Rethinking patent law in the administrative state.

• Author: Kerr, Orin S.

This Article challenges the Supreme Court's recent holding that administrative law doctrines should apply to the patent system. The Article contends that the dynamics of patent law derive not from public law regulation, but rather from the private law doctrines of contract, property, and tort. Based on this insight, the Article argues that administrative law doctrines such as Chevron and the Administrative Procedure Act should not apply within patent law, and that such doctrines in fact pose a serious threat to the proper functioning of the patent system.

INTRODUCTION

The Supreme Court recently tried to solve a riddle that has puzzled patent lawyers for decades. The riddle is this: if the Patent and Trademark Office (PTO) is an administrative agency, and patents bestow monopolies, then why have the courts refused to apply administrative law standards of review to PTO patent decisions?(1) As a 1942 Harvard Law Review article asked, why have the courts failed to treat the patent system "as a problem of administrative law?"(2) After all, courts routinely apply deferential administrative law standards of review such as Chevrons and Section 10(e) of the Administrative Procedure Act (APA)(4) to agency decisions involving licenses and permits. The same courts have rejected these administrative law standards in patent cases in favor of more rigorous standards of review.(5) Why the different standards for patents?

In Dickinson v. Zurko,(6) the Supreme Court offered an answer to this riddle by suggesting that past failures to apply administrative law standards to the PTO had been a mistake. Zurko raised a question with more symbolic than practical importance: When courts review PTO findings of fact in a patent appeal, should they apply the traditional "clearly erroneous" standard of review from outside of administrative law,(7) or should they switch to the APA's marginally more deferential administrative law "substantial evidence' standard?(8) Reversing the Federal Circuit, the Court held that the APA's administrative law standard should apply to review of the patent system. The Court reasoned that there was no particular reason to treat PTO patent rulings differently than other administrative agency decisions, and that "the importance of maintaining a uniform approach to judicial review of administrative action"(9) counseled strongly in favor of applying the administrative law standard to patent rulings. With Zurko, it seems, patent law's longstanding exclusion from the world of administrative law has come to an end.

This Article argues that the Supreme Court in Zurko chose the wrong answer to the riddle. I argue that the Zurko Court and the PTO overlooked a fundamental distinction that explains the patent system's unusual treatment: The patent system operates not through regulation, but rather through the private law mechanisms of contract, property, and tort.(10) Unlike licensing regimes, the patent laws express a unilateral contract offer. The government offers to grant a patent to any inventor who discovers a useful new invention and files a meritorious patent application with the PTO. The PTO's role is not to "regulate" the patent system, but merely to represent the government offeror by reviewing inventors' claims that they have accepted the offer. If an application satisfies the Patent Act, then the offer has been accepted; a binding contract exists, and the PTO must issue the property right of a patent as con-sideration. Conversely, if the application does not satisfy the Patent Act, the PTO must reject the inventor's claim to a patent because no contract exists. In short, the patent system is different from other areas of regulatory law: It is a private law patent system, rooted in contractual mechanisms that stand apart from the regulatory dynamic of administrative law.

The private law theory of the patent system that I present in this Article has important implications for both administrative law and patent law. Within administrative law, the private law basis of the patent system reemphasizes largely forgotten limits on the scope of administrative law doctrines. Today's administrative law scholars generally have adopted an expansive view of the scope of administrative law,(11) with its characteristic deference to the executive branch. Echoing the Supreme Court's opinion in Zurko, many scholars have endorsed the ahistorical notion that deferential administrative law doctrines apply as a matter of course when the courts review decisions from executive agencies, including nonregulatory agencies such as the PTO.(12) They reason that deference to the executive empowers better decision making because agencies generally possess specialized expertise.(13)

The private law basis of the patent system provides a perfect vehicle for recognizing the flaw in this argument. It confirms that Congress can direct the executive branch to act in two fundamentally different ways. First, Congress can direct agencies to exercise discretion within a zone of delegated authority, such as when it directs the FCC to evaluate applications for broadcast licenses.(14) Second, Congress can direct agencies to make ministerial decisions as its agent, such as when it directs the PTO to rule on patent applications.(15) Deferential administrative law doctrines were designed to apply only in the former case, regardless of agency expertise. Indeed, deference and delegation are two sides of the same coin. Judicial deference creates agency discretion, and agency discretion effectuates lawmaking power within a zone of delegated authority. Accordingly, Congressional delegations of power define the limits of administrative law doctrines. When Congress designs a legal regime, such as the patent system, that is based on private law mechanisms rather than a delegation of power, the deferential standards of administrative law should not apply.

An understanding of the private law nature of the patent system also has importance within patent law itself. First, it offers a new unified theory for understanding the purpose and design of patent law.(16) Scholars of patent law have noted that the field lacks a so-called "holy grail," a single "unifying theory that describes the overall patent system and the outcome of individual cases."(17) An understanding of the private law mechanisms driving the patent system may offer such a theory, or at least provide key insights that help lead to one.

More narrowly, the private law theory of the patent system offers a new perspective on whether deferential review of patent decisions can improve the patent system. Until now, the scholarly debate on this question has focused exclusively on the relative expertise of the PTO and its reviewing court, the United States Court of Appeals for the Federal Circuit. Those who believe that the PTO's expertise in patent law exceeds the Federal Circuit's favor deferential administrative law standards in patent law;(18) those who maintain that the Federal Circuit is wiser and more expert than the PTO oppose such standards.(19) This focus makes sense from a regulatory viewpoint: the institutional competence of courts and agencies has long been a justification for deference in regulatory law. From the private law perspective, however, we can see that the significance of deference to the PTO extends far beyond incremental differences derived from expertise.

The private law perspective teaches that the value of deference in patent law must be judged chiefly by how it would change the incentives facing prospective inventors. Unlike regulatory regimes, the private law patent system works by inducing reliance on Congress's contractual offer; the goal of patent law is to encourage inventors to invest in and disclose new research in order to obtain the quid pro quo of a patent(20) As a result, deference will promote research and technological progress if it encourages reliance on Congress's offer, but it will harm the patent system if it discourages reliance. From this perspective, we can see that deference to the PTO would cause the same trouble that would result from judicial deference to an offeror in a breach of contract dispute. Among prospective inventors considering whether to rely on Congress's offer, the knowledge that a court would later defer to the PTO's judgments would both destabilize the terms of the offer and create incentives to obtain patents by manipulating PTO discretion.(21) Both effects would sharply discourage the very investment in research and development that patent law seeks to induce, Accordingly, the private law perspective on the patent system suggests that courts should reject the PTO's campaign to apply deferential standards of review from administrative law when reviewing PTO appeals, and should adhere instead to the aggressive standards of review that courts traditionally have applied when reviewing direct appeals from the PTO.

I will present my argument in three sections. In Section I, I present my theory that the patent system can be understood through the private law doctrines of contract, property, and tort. Section II explores the ramifications of this theory for the field of administrative law, with particular emphasis on how it reveals often-forgotten limits on the scope of administrative law doctrines. Finally, Section III examines the importance of the private law theory within patent law, and argues that deference to the PTO poses a danger to the proper functioning of the patent system.

1. THE PRIVATE LAW THEORY OF THE PATENT SYSTEM

   In The Nature and Function of the Patent System,(22) Professor Edmund Kitch noted the similarities between the patent system and the legal regime governing prospecting for mineral claims in the American West during the last half of the nineteenth century(23) The mineral claims system encouraged private firms to discover and develop valuable natural resources by permitting those who ventured onto public land...