among other things, make it friendlier to patentees facing challenges in post-grant procedures such as inter partes review (IPR). For example, the Director could alter the Board’s practice of construing claims broadly during IPR. This and other IPR reforms are discussed further below.

The Director could also influence case law through PTO amicus briefs, which are likely to become more frequent and strategic if Rader or Johnson is appointed. In addition, the Director could influence legislation through PTO interactions with Congress. The Director could also enhance cooperation with foreign patent offices to share examination results, which could help shorten application pendency and keep down PTO operating costs. This list is non-exhaustive.

The End of Fee Diversion May Be Nigh

The Commerce Department has long diverted revenue generated by PTO fees to other concerns under the Department’s purview. Fee diversion was reduced but not eliminated by the America Invents Act. In 2013, for example, $120 million was diverted, which prevented the PTO from hiring additional examiners, updating its IT systems, and fully funding its satellite offices. 17

But there is reason to believe fee diversion may soon be sent to its final resting place. As mentioned above, when Pence served in Congress he argued against fee diversion. Never before has the issue been a preexisting concern of someone so high up in an administration. Furthermore, the case against fee diversion is easy to make as it operates in effect as a tax on inventors, which seems to be one of the most perverse taxes possible. Also, consensus should be readily achievable as the issue trips over no fault lines that divide the parties.

Reform of Inter Partes Review

The high kill rates in inter parties review have inspired calls for reform. Elimination of inter partes review (IPR) in its entirety is a long shot, but Senate bill S. 632, the STRONG Patents Act, proposes four moderate reforms that strike us as viable. Even if the bill goes nowhere, they could be implemented by the new Director.

One reform in S. 632 is to change the standard the Board uses when construing claims in IPR. Currently, the Board gives claims their broadest reasonable interpretation (BRI), which results in claims being construed more broadly in IPR than they are in federal court. This practice was recently approved in Cuozzo 18 where the Supreme Court deferred to the PTO’s long-standing practice of applying the same standard to patents during post-grant procedures that it applies to applications during examination.

Use of BRI during post-grant procedures makes less sense now than it did in the past. In the past, a stronger case could be made that the practice was efficient. Specifically, when post-grant procedures had less effect on the patent system as a whole and when it accounted for a smaller fraction of the Board’s total workload, it was more cost-justified to apply the familiar BRI standard instead of developing the procedures and devoting the effort to make the tougher judgment calls involved in applying a more nuanced standard. But post-grant procedures have gone from being a backwater to being a prime arbiter of the fate of the most important patents – those that are litigated.

Furthermore, in substance IPR is more akin to a validity attack in federal court than it is to examination. As in federal court, inter partes review is adversarial, and the patent in question has already survived an examiner’s scrutiny. Nowadays, when a patentee files suit, the defendant (or a party who expects to be a defendant) very often petitions for inter partes review and the co-pending suit is usually stayed. In these cases, the patents end up being subject to a broad construction for validity purposes (in IPR) but to a narrower construction for infringement purposes (in the copending suit).

Should the Board and the parties in an IPR devote as much effort to claim construction courts and parties devote to it in litigation?  It can be argued that devoting so much effort to claim construction would defeat the purpose of IPR – to provide a quick and efficient means to test the validity of patents. There should, however, be a middle ground whereby the Board construes claims under a standard closer to one used by courts but through a quicker and dirtier process that entails less input from and advocacy by the parties.

The second reform is to heighten the petitioner’s burden to prove invalidity from a preponderance of the evidence to the clear and convincing evidence standard used in federal court. If a robust assumption of validity is warranted in federal court, either because litigation is adversarial or because the patent in question passed an examiner’s scrutiny, why wouldn’t an equally robust assumption be warranted in IPR? In any event, we should not lose site of the big picture: because so many litigated patents are challenged in IPR, it has in effect largely eliminated the assumption long enjoyed by patents that they are valid absent clear and convincing evidence otherwise.

The third reform is to make it easier to amend patents in IPR. Currently, the Board allows amendments in only a tiny number of IPRs. That the Board generally forbids amendment seems a bit unfair given that the PTO previously granted the patent after a lengthy and costly examination in which the PTO failed to find or to assert the prior art asserted in the IPR. Forbidding amendment in IPR also seems backwards as it entails treating patents less favorably than applications.

The fourth reform is to require that the Board panels that reaches final decision differ from the one that decided to institute the IPR. Given the high kill rate for instituted claims that reach final decision, once a panel decides to institute the game is largely over. Insofar as different panels are apt to reach different conclusions on validity, then employing different panels for institution and final decision helps ensure that a patent’s fate turns on something besides the luck of the panel draw.

Should Very Obscure References Qualify as Effective Prior Art?

Patent law has long maintained the fiction that the person of ordinary skill in the art is omniscient in the sense that he is aware of all relevant prior art in existence anywhere in the world at the time the application was filed. Accordingly, in litigation and inter partes review, novelty and non-obviousness are assessed in light of the most technologically relevant prior art that a challenger can dig up, regardless of whether anyone who wanted to solve the problem solved by the patentee would’ve actually consulted that art.

For example, in In re Hall the Federal Circuit held that a copy of a doctoral thesis in a single library in Germany counted as a publication available against the patent.19 Similarly, in Titanium Metals v. Banner, the patentee claimed a titanium alloy having “good corrosion resistance in hot brine environments.” The Federal Circuit held that the claim was anticipated by a 1970 article in the journal Russian Metallurgy, which contained a graph with a data point that could, on close inspection, be recognized as representing a species within the claimed genus. It did not matter to the court that the article was concealed behind the Iron curtain or that its authors were unaware of the corrosion resistance.20

It has long been assumed that the fiction of omniscience is justified, but nowhere are the reasons for it elaborated. It may be time to determine whether the fiction is really warranted or whether it can be circumscribed.21 The problem with it is that it ignores the basic underlying rationale for patents – to enable the public to reap the benefits of inventions that it would not reap but for the promise of patent protection. The reality is that if a reference is highly obscure – in the sense that it’s very unlikely that anyone who was aiming to solve the same technological problem would’ve consulted the reference – then the reference in no way supplies the public with the benefit that the patentee supplied.

The notion that obscure prior art shouldn’t deep-six a patent is not as unprecedented as it may seem. Consider 102(g), under which prior invention doesn’t count as prior art if the prior invention was abandoned or suppressed. In other words, prior invention cannot defeat a patent under 102(g) if the prior invention did not inure to the public’s benefit.

The doctrine of inherency is to similar effect. Under the doctrine, prior art can invalidate a patent even if it does not explicitly teach the invention. The law of inherency has long been considered a muddle but there is one (and only one) way to make sense of the case outcomes on inherency: ask whether the prior art allowed the public to reap the benefit that the patented invention supplies.22 The case law shows that, if the reference allowed the public to reap the benefit, the prior art invalidates the patent. Otherwise the patent remains valid and the anticipation is characterized as merely accidental.

It may be time to extend the underlying principle of public benefit to encompass references so obscure that no one seeking what the inventors sought would’ve consulted them. This reform could be implemented by the courts, but legislation may be necessary to see it happen within our lifetime.  This reform will be discussed in more detail in an upcoming article on PatentAttorney.com.

Trump and the Political Will to Fight Digital Piracy

America’s comparative advantage lies not in competing on wages but in creativity and innovation. We supply the brunt of the world’s software, popular music, TV, movies, and videogames.23 We suspect the new Administration would be open to more aggressive anti-piracy measures. Trump has articulated a protectionist agenda and has promised to alter arrangements in which the US gets the short end of the stick. Anti-piracy measures fit this agenda because piracy comes largely at the expense of American creators whereas most mass piracy operations and the majority of illegal downloaders are in foreign countries.

Although the media doesn’t cover the issue like it did when Napster debuted in the late 1990s, digital piracy is not just alive and well but increasing.24 Today, almost any song, TV show or movie can be readily downloaded for free or very close to it – at essentially zero risk of being charged with copyright infringement. Absent new measures, piracy is likely to increase as more and more of the world gets the bandwidth to readily download and share movies and other large files.

In most cases, to download a copyrighted work all one has to do is type the name of the work and the word “torrent” into Google and up will come a list of sites from which the work can be downloaded at no charge or after paying a small price for unlimited access to the site. The same goes for many if not most videogames and software programs. Those not available on torrent sites are sometimes available on darknet sites, which can be accessed through a particular browser that makes it nearly impossible for anyone to identify the user’s identity or location.

The fact that most software and works of entertainment are readily available for free on the net is widely known but falls a hair short of being common knowledge. Perhaps the main reason it’s not quite common knowledge is that the prices the creative industries charge for legitimate access – e.g., to rent movies on Amazon.com or buy songs on iTunes – are low enough that the majority25 of people in first world countries never bother to spend the extra minutes it takes to download works for free.

But here’s the rub: the prices for legitimate access are not themselves legitimate; they’re artificially low. That is, they are as low as they are because, if they were higher, more people would choose to download illegally. The price an industry can charge depends on how consumers would react if faced with a higher price. Today, the option to download illegally tacitly determines the prices the market will bear – from Amazon.com’s $3.99 per movie, to Netflix’s $8-$10 per month for unlimiting viewing, to iTunes’ $1 or so per song, to Spotify’s $0-$10 per month for unlimited listening.

In the mid 1990s, a typical music consumer would pay about $20 for a CD and end up liking and listening to, let’s say, four songs on it, which implies an average value to the consumer of at least $5 per song consumed, or $8 per song in 2017 dollars. How do you think consumers today would respond if all legitimate sellers of music started charging $8 per song?

The larger point here is that the harm to creative industries from piracy comes not only from the illegal downloading that actually occurs but also from prices having to be kept so low that the majority of people in first-world countries will pay them rather than bother to download illegally.

Piracy also distorts the creative process by biasing it toward activity that can’t be pirated (such as live performances) and to the creation of works pirated at lower levels. In Nashville, the conventional wisdom is that musicians have the best chance of making a living in the industry if they pursue country or Christian music. Hence some Nashville musicians package themselves for those genres even though they don’t prefer or self-identify with them. We suspect these two genres hold out better career prospects because fewer of their fans download illegally. Statistically speaking, their fans are more likely to live in rural areas and less likely to have fast internet service or to be tech savvy. In addition, one would expect most Christian music fans to be disinclined to stiff Christian artists through illegal downloading.

Studies reinforce the common sense notion that piracy cuts into industry revenue. In the graph below, the red line shows album sales before and after Napster’s debut in 1999. 26 Note the overall upward trend until Napster’s debut. Note also the blue line, which suggests the upward trend would have continued but for Napster and subsequent piracy operations.

Although the creative industries still go after mass pirates and the US-based internet service providers who abet them, the industries seem resigned when it comes to the larger cultural and political fight against piracy. But if there ever was a time to get some fire in the belly, now seems like the time. The Trump Administration is likely to be more amenable to the fight than any previous administration previous and any in the foreseeable future.

Rampant piracy is not inevitable. Curtailing it is simply a matter of political will. Imagine if we fought piracy with even half of the intensity, resources and technology that we devote to the fight against terrorism. Imagine if the government started aggressively hacking piracy sites, tracking pirates, imposing sanctions on countries that harbor pirates, and reforming copyright law to impose liability on advertisers who fund piracy sites and on pirates who currently avoid liability by distributing files through a peer-to-peer system that enables pirates to coordinate file exchanges between the computers of site users such that the files are neither stored on nor pass through pirate servers.

Today, those who run mass piracy operations are rarely prosecuted or convicted and when they are the penalty is lax compared to the penalty for a less harmful but more traditional crime such as robbing a store. Suppose a thief busts out a store window to swipe a few necklaces in the storefront display and is later apprehended and prosecuted. Although the harm from this crime is relatively modest – e.g., on the order of a few thousand dollars to replace the window and necklaces – the thief could serve years for the crime.

Compare the robbery example to the harm caused by The Pirate Bay, the largest piracy site, with millions of files and users and in near continuous operation since 2003 until today. Over the years, this site must’ve caused tens of millions of dollars in lost sales, perhaps hundreds of millions. Yet, in 2009 its three founders were convicted and the one who served the most time served only seven months. 27 Granted, they were convicted in Sweden, but had they been convicted here the penalties still would’ve been extremely lenient relative to the harm caused.

Why are the penalties for piracy so lenient compared to penalties for much less harmful traditional crimes? Probably because the harm from piracy, unlike the harm from robbing a store, is indirect, diffuse, cumulative, statistical in nature, and invisible insofar as it results in works never coming into existence – in a word, abstract. But abstractness is not a good reason to go easy on pirates. On the contrary, it’s a good reason to assume that we are psychologically inclined to go too easy on them and that we should therefore revise the penalty in accord with reason and the logic of deterrence.

In addition to increasing the penalty for mass piracy, it’s also important – much more important than most people think – to go after some small-timers, i.e., users who participate in piracy at the consumer level by downloading pirated content for personal use. Going after small-timers is important for three reasons.

First, if we go after enough small-timers to make some headlines, it will probably generate a lot of deterrence bang for the deterrence buck. Cognitive psychologists have long known that people respond to low probability risks in a binary fashion. If a low probability risk is salient enough to appear on our radar, we treat it as if it’s more probable than it is. Conversely, if a low probability risk isn’t salient enough to appear on our radar, we do the opposite: we ignore the risk entirely and in effect treat its probability as zero.

This quirk of human psychology creates an opportunity to deter a substantial amount of illegal downloading with a relatively small investment in prosecutions or lawsuits. If we go after enough small-timers to make headlines, we can thereby create a blip on the radar of the other 100 million or so Americans who consume pirated content.28 Today, this quirk may be having the opposite effect as the legal risk to small-timers approximates zero or otherwise falls short of being salient enough to appear on their radar. Indeed, according to a recent survey, 31% of Americans think it’s legal to download pirated content!29

The second reason it’s important to pursue some small-timers is that it would beef up the cultural norm against piracy. Today the norm is frail and far from universally shared. Enforced laws affect norms. When an activity is banned and the ban is enforced, more people come to view the activity as something good citizens shouldn’t mess with.

The third reason to go after some small-timers is that it has become harder to go after the preferred target, those who mastermind mass piracy operations. Today most pirates are located outside the US and/or use peer-to-peer. Absent new counter-measures, we are left with no choice but to either go after some small-timers or sit back and let America derive less and less from its greatest comparative advantage.

AIPLA Survey of Costs of Patent Litigation and Inter Partes Review

Every other year the American Intellectual Property Law Association conducts an economic survey, which provides the best average estimates of the costs of patent infringement litigation in federal court, among other things. Here we summarize some portions of the 2015 Report of the Economic Survey, the most recent available. For the first time, the AIPLA Report also includes the costs for Inter Partes Reviews, which are set forth below after the table.

The Report is based on responses from 1,366 individuals who had first-hand knowledge of the costs either as a seller of legal services or as a buyer. About 18% of the respondents were corporate IP department attorneys and IP department heads. The rest were private attorneys.

For litigation, the Report shows the costs for four different amounts in controversy/at risk. It also shows the costs for two stages, namely, through the end of discovery and through completion of the litigation (e.g., through trial and appeal if there was one). The costs are comprehensive and include those of outside and local counsel, associates, paralegal services, travel and living expenses, fees and costs for court reporters, copies, couriers, exhibit preparation, analytical testing, expert witnesses, translators, surveys, jury advisors, and similar expenses.

It is worth bearing in mind that, in general, the costs reported below for litigation and for Inter Partes Review will be somewhat lower for small IP firms. As the Report points out, the median hourly billing rates for IP attorneys at large firms (101 attorneys or more) and mid-sized firms (31 attorneys or more) were $437 and $400, respectively. The median rates for firms of smaller sizes ranged from $300 to $350.

 

Median Costs of Patent Litigation

 <$1M at Risk$1M-$10M at Risk$10M-$25M at Risk>$25M at Risk
Through discovery$400K$950K$1.9M$3M
Through trial, appeal$600K$2M$3.1M$5M

 

The median costs for Inter Partes Review were dramatically lower:

  • Through filing petition                          $80K
  • Through end of motion practice        $200K
  • Through PTAB hearing                        $275K
  • Through appeal                                     $350K

 

The AIPLA Report includes additional information about costs not presented here. For example, the Report includes the costs of:

  • Patent litigation in major metropolitan areas, including the DC area
  • Litigation to defend against patent suits brought by non-practicing entities (NPEs)
  • ANDA/Hatch-Waxman patent litigation
  • Patent suits before the International Trade Commission under Section 337
  • Copyright infringement litigation
  • Trade secret litigation
  • Trademark infringement litigation
  • Trademark opposition and cancellation proceedings

The Report further includes typical charges for various legal services for patents, trademarks and copyrights. For patents, it includes, among other things, the charges for opinions of validity/invalidity, opinions of infringement/noninfringement, patentability searches, drafting, filing and prosecution of applications of various types and technologies, appeals to the Board, and ex parte re-exams.

Federal Trade Commission Releases New Report on PAEs

The Federal Trade Commission has released a long-awaited report on “patent assertion entities” (PAEs). As defined by the FTC, a “patent assertion entity” is a company that, as a primary business function, acquires patents from third parties and seeks to generate revenue by asserting them against accused infringers. These firms typically generate revenue by licensing these patents or, more rarely, through successful patent litigation. Such firms also typically open patent license negotiations by immediately demanding payment or filing a patent infringement suit.

The FTC made use of its subpoena power to obtain data on more than 2000 patent holding companies that it determined fit the PAE mold. It found that only a small minority of these PAEs had ever asserted their patent rights in court. The FTC found that, generally, these companies could be separated into two different categories: “portfolio PAEs” and “litigation PAEs.”

“Portfolio PAEs” assembled large portfolios, often containing hundreds or thousands of patents, and received most of their money through licensing. Typically, they were able to do this without first suing the alleged infringers. While “portfolio PAEs” accounted for only a small portion of the licenses in the study (around 9%), these licenses accounted for an overwhelming majority of the total revenue of all licenses looked at in the study (around 80%, or approximately $3.2 billion in licensing revenue). These entities typically received most of their initial startup capital from investors, which included institutional investors and manufacturing firms.

“Litigation PAEs” typically operated by suing potential licensees and using the threat of prolonged litigation to induce defendants to settle and take licenses. These companies typically operated using small portfolios, usually containing fewer than ten patents. The typical charge for these licenses was just under the lower bound of early-stage costs for defending against a patent suit; as a result, the FTC has concluded that such lawsuits are “consistent with nuisance litigation.” However, while these litigation PAEs represented most of the litigation activity within the FTC’s study (around 96%), and were responsible for most of the licenses examined by the study (around 91%), these PAEs only received around 20% of the total licensing revenue.

Several interesting results came out of the FTC study. First, it did not appear that many (if any) patent defendants negotiated patent licenses when faced with a demand letter from a litigation PAE, and that in essentially all cases, the PAE had to file suit against the defendant to bring them to the negotiating table.

Second, while a large number of the patents that were asserted by PAEs had to do with either information and communications technology (ICT) or computer software, most of the litigation PAE targets were not in the software industry; instead, it appeared that the largest plurality of PAE targets were in the consumer retail industry. These targets included, for example, store retailers that operated fixed point-of-sale operations and non-store retailers (such as Internet sites) that directly sold products.

The FTC’s findings also suggest that many of the solutions put in place with the stated goal of curbing the abuses of litigation PAEs, such as legal fee shifting, may not be as effective as hoped. Most litigation PAEs are small companies with few assets, and most PAE litigation appears to settle early, before an award of fees is considered. The FTC has prepared some of its own ideas, such as discovery reform, which may help to curb the abuses of litigation PAEs where past reform efforts have failed.