Patent misuse and innovation.

• Author: Leaffer, Marshall

1. Introduction

   Economists often make the distinction between innovation and invention. Innovation involves a multifaceted effort: the discovery, development, improvement and commercialization of new processes and products. Innovation therefore differs from invention. (1) It includes not only the initial discovery or the creation of potential new products or processes, but also their subsequent development and commercialization. (2) Since Schumpeter, the consensus among economists is that innovation is the most important factor in the growth of the economy. (3) The patent system, whose principal purpose is to promote innovation by giving incentives to inventors, is a prominent method that society utilizes to encourage innovation.

   This policy goal is rooted in the original Constitutional language that provides for legislation "[t]o promote the Progress of Science and the useful Arts, by securing for limited times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." (4) In this way, the Constitution does more than empower Congress to grant patents, it grants that power specifically to promote the progress of science. (5) When viewed from its 150 year existence, the goal expressed in the Constitutional provision has come to fruition. (6) Despite a dearth of empirical support for the patent system, (7) the consensus remains that in certain industries, it has played a positive role in the evolution of the United States becoming the paramount technological innovator in the world. (8)

   Today, however, the patent system is viewed with increasing skepticism and scholarly literature is unsparing in pointing out its deficiencies. (9) Many commentators view the patent system as a hindrance rather than a stimulus to innovation. (10) The criticism follows a familiar pattern. (11) An increase in patent applications and weakened standards for examining patents has led to a dramatic increase in the number of patents granted in the U.S., roughly tripling between 1983 and 2002. (12) During this same period, the Court of Appeals for the Federal Circuit (CAFC) made it easier to enforce the rights conferred by the acquisition of a patent and has extended those rights by doctrines such as the doctrine of equivalents. (13) It is hardly surprising that patent litigation has swelled, nurtured by a progressive escalation in monetary awards. (14) Single company acquisition of a dense web of overlapping patents--patent thickets (15)--may create a seemingly impenetrable web which a company must hack its way through in order to commercialize new technology. (16) As the number of issued patents skyrocket, companies more frequently enter into arrangements with competitors "not only to recover their investment from creating patented products but also to avoid the patent landmines that line the path of innovation." (17) Companies strategically use patent litigation as a means to protect their competitive position. (18) Even though a company might believe that it is not infringing, it is often better to settle than fight. (19) The risk of liability is particularly harsh on small firms who are forced to accept license agreements and pay compensation for past royalties because they are unable to finance litigation. (20)

   The omnipresent threat of litigation may result in agreements suspect in their effect on competition and their harmony with patent policy. (21) Armed with the imprimatur of the patent grant, patentees are adept at imposing various forms of licensing agreements on third parties as well as forming arrangements between competing patentees through patent pools. (22) These arrangements often serve a pro-competitive purpose, but in some instances may hamper competition and reduce optimal investment in R&D. (23) One may conclude that these post-grant activities in litigation and licensing suggest that the current patent system too often reduces incentives to innovate, while encouraging wasteful duplication of effort. (24)

   In sum, the patent system creates obstacles for those who would otherwise contribute to subsequent phases in technological development. (25) In areas of science such as biotechnology and digital technologies, where innovation is often evolutionary, incremental, and collaborative, overlapping patents and threats of litigation impede innovation. (26) Thus, the broad rights granted to those who contribute to the initial phases of invention can obstruct the advancement of subsequent phases of technological inquiry, thereby reducing the benefits to society as a basis for future innovation. (27)

   Comprehensive patent reform provides the solution to the perverse consequences of the current patent system. (28) As a principal mode of reform, there seems to be a general agreement that, above all, patent quality must be improved. (29) In effect, patents should be more difficult to obtain, resulting in the issuance of patents that are truly novel and nonobvious. (30) Unfortunately, we have a one-size-fits-all patent system irrespective of the technology involved, leading some to suggest that we modify our patent laws to accommodate the different fields of technological inquiry. (31) Proper administration, among other steps, will necessitate a significant increase in the funds allocated to the Patent office. (32) In addition, enhanced post-grant procedures to weed out "bad" patents would be an excellent accompaniment to enhanced examination procedures. (33)

   Unfortunately, beneficial patent reform in the current context will probably not take place in the near future. In the meantime, is there a way to level the judicial playing field? Can we tailor rules so that they create optimal incentives to inventors while also tempering side effects of the system which is more crucial in today's technological environment? For this purpose, I propose a reconsideration of the doctrine of patent misuse, a defense to patent infringement, in which the patentee has attempted to enforce his patent contrary to proper contours of patent policy.

2. What is Patent Misuse?

   The origin of patent misuse lies in the equitable doctrine of unclean hands, "whereby a court of equity will not lend its support to enforcement of a patent that has been misused." (34) The misuse doctrine is designed to curb practices that generate "anticompetitive effect" from the patent grant. (35) Through the years, courts have found patent misuse in a relatively limited number of specific acts of the patent owner, often in the context of patent licensing. (36) As the CAFC has stated, the fundamental inquiry is whether, by imposing a challenged condition, the patent owner has improperly expanded the physical or temporal scope of the patent grant with anticompetitive effect. (37) If the alleged infringer can demonstrate that the patent owner engaged in prohibited conduct, the patent is rendered unenforceable despite its validity. (38) In this respect, patent misuse is similar to the doctrine of inequitable conduct, which also results in making the patent unenforceable. (39) A defendant claiming patent misuse is not required to show that he/she was personally harmed by the misuse. (40) This broad interpretation of standing to assert patent misuse allows any person harmed by the practice to use he defense, even despite that person's past transactions with the patentee. (41) In contrast with contract-based defenses such as equitable estoppel and implied license, the patent misuse defense is not restricted to those who had negotiated with the patentee. (42)

   Patent misuse is an elusive doctrine that has waxed and waned through the years while viewed favorably by some and reviled by others. (43) Despite its checkered history, the doctrine has been applied as a means to restrain a patent owner's abuse of a broad patent grant deemed contrary to patent policy. (44) In applying patent misuse, the courts have focused on the anticompetitive effect resulting from the practice. (45) In so doing, they have naturally gravitated to antitrust law to determine when the misuse doctrine should be applied. (46) As explained below, I argue that patent misuse should transcend the contours of traditional antitrust law and should concern itself with policy of patent law and the effect on innovation. Before I discuss the interplay of patent misuse and antitrust I would like to provide a brief historical overview of the doctrine.

3. Patent Misuse: A Ninety Year History

   Patent misuse is a court-made doctrine that first appeared in the 1917 Supreme Court decision known as the Motion Picture Patents case. (47) In that case, the plaintiff owned a patent on a mechanism for threading film into a movie projector. (48) The patentee licensed the patent covering this mechanism on the condition that all movie projectors contain a notice precluding the use of any film not manufactured by the patentee. (49) The Court held that the restriction violated patent policy, by imposing a license restriction falling outside the scope of the patent. (50) Despite the pro-competitive focus of the case, the Court based its decision on the principles of patent policy, nowhere mentioning the following antitrust law:

   A restriction which would give to the plaintiff such a potential power for evil over an industry, which must be recognized as an important element in the amusement life of the nation, under the conclusions we have stated in this opinion, is plainly void, because [it is] wholly without the scope and purpose of our patent laws ... (51) The Motion Picture Patents case not only established the misuse doctrine as a fixture of patent policy, but it also set the stage for the doctrine's preoccupation with "extension" of the patent monopoly in general and tying in particular. (52) Through the 1940's the Court made abundant use of the patent misuse doctrine, striking down a variety of restrictive license agreements, particularly those that involved tying agreements, that is linking the...