The case for preferring patent-validity litigation over second-window review and gold-plated patents: when one size doesn't fit all, how could two do the trick?

• Author: Kieff, F. Scott

Complaints about frivolous patents abound in academic, business, and policy circles, and the focus of blame is usually on the large number of junk patents that have issued from the Patent Office that are actually invalid. The underlying cause is said to be the relatively modest examination performed by the Patent Office. Most popular proposals for change suggest methods for segregating patents into two or so bundles based on whether the patents should be subject to closer examination. A so-called "second window of review" has been proposed to allow competitors to make the choice of which patents get closer examination; and a so-called "gold-plated approach" has been proposed to allow patentees to make the election. Applying a back-to-basics approach, this Article points out two core problems with these popular proposals: (1) they do not adequately account for the information costs, error costs, and risks of capture that accompany any system premised on flexible and discretionary administrative review, and (2) they overlook the central lessons learned through debates over civil litigation generally about how to balance the conflicting goals of speed, cost, accuracy, and finality. The Article then elucidates how some small changes to our patent system could be used to better solve the problem of bad patents than would other popular proposals. This small number of changes, which are implementable through either case law or statute, would interact to make available a symmetrical risk of fee and cost shifting for bad-faith litigation over patents to encourage parties to exchange information and resolve disputes before getting deeply into expensive litigation. Such an approach would directly address the complaints of patent critics without injecting the degree of unpredictability and political manipulability into the system that would be caused by their proposed changes. It takes seriously the importance to the economy of strong intellectual property rights as well as reforms designed to lessen the negative impact of junk patents and frivolous lawsuits.

INTRODUCTION I. OVERALL INTELLECTUAL APPROACH II. PATENT THEORY III. THEORY OF PROPOSED DECISION-MAKING OPTIONS A. Administrative Agencies B. Court Litigation IV. PROPOSALS IN PRACTICE A. Increased Reliance on Administrative Agencies B. Reforming Court Litigation C. Common Concerns with Both Approaches 1. Maintaining Flexibility and Minimizing Uncertainty 2. Maintaining Self-Disciplining Tensions CONCLUSION INTRODUCTION

Complaints about frivolous patent suits abound in academic, business, and policy circles. The focus of the problem is the tendency of businesses, both large and small, to find themselves having to defend against large numbers of lawsuits over junk patents that have issued from the Patent Office but that are actually invalid--a death by a thousand pin pricks created by the lure of occasional high damages awards in cases adjudicated to involve infringement of valid patents. The underlying cause is said to be the relatively modest examination that the Patent Office gives to the vast majority of patent applications before they are issued as patents. In decision-making terminology, the problem is seen as a screening process that is underinclusive.

In response, most popular proposals are directed at ways to segregate patents into two or so bundles, based on whether the patents should be subject to more scrutinizing examination procedures. A so-called "second window of review" has been proposed to let competitors make the choice of which patents get closer examination; a so-called "gold-plated approach" has been proposed to allow patentees to make the election. (1) Both proposals are on top of significant recent changes that have occurred in the underlying substantive criteria for assessing patentability through cases like the KSR International Co. v. Teleflex Inc. (2) decision on obviousness and the In re Bilski (3) decision on permissible subject matter.

One fundamental shortcoming of these approaches is that they do not adequately consider the information costs, error costs, and risks of political capture that accompany any system premised on flexible and discretionary administrative review. The extensive scrutiny they impose leaves some patent applications tied up in the administrative process for too long and some patent applications unduly rejected. A new problem has crept in: the screening process has become overinclusive. Indeed, the system now is both underinclusive, in allowing too many low-quality patents, and overinclusive, in erecting too many barriers to patents. In addition, an administrative stacking problem arises as these enhanced procedures are piled on top of the increased flexibility already injected into the substantive criteria for patentability by recent changes in case law. This combination leaves the system vulnerable to too much flexible discretion, exposing flexibility's Achilles' heel. Flexibility increases the discretion of government bureaucrats, which has the effect of increasing uncertainty rather than decreasing it, and gives a built-in advantage to large companies with hefty lobbying and litigation budgets by making it much easier for them to tie up any patent owned by a smaller innovator. Moreover, these heightened costs of administrative process are imposed without the benefits that generally motivate the case for administrative agencies: the need for judgment calls by leadership.

A second fundamental problem with these approaches is that by woodenly splitting patents into different categories of treatment, they overlook the central lessons learned from debates over civil litigation generally. Civil litigation should pay attention to a set of goals including speed, cost, accuracy, and finality--the same set of goals that motivated drafters of the Federal Rules of Civil Procedure. (4) That is, our thinkers, policymakers, and practitioners have already carefully developed over many years a set of rules designed to address these conflicting goals through the fairest process that we have to offer. This system provides rules governing the procedures for joinder, compulsory counterclaims, issue preclusion (also called collateral estoppel), and claim preclusion (also called res judicata), which are collectively designed to avoid abusive and repetitive process, as well as rules for procedures such as summary judgment, which are designed to avoid long trials in which there is no genuine issue of material fact. (5)

This Article elucidates how some small changes to our patent system could solve the problem of bad patents better than other popular proposals. We should (1) return to the rule that gave patentees easier access to enhanced damages and (2) dial down the presumption of validity to give alleged infringers easier access to the same when the patentee is on notice of the key prior art. Such symmetry in cost and fee shifting would encourage parties to exchange information and resolve disputes before getting deeply into expensive litigation. The goal of this proposed reform is to directly address the complaints of patent critics without injecting the degrees of burdensome process, unpredictability, and political manipulability into the system that their proposed changes would cause. The approach proposed here takes seriously the importance to the economy of strong intellectual property rights and the importance of reforms designed to lessen the negative impact of junk patents and frivolous lawsuits.

1. OVERALL INTELLECTUAL APPROACH

   This Article builds on prior work that applies a "basics matter" approach to commercial law. This approach takes seriously the core principles and features of distinct areas of law, including their history and internal normative debates, (6) while applying the intellectual tools from the field known as New Institutional Economics (NIE), or The New Institutionalism, (7) to highlight the ways that property rights in intangible assets can be structured so as to improve economic development, innovation, and competition by encouraging private actors to interact and strike deals with each other rather than with legislators, regulators, judges, and the powerful political constituents who influence these government actors. (8) Following this approach when thinking about how to structure or improve a system of laws focused on market-based financial activities (as compared with those laws focused on subjects such as fairness and civil rights), we should begin our analysis of a particular problem with an understanding of the set of underlying goals. When making decisions about how to address such a problem, we should try hard to determine how future parties will deal with similar situations in the face of various possible legal responses to present ones. That is, we should see things as dynamic, not static. We should also fully expect that we will not be able to select the true, correct outcome in a given case with certainty. Thus, we should try to develop a set of comparative analyses of relative magnitudes and frequencies of the inevitable over- and underinclusiveness associated with different legal regimes designed to address the problem. We should also develop an understanding of who is the lowest-cost provider and evaluator of the information needed to make an appropriate decision, and we should be vigilant about administrative costs in different decision-making processes. We should be vigilant about the transaction costs of those deals needed to help ensure that resources regularly move to their highest and best use as well as the agency costs for those hierarchies we create within organizations. Throughout it all, we should be very skeptical of comparative exposure to public-choice problems, such as capture, for each different available approach.

2. PATENT THEORY

   A well-functioning patent system can effectively and efficiently target a relatively modest set of underlying goals. Like fame...