Improving the patent system by encouraging intentional infringement: the beneficial use standard of patents.

Author:Xie, Kai Yi

With the growing importance of intellectual property in the global economy, "patent infringement" has become a dirty phrase for patentees and defendants alike. For plaintiffs, it raises thoughts of the theft of one's just deserts. Yet defendants may think of nuisance-value suits and artificial impediments to the free flow of information. Neither side is happy because the American patent system adopts a blunderbuss approach to granting and protecting inventions. We have a one-size-fits-all solution regulated by an administrative agency, the U.S. Patent and Trademark Office, incapable (perhaps intentionally) of reliably screening out low-quality patent applications. The result has been a deluge of patents that have been granted when they should not have been--i.e., patents that remain unlitigated, impose high costs, and chill follow-on innovation. But because all patents are treated alike, good patents and bad patents are equal under the law; the patent right is always of equal "strength."

In this Comment, I argue that patent infringement is something to be embraced, not avoided. Much as the legal academy and practitioners have adopted the counterintuitive idea of the efficient breach of contracts, I note that there is such a thing as the efficient infringement of patents; we should be encouraging infringement in certain circumstances to address to the vast private and social costs in today's patenting system. In this Comment, I analyze the economic and philosophical underpinnings of patent rights, and also make comparisons to trademark law and water law--another area of law that assigns rights under conditions of scarcity. Through this analysis, I demonstrate that sometimes incentivizing patent infringement by varying the strength of the patent right is preferable to the status quo. There is no reason for us to have a one-size-fits-all patent right when granted patents are often of low quality and there is room to fit the strength of the right to the underlying value of the patent.

Simply put, I show that a "beneficial use" standard for patents, one that identifies whether the patent owner is exploiting the granted patent right in a societally beneficial manner, is more efficient and makes for better policy than our current system.

INTRODUCTION 1020 I. PATENTS AS PROSPECTS 1025 II. PRIOR APPROPRIATION WATER LAW AND PATENTS 1028 A. Priority 1030 B. Diversion 1031 C. Beneficial Use 1032 III. THE BENEFITS OF MODULATING PATENT STRENGTH 1033 A. The Economic Rationale 1033 B. The Philosophical Rationale 1036 IV. PROXIES FOR THE BENEFICIAL USE OF PATENTS 1038 A. Bona Fide Commercial Use 1038 B. Annual Patent Fees 1040 CONCLUSION 1041 INTRODUCTION

Calls for patent reform have reverberated loudly from Silicon Valley to the halls of Congress, making for unlikely bedfellows like Adobe and JCPenney in the battle against nonpracticing entities (NPEs), or so-called patent trolls.(1) Although post-America Invents Act (AIA) Congresses have proposed myriad bills seeking to address the purported inefficiencies of the patent system, none have reached the President's pen.(2) Far from solving an obvious problem, patent reform has faced roadblocks because there is little consensus regarding what the exact problem is and which policy levers Congress should pull to fix the issue du jour. For instance, empirical data present a far from convincing picture of the negative impacts of NPE activity.(3) Nor is it obvious that we should simply make issued patents better by throwing money at the Patent Office to make it a more effective screening mechanism, rooting out "bad" patents before they can even become patents.(4) Despite all of what we do not know, there are some critical and near-universal opinions about the patent system that suggest we should attempt to fix it rather than give up in the face of uncertainty: an incredible number of patents are low-quality (i.e., were granted and should not have been)(5) and remain unlitigated.(6)

Even if we are to assume that worthless patents are cost-neutral to society and there are no externalities, these patents have already imposed administrative costs on the U.S. Patent and Trademark Office (USPTO) and private costs on the patentee. At best, spending capital on droves of frivolous patents indicates at least partial market failure due to cost-internalization issues on the part of the patentee. At worst, poor quality creates inherent uncertainty in patents, driving up private and social costs.(7) In addition, unlitigated or low-quality patents can still exert a strong chilling effect on follow-on innovation, especially in a portfolio of related patents (a so-called patent thicket).(8) It is difficult to quantify such effects. After all, how does one quantify the mere potentiality for more innovation had it not been for a blocking patent or portfolio? Thus, it makes it difficult to legislate a solution because it is nearly impossible to measure innovation that does not exist but could have existed had it not been for a predicate condition. So how would Congress, using command-and-control policy levers, ever be able to legislate an optimal solution given that the requisite cost-benefit analysis is shrouded in uncertainty?

Instead of ham-handedly passing laws in an attempt to address the symptoms of an inefficient patent system, a better approach would be to offer incentives to patentees to encourage societally beneficial patenting behaviors and punish them for detrimental behaviors.(9) In this Comment, I argue that we can do so by varying the strength of the patent right as a function of the patent owner's post-grant behavior. Under such an approach, "good" behaviors would be rewarded with a stronger patent right. Undesirable behaviors, such as letting the patent lay unexploited and unused, would be punished with a weaker patent right. And, as I will explain, even though this solution targets patents after they have been granted, it also has the benefit of changing the behavior of prospective patentees.

In proposing to adjust patent strength, I must emphasize that I do not mean adjusting patent scope. Adjusting scope by, for instance, varying the amount of underlying matter the patent seeks to protect is not the aim of this proposal. Changing how much an issued patent's claims cover is antithetical to efficiency because doing so would heighten uncertainty over the scope of a patent and would defeat the public-notice function of patent claims.(10) In terms of what it means to vary patent strength, I proceed from the notion that the strength of a right ultimately lies in the right's redressability. As Chief Justice Marshall said, "[E]very right... must have a remedy, and every injury its proper redress."(11) So the strength of the patent right lies in how violations of that right are to be rectified (or not rectified, as the case may be).

We traditionally conceive of the patent claim as static. That is, once the USPTO grants a patent, the strength of that right is invariant with time.(12) This is because the typical justification for the static nature of the patent right comes from the public-notice function of the patent claims.(13) But public notice speaks to what may trigger infringement liability, which is a separate question from the strength of the patent right itself. This Comment does not propose to alter what conduct gives rise to infringement liability. Rather, it suggests that we should seek to modulate the law's ability to redress any patent infringement depending on desired policy outcomes. Effectively, I am advocating for the government, in some circumstances, to encourage patent infringement by reducing the ease or degree of redressability for that infringement. This would also award the intentionally infringing party more negotiating power over the patent owner during pre-enforcement bargaining or settlement negotiations.

This proposal is very much akin to encouraging efficient breaches of contracts by restricting specific performance remedies for breaches. Efficient breach stems from the idea that "if the promisor's gain from breach, after payment of expectation damages, will exceed the promisee's loss from breach," the net gain in social utility from nonperformance is greater than if the contract was performed.(14) Correspondingly, it is sometimes socially desirable to encourage patent infringement, and so the government should act to encourage it in instances where the benefits of infringement outweigh the costs of enforcement. But, of course, the devil is in the details.

Scholars have discussed potential administrative reforms of the USPTO extensively, thus targeting the patenting process before a patent issues in the hope that the final granted patents are of higher quality.(15) Legislators have also proposed litigation reforms and tweaks to procedural rules because they have identified vexatious litigation by patent trolls as a severe problem generating high social costs.(16) These academic and legislative proposals do not, however, seek to create different classes of granted patents as I do here. Because there are many ways to vary the strength of the patent right, I do not make a specific policy proposal, which would be beyond the scope of this Comment. I instead make a normative claim that it is desirable and optimal to reform the patent system in such a manner. Embedding change as a part of the right itself, as I propose here, is neither antithetical to the concept of a right (as demonstrated by water law) nor alien to intellectual property rights (as demonstrated by the doctrine of incontestability in federal trademark law).(17) And part of the appeal of this situation is that it exerts influence on all patents, not just on patent applications or litigated patents.

This Comment proceeds in four parts. Part I discusses the modern realities of the patent system. There are many extrinsic and intrinsic pressures driving firms to prematurely seek patent...

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