#IPSC18 Preview: Copyright

Yesterday I previewed the panels on patents and innovation at next week's IP Scholars Conference at Berkeley Law. Here are the copyright-focused panels:

• Breakout 1 – Copyright: Intermediaries and Markets
• Annemarie Bridy – IP owners are now conscripting content delivery networks and domain name registries for online IP enforcement.
• Juan Contreras & Carlos Uribe – TVEyes illustrates the tension between competition law and IP exclusion power.
• Jim Gibson & Chris Cotropia – Convergence of caselaw on online copyright infringement and DMCA standards has caused courts to conflate the two standards in problematic ways.
• Molly Van Houweling – Copyright limitations like fair use and first sale help support market conditions that allow contractual waivers of those limitations.
• Breakout 2 – Copyright
• Shane Burke – Sol LeWitt's practice of providing instructions for works with limited supervision—including examples leading to post-mortem performances—challenges conceptions of authorship.
• Andrew Gilden – Non-traditional interests such as privacy and autonomy are regularly vindicated through the rhetoric of copyright markets, but only by powerful rightsholders.
• Zahr Said – Copyright law is surprisingly jury-unfriendly, which could be addressed through improved jury instructions.
• Christopher Yoo – The debate over whether thought is independent of language can inform copyright doctrines.
• Breakout 3 – Copyright: Empirical
• Frederic Blockx – In copyright cases, SCOTUS and ECJ use 5 of 10 interpretive techniques similarly, and 5 differently (particularly related to legislative intent).
• Kevin Collins – Copyright in customized works that lack demand among strangers is not justified by incentives to create, but it does prevent clients from misappropriating works without fully compensating authors.
• Paul Heald – Empirical study: The right of statutory reversion to authors increases in-print status for important classes of books.
• Matthew Sag – Can "books as individual works" and "books as collective data" coexist?
• Breakout 4 – Copyright: Fair Use
• Clark Asay & Arielle Sloan – Review of transformativeness in fair use cases from 1991-2017.
• Barton Beebe – Update of empirical study of fair use cases 1978-2005.
• Cathay Smith – A moral rights claim under VARA could have a fair use defense.
• Xiyin Tang – Analysis of the relevant market for fair use should disfavor copyright owners who deliberately restrict the market for their works.
• Breakout 4 – AI and IP
• Aviv Gaon – Authorship under international treaties should be interpreted broadly to recognize countries' right to extend copyright protection for AI-created works.
• Gi-Kuen Jacob Li – Allowing AI-generated works to fall into the public domain may be harmful.
• Rob Merges – Autonomous vehicle design architecture. (No abstract.)
• Mira Sundara Rajan – Moral rights may be more appropriate to address AI creation than copyright as a whole.
• Breakout 5 – Copyright
• Ann Bartow [canceled] – Examines how copyright contributes (or not) to the value of works of visual art, and how this intersects with art institutions and with race and gender.
• Michael Carroll – Examines the law of musical quotation, adaptation, and sampling.
• Justin Hughes – Should actors be copyright authors, and if so, when and how?
• Tim McFarlin – What role should the public interest play in copyright injunctions?

Those interested in copyright scholarship should also check out Rebecca Curtin's paper in Breakout 1 – History: IP and Innovation, Shyamkrishna Balganesh's paper in Breakout 4 – Old and New Theories of IP, Ariel Katz & Patrick Pang's and Argyri Panezi's papers in Breakout 6 – IP and Academic Institutions, and Tonya Evans's and Kristelia Garcia & Justin McCrary's papers in the Closing Plenary.

#IPSC18 Preview: Patents & Innovation

The 18th Annual IP Scholars Conference is next week (Aug. 9-10) at Berkeley Law, and it includes over 140 academic talks given in six parallel tracks. It's not a great format for deep substantive engagement, but it's my favorite conference for getting an overview of what the IP academic community is working on. Of course, you can only see one-sixth of the projects, so if you want a taste of everything: I just read all the abstracts for this year's conference and wrote one sentence on each of them.

Here are all the panels that seem primarily focused on patents and innovation; I'll post about other IP areas (including panels combining patents with other areas of IP) in the coming days. For coauthored papers, the presenting author is listed first.

• Breakout 1 – Patent Theory
• Scott Baker & Anup Malani – An economic model suggests that an opt-in regulatory system (such as the patent system) can improve welfare through mistaken grants by encouraging firms to opt in and thus improving information for investors.
• Michael Burstein & Mark McKenna – SCOTUS's line between patentable inventions and unpatentable discoveries needs normative justification.
• Nicholson Price – The novelty requirement is not always aligned with social welfare, as illustrated by the biomedical field. (Builds on scholars such as Sean Seymore and Ben Roin; see also Krieger et al. on drug novelty. I'm sorry to have to miss this session!)
• Miriam Marcowitz-Bitton & Maayan Perel [canceled] – Patent term should be keyed to recoupment of investments plus reasonable profits. (Related to literature on basing damages on R&D costs, which I review here.)
• Breakout 1 – Ad Law of IP
• Michael Frakes & Melissa Wasserman – Another USPTO empirical project from this inimitable duo, this one on how PTAB reversals affect patent examiner behavior. (Wish I could be at this session too!)
• Jonathan Masur – "The outcome in Oil States provides a possibly counter-intuitive answer as to whether panel stacking by the PTO director will remain permissible." (Wasserman & Walker also have thoughts on this, so I'm glad they're in the same session.)
• Saurabh Vishnubhakat – Empirical data suggests SAS was rightly decided, despite criticism "for sacrificing efficiency on the altar of wooden statutory interpretation."
• Melissa Wasserman & Chris Walker – PTAB adjudication is not unusual except that agency head lacks final decision-making authority. (Great paper, summarized here.)
• Breakout 1 – History: IP and Innovation
• Rebecca Curtin – John Locke's commercial dealings with publishers illustrate diverse transactional tools and emerging sense of authors' rights. (This is copyright, not patent, so I'll note it again tomorrow, but the rest of the panel is more patent-focused.)
• Randy Picker – Reviews computer competition and innovation over last 100 years, including how WWII government contracting decisions shaped the computer patent environment.
• Michael Risch – 19th century apple-parer patents are instructive, including in showing how patent enforcement can channel innovation toward noninfringing workarounds.
• Breakout 2 – Patents
• Chris Holman – Vanda v. West-Ward, holding that step requiring action based on diagnostic result rendered a claim patent eligible, is good news.
• Amy Motomura – Allowing a patentee's own past patent applications to serve as prior art discourages valuable disclosure. (Amy is a patent prosecutor with an MS in bioengineering who recently joined Stanford as a fellow with the Center for Law and the Biosciences—patent folks should meet her!)
• David Schwartz, Jay Kesan & Anne Layne-Farrar – Empirical study of patents acquired by hybrid PAEs (those subject to some level of operating company control).
• James Stern – Patent holders should be able to obtain a final determination that their patents are valid.
• Breakout 2 – Law, Norms, Forms
• Jorge Contreras – FRAND policies are governed by the jurisdiction in which the standards-development organization is based, threatening a race to the bottom.
• Brett Frischmann, Katherine Haenschen & Ari Waldman – Knowledge-sharing communities develop privacy rules and norms to enable their cooperation. (Not patent-specific, but sounds interesting.)
• Robert Cooter & Uri Hacohen – Patent doctrines should be interpreted to maximize innovation (and thus growth), not static efficiency or redistribution. (Cooter presented this idea when he received the Ronald H. Coase medal at ALEA. Even if one buys the normative claim, I was skeptical that it has the clear doctrinal payoffs he suggested.)
• Jacob Sherkow [canceled] – High-throughput DNA sequencing leading to adaptive immunoreceptor repertoire (AIRR) data, and what it teaches us about trade secrecy and disclosure.
• Breakout 3 – Infringement and Remedies
• Bernard Chao & Roderick O'Dorisio – Mock jurors will be asked to render patent damages awards in a 3x3x2 experiment. (I'm looking forward to the results!)
• Pamela Samuelson & Mark Gergen – Disgorgement damages for design patents should be based on an assessment of the profits that can be causally attributed to the infringing elements in a defendant's product.
• Amy Landers – Proximate cause in patent cases should be reexamined in light of patent law's purposes.
• Erik Hovenkamp – The antitrust question can be addressed without inquiring into whether the patent is valid and infringed by looking at the nature of the settlement agreement. (Interesting that there aren't more IP & antitrust papers at IPSC this year!)
• Breakout 3 – Ad Law of IP
• Jeremy Bock – The PTO receives insufficient feedback from the rest of the patent system.
• Charles Duan – Regulation sometimes requires use of IP-protected material; courts take inconsistent approaches to the resulting overvaluation of IP. (This paper isn't patent-specific, but the rest of the panel is.)
• John Duffy – The AIA pushed the PTO away from its "rational ignorance" approach toward the prevailing ad law process of "reasoned decisionmaking."
• Arti Rai – AI could improve patent examination, but it also poses challenges.
• Breakout 3 – Patent's Purpose
• Jonas Anderson – Inventors of surgical techniques seek patents despite their inability to enforce such patents against surgeons and hospitals because they are motivated by prestige and reputational rewards.
• Dan Prud'homme – Survey data from Chinese firms suggests that state patenting incentives help latecomer firms facing patent thickets.
• Brenda Simon – Interviews with medical device professionals illuminate patents' disclosure function. (Yay for more research on disclosure!)
• Neel Sukhatme – A field experiment tests whether making a product's patent status more salient makes it more desirable to consumers.
• Breakout 4 – Patent Litigation
• Rebecca Eisenberg – Debates over PTO vs. judicial decisionmaking should pay attention to timing—both the value of alacrity in resolving disputes (which may be served by more judicial deference to the PTO) and the benefit of later evidence not available at the time of prosecution.
• Paul Gugliuzza – The elite bar has contributed to the growth of SCOTUS's patent docket, and the Court relies more on these kinds of heuristics in patent cases than in other areas.
• Dmitry Karshtedt – Patent challengers should not be able to relitigate in the PTAB issues that a district court has already decided.
• Brian Love, Bernhard Ganglmair & Christian Helmers – Defensive patent litigation insurance deters subsequent assertion (economic model + empirics).
• Breakout 4 – IP and International Economic Development
• Aman Gebru – A disclosure-of-origin requirement could spur innovation by preventing source communities for genetic resources and traditional knowledge from putting up barriers to research.
• Cynthia Ho – The U.S. culture has been captured by the "patents work in pharma" view and can learn from other countries that are more skeptical of pharma patents.
• John John Uket – Case studies from Nigeria, South Africa, and Kenya show that stronger IP is necessary for African development.
• Rebecca Wolitz – Many states are experimenting with new laws to address drug-pricing controversies, raising important issues of federalism. (Yet another rock star Stanford fellow, with training in law and philosophy and interests in IP, health law, and corporations. Come meet her if you haven't yet!)
• Breakout 4 – IP and Innovation
• Christopher Cotropia – A study of almost 6500 Kickstarter campaigns in patent-eligible categories finds that patent-pending projects are more successful in getting funded than projects with issued patents or with no patents.
• Camilla Hrdy – Many state and federal "innovation" incentives are in reality designed to promote job creation that has nothing to do with inventiveness. (Not patent specific, but an important contribution to the literature on patent alternatives.)
• Lucas Osborn – The US should join Europe and Japan in allowing patent claims directly on 3D printable files of otherwise patentable objects.
• Raphael Zingg & Ludvig Wier – Based on the patent citation network in 662 fields, the more clustered past research is, the higher is subsequent innovation. (For other efforts to study the effect of geographic proximity on innovation, see the NBER Summer Institute papers by Bikard & Marx, Andrews, and Watzinger, Treber & Schnitzer.)
• Breakout 5 – IP in the Courts
• Sam Ernst – SCOTUS's most common rationale for reversing in patent cases is that the Federal Circuit ignored its pre-1952 precedent. (If anyone feels inspired to extend my list of Supreme Court patent cases into this period, let me know!)
• Jyn-An Lee & Dicky Tsang – Different jurisdictions approach choice-of-law issues in FRAND cases quite differently, and choice-of-law clauses have limited effects, but courts rarely state their reasoning.
• Joseph Miller – Co-citation analysis of SCOTUS IP cases from 1900 to the present shows cases most often cited together. (Not purely patent related, and you can see his slides here.)
• Shawn Miller – An empirical assessment in changes in venue choices across different patent plaintiff types due to TC Heartland shows a shift in PAE—and only PAE—filings from E.D. Tex. to D. Del. and other districts. (Shawn is another terrific Stanford fellow; for his other interesting empirical papers, including two that have been featured on this blog, see here.)
• Breakout 5 – Patents (with a focus on § 103)
• Ryan Abbott – AI will make all patents obvious. (Reviewed here.)
• Andrew Michaels – Patentable subject matter jurisprudence conflates innovativeness and abstractness, as illustrated by abstract ideas in virtual reality.
• Ted Sichelman – An empirical study of pre- and post-KSR obviousness decisions shows the Federal Circuit has shifted much less than the district courts.
• Ryan Whalen & Laura Pedraza-Fariña – A new "network measure of nonobviousness" based on distance from the prior art in "technological space" can be used to aid claim assessment without hindsight bias. (IPSC participants interested in algorithmic measures like this might also be interested in Jonathan Ashtor's paper—also in Breakout 5, but a different time slot, so you could see both—and in the Patent Quality session in Breakout 6.)
• Breakout 5 – Patent Practitioners
• Wissam Aoun – From the 19th to early 20th century, socioeconomic trends shaped the professionalization of patent agents, and lessons from the first Industrial Revolution inform what a modern democratized patent agent profession may look like in light of AI and other disruptions.
• Jonathan Ashtor – An algorithmic measure of patent novelty based on linguistic analysis of claim text is validated against established novelty proxies and actual USPTO rejections. (Noted by Michael Risch on this blog here.)
• Jeanne Curtis & Christopher Buccafusco – It makes no sense to require design patent prosecutors to have a science/engineering background, and it likely impacts women's access to the profession. (Jeanne was my supervising partner when I summered at Ropes & Gray, and she recently left private practice to lead the Cardozo-Google Patent Diversity Project.)
• William Gallagher – Semi-structured interviews with patent prosecutors are used to understand what they actually do.
• Breakout 5 – Innovation and Health
• Robin Feldman – Combining litigation records and other reports illustrates competitive distortions in the health care market.
• Michael Mattioli – Ethnographic tools reveal the idiosyncratic ways that innovative assistive technologies have developed.
• Ana Santos Rutschman – Vaccine development is supported by both patent strategies and new public-private partnerships. (Related to Amy Kapczynski's work on the flu network.)
• Laura Vidal – The Mexican government cannot comply with its immunization schedule due to limits on pharmaceutical firms' capacity to conduct research.
• Breakout 6 – Patent Big Questions
• Dan Burk – State constitutions whose protections extend beyond those offered by the federal First Amendment can alter or prohibit certain patent assertions.
• TJ Chiang – Patents can restrict free speech just like copyrights and trademarks without corresponding doctrinal safeguards.
• Greg Reilly – Arguments that Congress cannot depart from long-standing features of the patent system cannot sound in originalism (because such features developed in the mid-19th century) and are instead based on living constitutional theories.
• David Taylor – The United States and Europe have different histories of morality as a basis to deny patent eligibility.
• Breakout 6 – IP and International Economic Development
• Margaret Chon – Public-private partnerships are used in global governance structures in which IP is explicitly connected to other development goals.
• Su Li & Shi Chen – Analysis of 444K patent applications filed by U.S. inventors in China shows that patents with more claims and more forward citations are more likely to be approved, whereas patents with more backward citations are less likely to be approved.
• Arul Scaria – A survey of science researchers in India shows the extent to which they have adopted open science practices; survey results are here.
• Joy Xiang – For cleantech collaborations between developing and developed countries to be successful, the collaboration needs to be mutually benefiting and to not ignore IP rights.
• Breakout 6 – Patent Quality
• David Abrams – For pharmaceutical patents, citations are strongly correlated with technological impact, correlated with private value (but elasticities are small), and only somewhat correlated with consumer value.
• Colleen Chien – Comparing 100K applications filed at the EPO and USPTO and using the EPO as a benchmark reveals new ways to measure patent quality.
• Glenn Woroch, Mark Rodini & Thomas Varner – Forward citation ratios (forward citations scaled by average forward citations for similar patents) are correlated with other patent quality metrics but only weakly with royalties.
• Andrew Torrance & Jevin D. West [canceled] – A worldwide network of over 200M patent citations shows how patents organize at subcommunity scales.

As noted above, there are also patent- and innovation-focused papers on non-patent-focused panels that will be summarized in upcoming posts. In particular, watch for papers by Toshiko Takenaka in Breakout 2 – IP History and Theory, Stefania Fusco et al. and me & Andrew Tutt in Breakout 6 – IP and Academic Institutions, and Rachel Sachs in the Closing Plenary.

The Real World Impact of the Copyright Registration Prerequisite

Just before the summer recess, the Supreme Court snuck in a certiorari grant that I don't think has received much attention in proportion to its importance--Fourth Estate Public Benefit Corp. v. Wall-Street.com LLC. The issue is seemingly simple: before filing a lawsuit, a copyright owner must register the copyright. But what does it mean to register the copyright? Simply file the application, or actually receive the registration certificate.

I'd say this question is one of the most practically important IP questions the Court has faced in the last decade. When I was in active practice, I would estimate that a quarter to a third of our clients did not have a registration at the time they wanted to sue, and we relied on the Ninth Circuit's permissive "application is enough" rule to get a case filed (and sometimes seek injunctive relief). The alternative was to file and wait, sometimes months or even more than a year, to get a registration. (I've read that pendency is now about six to eight months). Alternatively, one can pay $800 for an expedited registration within 10 days.

Why might someone not file a registration well in advance of suing? First, because they don't have to. The post-Berne Convention adoption amendments from 1989 allow copyright to vest from the time of fixation. Indeed, in order to maintain compliance with Berne, the pre-filing registration requirement only applies to U.S. Works. Foreign works may sue at will--more on this later.

More practically, there are plenty of reasons why one might not file. In an era of mass digital photography, it would be ridiculously expensive to register every work in case one was infringed; it is far more efficient to see if anyone infringes, and then register that work. In software, new versions are created all the time--almost literally so in software as a service platforms. It would be impossible to file a new derivative work registration for every single released version, especially for open source (though I bet Microsoft does it).

As a result, the registration requirement would become a hammer that would keep rightful owners from bringing suit. The Supreme Court even recognized this several years ago in Reed Elsevier, Inc. v. Muchnick. In that case, a class of journalists filed suit for transfer of their print works into electronic databases. Some putative class members objected to a settlement, but they had not registered. The Court ruled that registration was not jurisdictional. Does this mean that one can apply and sue, so long as registration occurs before any final determination?

I won't run through the pro and con arguments in detail, as arguments can be made on each side from different interpretive points of view. The statute clearly states that registration is required. But another section states that registration is effective from the date of application. But another part states that one may sue if the registration has been denied, which implies that registration is not complete until accepted. But then one wonders how long an applicant must wait until there is an assumption that the work has been "pocket denied," especially when registration is a ministerial act. But then the copyright office might argue that registration is not a ministerial act. And so forth. But the outcome of the arguments will have a real effect on real people and businesses.

I'd like to end with the challenge not made in the case: equal protection. While a couple commentators here and there have mentioned this problem with the dual registration rules, I can find no case with "411(a) & 'equal protection'" as search terms. Requiring a separate hurdle for some works and not others is about as unequal as I can think of. It is unclear why SAP can file suit immediately, but Oracle may not. I don't know if the Supreme Court can reach this issue as part of its interpretive determination (it's not an issue and it wasn't briefed), but I hope it does.

NBER Summer Institute 2018: Innovation

Last week I was a discussant at the Innovation section of the 2018 NBER Summer Institute (full schedule here), which I highly recommend to scholars interested in the economics of innovation. The quality of the papers and the discussion was pretty uniformly high. There were a few examples of the insularity of economics, such as remarks about topics that "no one has studied" that have been studied by legal scholars, but I think this just illustrates the benefits of having scholars familiar with different literatures at disciplinary conferences.

Here are links and brief summaries of the innovation-related papers. (There was also a great panel discussion on gender and academic credit, which I might post about separately at some point.)

Janet Freilich, Prophetic Patents – This was the paper I was a discussant for, and I'll devote a stand-alone post to it soon, so for now I'll just note that it does a great job highlighting the problem of fictitious data in patents and demonstrating how this confuses scientists.

Joshua Krieger, Danielle Li & Dimitris Papanikolaou, Developing Novel Drugs – Using a new measure of a drug's novelty relative to already-approved drugs, the authors show that novel drugs are less likely to be approved by the FDA but, conditional on approval, generate higher private and social returns. Additionally, firms respond to an increased cashflow with investment in more novel drugs, suggesting that "on the margin, firms perceive novel drugs to be more valuable ex-ante investments, but that financial frictions may hinder their willingness to invest in these riskier candidates." Lots of clever empirics, though figuring out the welfare effects is difficult.

Yifei Mao & Jessie Jiaxu Wang, Labor Scarcity, Finance, and Innovation: Evidence from Antebellum America – Using the staggered passage of free backing laws across states from 1837 to 1860 and differences in labor scarcity between slave and free states, they find that greater access to finance "encouraged technological innovation that substituted for free labor, but discouraged technological innovation that substituted for slave labor." The economic historians in the audience had questions about some of the data sources.

Michaël Bikard & Matt Marx, Hubs as Lampposts: Academic Location and Firms’ Attention to Science – Interesting results on knowledge flows: Academic publications are more likely to be cited by firms when they emerge from "hubs"—geographic concentrations of patenting by firms in the same specialized technical field as the paper—even when the citing firm is not in the hub. Academics in hubs do not seem to engage in more applied research; rather, the increased attention to hub-based research seems driven by its higher quality and the use of hubs as search heuristics (in that firms are more likely to cite a hub-based paper than a "twin" paper making the simultaneous finding outside the hub).

Lily Fang, Josh Lerner, Chaopeng Wu & Qi Zhang, Corruption, Government Subsidies, and Innovation: Evidence from China – Allocation of R&D subsidies in China was influenced equally by firms' innovative capabilities and corruption (as measured by anomalously high "Entertainment and Travel Costs"), and the 2012 anti-corruption campaign was effective at reducing the influence of corruption and increasing the effect of subsidies on future innovation. Seems like an important input for the choice between government-set and market-set innovation incentives.

Michael J. Andrews, The Role of Universities in Local Invention: Evidence from the Establishment of U.S. Colleges – Comparing cities that received new colleges 1839-1954 with runner-up sites suggests that new colleges caused 40% more patents per year. This effect seems primarily driven by migration: establishment of other institutions such as prisons or mental institutions had a similar effect; colleges had no independent effect after controlling for population; and most patents are by migrants to the college county rather than alumni or faculty. I thought this was a great paper that represented a tremendous amount of work, though I'm not sure that it tells us anything about the role of colleges in promoting local innovation today—a lot has changed since 1954.

Martin Watzinger, Lukas Treber & Monika Schnitzer, Universities and Science-Based Innovation in the Private Sector – Another interesting paper about knowledge flows. Comparing newly hired professors for a German university with runner-up candidates shows the effect of professors on the local private sector: local firms start to cite the newly hired professor's articles more and local patents become more similar to her articles. The effect seems primarily driven by PhD graduates working in the private sector.

Enrico Berkes & Ruben Gaetani, Income Segregation and Rise of the Knowledge Economy – Using a novel instrument related to the network of patent citations, they find that "innovation intensity is responsible for 14% of the overall increase in urban segregation between 1990 and 2010." The relationship between innovation and inequality is a growing area of scholarly interest (see, e.g., the interesting work by Raj Chetty et al.), and this is an important contribution to the field.

Hugo Hopenhayn & Francesco Squintani, On the Direction of Innovation – Using a theoretical model and plausible assumptions, they show that "the competitive market allocates excessive innovative efforts into high returns areas." This result is different from standard rent dissipation through patent races and from the point that private and social value can be misaligned. Instead, their point is that there is differential rent dissipation stemming from externalities imposed by marginal entrants to others focused on the same research goal. There are three sources of bias: (1) a static misallocation to high-value areas that depends on the assumption that the elasticity of discovery (i.e., the probability of solving the problem) is decreasing with the number of researchers; (2) a dynamic misallocation due to the externality a successful researcher imposes on remaining researchers who must bear the costs of switching to different research lines (which increases with the number of researchers); and (3) a second dynamic misallocation caused by individual researchers not taking into account the future option value of an unsolved problem (which is higher for high-value problems). The authors also claim that IP regimes cannot be the solution "as they grant property rights over the solutions and not the original problems," though there are lots of ways in which patent rights are often granted over ideas rather than complete solutions—see, e.g., Janet Freilich's paper above, or my review of some of this literature here.

Eugenie Dugoua, International Environmental Agreements and Directed Technological Change: Evidence from the Ozone Regime – The Montreal Protocol drove a large increase in R&D on alternatives to ozone-depleting molecules. Careful empirics, though the result isn't that surprising, and I'm not sure that this tells us much about international environmental agreements more generally. As scholars such as Cass Sunstein have explained, Montreal was much more successful than the Kyoto Protocol for a host of institutional reasons.

Ruchir Agarwal, Talent Matters: Evidence from Mathematics – Performance on the International Mathematics Olympiad (IMO) is correlated with a number of outcomes related to mathematical success, but IMO participants from low- and middle-income countries have less mathematical success than equally talented participants from high-income countries. This reminded me of the work on Lost Einsteins, though I wasn't sure what to take away from the results.

What Drives Product Companies to Sue?

There are many studies of patent litigation, including the reasons that firms litigate - I have worked on some myself. Much of it is really helpful information, but all of the studies lack one key component: the patents that get litigated are highly selected. They are selected for a) the firms that litigate (practicing v. non-practicing), b) the patents that are litigated (individual, portfolio, lead), and c) the cases that are litigated to judgment (default, settlement, summary judgment, trial).

In the realm of which firms and patents litigate, most of the studies have looked at the litigation level, comparing characteristics of patents and technology with samples of those patents and technologies that were not litigated. This is helpful information, but it certainly doesn't tell the whole story. So, Dirk Czarnitzki and Kristof Van Criekingen (KU Leuven Managerial Economics) have used suvey data of Belgian firms to be better understand which firms litigate. A draft of their paper New Evidence on Determinants of IP Litigation: A Market-Based Approach is posted on SSRN.  Here is the abstract:

We contribute to the economic literature on patent litigation by taking a new perspective. In the past, scholars mostly focused on specific litigation cases at the patent level and related technological characteristics to the event of litigation. However, observing IP disputes suggests that not only technological characteristics may trigger litigation suits, but also the market positions of firms, and that firms dispute not only about single patents but often about portfolios. Consequently, this paper examines the occurrence of IP litigation cases in Belgian firms using the 2013 Community Innovation Survey with supplemental information on IP litigation and patent portfolios. The rich survey information regarding firms’ general innovation strategies enables us to introduce market-related variables such as sales with new products as well as sales based mainly on imitation and incremental innovation. Our results indicate that when controlling for firms’ IP portfolio, the composition of turnover in terms of innovations and imitations has additional explanatory power regarding litigation propensities. Firms with a high turnover from innovations are more likely to become plaintiffs in court. Contrastingly, firms with a high turnover from incremental innovation and imitation are more likely to become defendants in court, and, moreover, are more likely to negotiate settlements outside of court.

The paper itself is relatively straightforward and the results are unsurprising: firms that seem to rely heavily on big innovation sue more, and firms that "imitate" or make incremental innovations tend to get sued more.

I'm not sure what to make of the finding that defendants who imitate are more likely to settle pre-suit (patent portfolio quality being held equal). I suppose that defendants who are making their own big innovations are more likely to challenge validity or argue noninfringement. Then again, the study finds that imitator defendants are more likely to seek patent invalidity, so it may be that either a) they settle when they cannot do win the challenge, or b) innovator defendants rely more on noninfringement.

I suppose that my primary critique is not so much with the empirical method but with the literature review. I think the discussion could have been informed a bit by reference to some of the legal literature in this area. I realize that most economists see law reviews as articles non grata due to lack of peer review, but there's been plenty of decent enough work in this area to merit comment. For example, this draft argues that it is the first to consider out of court settlements, but Lemley, Richardson and Oliver circulated a draft of comprehensive survey results in 2017. Similarly, the article discusses patent portfolios in enforcement, but doesn't mention any of the several legal articles focusing on these dynamics. This is a small point, but an important one. I think legal scholars should look to the economics literature much more often than they do, and I think economic research wouldn't hurt by doing the opposite every once in a while.

In any event, this is an interesting paper that adds new information about how we should think about what drives competitive company litigation.

The Trade Secret-Contract Interface

Deepa Varadarajan's new article, The Trade Secret-Contract Interface, published in the Iowa Law Review, explores the role of contracts in trade secret law. This article returns to an issue that remained unresolved following rich exchanges between Robert Bone and other scholars such as Michael Risch and Mark Lemley. Varadarajan's article is a welcome follow up.

The Prior Debate: Does Trade Secret Law Have An Independent Justification?

Prior scholarship probed whether trade secret law is justified separate and apart from contract law. Contract law operates on the notion that parties who enter into an enforceable agreement with one another can sue a counter-party who breaches and obtain damages in an amount that approximates the benefit of the bargain. In contrast, the owner of a "trade secret"—information that is not generally known and has been the subject of reasonable efforts to maintain its secrecy—can sue another who misappropriates the trade secret, regardless of whether they are in a contractual relationship. The trade secret owner can obtain an injunction to protect the sanctity of the secret, not just money damages.

In his 1998 article, A New Look at Trade Secret Law: Doctrine in Search of Justification, Robert Bone argued that trade secret law lacks a theoretical justification distinct from other legal theories, in particular contract law. When trade secret law reaches beyond contractual liability, Bone wrote, trade secret law subsists in a "normative vacuum that continues to remain unfilled." Within that vacuum, judges "view trade secret law as a relatively open-ended delegation of authority to police the morality of commercial relationships." (Bone, 245).

In the wake of Bone's bombshell, several academics sought to justify trade secret law. Two of the most oft-cited papers seeking to do so were those of Michael Risch (2007) and Mark Lemley (2008).

Several justifications for trade secret law emerged from these discussions. The seeds of most of them can also be found in the Supreme Court's crucial holding in Kewanee Oil Co. v. Bicron Corp. (1974), where the Court held Ohio's trade secret statute was not preempted by federal patent law.

(1) Promoting Innovation Beyond Patents
First, trade secret protection, like patent protection, serves to promote innovation, including patentable as well as unpatentable innovation. As the Court put it in Kewanee, "[t]rade secret law encourages the development and exploitation of those items of lesser or different invention than might be accorded protection under the patent laws, but which items still have an important part to play in the technological and scientific advancement of the Nation."

(2) Promoting "Disclosure"
Second, trade secret law, like patent law, promotes disclosure of information. But while patent law encourages public disclosure in patent specifications, trade secret law encourages "disclosure" within firms (between employers and their employees and between employees) and between firms (especially between licensors and licensees of protected information). As the Court explained in Kewanee, without trade secret protection,

"[t]he holder of a trade secret would not likely share his secret with a manufacturer who cannot be placed under binding legal obligation to pay a license fee or to protect the secret. The result would be to hoard rather than disseminate knowledge."

(3) Limiting Expenditures On Costly Precautions
Third, trade secret law reduces the costs of self-help. In Risch's words, trade secret law provides "incentives for businesses to spend less money protecting secret information or attempting to appropriate secret information." (Risch, 44).  Back in 2007, Risch gave a helpful "real world example" from his law practice.

"A client proudly told me about how his company’s new development center in China was set up to protect trade secrecy: fingerprint scanners, almost no Internet access, expensive network filtering appliances to scan outgoing email, special locks on the computers... and so forth. These expensive and potentially efficiency-reducing measures are not installed in the United States (though here there are other more “standard” precautions). The only difference in the client’s decision making is the perceived inability to enforce trade secret rights in China."

(Risch, 44). While hardly empirically bulletproof, Risch's example suggests that a contract-only regime does a sufficiently worse job at protecting information as to make a difference in companies' expenditures on precautions.  (Douglas Lichtman also wrote a paper on the self-help issue in 2004).

(4) Channelling Subject Matter Into, And Out Of, The Patent System
Lastly, trade secret law, in Lemley's telling, helps to "channel" subject matter between the domains of trade secret protection, which requires retaining near-absolute secrecy, and patent protection, which requires near-total public disclosure. Lemley implied that channelling can only effectively occur if trade secret law is conceived as a property-like regime with strict subject matter restrictions, including first and foremost, secrecy.

But none of this convinced Bone. In his 2014 follow-on article, The (Still) Shaky Foundations of Trade Secret Law, Bone remained convinced of the fundamental soundness of his earlier critique, writing:

"I have learned much from this work. But it does not convince me that broad legal protection for trade secrets is justifiable. I remain skeptical that there is a normative basis for a freestanding trade secret law that is not parasitic on other legal norms."

(Bone 2014, 1804).

Bone's response (and thanks to Jeanne Fromer for reminding me to read it!) is particularly relevant as we move into a new world of federal civil trade secret law under Title 18. A few of Bone's key critiques are worth highlighting, as they could prove useful areas for empirical study:

• "[I]t is not clear how much additional incentive trade secrecy adds [as an incentive to innovate], given that patent law already provides indirect incentives for nonpatentable inventions ... and .... firms already have market incentives to develop nontechnological, commercial information."  (1812). 
• "[Trade secret protection] diverts investment away from patentable inventions by enhancing the private value of nonpatentable ones...[and] frustrates the disclosure goals of the patent system when firms opt for trade secrecy to protect patentable inventions." (1813) 
• "[Contrary to what the Supreme Court stated in Kewanee,] trade secrecy does not publicly disclose inventions. It discloses to a contracting party but only under confidentiality constraints. That party learns the invention and might profit from the general knowledge in future work. But it cannot teach the information to others." (1814). 
• "Defenders of trade secret law continue to insist that trade secrecy can be justified by its salutary effect on the precaution-stealing arms race. However, none of the more recent arguments add all that much to the analysis. Indeed, some treatments simply reassert the benefit without addressing any of the detection or litigation-cost problems [i.e. that the option to sue for trade secret misappropriation comes with its own costs.]."

All of these critiques remain subjects of controversy. If Bone is (still) right that trade secret law is not justified except as a "parasite" on other legal norms, or at least not quite enough to justify the costs of introducing it, then the new federal trade secret law subsists in a "normative vacuum" too.

Varadarajan: Maybe Contracts Are The Boogeyman, Not Trade Secrets

And now we come to Varadarajan's new article, The Trade Secret-Contract Interface. It's not exactly a "bombshell," but it does pry open a very important sliding door that hopefully others will enter.  (Forgive the metaphors; it's been a hot summer).

The subject of the prior debate was whether trade secret law is justified independently from more traditional legal regimes like contract. In her new article, Varadarajan builds on this scholarship. But she enters the discussion from a different angle. Whereas Bone and the others debated how to justify trade secret law apart from contract law, Varadarajan's purpose is to probe, and ultimately criticize, the pervasive role of contracts within, and around, trade secret law.

As mentioned above, contract law can be far weaker than trade secret law. This is because trade secret law acts in places where no contract exists, and provides a far blunter remedy. "Efficient breach" is not possible in trade secret; courts may impose injunctions even in cases where this leaves the trade secret owner with more than she bargained for. (To give one example, courts, including in my state of Ohio, may impose lengthy "headstart" injunctions "in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.").

Take the example of the high profile Waymo/Uber lawsuit, in which Waymo sued Uber in order to stop Uber from acquiring and using trade secrets that Uber employee Anthony Levandowski allegedly obtained while working for Waymo. (The case subsequently settled.) Waymo never got Levandowski to sign a non-compete agreement and could not have done so given the California ban on non-competes, but using trade secret law Waymo might have obtained a permanent injunction preventing Levandowski from working at other firms like Uber, or even from working on self-driving cars period. Waymo never entered a contract with Uber at all; they were not in privity. Yet under trade secret law, Waymo could reasonably argue that Uber misappropriated trade secrets by hiring away Levandowski with knowledge that he came onboard with "14,000 highly confidential and proprietary files" containing Waymo information. If Waymo had succeeded at trial, it could potentially have enjoined Uber's entire self-driving car operation for years into the future.

Try doing that through contract law.

Yet at the same time, contract law can offer stronger protection for information than trade secret law. A principle reason is that contract protects a broader scope of information than trade secret law does. Waymo, for instance, could have accomplished a good deal using contracts. What if the information Levandowski took wasn't really a trade secret? Waymo still could have sued Levandowski for breach of contract with respect to "confidential," if not actually "trade secret," information he obtained while working at Waymo. Even without the ability to make Levandowski sign a non-compete agreement, Waymo could, and presumably did, have Levandowski enter a variety of contracts as a precondition to employment, ranging from non-disclosure to non-solicitation agreements. (On this point, see Jonathan Barnett and Ted Sichelman's working paper, arguing that companies in states that don't enforce non-competes have plentiful alternatives for limiting post-employment competition.) In addition, Waymo could have contracted with Uber and other competitors to agree not to "poach" each others' employees. True, the legality of anti-poaching agreements is seriously questioned. But the New York Times just reported that until recently major fast food companies like Arby's, Carl's Jr., and McDonald's used controversial "no-poach" clauses all the time, at least among franchises.

Varadarajan identifies two distinct functions that contracts play within trade secret law.

The Evidentiary Function of Contracts

The first function is evidentiary. When courts assess a trade secrecy claim, they use contracts as evidence to support two key elements. (Varadarajan, 1557-1559).

First, contracts provide evidence for whether or not the subject matter is protected. U.S. trade secret law requires the owner of a trade secret to take "reasonable measures to keep such information secret[.]" 18 U.S.C. § 1839(3). Contractual protections are often crucial for establishing reasonable secrecy precautions. As Varadarajan notes, citing studies by David Almeling and his colleagues, “confidentiality agreements with employees and business partners are the most important factors in the courts’ analysis of reasonable measures.” (1557) (citing David S. Almeling et al., A Statistical Analysis of Trade Secret Litigation in State Courts, 46 GONZ. L. REV. 57, 69 (2011)). Thus, when putative trade secret owners fail to use contracts to protect their information, by requiring non-disclosure agreements when exchanging information with manufacturers and by requiring confidentiality contracts when hiring employees, they are more likely to lose in court.

Second, contracts assist courts in determining whether the defendant was under a duty of confidentiality. U.S. trade secret law does not impose liability for disclosing or using another's information unless the person does so using "improper means" (e.g. breaking into a factory) or in breach of a "duty to maintain the secrecy of the trade secret."  18 U..S.C. § 1839(5). (There is also a claim based on mistaken disclosures). There is not always a written contract indicating that a person owes a duty to maintain the secrecy of given trade secrets. In those cases, courts may nonetheless "imply" a contract, either as a matter of fact ("implied in fact") or as a matter of law ("implied in law").  Varadarajan  argues courts are "wary" of implying contracts in the absence of good evidence, though, perhaps notably, she only cites a around five cases for this proposition, and one "but see." (1559-1560, nn. 88-89). This is important to her argument because if courts find "implied" duties to maintain secrecy everywhere, then contract isn't doing as much work as Varadarajan suggests in establishing liability.

This first part of the article (Parts I, II, and III) is largely descriptive. Varadarajan's contribution is simply to explain what trade secret lawyers and students already know: that in practice courts look to contracts as evidence that trade secrets exist and that defendant was under a duty with respect to those secrets. But Varadarajan also provides a simple explanation for contracts' utility in both establishing the existence of a trade secret and in establishing whether misconduct occurred. Drawing on her prior work, she argues that contracts, assuming they are clearly drafted and suitably represented to all relevant parties, provide "notice" as to what is protected, and what is not. "The pivotal evidentiary role of contracts in trade secret cases," she concludes, "stems largely from [contracts'] notice function." (1560).

Varadarajan is right to focus on notice. In patent law, patent disclosure and the claims in particular play an important notice function, alerting others, including potential infringers, of the patentee's rights and of the possibility of future litigation. See Nautilus, Inc. v. Biosig Instruments, Inc., 134 S.Ct. 2120, 2129 (2014) ("[A] patent must be precise enough to afford clear notice of what is claimed, thereby "`appris[ing] the public of what is still open to them.'") (citations removed). But in the trade secret context, the people who encounter trade secrets may not always know or even suspect that a trade secret exist.  "Unlike patent law," Varadarajan writes, "trade secret law does not require putative trade secret owners to formally apply for or describe the boundaries of asserted trade secrets." Thus, the trade secret defendant "does not even learn of the existence or precise boundaries of the trade secret she is alleged to have violated until she becomes the subject of litigation." (1560).

Her theory, in short, is that clear contracts "can help alert recipients of information about the existence and scope of claimed trade secrets[,]" (id.), thus avoiding the uncertainty and unfair surprise that comes with invisible boundaries. Interestingly, while Varadarajan does not appear to take a stance on the debate mentioned above about which legal norms best justify trade secret law, but her focus on notice as a sign of "possession" sounds more in property theory than in contract.

The "Evasive" Function of Contracts

The second function Varadarajan identifies for contracts is substantive rather than evidentiary. Along with serving as ex post evidence of a viable trade secret claim, contracts can be used by sophisticated parties to get around or "evade" the boundaries of trade secret protection. Varadarajan calls this (I think far too leadingly) contracts' "evasive" function.

Varadarajan's identifies several "evasive" uses of contract in the trade secret context, including:

• use of contracts to expand the subject matter of protectable information beyond a legal trade secret; 
• use of contracts to eliminate potential reverse engineering defenses, for instance by publicly selling software subject to a license containing an anti-reverse engineering clause; and  
• use of contracts to prevent employees from working for competitors after they leave, i.e., non-compete agreements. 

(1569-70).

If the prior part of the article is descriptive, this part (Part IV and V) is highly normative. Drawing on the work of others like Orly Lobel, Pam Samuelson, and Rochelle Dreyfuss, Varadarajan asserts that contracts are being used to inappropriately "evade" the doctrinal limits of trade secret law. "While contracts can perform a valuable notice function in trade secret law," she writes, firms "use contracts strategically to evade trade secret law’s requirements and limitations." (1563). She thinks this is problematic because, in her words,

firms’ pervasive use of contracts to subvert trade secret law’s requirements and limitations can negatively impact cumulative innovation and employee mobility.

(1576) (emphasis added by me).

The most basic example of this problem (though, as I will explain, I am not sure it is a problem) is when firms use contracts to protect relatively confidential information that may not qualify as "secret."  Varadarajan asserts that "[p]utative trade secret owners use contract law to evade [the] ongoing 'secrecy' requirement and chill uses of non-secret information—in effect, enlarging the scope of protectable information." Quoting Lobel, she makes the semi-empirical claim that "'[c]ontractually, it has become standard to include broad and open-ended lists of confidential information that goes beyond the statutory definition of trade secrets.'" (1565) (quoting Lobel).

To be clear, Varadarajan does not contend that any use of contracts to protect information should be viewed with suspicion. Rather, she argues contracts should be scrutinized more or less strictly, depending on where they fall on the "negotiability spectrum." (1573-1574). On one end, are business-to-business contracts involving sophisticated parties; on the other end are corporation-to-user and employer-to-employee contracts, where one contracting party may have unequal levels of information and bargaining power.  (1574).

Since most contracts at issue in trade secret litigation are likely to fall on the latter end of this spectrum (primarily, contracts signed by employees), this stance would cast suspicion on many of the contracts courts currently see in trade secret disputes. For instance, non-compete agreements, which prevent employees from working for competitors for a set period following departure, would be more strictly scrutinized, even in states where they are not banned, by virtue of the fact that, as compared to licensing contracts, they involve parties with unequal bargaining power.  (1577) ("[C]ourts should be more skeptical of employee and consumer contracts that depart from trade secret default rules.").

Varadarajan discusses various doctrinal ways to weaken these contracts: preemption, misuse, and traditional non enforceability of contract. (1576-1590). Without going into these solutions, I'll just note that none of them appears to have much of a bark. (See, e.g., 1588) ("Even in the employment context, where employees often assent under conditions of information asymmetry and disparate bargaining power, unconscionability arguments have held little sway.").

From Contract To Trade Secrets To ... Contracts

I am not convinced that this boogeyman exists. The earlier debates surrounding Bone's 1998 article implied that, where there is a contract in place, a legal remedy is more justified than when no contract exists. Yet Varadarajan suggests that relying so heavily on contracts is problematic, and that now contracts need to be justified when they go beyond the confines of trade secret protection.

Like Varadarajan, I also see irony in the trajectory her article describes: trade secret law has its origins partly in contract law; yet now companies use the existence of trade secrets to justify broad enforceability of their contracts.

[F]irms try to legitimize non-competes by invoking their connection to trade secret law—yet ironically, non-competes enable firms to bypass trade secret law’s requirements and limitations altogether. ... Indeed, “courts across the country point to the protection of trade secrets as the primary justification for enforcing non-competition covenants.”

(1572) (quoting Charles Tait Graves' article in Rochelle Dreyfuss and Katherine Strandburg's outstanding handbook on trade secrecy).

But there still has to be more discussion of why using contracts instead of or on top of trade secret law is inefficient, immoral, or what be it. In deciding whether this problem really exists, it is useful to disaggregate the two scenarios identified above: the evidentiary function of contracts, on the one hand, and the substantive function, on the other (what Varadarajan calls their "evasive" function).

With respect to contracts' evidentiary function, I cannot see much of a problem with courts looking for a contract in deciding whether to impose trade secret liability. As Judge Posner famously observed in Rockwell, the more precautions a putative trade secret owner takes, whether physical or contractual, the more likely they 'deserve' legal protection, and the more likely the misappropriator was on notice that the information was to be protected. See Rockwell Graphic Systems, Inc. v. DEV Industries, Inc. (7th Cir. 1991) ("...the more the owner of the trade secret spends on preventing the secret from leaking out, the more he demonstrates that the secret has real value deserving of legal protection, that he really was hurt as a result of the misappropriation of it, and that there really was misappropriation.").

The only instance I'd see this evidentiary function as controversial is where the employer uses contracts in ways that, while virtually costless to them, do not really provide meaningful notice of what is off limits. (See discussion on page 1567). But under ordinary circumstances, when a court finds that contractual agreements to retain confidentiality abounded, and that the employee clearly signed and understood them, the justifications for imposing trace secrecy should be more, not less, robust.

Contracts' substantive/"evasive" function seems inherently easier to critique—at least in the way Varadarajan characterizes it. As noted above, Varadarajan asserts that the "use of contract law to subvert the limitations and requirements of trade secret law can negatively impact innovation, as well as employee mobility." (1576).  If true, this suggests that using contracts to tie up more information than is "not generally known or readily ascertainable" in the trade secrecy sense could be bad for innovation and welfare.

But is this true? The cases of non-compete agreements and anti-reverse engineering clauses are particularly controversial and have been critiqued by many. Notably, the non-compete case is especially controversial because it implicates external concerns—to quote Viva Moffat in the Akron Law Review, non-competes raise questions about "personal autonomy and liberty." Varadarajan relies heavily on these critiques, without proving they are true or addressing the counter-arguments with more than a "but see."

Leaving aside the non-compete and reverse engineering cases, Varadarajan does not provide any evidence to support that expanding protections through contract is bad for innovation or welfare generally. This is a problem because the onus is on her to show that contracts should be treated with suspicion.

The law and the norm at the state and now federal level is that contracts can be used to protect information that does not qualify as a trade secret. The UTSA does not preempt contractual remedies, "whether or not based upon misappropriation of a trade secret." As Varadarajan notes, this almost certainly does not change post-DTSA. (See discussion on pages 1580-1583). The DTSA does not preempt state law remedies and does not touch state law contracts. 18 U.S.C. § 1838.

It is possible to make a compelling argument that trade secret law's current 'anti-preemptive' stance on contracts is bad. Varadarajan notes briefly that some commentators have made this argument. Dreyfuss, for instance (channeling Lemley's channeling function), argued that when trade secret owners augment their rights with contracts, this upsets the balance between trade secrecy and patents; thus, these contracts should be vulnerable to preemption by federal patent law. (Varadarajan, 1579-1580).

But the reverse argument is strong.  As Varadarajan notes, "[f]or strong proponents of freedom of contract," contractual provisions that conflict with trade secret law should "essentially 'always'" be enforced, "constrained perhaps only by antitrust law." (1576).  We cannot simply forget Bone's bombshell when it suits us. His entire premise was that contracts lie on stronger normative footing than trade secret law. To quote his 2014 article:

"[W]hen trade secret law imposes liability for breach of a contractual duty of confidence, the policy reasons for doing so are simply those that support contract enforcement more generally." 

(Bone, 2014, 1806) (emphasis added).

On this reasoning, if parties agreed not to use or disclose certain information, the court should enforce the contract even if the information isn't a trade secret, especially if the party is seeking only contractual remedies.

The response to this point, of course, comes not from the contract field, but from the intellectual property field, where the Supreme Court has said over and over that protecting information outside the bounds of patent law has potential costs for innovation. This was (I think) Lemley's main reason for analyzing trade secrets as a branch of intellectual property. As he put it,

"[t]reating trade secret law as an IP right dependent on proof of secrecy highlights the policy stakes, and will encourage courts to preempt common law claims that threaten to undermine the balance trade secret law strikes."

This quote suggests that Lemley embraced trade secret-as-intellectual property due to intellectual property's limits, and close attention to information as a public good, more than its "property" aspect.

And yet. Contracts are still different.

Varadarajan briefly gives lip service to this debate between freedom of contract and freedom of information. (1576) ("While antitrust law can police some egregious forms of anticompetitive conduct [effectuated through contracts], it is not designed to address other IP policy concerns—for example, promoting innovation or protecting the public domain.").  But I did not see quite enough of this back and forth in her article. Instead, she relies heavily on the arguments of others such as Lobel, and reverts to the standard story of "more protection bad; less protection good"—but without explaining exactly why.

***

To conclude, and as can clearly be seen from the length of this post, Varadarajan's article is a tremendously enlightening read and a fantastic beginning. It does a lot of the leg work towards deepening understanding of an evolving area of law: the trade secret-contract interface.

What do Generic Drug Patent Settlements Say about Patent Quality?

An interesting study about Orange Book patents challenged both under Hatch-Waxman and Inter Partes Review caught my eye this week, but perhaps not for the ordinary reasons. One of the hot topics in drug patent challenges today is reverse payments: when the patentee pays the generic to stop a challenge. The Supreme Court has ruled that these payments can constitute antitrust violations. Though the drug companies give reasons, I'll admit that I've always been skeptical of these types of payments.

One of the key questions is whether the patent was going to survive. Most seem to assume that if a company pays to settle, then the patent was likely going to be invalidated. That's where the draft, Maintaining the Balance: An Empirical Study on Inter Partes Review Outcomes of Orange Book-Listed Drug Patents and its Effect on Hatch-Waxman Litigation, by Tulip Mahaseth (a recent Northwestern Law grad) comes in. Here is the abstract from SSRN:

The Hatch-Waxman Act intended to strike a delicate balance between encouraging pioneer drug innovation and promoting market entry of affordable generic versions of pioneer drugs by providing a streamlined pathway to challenge validity of Orange Book patents in federal district courts. In 2012, the America Invents Act introduced Inter Partes Review (IPR) proceedings which provide a faster, cheaper pathway to challenge Orange Book patents than Hatch-Waxman district court litigation. IPRs also have a lower evidentiary burden of proof and broader claim construction standard, which should make it easier, in theory, to obtain patent invalidation in IPRs as compared to Hatch-Waxman litigation. This empirical study on IPR outcomes of Orange Book patents in the past six years shows that both generic manufacturers and patent owners obtain more favorable final decisions in IPRs as compared to their Hatch-Waxman litigation outcomes because the rate of settlement in IPRs is much lower than in Hatch-Waxman litigation. Moreover, generic manufacturers do not appear to be targeting Orange Book patents in IPRs during their drug exclusivity period. Only 2 out of more than 400 IPRs against Orange Book patents were filed by generic petitioners during the patents’ New Chemical Entity exclusivity period. About 90% of the 230 Orange Book patents challenged in IPR proceedings were also challenged in Hatch-Waxman litigation. It is likely that generic manufacturers are not deterred from Hatch-Waxman litigation because of the lucrative 180-day exclusivity period, which gives the first generic filer 180 days to exclusively market their generic version without competition from other generics when the Orange Book drug patent is successfully invalidated in a subsequent district court proceeding. Therefore, IPR proceedings do not appear to be disrupting the delicate balance sought by the Hatch-Waxman Act. Instead, the IPR process has provided generic manufacturers a dual track option for challenging Orange Book patents by initiating Hatch-Waxman litigation in district courts and also pursuing patent invalidity in IPRs before the Patent Trial and Appeal Board, which has reduced rate of settlements resulting in more patents being upheld and invalidated.

There's a lot of great data in this paper, comparing Orange Book IPRs with non-Orange Book IPRs, including comparison of win rates and settlement rates.

But I want to focus on one seemingly minor point: as the number of IPRs has increased, the rate of settlement has decreased. And, more important, the decreasing rate of settlement has led to more invalidation and more affirmance of patents.

This result gives a nice window into how we might view settlements. Traditional Priest-Klein analysis says that this is exactly what we should see - that the previously settled cases were 50/50. But proving this is harder, and this data set would allow for a nice differences-in-differences analysis in future work.

Additionally, a split among outcomes implies that the settlements were not necessarily because the patentee believed the patent was at risk.  If anti-competitive settlements were ruling the day, I would have predicted that most of the (recent) non-settlements would have resulted in patent invalidation. Then again, it is possible that a 50% chance was risky enough to merit a reverse payment settlement in the past. Regardless of how one comes out on this issue, this study provides some helpful details for the argument.

How did TC Heartland Affect Firm Value?

In Recalibrating Patent Venue, Colleen Chien and I did a nationwide study of forum shopping in patent cases (shocker - everybody did it, and not just in Texas), and predicted that many patent cases would shift from the Eastern District to the District of Delaware. And, lo, it has come to pass. Delaware is super busy. This has been good for us at Villanova (only 30 miles away from the court), as our students are getting some great patent experience in externships and internships.

But how much did firms value not being sued in Texas? The TC Heartland case is a clear shock event, so an event study can measure this. In Will Delaware Be Different? An Empirical Study of TC Heartland and the Shift to Defendant Choice of Venue, Ofer Eldar (Duke Law) and Neel Sukhatme (Georgetown Law) examine this question. The article is forthcoming in Cornell Law Review and a draft is on SSRN. Here is the abstract:

Why do some venues evolve into litigation havens while others do not? Venues might compete for litigation for various reasons, such as enhancing their judges’ prestige and increasing revenues for the local bar. This competition is framed by the party that chooses the venue. Whether plaintiffs or defendants primarily choose venue is crucial because, we argue, the two scenarios are not symmetrical.

The Supreme Court’s recent decision in TC Heartland v. Kraft Foods illustrates this dynamic. There, the Court effectively shifted venue choice in many patent infringement cases from plaintiffs to corporate defendants. We use TC Heartland to empirically measure the impact of this shift using an event study, which measures how the stock market reacted to the decision. We find that likely targets of “patent trolls”— entities that own and assert patented inventions but do not otherwise use them—saw their company valuations increase the most due to TC Heartland. This effect is particularly pronounced for Delaware-incorporated firms. Our results match litigation trends since TC Heartland, as new cases have dramatically shifted to the District of Delaware from the Eastern District of Texas, previously the most popular venue for infringement actions.

Why do investors believe Delaware will do better than Texas in curbing patent troll litigation? Unlike Texas, Delaware’s economy depends on attracting large businesses that pay high incorporation fees; it is thus less likely to encourage disruptive litigation and jeopardize its privileged position in corporate law. More broadly, we explain why giving defendants more control over venue can counterbalance judges’ incentives to increase their influence by encouraging excessive litigation. Drawing on Delaware’s approach to corporate litigation and bankruptcy proceedings, we argue that Delaware will compete for patent litigation through an expert judiciary and well- developed case law that balances both patentee and defendant interests.

As I discuss below, I have a like/dislike reaction to this paper.

I like the empirical setup - comparing companies that will be sued in Texas with those that will be sued in Delaware and with those that will be sued outside of Delaware (because they are incorporated elsewhere). The most robust results are that being sued anywhere else increased value, though there are some barely significant results that firms did even better in Delaware. This was interesting and useful.

But I dislike event studies generally, for a variety of reasons. The big issue here is uncertainty about how districts will change behavior in the long term. Thus, there is no way the authors could have waited for a correction (they note this, of course). But this means (which they also note) that this is a market prediction about firm value from not being sued in Texas - but that tells us very little about the actual impact of actual litigation or changes in the future. It may be that Delaware is already perceived as better than Texas, or it could be that the market is simply wrong about the cost of being in Texas.

I like the theoretical setup - that Delaware has attracted incorporation through its court behavior and laws, and using bankruptcy as an example. This adds a lot, though the empirical results only weakly support the theory (in a predictive sense) from a patent point of view. But the thought that Delaware will move to be pro-defendant (or at least less pro-plaintiff in their view) is an area for explanation.

But I dislike the theoretical conclusions. I believe the paper relies too heavily on the "forum selling" motif without critical analysis. There is at least one article (Colleen's and mine) that discusses other reasons why local scheduling winds up looking bad for defendants, such as congestion. Of course, we discuss selling as well, but we make the explicit point that the jury is out as to whether Delaware will be so friendly once the volume of cases doubles with its only four judges.

To that end, one would think that Delaware always had this pro-defendant (or balanced) approach if we buy the forum selling theory. But then why did so many plaintiffs (including NPEs) sue there even before TC Heartland? Doesn't that seriously crimp either a) a selling theory, or b) a post-TC Heartland change?

But I do like their further discussion of this about a two-stage venue selection game: 1) select where to incorporate or have facilities, and 2) select where to sue. This would be an interesting theoretical paper in the future, or even something to be tested. I wonder whether Delaware's incentives to treat plaintiffs/defendants a certain way will have much of an effect if the result is plaintiffs suing in other districts (which will often not have very helpful scheduling rules).

In the end, none of these are answered by the interesting empirical results. So, while I like the empirical analysis, I dislike that the analysis is not tied to the conclusions in a meaningful way.