Patent Reform Act of 2007 (PRA), eBay v. MercExchange, KSR, Leapfrog : Vested Interests & Territoriality : Justice Harlan I Wins Again for Modern Law

The Problem of Vested Interests for any Reform Activity

One of main problems encountered in attempting to instigate reform of any kind is the problem of vested interests, which can be described academically or historically as the sum of advantages, real or perceived, that mark the status quo in a given area, and which advantages are enjoyed by some person or group in that area. It goes without saying that the status quo of the patent system is also marked by such vested interests. Indeed, these are fighting tooth and nail to hang on to the advantages that they now enjoy after 20 years of unhindered proliferation.

Consequently, pursuant to the aforesaid, it is important to recognize in this context that most argumentation about reform of any kind is not conducted with a view toward objective improvement of any given status quo, but is rather a battle between opposing camps – those who stand to lose something – and – those who stand to gain something – by any reform. Neutrality is especially not be expected from those who themselves presently work in the system to be reformed, as they are not about to bite the hand that feeds them.

One result is that those insiders who know any particular system best, often say nothing, because they have no interest to rock the boat in which they are comfortably sitting. Similarly, if they do say something, their argumentation will openly or subliminally support the “insider” position that they are trying to protect. Since insiders who wash dirty linens publicly are generally ostracized by any group, very little legitimate criticism about a system thus ever comes from within that system and one should expect very little help from them.

For example, the USPTO will always support measures that give them more personnel and make them bigger and more powerful than they already are, quite apart from any objective gains or losses suffered thereby by the patent system or legal system as a whole. Similarly, the USPTO will oppose measures which curtail their powers and personnel, regardless of the objective value of such measures.

In the same vein, patent judges, patent attorneys and patent academics will tend to favor “patent solutions” which elevate their own position within the legal system and make them more important and more successful in the patent system as reformed. Any reforms which limit or minimize their roles will be rejected, based on allegedly “objective” grounds, of course.

Territoriality – The Territorial Imperative

Similarly, not only established ways of doing things but also expressed opinions will be defended as a type of territory – as a vested interest, a territorial imperative, true to the motto that “new ideas do not prevail on their merits, rather, they prevail when their “old guard” opponents die out or fall into the minority. There is a lot of truth to that territorial wisdom: see e.g. Michael D. Coe’s Breaking the Maya Code for a spectacular and also sad example of the territorial imperative in academia.

Territoriality is a primary force and even the concept of legal jurisdiction is based upon the territoriality principle. Only two American Presidents worked as land surveyors prior to be being elected – Washington and Lincoln – and they are often ranked as the two greatest Presidents that America has ever had. They understood land, and they understood territory.

See Kal Raustiala, The Evolution of Territoriality in U.S. Law, for the proposition that US territoriality is becoming increasingly uncoupled from sovereignty and geography.

Vested Interests and Territorial Claims Burden Patent Law Reform

Vested interests and territorial claims are the main impediments to patent reform in the United States. These vested interests have been instrumental in hindering Congressional patent legislation, discussed below.

The Sluggishness of Patent Reform and the Voices of Neutral Outsiders

True reform in any field, especially in patent law, thus depends primarily on the voice of more-or-less neutral outsiders who have sufficient knowledge about a particular system under scrutiny, but who are not dependent upon that system and who suffer no losses and/or who gain no advantages from a reform of that system.

Indeed, one reason that the patent law system had come into such disarray in the last 20 years is precisely because not enough outside voices had come to bear on the vested interests and territorial claims within that system. Now that these outside voices are becoming louder and more numerous, the patent system has no option but to change in the direction demanded, like it or not. As every smart investor knows, no one is bigger than “the market”, i.e. the entire public, viz. republic, is stronger than the special interests.

We are one of those neutral voices in the larger public “market” with no personal stake in the outcome of patent reform. Rather, we are suggesting changes in patent law that we think to be absolutely necessary for the good of the legal system and the country as a whole. That there will be winners and losers in such a patent reform is clear, but this is not our main concern, as we see a need to curb the current powers of the vested interests for the good of the common weal. Anyone arguing for or against a PARTICULAR group of territorial claims therefore has little standing with us since our concern is the WHOLE big picture. We view other voices in this debate from the standpoint of their allegiances, vested interests and territorial claims. Do their arguments seek the best for everyone, or just a chosen few?

The Patent Reform Act of 2007 (PRA)

Via the University of Chicago Law School Faculty Blog we are directed to Richard Epstein’s column at the Financial Times ( website which views the Patent Reform Act of 2007 (PRA) as A dangerous one-two punch, arguing that changes to rules on patent-based injunctions and patent infringement damages would dampen patent innovation.

As far as injunctions are concerned, Epstein points to the standard voiced by the US Supreme Court holding in eBay v. MercExchange. That rule, as Epstein writes, is:

[A] four-factor public interest test [which asks] whether the patent holder suffered an irreparable injury, whether damages were an adequate remedy, what was the relative balance of hardships between the parties, and how best to serve the public interest.

According to Epstein, the US Supreme Court wrongly bypassed “the long-standing rule of equity from the Court’s 1908 Continental Paper Bag decision, which treated the issuance of an injunction as a matter of course whenever a patentee practices an invention“.[link added by LawPundit]

That decision, found in a badly reasoned opinion by Justice McKenna (who studied law at the Benicia Collegiate Institute, closed in 1867), was rightly dissented to by Justice John Marshall Harlan (the 1st Supreme Court Justice to have earned a modern law degree and the lone dissenter to the segregationist case of Plessy v. Ferguson – a case which ranks with Continental Paper Bag as an unfortunate historical anachronism of American jurisprudence):

“Mr. Justice Harlan thinks that the original bill should have been dismissed. He thinks the facts are such that the court should have declined, upon grounds of public policy, to give any relief to the plaintiff by injunction, and he dissents from the opinion and judgment.” [emphasis added by LawPundit]

In supporting Justice McKenna and in not supporting Justice Harlan, Epstein is as wrong as those who supported Justice Henry Billings Brown (who never earned a law degree) in Plessy v. Ferguson and who similarly ignored the wise corresponding dissent of that same Justice Harlan.

Epstein writes about the PRA and the new damage rule:

The key damage provision states “The court shall conduct an analysis to ensure that a reasonable royalty . . . is applied only to that economic value properly attributable to the patent’s specific contribution over the prior art.” Thereafter the PRA also instructs courts to exclude from the damage calculations any economic value properly attributable to other patented or nonpatented improvements.

Epstein claims that these rules combined will “dampen patent innovation on the heels of Ebay“.

That is simply an allegation without proof, for which there is no evidence of any kind. Nothing indicates that patent innovation ever has been dampened or will be dampened in any manner by sensible rules on injunctive relief and damages.

What we as observers of the world of patent trolls have seen up to now is that the threat of broad injunctive relief leads to the kind of ridiculous court-based virtual extortion witnessed in the NTP v. Research in Motion case (the Blackberry case) and that the possibility of outlandish damage awards leads the kind of egregious court-based virtual extortion witnessed in the Eolas vs. Microsoft case. In those two cases, none of the patent-holders contributed anything to the economic development of the highly profitable products that were created by thousands of other people and the amount of money demanded as damages in those two cases bore no reasonable relationship to the inventor’s alleged contribution to those products.

The Eolas and Blackberry cases are prime evidence of patent law run wild – a development which has not escaped the notice of the US Supreme Court, whose decision especially in KSR v. Teleflex clearly and thankfully points to the inexorable swing of the patent law pendulum in the opposite direction. The subsequent Federal Circuit decision in Leapfrog confirms that assessment.

The danger that Epstein sees, especially to the pharmaceutical industry, is a straw man:

It is no wonder that the pharmaceutical companies dread the PRA, because of its potential to slash their returns while increasing their costs.

We worked in that industry for numerous years and it is one of the most profitable businesses on this planet due to the monopoly powers granted by patents. Just take a look at the Fortune 500 Global 500 and then look at the pharmaceutical industry specifically – and then compare profits with revenues. The Fortune Global 500 lists as the most profitable the company that has the most dollar profits, regardless of revenue. But a better way to judge profits is by comparing profts as a percentage of revenues. For that list, the pharmaceutical industry wins hands down. Just take a look at the year 2007 profits as a percentage of revenues in the pharmaceutical industry’s top echelons:

Top Ten Profits as a % of revenues are as follows
Fortune 500 Global 500 in 2007 – The Pharmaceutical Industry

Pfizer 36.9% of revenues
GlaxoSmithKline 23.2% of revenues
AstraZeneca 22.8% of revenues
Johnson & Johnson 20.7% of revenues
Wyeth 20.6% of revenues
Merck 19.6% of revenues
Novartis 19.4% of revenues
Roche Group 18.1% of revenues
Eli Lilly 17.0% of revenues
Sanofi-Aventis 13.6% of revenues

By comparison, even the multinational oil companies, known for taking the public for every cartel penny they can, are mere amateurs in filling their coffers. The rationale for patent-supported high drug prices in the pharmaceutical business is to recoup research costs and to finance new research, but in fact, those patent-created monopolies lead to phenomenal profits far beyond research recoupment.

It is not just for the period that patents are granted that monopoly profits are made, but far beyond those patents, as patent monopolies create strong market positions which serve as powerful barriers to entry to competitors down the road – long after patents have expired. In fact, many generic pharmaceutical companies – who sell the patent-expired products – are owned by patent-based companies, as the cow is milked long beyond patent protection.

Fiona M. Scott Morton writes at the Journal of Economics and Management Strategy in Horizontal Integration Between Brand and Generic Firms in the Pharmaceutical Industry that about 70% (SEVENTY percent) of all generic pharmaceutical companies are owned by branded companies.

We have nothing against the pharmaceutical industry, by the way, as antibiotics have saved our own life several times, but using the incomparably profitable pharmaceutical industry as the prime example for not invoking badly needed patent reform is – when one views the above profit figures – er, what shall we say, amusing.

In our opinion, limiting injunctive relief and bringing damages down to rational levels in patent infringement cases will not harm the powerful pharmaceutical industry significantly, and we have seen no presentation of evidence that this has ever occurred or will ever occur.

Legitimate, socially useful patents, correctly granted by the USPTO for non-obvious inventions, and demanding reasonable royalties, have nothing to fear from patent reform. Patent reform is aimed at the parasitical patent trolls and at all those who seek to profit unreasonably from any invention, where that invention is – 99% of the time – just a tiny part of the entire economic framework of the modern world and which should thus not be unduly rewarded and not be given broad injunctive powers of extortion fully at odds with modern economic realities.

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