All about IP & Price Discrimination

It's a grading/break week, so just a short post. A recent article that I enjoyed a lot, but that hasn't found much love on SSRN is Price Discrimination & Intellectual Property, by Ben Depoorter (Hastings) and Mike Meurer (Boston University). The paper has the following abstract:

This chapter reviews the law and economics literature on intellectual property law and price discrimination. We introduce legal scholars to the wide range of techniques used by intellectual property owners to practice price discrimination; in many cases the link between commercial practice and price discrimination may not be apparent to non-economists. We introduce economists to the many facets of intellectual property law that influence the profitability and practice of price discrimination. The law in this area has complex effects on customer sorting and arbitrage. Intellectual property law offers fertile ground for analysis of policies that facilitate or discourage price discrimination. We conjecture that new technologies are expanding the range of techniques used for price discrimination while inducing new wrinkles in intellectual property law regimes. We anticipate growing commentary on copyright and trademark liability of e-commerce platforms and how that connects to arbitrage and price discrimination. Further, we expect to see increasing discussion of the connection between intellectual property, privacy, and antitrust laws and the incentives to build and use databases and algorithms in support of price discrimination.

They call it a chapter, but they don't identify the book that the chapter will appear in. It's probably an interesting book.

In any event, the chapter is a really interesting, thorough look at price discrimination generally, in addition to price discrimination as it relates to IP. It discusses the pros and cons as well as the assumptions that underlie each. If you are interested in a better understanding of the economics of IP (and secondarily, the internet), this is a good read.

The Value of Patent Applications in Valuing Firms

It's an age-old question that we've blogged about here before - what role do patents have on firm value? And is any effect due to signaling or exclusivity? Does the disclosure in the patent have any value? Does anybody read patents?

These are all good questions that are difficult to measure, and so scholars try to use natural experiments or other empirical methods to divine the answer. In a recent draft, Deepak Hegde, Baruch Lev, and Chenqi Zhu (all NYU Stern Business) use the AIPA to provide some useful answers. For those unaware, the AIPA mandated that patent applications be published after 18 months by default, rather than held secretly until patent grant. The AIPA is the law that keeps on giving; there have been several studies that use the "shock" of the AIPA to measure what effect patent publications had on a variety of dependent variables.

So, too, in Patent Disclosure and Price Discovery. A draft is available on SSRN, and the abstract is here:

We focus in this study on the exogenous event of the enactment of American Inventor’s Protection Act of 1999 (AIPA), which disseminates timely, detailed, and credible public information on R&D activities through pre-grant patent disclosures. Exploiting the staggered timing of patent disclosures, we identify a significant improvement in the efficiency of stock price discovery. This improvement is stronger when patent disclosures reveal firms’ successful, new, or technologically valuable inventions. This improvement is more pronounced for firms in high-tech or fast-moving industries, or with a large institutional ownership or analyst coverage. We also find stock liquidity rises and investors’ risk perception of R&D drops after the enactment of AIPA. Our results highlight the importance of timely, detailed, and credible disclosures of R&D activities in alleviating the information problems faced by R&D-intensive firms.

This is a short abstract, so I'll fill in a few details. The authors measure the effect on  intra-period timeliness, a standard measure used to proxy for "price discovery," or how quickly information enters the market and settle the price of a stock. There are a lot of articles on this, but here's one for those interested (paywall, sorry).

In short, the authors look at how quickly price discovery occurred before and after the AIPA, correcting for firm fixed effects and other variables. One of the nice features of their model is that patent applications occurred over a period of years, and so the "shock" of patent publication was not distributed only in one year (which could have been affected by something other than the AIPA that happened in that same year).

They find that price discovery is faster after the AIPA. Interestingly, they also find that the effect is more pronounced in high-tech and fast moving fields -- that is, industries where new R&D information is critically important.

Finally, their results say something about the nature of the patent disclosure itself - the effects come from disclosure of the information, and not necessarily the patent grant. Thus, the signaling effect may really relate to information, and (some) people may well read patents after all.

Adam Mossoff: Are Property Rights Created By Statute "Public Rights"?

I greatly enjoyed Professor Adam Mossoff's new article, Statutes, Common-Law Rights, and the Mistaken Classification of Patents as Public Rights, forthcoming in the Iowa Law Review.  Mossoff's article is written in the wake of Oil States Energy Services v. Green's Energy Group, where the Supreme Court held it is not unconstitutional for the Patent Trial & Appeals Board (PTAB), an agency in the Department of Commerce, to hear post-issuance challenges to patents, without the process and protections of an Article III court. Justice Thomas' opinion concluded that patents are "public rights" for purposes of Article III; therefore, unlike, say, property rights in land, patents can be retracted without going through an Article III court.

Mossoff's article objecting to this conclusion is a logical follow on to his prior work, while also providing new insights about the nature of patents, property, and the public rights doctrine. He does so quite concisely too, with the article coming in at only 21 pages.

The Public Rights Doctrine

The general rule is that Article III mandates that disputes involving "private rights"—rights that arise as between citizens, such as rights arising under contract, tort, or property law—must be adjudicated in Article III courts. (Mossoff, at 5). But there is an exception for rights classified as "public rights," created not from relations between individual citizens, but from relations with the sovereign.  (Mossoff, 4) ("[A] public right is a privilege granted to or created in a citizen 'in connection with the performance of the constitutional functions of the executive or legislative departments.' ") (quoting Crowell v. Benson, 285 U.S. 22, 50 (1932)). If a legal entitlement is classified as a public right, this means the legislature has discretionary power to retract it, and to give non-Article III agency courts in the political branch, such as the PTAB, power over this process. Mossoff summarizes the basic idea behind the public rights exception thus: " '[as] Congress giveth, Congress [can] taketh away' ..." (Mossoff, at 5) (quoting NGS American, Inc. v. Barnes, 998 F.2d 296, 298 (9th Cir. 1993) (referring to Congress’ authority with respect to employee benefit plans under ERISA)).

Importantly, Article III's mandate that disputes over private rights be adjudicated by the judicial branch arises from a concern over separation of powers, not procedural due process. As Professor Greg Dolin puts it in his recent article, Yes, The PTAB is Unconstitutional, Article III's solicitude for adjudications involving private rights has two purposes: to protect litigants’ right to have claims decided before judges whose decisions are not affected by other branches of government, and to preserve separation of powers at an institutional level by dividing responsibilities and maintaining the balance between the legislature, the executive, and the judiciary. Due process, which mandates certain procedural safeguards when government takes actions that threaten "liberty" or "property" interests within the meaning of the Due Process Clause of the Fifth or Fourteenth Amendment, is a separate issue. A right that is classified as "private" for purposes of Article III receives a fuller panoply of protection, including both a guarantee of an Article III forum and potential compensation against a Taking under the Fifth or Fourteenth Amendment. But a right that is classified as "public" for purposes of Article III's public rights exception still triggers procedural due process. Thus, the Court's' decision in Oil States that patents are public rights does not deprive patentees of standard due process protections.

Mossoff's Argument 

It is not surprising that Mossoff would object to Justice Thomas' decision classifying patents as public rights. In his 2007 article, Who Cares What Thomas Jefferson Thought About Patents? Reevaluating the Patent 'Privilege' in Historical Context, Mossoff questioned the common assumption that patents are merely "privileges" that are granted at the whim of the sovereign. By retracing what the term "privilege" actually meant in historical context, Mossoff argued patents were in fact not viewed as rights contingent on the sovereign, but as private property rights based on a Lockean labor theory of property and natural rights philosophy.

Although many may disagree with Mossoff's argument that patents are based on natural rights, it is hard to ignore the historical case law Mossoff unearthed. His work, in that article and thereafter, has clearly been influential. The dissent in Oil States, written by Justice Gorsuch and joined by Chief Justice Roberts, cited extensively to Mossoff's scholarship in order to support their view that allowing an executive agency to revoke patents was a departure from historical practice, since, Justice Gorsuch wrote, "[o]nly courts could hear patent challenges in England at the time of the founding[,]" and risked undermining "the promise of judicial independence."  

Mossoff's new article is not duplicative of his prior work. Nor is it duplicative of Gorsuch's dissent. Rather, Mossoff makes important insights about how patents are classified in the private rights/public rights framework, and about how we tend to think about the private rights/public rights framework more generally. In short, his article illustrates the inaccuracy of a common assumption, which both sides sometimes made in the course of the Oil States case: that property rights created through common law are "private rights," while property rights created through statutes are "public rights." Here is an excerpt from Justice Thomas' opinion in this regard (case citations and Latin removed):

[P]atents are “public franchises” that the Government grants “to the inventors of new and useful improvements.” The franchise gives the patent owner “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States.”  That right “did not exist at common law.” Rather, it is a “creature of statute law.”

Mossoff, I think rightly, argues that this distinction, between statutes as public rights and common law rights as private rights, is far too simplistic. It actually makes little sense in light of history and in light of how property law works today. Many property rights have mixed statutory and common law origins. Mossoff draws this out in the paper, with comprehensive citations to historical case law. Here is the key argument:

At common law and in the early American Republic, courts and commentators recognized that the distinction between statutes and common law rights was merely a generalized distinction that did not reflect the complex institutional relationship between legislatures and courts in creating and applying legal rights. ... The reason is simple: all legal rights share a mixed provenance in both statutes and judicial decisions, and thus this distinction between statutes and judicial decisions could never serve as a coherent rule for distinguishing public rights and private rights.  

(Mossoff, 10).

Mossoff goes on to document copious examples of property rights with their basis in (often both) statutory and common law:

The fundamental role of statutes in creating property rights in land has continued in the states from the early years of the American Republic up through today. State legislatures have enacted statutes codifying and securing the rights of adverse possessors, creating title recordation requirements, defining and securing conveyance rights, defining and securing wills and the creation of future interests in land...
...
Even the notorious common-law doctrine, the rule against perpetuities, has been codified in many states.

(Mossoff, 12-13).

The upshot, for Mossoff, is as follows. The fact that patents are created under a statutory regime codified in the Patent Act (which incidentally was passed pursuant to a specifically delineated constitutional power under Article I, Section 8, Clause 8) is not determinative of whether patents are private or public rights for purposes of Article III.

There are two reasons. First, as just explained, many classic property rights are, to quote Justice Thomas' quotation, a "creature of statute law." Thus, patents being creatures of statute law does not answer whether they are private or public rights. Second, patent law has evolved through a lawmaking process that resembles common law. As Mossoff puts it, citing to case law and appropriate scholarship on the issue,

[In patent law,] courts have created out of whole cloth new substantive legal rights that are not listed anywhere in the patent statutes. For instance, courts created the exhaustion doctrine, secondary liability, the experimental use defense [...etc.]...  [I]n addition ... courts have created substantive doctrines in interpreting and applying statutory provisions in the Patent Act. These judicially-created doctrines become “the law” that is subsequently applied by courts, and patent law is replete with them. For example, the “all elements rule” in comparing a patent to a product or process in finding either literal or equivalents infringement is found nowhere in § 271... [etc.]

(Mossoff, 17-18).

The implication of the fact that patent law, despite being statutory, proceeds through a common law method, is to melt away the notion that patents are simply creatures of statute. If anything, patents are creatures of mixed statutory and common law—not that different from certain property rights in land like those generated through adverse possession.

I think this reasoning is sound, and am grateful for the impetus to reexamine my own assumption about the nature of a "public right." Of course, it will almost certainly not change people's minds on whether patents are public rights or on whether Oil States was rightly decided. Even after we dispose of the overly simplistic distinction between statutory and common law property rights, many will still argue, quite reasonably, that patents are public rights. But this is a different argument that Professor Mossoff can have with Justice Thomas, and the others whose work Mossoff discusses in the paper, such as Professor Mark Lemley and Professor Greg Reilly.

Public Rights, State Patents, and State Courts 

I do have one comment. I was surprised not to see more discussion, or citation to literature, regarding state and colonial patents. Mossoff mentions them, but only very briefly.

From the first enactments of copyright and patent statutes by the states under the Articles of Confederation, and then by Congress enacting the first federal patent and copyright statutes in 1790, courts interpreted, applied and extended these statutes in common law fashion in crafting the doctrines that comprise the fundamental rights and duties in U.S. patent law.

(Mossoff, 17).

As I discussed in my article on this subject, State Patent Laws in the Age of Laissez-Faire, state and colonial patents (at least those I reviewed) do resemble, superficially, "public rights" that could be retracted by the sovereign if the requirements of the grant were not met. Indeed, some were retracted, such as John Fitch's steamboat patent from the state of New York. As I wrote, "New York’s retraction of Fitch’s 1787 grant in 1798 suggests that the state could have rescinded an inventor’s patent for failure to establish a working technology in state jurisdiction even when the patent contained no explicit working clause." (Hrdy, 66, n. 83) (quoting Livingston v. Van Ingen, 9 Johns. 507 (N.Y. 1812)).

After reading Mossoff's article, I agree that the fact that state and colonial grants were statutory rights is not dispositive on the issue of whether they are public rights or private rights under Article III. But I would like to see Professor Mossoff's answer as to whether state patents were, despite appearances, more like private rights than public rights, and what state and colonial practice tells us about patents' status today under the federal Patent Act. If patents were being retracted by state legislatures before, and after, ratification of the Constitution with very little legal process (probably not even due process in Fitch's case), doesn't this suggest patents were seen as "public rights" at the time of ratification, and when the first Patent Act was passed in 1790?

I raised this question with Professor Dolin. His response was that the grounds for the cancellation matter, as does the process through which the revocation is effectuated. If the state cancelled the patent based on a failure to meet the requirements of a working clause, for instance, this may not undermine the notion that this was a private right. The patent grant may have been akin to a real property right granted subject to a condition subsequent, with a right of reentry, depending on the terms of the original grant. The real question, Dolin said, is whether such revocations of state patents were contestable in courts with some degree of independence from the political branches. At that time, this would have been state courts. (Federal courts did not even gain their exclusive jurisdiction over federal patent cases until some time later, and uncertainty over state courts' jurisdiction in patent cases continued into modern times).

This leads to a related conundrum that bugs me about the public rights doctrine: the doctrine does not much care about what happens in state courts. As explained above, the purpose of Article III's public rights versus private rights distinction is to preserve the separation of powers as between Congress and the federal judiciary. But it is not a guarantee of due process, or a guarantee of federal process. This means Article III would not allow a vested property right, such as a piece of land, to be adjudicated in a non-Article III court, based on the concern that this would deprive litigants of a forum free of influence by the political branches. But at the same time, under Article III, Congress is not required to create lower federal courts and is free to authorize state courts to hear disputes arising under federal law. Indeed, most claims can brought in state or federal court. Most property rights could be invalidated in a state court and not get a true Article III court. This is the case regardless of whether state judges are elected or appointed, and regardless of how sloppy a state's rules of procedure are.

If Congress relaxed patents' exclusive jurisdiction, amended 28 U.S.C. § 1338, and declared tomorrow that federal patents can be litigated and potentially invalidated in state courts (beyond the confines of "backward" looking situations like Gunn v. Minton), this would actually be okay under the Article III public rights doctrine. When you consider state courts as a backdrop option, in a world where there was not exclusive federal jurisdiction in patent cases, the public rights doctrine seems a bit silly.  It would be okay for patents to be litigated in state courts so long as other constitutional protections like due process were satisfied...but not in the PTAB.  

----
In sum, Mossoff does a great service in calling out the oversimplification that creatures of statute are not necessarily "public rights" for purposes of Article III. I am not sure this leads to the conclusion that patents deserve the full panoply of protection given to private rights, now or historically.  Whether government should, at a normative level, be able to re-review patents is a very interesting and difficult question, on which people have different views. Many of these issues are drawn out by Professor Dolin and Professor Irina Manta in Taking Patents.  I co-authored a response with Ben Picozzi expressing disagreement, opining that the America Invents Act was not a taking, and that government may constitutionally reconsider patent grants under the Takings Clause. I reach the same conclusion under Article III, though agree with Professor Mossoff that how we reach this conclusion is not altogether clear when we consider treatment of other forms of property rights. 

Helsinn Argument Recap: Did the AIA Change the Meaning of Patent Law's "On Sale" Bar?

As Michael previewed this morning, the Supreme Court heard argument today in Helsinn v. Teva, which is focused on the post-America Invents Act § 102(a)(1) bar on patents if "the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public" before the relevant critical date. The Federal Circuit held that Helsinn's patents were invalid because Helsinn had sold the claimed invention to a distributor more than one year before filing for a patent, but Helsinn (supported by the United States as amicus) argues that the "on sale" bar is triggered only by sales that make the invention "available to the public" under a broad reading of "public."

During argument, none of the Justices seemed inclined to favor Helsinn's attempt to argue that "on sale" clearly means on sale to everybody—Justice Kavanaugh said "it's pretty hard to say something that has been sold was not on sale," and Chief Justice Robert's noted that Helsinn's interpretation "might not be consistent with the actual meaning of the world 'sale'" because "if something's on sale, it doesn't have to be on sale to everybody." Nor did they jump at the government's argument that "on sale" means a product can be purchased by its ultimate consumers—Justice Sotomayor said: "This definition of 'on sale,' to be frank with you, I've looked at the history cited in the briefs, I looked at the cases, I don't find it anywhere."

Helsinn's better statutory argument is that the meaning of "on sale" is modified by "or otherwise available to the public" to require that the sale be publicly available. Indeed, for a reader with no background in patent law, this might seem like the most natural reading of the statute. Justice Alito said that "the most serious argument" against the Federal Circuit's position is "the fairly plain meaning of the new statutory language," and that he "find[s] it very difficult to get over the idea that this means that all of the things that went before are public." And Justice Gorsuch suggested, at least for hypothetical purposes, that "the introduction of the 'otherwise' clause introduced some ambiguity about what 'on sale' means now." But if there was more support to reverse the Federal Circuit, it was not apparent from the argument.

Much of the statutory language used in the Patent Act—including "on sale"—has developed a technical legal meaning over time, generally due to courts' attention to the law's utilitarian focus. For example, patentable subject matter caselaw is "implicit" in § 101, courts have put a highly specialized gloss on the word "obvious" in § 103, and—relevant here—the § 102 categories of prior art have long been interpreted to include relatively obscure and private uses. Although this expansive definition of prior art might seem unfair to patentees, there are also strong policy arguments in its favor, including (1) encouraging patentees to get to the patent office early (leading to earlier disclosure and patent expiration) and (2) avoiding patents when their costs (including higher prices for consumers and subsequent innovators) aren't likely to be outweighed by their innovation-incentivizing benefits, such as when there is independent invention—even when evidence of that invention is relatively obscure.

As Justice Kavanaugh noted at argument today, Mark Lemley's amicus brief on behalf of forty-five IP professors describes the long history of treating relatively non-public disclosures as prior art, including (1) "noninforming public use" cases, (2) "output of a patented machine or process" cases, and (3) cases involving secret, confidential, and nonpublic sales transactions. Justice Breyer also mentioned the Lemley brief, and he said it "seems right" to have the on-sale bar include private sales "to prevent people from benefitting from their invention prior to and beyond the 20 years that they're allowed." The legislative history of the AIA does not suggest that Congress intended to do sweep away all of these cases—Justice Kavanaugh said that he thinks "the legislative history, read as a whole, goes exactly contrary" to Helsinn's contention because "there were a lot of efforts … to actually change the 'on sale' language, and those all failed," leaving the losers "trying to snatch victory from defeat" with "a couple statements said on the floor."

It is perhaps because of this history that Helsinn and the government seemed more focused on the argument that "on sale" has always excluded nonpublic sales than on the argument that the AIA changed the law. Justice Ginsburg's only comment during argument was to ask Helsinn to clarify this: "I thought that one argument was that the AIA changed the way it was. But … you seem to say there was no change; 'on sale' never included the secret sale." Arguing for the government, Malcolm Stewart even conceded—in response to questioning from Justice Kagan—that if the law was settled pre-AIA such that "on sale" included nonpublic sales, then the new AIA language ("or otherwise available to the public") "would be a fairly oblique way of attempting to overturn" the law. But based on my reading of the transcript, it doesn't seem likely that the argument that "on sale" has always meant "on sale publicly" will get five votes.

I waited until after writing the above to get Ronald Mann's take at SCOTUSblog, but I think I very much agree on his bottom line conclusion: while this isn't "a case in which the argument clearly presages the result," the overall transcript "suggests that the most likely outcome will be an affirmance."

How Important is Helsinn?

In honor of the oral argument in Helsinn today, I thought I would blog about a study that questions its importance. For those unaware, the question the Supreme Court is considering is whether the AIA's new listing of prior art in 35 U.S.C. §102(a)(1): "the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public..." changed the law.

Since forever, on sale meant any offer or actual sale, regardless of who knew about it. Some have argued that the addition of "or otherwise available to the public" means that only offers that are publicly accessible count as prior art. I think this is wrong, and signed on to an amicus brief saying so. We'll see what the Court says. Note that non-public does not mean "secret." True secret activity is often considered non-prior art, but the courts have defined "public" to mean "not-secret." The question is whether that should change to be "publicly accessible."

But how big a deal is this case? How many offers for sale would be affected? Steve Yelderman (Notre Dame, and soon to be Gorsuch clerk) wanted to know as well, so he did the hard work of finding out. In a draft paper on SSRN that he blogged about at Patently-O, he looked at all invalidity decisions to see exactly where the prior art was coming from. Here is the abstract for Prior Art in the District Court:

This article is an empirical study of the evidence district courts rely upon when invalidating patents. To construct our dataset, we collected every district court ruling, verdict form, and opinion (whether reported or unreported) invalidating a patent claim over a six-and-a-half-year period. We then coded individual invalidation events based on the prior art supporting the court’s analysis. In the end, we observed 3,320 invalidation events based on 817 distinct prior art references.

The nature of the prior art relied upon to invalidate patents informs the value of district court litigation as an error correction tool. The public interest in revoking erroneous patent grants depends significantly on the reason those grants were undeserved. Distinguishing between revocations that incentivize future inventors and those that do not requires understanding the reason individual patents are invalidated. While prior studies have explored patent invalidity in general, no study has reported data at the level of detail necessary to address these questions.

The conclusions here are mixed. On one hand, invalidations for lack of novelty bear many indicia of publicly beneficial error correction. Anticipation based on obscure prior art appears to be quite rare. When it comes to obviousness, however, a significant number of invalidations rely on prior art that would have been difficult or impossible to find at the time of invention. This complicates — though does not necessarily refute — the traditional view that obviousness challenges ought to be proactively encouraged.

So, let's get right to the point. The data seem to show that "activity" type prior art (that is sale or use) is much more prevalent in anticipation than in obviousness. This is not surprising, given that this category is often the patentee's own activities.

With respect to non-public sales, they estimate that a maximum of 14% of anticipation and 2% of obviousness invalidations based on activity were based on plausibly non-public sales. This translates to about 8% of all anticipation invalidations and 1% of all obviousness invalidations. Because there are about as many obviousness cases as anticipation cases, this averages to 4.25% of all invalidations. They note that with a different rule, some of these might have been converted to "public" sales upon more attention paid to providing such evidence.

A related question is whether the inventor's actions can invalidate, or whether the AIA overruled Metallizing Engineering, which held that an inventor's secret use can invalidate, even if a third-party's secret use does not. The study found that the plaintiff's actions were relevant in 27% of anticipation invalidations and 13% of obviousness invalidations.  Furthermore, they found that most of the secret activity was associated with either the plaintiff or defendant--this makes sense, as they have access to such secret information.

So, what's the takeaway from this? I suppose where you stand depends on where you sit. I think that wiping out 4% of the invalidations, especially when they are based on the actions of one of the two parties, is not a good thing. It's bad to allow the patentee to non-publicly sell and have the patent, and it's bad to hold the defendant liable even if it has been selling the patent in a non-public (though non-secret) way. We're talking about 20 claims per year that go the other way - too high for my taste, especially when it means we have to start defining new ways to determine whether something is truly public.

Furthermore, the stakes of reversing Metallizing are much higher. I freely admit that the "plaintiff's secret actions only" rule has a tenuous basis in the text of the statute, but it has been the law for a long time without being expressly overruled by two subsequent revisions. Given that more than 25% of the invalidations were based on the plaintiffs actions, I think it would be difficult to reverse course.