JIPEL Vol. 7, No. 2 – Spring 2017

The NYU Journal of Intellectual Property and Entertainment Law is proud to present Volume 7 Issue 2 of the Journal. While PDFs of the individual articles may be found accompanying their respective posts, you may view and download a PDF of the complete issue here

A Judicial ‘Supplement’ to Advertising Law: The Fourth Circuit’s GNC Decision and Policy Implications for the Dietary Supplement Industry

A Judicial ‘Supplement’ to Advertising Law: The Fourth  Circuit’s GNC Decision and Policy Implications for the Dietary Supplement Industry
By Gia Wakil*

Download a PDF version of this article here

 

Introduction

Every home has a story, as the old adage goes, and the story in this Note is set in the modern-day vitamin cabinet. Few items are as ubiquitous in American homes as the pill bottle. From vitamins like A and C, or minerals like iron and zinc, the supplements found in a single household typically run the full alphabet. The majority of adults in the United States take one or more dietary supplements occasionally, or even every day,[1] with sales to American consumers exceeding $35 billion per year.[2] Americans rely on supplements to ameliorate nutritional deficiencies or to maintain their health. And yet, despite the prevalence of supplements, concerns abound about their efficacy and the veracity of claims supporting the use of supplements. Oftentimes, the prospect of shorter colds, stronger nails, or improved general health justifies the price of the “gamble” in the minds of many consumers.

It was in similar, health-conscious hopes that consumers in the In re GNC Corp. [3] case had reached for bottles of glucosamine-chondroitin, two common ingredients in joint health specialty products.[4] The labels touted that the mixtures “promote[] joint mobility and flexibility” and provide “[c]linical strength for daily long-term use.” GNC allegedly had, and on some labels cited to, a reasonable scientific basis for these claims, though its legitimacy was tarnished in the face of mounting scientific evidence indicating otherwise.

After years of medical controversy examining whether glucosamine-chondroitin is effective, lawsuits against a variety of its manufacturers and sellers popped up across the United States.[5] Perhaps the consumers were tired of “gambling” on glucosamine and thought that the products did not live up to their billing. More likely, plaintiffs’ lawyers had been following the debate, and they believed there were issues to be asserted in the form of consumer class actions.[6] Multiple false advertising lawsuits against GNC commenced between March and December 2013, with allegations of consumer deception across California, Florida, Ohio, New York, Illinois, Pennsylvania, and New Jersey.[7]

The controversy surrounding truthfulness in supplement advertising has only grown louder in recent years, and for good reason. Over the last fifteen years, sales of vitamins, minerals, and nutritional and herbal supplements — which, together, comprise the dietary supplement industry — have surged. In December 2013, McKinsey & Company estimated the global value of the supplement market to be $82 billion, with a high concentration of that value in the U.S.[8] High levels of sales appear to correlate with high consumer confidence. The majority of U.S. adults — 68 percent — take supplements, and nearly 85 percent of those consumers express “overall confidence in the safety, quality and effectiveness of dietary supplements.”[9] Competition in the supplement industry is fierce and no one company accounts for more than a five percent share.[10]

Unbeknownst to many consumers, the laws governing supplement labeling and advertising are notoriously tricky to navigate. The Food and Drug Administration (FDA) issues rules and regulations regarding supplement labeling, marketing, and safety,[11] but there are significant limitations to FDA oversight. For example, the manufacturer or seller does not need to prove that a claim is accurate to the FDA’s satisfaction before it appears on the product,[12] and the agency reviews substantiation for claims periodically, as resources permit.[13] The Federal Trade Commission (FTC) polices health and safety claims made in advertising for dietary supplements,[14] but its oversight is similarly limited by the availability of resources.[15]

High sales, patchy government supervision, and dubious marketing practices have created a “perfect storm” on the litigation frontier. False advertising in the consumer class action context is a rapidly growing area of law.[16] GNC is a rich case study for exploring issues related to truth in advertising, particularly when dealing with scientific controversy. In GNC, the Fourth Circuit held that the existence of a single expert in agreement with a claim bars the statement from being found literally false.[17] Since Plaintiffs did not challenge the validity of GNC’s study that supported the claims found on bottles — even after an opportunity to amend their complaint — they could not prove that glucosamine-chondroitin was not beneficial to joint health. In other words, at least one reasonable expert or study is sufficient to carry the claim on the bottle, even if the vast weight of scientific evidence suggests otherwise. Furthermore, a “battle of the experts” did not necessitate a jury trial, nor did it forestall judgment in the supplement manufacturer’s favor.

This Note argues that the Fourth Circuit’s holding in GNC is the preferred solution to the truth-in-advertising dilemma that is rampant in the supplement industry, particularly in periods of scientific controversy. Scientific evidence is neither static nor consistent; there can be two pools of reasonable evidence on either side of a medical controversy, and the minority position may well be proven right. Reserving judgment for juries beyond the pleadings stage would overestimate juries’ abilities to resolve highly technical scientific controversies. Both consumers and retailers benefit from consistent interpretation of consumer protection measures, and the Fourth Circuit has articulated a workable standard for these various state law claims.

The argument unfolds in three parts. Part I surveys the landscape of advertising laws, with heightened focus on the Lanham Act and state consumer deception statutes. Supplement advertising should be treated as a carve-out amidst this patchwork of laws, and I will argue that the Fourth Circuit’s ruling, if appropriately limited, does no damage to the existing doctrines. Part II offers a detailed description of the GNC case, both at the district and appellate court levels. This background serves to illustrate why the unanimous GNC judgment is an interesting solution to a difficult truth-in-advertising question. Part III assesses the policy implications of the Fourth Circuit’s decision. It begins by addressing criticism of the GNC ruling, which was presented in an Amicus Brief submitted by a prominent group of law professors. It then responds to the criticism provided in the Amicus Brief and counters with the merits of the Fourth Circuit’s holding. The Conclusion reviews the argument and demonstrates why the analysis presented is persuasive.

Part I: The Legal Landscape of the Supplement Industry

A. Sources of Truth-in-Advertising Law

There is a patchwork of federal, state, regulatory, and common law sources of truth-in-advertising law, in addition to industry-specific trade associations that advise dietary supplement manufacturers and retailers. Both the FTC and FDA[18] can initiate their own investigations into false advertising and labeling of dietary supplements. Their overlapping jurisdiction and shared enforcement responsibilities are explained further in Section I.B., infra. However, since actual oversight by these bodies is notoriously constrained, consumers and business competitors have often resorted to alternative forms of legal redress. Companies may challenge claims made by their competitors under the federal trademark law, Lanham Act § 43(a), discussed in Section I.C., infra.[19] While the federal cause of action is not available to consumers, the Lanham Act remains instructive in understanding state deception laws that are available to consumers.[20] The relationship between the Lanham Act and state consumer protection laws is explored further in Section I.D., infra. Lastly, the dietary supplement industry finds guidance from self-regulatory associations: the Council for Responsible Nutrition (CRN) is its primary trade association,[21] and the Better Business Bureau’s National Advertising Division (NAD) offers alternative forms of dispute resolution. [22]

B. The FTC-FDA Regulatory Regime

Congress has entrusted matters of food, drug, and supplement policing to both the FTC and FDA,[23] which have overlapping jurisdiction and work together to ensure consistency in consumer products.[24] “In 1971, the agencies issued a memorandum of understanding under which the FTC assumed primary responsibility for advertising and the FDA assumed primary responsibility for labeling of food, medical devices, and cosmetics.”[25] Advertising in the FTC’s domain includes print and broadcast ads, infomercials, catalogs, and similar direct marketing materials; labeling refers to the information panels on product itself, such as the nutritional content and manufacturer address.[26]

There is an enormous disparity between what the law permits and what the agencies enforce. Dietary supplements have posed a unique challenge to the joint FTC-FDA working relationship. Neither food nor drug, dietary supplements occupied a “liminal” regulatory category for much of the 20th century.[27] By the 1990s, however, Congress overrode attempts by the FDA to regulate supplements more extensively. The resulting legislation paved the way for the modern explosion of supplement products on the American market.[28]

1. FTC Regulation of Supplement Advertising

The FTC is the federal consumer protection agency charged with safeguarding consumers against “unfair and deceptive trade practices,” under the authority granted to it in Section 5(a) of the Federal Trade Commission Act. It uses two investigative methods to challenge advertising it finds to be false: either compelling information from a potential defendant (for example, in the form of a subpoena), or requesting voluntary cooperation (in the form of an access letter). Notably, consumers do not enjoy the same authority in compelling disclosure of a corporate advertiser’s studies.

The FTC has articulated its own standard for actionable false advertising. The 1972 Pfizer doctrine[29] is an unsubstantiated theory of liability: no dissemination (of an ad claim) without prior substantiation. For an advertisement to be substantiated, the advertiser must have had a “reasonable basis” for its advertising claims before they are disseminated. For health or safety claims, which include representations made in connection with dietary supplements, the Commission has typically required a relatively high level of substantiation. In such cases, the “reasonable basis” must be “competent and reliable scientific evidence,” typically defined as “tests, analyses, research, studies, or other evidence based upon the expertise of professionals in the relevant area, that has been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.”[30] The FTC reaffirmed this standard in its Policy Statement Regarding Advertising Substantiation, and there are numerous representative cases applying the doctrine.[31]

2. FDA Regulation of Supplement Labeling

Unlike drugs, dietary supplements do not need FDA approval before being legally marketed in the United States. Under the Dietary Supplement Health and Education Act (“DSHEA”) of 1994,[32] the FDA’s role in regulating the dietary supplement industry is constrained. Under DSHEA, a supplement company is responsible for determining that its products are safe and that any representations made are substantiated by adequate evidence of their truthfulness. A company does not have to provide the FDA with the evidence it relies on to substantiate safety and effectiveness unless specifically requested. Instead, the FDA has relied on a disclosure theory of consumer protection, requiring firms to identify the product as a dietary supplement and include a “Supplement Facts” panel that identifies each ingredient contained in the product.[33]

C. The Lanham Act

Congress enacted the Lanham Act (codified at 15 U.S.C. §§ 1051-1127 (2012)) in 1946. It serves both as the federal trademark law and as a primary source of truth-in-advertising regulation. Section 43(a) of the Lanham Act provides that “any person who believes that he or she is or is likely to be damaged” by a false or misleading description or representation of fact may sue.[34] The Trademark Revision Act of 1988 substantially broadened the scope of section 43(a) to cover a company’s false representations about itself and others.[35]

Section 43(a) is the core legal protection for those injured by false advertising. The Supreme Court has interpreted standing under section 43(a) to be limited to business competitors; consumers are excluded from filing suits under the Lanham Act. In Lexmark International, Inc. v. Static Components, Inc., the Supreme Court explained that standing to sue for false advertising under the Lanham Act requires pleading “injury to a commercial interest in sales or business reputation,” and that injury must be “proximately caused by the defendant’s misrepresentations.”[36] The injury cognized by Lexmark is “unfair competition” through false or misleading advertising, rather than consumer deception or confusion. Accordingly, consumers’ interests do not fall within the “zone of interests” protected by section 43(a)(1)(B).[37] As a result, plaintiffs in these lawsuits are typically commercial competitors of the alleged false advertiser.

Since remedy under the Lanham Act is unavailable to non-competitors, consumers often rely on state consumer protection statutes to bring cases against advertisers. Since these state statutes effectively police the same mischief, federal common law remains instructive in understanding the state law cause of actions.[38]

Section 43(a)(1)(B) establishes liability for two modes of advertising: advertising that is false and advertising that is misleading. Actionable representations include statements made about one’s own goods or services, as well as the commercial disparagement of others. These two categories of advertising, as well as the specific violations that they encompass, are next considered.

1. Two Modes of False Advertising

Courts are tasked with determining whether representations are either false or misleading. Both incur liability under section 43(a), but there are important doctrinal and pleading distinctions. The analysis begins with five basic elements: (i) whether the alleged misrepresentation is false or misleading, as opposed to non-actionable puffery,[39] (ii) whether a plaintiff can demonstrate actual deception or capacity for deception as a result of the falsehood, (iii) whether the falsehood or misleading information is material to a consumer’s decision to buy,[40] (iv) whether a plaintiff was harmed, either by direct diversion of its sales or by a lessening of the goodwill associated with its products, and (v) whether the falsehood or deception occurs in interstate commerce.[41] These elements are conjunctive, and a plaintiff must meet all five to trigger liability.

i. Literal Falsity

Literally false representations communicate one unambiguous message, either verbally or visually, that is untrue or unsupported. These representations violate the Lanham Act without proof of consumer deception; instead, courts presume that the buying public has received the false message.[42] Consequently, plaintiffs in these cases can avoid the time and expense of preparing consumer surveys regarding the ad’s message. The burden of proof in falsity cases is on the plaintiff, and falsity is assessed on the basis of scientific testing or related types of extrinsic evidence.[43]

A classic example of a literally false representation comes from Coca-Cola.[44] In 1982, Tropicana featured athlete Bruce Jenner in a television commercial for orange juice, squeezing juice out of an orange directly into a Tropicana carton while saying, “[i]t’s pure, pasteurized juice as it comes from the orange.” In fact, the juice was heated and, in some cases, frozen before packaging. Further, the juice did not in fact come “pasteurized” straight from the orange. The Second Circuit granted preliminary injunctive relief against the “blatantly false” statement. The plaintiff did not have to make a showing that the advertisement would mislead the consuming public.

ii. Literal Falsity by Necessary Implication

A court may evaluate an advertisement for falsity even if the representation is implied by context, rather than stated directly. This category of false advertising is referred to as false by necessary implication. Actionable advertisements of this type convey one unambiguous message. While the message is conveyed implicitly, the meaning of the message is clear and unequivocal. Ultimately, if the impression left on the viewer conflicts with reality, it is effectively treated as if that false impression was directly stated.

The Second Circuit embraced the false-by-necessary-implication doctrine for the first time in Time Warner Cable, Inc. v. DIRECTV, Inc.[45]— a case which provides an excellent illustration of this type of actionable falsity. A series of DIRECTV commercials featured celebrities touting the merits of the satellite service provider’s 1080i high definition (HD) transmission. A commercial from the “Source Matters” campaign concluded with William Shatner stating that “settling for cable would be illogical.” This statement was made in the context of surrounding text (“amazing picture quality of […] DIRECTV HD”) and images (a very clear DIRECTV picture and a far inferior picture from an anonymous second provider, though cable was obviously targeted). Without extrinsic evidence, the district court determined that Mr. Shatner’s assertion (“settling for cable would be illogical”) “could only be understood as making the literally false claim that DIRECTV HD is superior to cable HD in picture quality.”[46] In reality, however, DIRECTV and cable HD’s picture quality were equivalent. The Second Circuit upheld this ruling for Time Warner, concluding that the impression left on the viewer conflicted with reality.[47]

2. Misleading Advertising

The second category of actionable false advertising claims are, while not literally false, deemed misleading to consumers. Such ads contain representations of fact about a product or service that are ambiguous or tend to deceive consumers. The statements may be literally true, and yet have the tendency to mislead. The language of section 43(a) deems merely misleading representations equally as objectionable as those that are literally false, explicitly rendering unlawful a “false or misleading description of fact, or false or misleading representation of fact.”

There are a number of important differences between false and misleading advertising, even though both types of representations violate section 43(a). Although the categories are doctrinally distinct, the evidentiary differences are more significant in practice. Literal falsehoods — those that are false on their face — are actionable without proof of consumer deception, as in the Coca-Cola and DIRECTV cases previously considered. In a case of misleading advertising, plaintiffs must present extrinsic evidence to establish consumers’ perception of the implied falsehood.[48] Such proof typically includes consumer surveys, direct consumer testimony, or consumer comments received in the ordinary course of business.

In Vidal Sassoon, Inc. v. Bristol-Myers Co.,[49] the Second Circuit addressed literally false as well as misleading claims. This case provides a clear example of the difference between literal falsity and misleadingness. In a television commercial, a spokesperson states that “in shampoo tests with over 900 women, Body on Tap got higher ratings than Prell for body. Higher than Flex for conditioning. Higher than Sassoon for strong, healthy looking hair.” The literally false claim is that the tests involved over 900 women; in fact, only two-thirds of testers were actually adult women. The claims regarding higher satisfaction were deemed misleading based on a consumer survey assessing the message of the ad. Consumers surveyed about the commercial said that they thought each tester had tried at least two of the named products in order to compare their quality. Since this was not the actual testing procedure, the court held that consumers were deceived by the ad’s claims, and that the claims were actionable as misleading.

D. State Consumer Protection Statutes

Every state has a consumer protection law that prohibits deceptive practices.[50] Many of these statutes take the form of a “little” FTC Act, incorporating the language of Section 5 of the statute for which they are named.[51] These statutes provide the basic protections for consumers engaging in thousands of transactions across the United States, prohibiting “unfair methods of competition or unfair deceptive trade practices” as well as “all forms of fraudulent, deceptive, and unfair acts.” While many statutes track the federal guideline, they nevertheless may vary in form and strength from state to state.[52] State attorneys general and consumers may bring suits pursuant to these acts.

As mentioned infra, the state consumer deception statutes at issue in GNC were interpreted in accordance with the great body of federal common law surrounding false advertising and the Lanham Act. There remains a significant difference in the standing requirements: in a Lanham Act lawsuit, the plaintiff is typically a competitor; in putative consumer class action lawsuits, representatives must allege that they were personally deceived to have standing.[53] Despite these differences in standing, the laws have been interpreted relatively congruously. The mischief to be corrected, in both cases, is false advertising and unfair competition. However, there is no requirement that each state’s consumer deception law track the Lanham Act or federal case law.

Part II: The GNC Case and the Glucosamine-Chondroitin Problem

A. Factual Background

General Nutrition Corporation (GNC), a national nutritional products retailer, has manufactured and sold a line of joint health supplements[54] for years. These products, which list glucosamine, chondroitin, and various other compounds as the primary active ingredients, are marketed collectively under the “TriFlex” brand. Although the products differ slightly in their total combination of ingredients, they advertise similar claims[55]; essentially, the TriFlex brand improves the health, comfort, and function of joints. The label for one product, TriFlex Fast-Acting, included a ”[c]linically studied” establishment claim: a “12-week multi-center, randomized, double-blind, placebo controlled study of 60 adults [. . .] taking 250 mg/day of the GNC TriFlex Fast-Acting Blend” proved that the product was “shown to improve joint comfort and function,” in addition to promising 20% improvement in joint function and 25-30% improvement in joint flexibility.[56] GNC produced a similar line of products for Rite Aid, which claimed to “promote joint health” and “help[. . .] rebuild cartilage and lubricate joints.” In compliance with FDA guidelines, all of the TriFlex and Rite Aid products included the disclaimer: “This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.”

Beginning in March 2013, class action lawsuits against GNC and Rite Aid popped up across the United States. Plaintiffs in California, Illinois, Florida, New York, New Jersey, Pennsylvania, and Ohio alleged violations of an array of state consumer protection, deceptive practices and/or express warranty statutes in regard to the glucosamine-chondroitin products.[57] In December 2013, the pending lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation and, pursuant to 28 U.S.C. § 1407, transferred to the U.S. District Court for the District of Maryland.[58]

B. The Complaint

In the Consolidated Amended Complaint, Plaintiffs alleged that the “overwhelming weight of high quality, credible and reliable studies demonstrate that glucosamine and chondroitin…do not provide joint health benefits” (emphasis added).[59] They stated that the inefficacy of these supplements was “generally recognize[ed]” by the scientific community.[60] In support of their allegations, Plaintiffs cited to thirteen studies released between 2004 and 2013.[61] In the studies, researchers concluded that (1) glucosamine and chondroitin did not reduce symptoms for osteoarthritic users or chronic joint pain sufferers (who, Plaintiffs alleged, were an appropriate proxy for non-arthritic users), and (2) MSM, another compound found in the TriFlex products, did not provide pain or joint symptom relief for osteoarthritic consumers. Notably, the Plaintiffs did not provide any testing of GNC’s particular products or combination of ingredients. Instead, they relied on the “vast weight of competent and reliable scientific evidence” (i.e., the cited studies) to infer that the “ingredients in GNC’s TriFlex Products do not work as represented” and that the “representations [were] false.”[62]

Defendants GNC and Rite Aid filed a Motion to Dismiss,[63] arguing that the studies did not test the products (or specific combination of ingredients) at issue,[64] that no representations were made with regard to improving osteoarthritis symptoms, and that osteoarthritis patients were not an appropriate proxy for non-arthritic users, among other deficiencies. Regarding the osteoarthritis issue, Defendants specifically cited to the FDA disclaimer on all of the labels, which state that the products are “not intended to diagnose, treat, cure, or prevent any disease.”[65]

C. Decision Granting Motion to Dismiss

In spite of Plaintiffs’ allegations, District Court Judge J. Frederick Motz dismissed the Complaint with leave to amend. He found that Plaintiffs’ allegations regarding the “vast weight of scientific evidence” — in light of GNC’s study to the contrary — could not support the single conclusion that the claims are false.[66] Under the Twombly/Iqbal plausibility standard, there was a “fatal flaw” in the allegations of the CAC: it did not allege that “experts in the field” were prepared to testify that, on the basis of the existing scientific evidence, any reasonable expert would conclude from the cited studies that glucosamine and chondroitin are ineffective in non-arthritic consumers.[67] The “mere existence of a ‘battle of the experts’” was not proof of falsity, but was rather to be “expected.”[68] The following excerpt from Judge Motz’s Memorandum Decision provides an important glimpse into the Court’s reasoning:

“Disagreements between experts, even under the ‘reasonable degree of scientific certainty’ standard, are to be expected. In my judgment, however, the fact that one set of experts may disagree with the opinions expressed by other qualified experts does not ipso facto establish any violation of the applicable consumer protection laws. If there are experts who support what defendants say in their advertisements, the advertisements are not false and misleading . . . unless the clinical trial relied upon by defendants was itself false and/or deceptive.”[69]

In this passage, the Court referenced the “reasonable basis” standard that marketers must adhere to when preparing advertising claims (discussed later in Section III, supra). Stated briefly, if scientific evidence points in different directions, the reasonable basis standard will allow for inconsistent messaging. In a footnote to this excerpt, the Court addressed whether this is a burden of proof issue and concluded that it is not, based on the nature of the advertising claims in the case.[70] The Court contrasted the example to a product liability case, in which plaintiff must establish that a product is defective. There, Judge Motz said, it would be “entirely appropriate for a jury to decide the defect issue” based on expert testimony that, to a reasonable degree of scientific certainty, a product is defective.[71] This distinction is enormously significant for procedural and substantive reasons, reserving for juries their fact-finder role beyond false advertising cases.

By granting the Plaintiffs leave to amend their complaint, Judge Motz offered Plaintiffs an opportunity to revive their claim for literal falsity. He specifically instructed that Plaintiffs must plead that the clinical trial relied on by GNC (1) did not exist at all, (2) exists but did not support any of GNC’s representations about TriFlex, or (3) exists and supports the assertions on TriFlex Fast-Acting’s bottle, but was not conducted in an appropriately scientific manner.[72] Only under such a pleading could the Court infer, on the face of the complaint, that the products are ineffective as to non-arthritic users. Otherwise, if at least one expert supported what GNC and Rite Aid said in their ads, the advertisements could not be false.[73] Plaintiffs could only file an amended complaint if they could do so in accordance with Fed. R. Civ. P. 11, which requires sufficient due diligence to avoid sanctions.[74] Absent such a pleading, Plaintiffs’ claim of falsity would not be facially plausible.

Six days after the Motion to Dismiss was granted, GNC’s counsel sent plaintiffs a letter contending that “qualified experts” support the TriFlex and Rite Aid products’ claims.[75] Plaintiffs rejected the opportunity to amend, and instead filed a motion for reconsideration on the basis of the existing complaint.[76] Judge Motz denied the motion and reiterated the rationale presented in the Memorandum Decision. Regarding policy, he added one additional reason to his earlier holding: It would be unfair to consumers who wish to gamble on glucosamine and chondroitin if lay juries could effectively ban the sale (or artificially raise its pricing) simply because evidence of their effectiveness is inconclusive.[77] Plaintiffs appealed to the Fourth Circuit.

D. Plaintiffs’ Appeal

After oral argument before a three-judge panel, the Fourth Circuit unanimously affirmed the District Court’s decision in favor of GNC.[78] The Fourth Circuit inexplicably held that “plaintiffs must allege that all reasonable experts in the field agree that the representations are false.”[79] In other words, a single expert in disagreement bars a statement from being literally false. In the Court’s words:

“[I]n order to state a false advertising claim on a theory that representations have been proven false, plaintiffs must allege that all reasonable experts in the field agree that the representations are false. If plaintiffs cannot do so because the scientific evidence is equivocal, they have failed to plead that the representations based on this disputed scientific evidence are false.”[80]

Under the Fourth Circuit’s test, “the question of falsity hinges on the existence (or not) of scientific consensus.”[81] Scientific experts may — and often do — disagree about the truthfulness of a statement, but equivocalness is not falsity.[82] Regarding Plaintiffs’ argument that a “battle of the experts” could not be resolved on the pleadings, the Court retorted:

“When litigants concede that some reasonable and duly qualified scientific experts agree with a scientific proposition, they cannot also argue that the proposition is ‘literally false.’ Either the experts supporting the Companies are unreasonable and unqualified (in which case, there is no real battle of the experts to begin with) or they reflect a reasonable difference of scientific opinion (in which case the challenged representations cannot be said to be literally false).”[83]

Indeed, by characterizing the dispute as a “battle of the experts,” the Court held that Plaintiffs (inadvertently) conceded that “a reasonable difference of scientific opinion exists as to whether glucosamine and chondroitin can provide the advertised joint health benefits.”[84] The Fourth Circuit also responded to Plaintiffs’ concern that manufacturers might hide behind so-called experts in proffering dubious marketing claims, relying on the Federal Rules of Evidence to ensure relevant and reliable scientific testimony.[85]

Part III: Legal and Policy Considerations

A. Law Professors’ Amicus Brief, with Rebuttal

After the Circuit Court handed down its GNC decision, sixteen prominent law professors submitted an Amicus Brief for the Plaintiffs in support of rehearing.[86] The Amici describe their interest in the case as “promoting truth in advertising, which protects consumers and promotes fair competition.”[87] In the eight-page brief, the law professors[88] supported Plaintiffs’ petition for rehearing and criticized the Fourth Circuit’s decision. The Amici argued that the Fourth Circuit “erred when it disregarded binding precedent” to produce a ruling with adverse procedural and substantive consequences. They further argued that questions of falsity cannot be resolved on the pleadings; instead, the fact finder (presumably a jury) should evaluate competing experts and pools of scientific evidence to determine the truth of a claim.

The brief is problematic in numerous respects. Specifically, the Amici (i) misstate the legal standards in falsity cases, (ii) misstate the nature of “binding” precedent, (iii) mischaracterize the nature of scientific evidence, and (iv) fail to appropriately consider the impact of the suggested alternative on jury instructions. This Note argues that the Amicus Brief, as well as the alternative outcome that Amici support, is a less persuasive answer to the truth-in-advertising dilemma presented by the GNC case. Instead, the Amici’s criticism offers insight into the utility and strengths of the Fourth Circuit’s logic. This section presents the Amici’s arguments and responds to points addressed in their brief.

1. Inaccurate Legal Standards

The Amicus Brief begins with a “Summary of Argument” that describes the purported standard in literal falsity cases: “Literal falsity is about how an advertisement is received by consumers. The adjectives ‘literal,’ ‘explicit,’ and ‘implicit’ (and falsity ‘by necessary implication’) describe consumer reaction to a message, which is either proved by evidence such as surveys or presumed as a matter of law.”[89] The italicized portions of this excerpt are problematic and, pun intended, literally false. First, literal and explicit claims are not assessed on the basis of consumer perception; rather they are accepted as literal messages. Second, literal and explicit claims are evaluated based on underlying substantiation, such as scientific testing, regardless of the message received by consumers. These important doctrinal and evidentiary distinctions are reviewed in Section I and, briefly, below.

As mentioned in Part I, infra, two modes of advertising are liable under Section 43(a): advertising that is false, and advertising that is misleading. Within the umbrella of false advertising, courts have generally recognized two types of falsity: (i) advertising that is literally false (based on a clear and explicit misrepresentation of fact), and (ii) advertising that is false by necessary implication (based on a claim that, considered in context, necessarily and unambiguously implies a message). Neither case requires surveys or other proof of consumer deception. Amici’s emphasis on “consumer reaction to a message” and “surveys” is misplaced, as both of those issues are irrelevant to a finding of literal falsity.

Amici then describe an example of a potentially misleading representation: “Vitamin B7 can remedy hair loss.” Since implied messages can convey multiple messages to the buying public, evidence of consumer confusion is required to determine which message consumers are receiving. While a discussion of misleading advertising can be helpful for comparison purposes, it is not relevant in the GNC case. First, the TriFlex claims at issue are literal and explicit: for example, “promotes joint mobility and flexibility” and “protects joints from wear and tear of exercise.” Second, there was no survey evidence of the messaging received by consumers, which would be required to sustain a cause of action for misleading representations.[90]

There are subsequent discussions regarding advertising that is false by necessary implication.[91] While actionable, this mode of deception is also irrelevant to the GNC case. The claims at issue on the TriFlex label are clear and explicit. Advertisements that are false by necessary implication do not involve an explicit statement of fact, but rather an unambiguous assumption that follows from a claim. Consider a comparison to the claims at issue in DIRECTV v. Time Warner Cable, discussed in Part I.C., infra. In that case, the court considered other words and images within the context of the statement that “settling for cable would be illogical;” the necessary implication was that settling for cable would be illogical because DIRECTV offers superior picture quality (it did not). The clear and explicit TriFlex claims simply do not fit into this category of consumer deception.

2. Misstatement of Precedent

The Amicus Brief continues with a citation to “binding precedent,” namely C.B. Fleet Co. v. SmithKline Beecham Consumer Healthcare, L.P., which the Fourth Circuit courts allegedly “disregarded” in dismissing the GNC case. In the opening paragraph of the Amicus Brief’s “Argument,” Amici state: “This Court has repeatedly held that both inquiries involve questions of fact. C.B. Fleet Co. v. SmithKline Beecham Consumer Healthcare, L.P., 131 F.3d 430, 434 (4th Cir. 1997) (“Whether an advertisement is literally false is an issue of fact.”).” This is both a mischaracterization of the holding as well as the case’s precedential value.

Amici appropriately classify C.B. Fleet as a literal falsity case.[92] At issue were “improved design” and “comparative superiority” claims for SmithKline’s new model of a feminine hygiene product. The Amici presumably provide this quotation in support of the alternative outcome they propose: factual disputes, such as a battle of the experts, should be reserved for juries. However, this proposition is conceptually distinct from the “issue of fact” identified by the C.B. Fleet Court. In C.B. Fleet, the Fourth Circuit was reviewing the district court’s determinations of falsity on appeal; the quote provided by Amici stands for the proposition that district courts, in their fact-finding role, are given deference in reaching such conclusions.[93] Furthermore, there is a citation following the C.B. Fleet reference — omitted without acknowledgment in the Amicus Brief — to L&F Prods. v. Procter & Gamble Co., 45 F.3d 709, 712 (2d Cir. 1995). That underlying authority from L&F Products states as follows: “The district court’s determination with respect to facial falsity is a finding of fact which we review for clear error.”[94] In both C.B. Fleet and L&F Products, the “issue of fact” is raised with respect to the deference due to district courts, rather than juries’ roles in resolving factual disputes.

In fact, the definition of falsity in C.B. Fleet does not conflict with the determination made in GNC. However, there remains a crucial factual difference between the cases. As the GNC Court noted, plaintiffs were given leave to amend the Consolidated Amended Complaint to plead that GNC’s study (1) did not exist at all, (2) existed but did not support any of GNC’s representations about TriFlex, or (3) existed and supported the assertions on TriFlex Fast-Acting’s bottle, but was not conducted in an appropriately scientific manner. The Court specifically instructed that plaintiffs could not rely on the “vast weight of the evidence” to prove falsity. In C.B. Fleet, plaintiff met this burden, challenging the scientific reliability of SmithKline’s testing procedures. In GNC, by contrast, plaintiffs twice relied on the “weight of the evidence” without attacking GNC’s testing – even after a second bite at the apple.

Although the Amici state that the Fourth Circuit has “repeatedly held that [the falsity inquiry] involve[s] questions of fact,” only C.B. Fleet is offered as support. One might reasonably expect a string cite supporting such an assertion. While the Fourth Circuit cemented a new rule for the meaning of literal falsity in supplement cases, its definition is hardly inconsistent with “binding” and “disregarded” precedent. In fact, the issue presented in GNC was a matter of first impression before the Court. While Amici’s proposal is a permissible solution to the GNC question, it is neither required by precedent nor, as this Note argues, able to achieve a better outcome on policy grounds. The Fourth Circuit’s ruling is a novel but befitting solution to truth-in-advertising questions in the dietary supplement industry.

3. The Nature of Scientific Evidence

The most persuasive portion of the Amicus Brief comes in the form of a hypothetical regarding the medical cause of ulcers. Amici present the following scenario: In 1910, a doctor would have said that stress and diet caused stomach ulcers, and that bacteria did not. We now know that this is untrue; the bacterium H. pylori — not stress and diet — causes many stomach ulcers. [95] The Amici use this illustration to argue that, despite expert support for a claim, it may be false. The fear is that corporate defendants may insulate themselves from lawsuits by hiding behind one unreliable study. This illustration lends support to Amici’s claim that experts are not infallible, and perhaps that juries serve as a valuable check on expert elitism.

Understood another way, the ulcer hypothesis could be marshaled in support of the Fourth Circuit’s ruling. Indeed, scientific knowledge is always a work in progress, and our understanding of medical issues is constantly evolving in the face of new research and methodology. Consider an alternative analysis of the ulcer illustration. In 1910, the majority of doctors, based on our understanding of ulcers at the time, would have said that the claim that bacteria cause ulcers is literally false. In the decades that followed, medical explanation for ulcers changed in light of evolving research. By 1950, the weight of scientific evidence would indicate that bacteria do, in fact, cause ulcers. Today, it is scientific truth that H. pylori is the culprit behind stomach ulcers — a proposition that would have been literally false in 1910 if the “vast weight of scientific evidence” set the standard in falsity cases.

The point is that the minority opinion in a scientific debate may turn out to be correct. The GNC holding corrects for the mistaken understanding that a minority position is wrong simply because it is not supported by a majority of scientists at that time. In a 1910 jury trial, the jury would likely — and incorrectly — have discounted the minority position because it would not meet the preponderance of the evidence standard. Then, the question becomes, why should we let a jury decide such matters? In the ulcer case, how and why would a jury have reached a better result?

The Fourth Circuit recognized a key difference between claims that, in light of the existing scientific evidence, are inherently false, as opposed to claims that are reasonably debatable. The GNC standard is most receptive to the changing nature of scientific evidence and techniques. Until consensus among duly qualified and reasonable experts emerges around the veracity of a claim, it would simply be premature to rule out the minority opinion as false. The ulcer anecdote, perhaps inadvertently, stands for this proposition.

Amici would likely retort that the GNC rule too easily insulates corporate advertisers, hiding behind a single study, in literal falsity cases. However, as the GNC Court noted, plaintiffs remain protected due to the rules of evidence and by alternative causes of action. As Judge Floyd explained, “Plaintiffs remain protected from dubious experts by the Federal Rules of Evidence, which ‘ensure that any and all scientific testimony…is not only relevant, but reliable.’” The importance of relevant and reliable scientific testing cannot be overstated, since plaintiff must prove that no reasonable scientific expert could find merit in the advertiser’s claims. The Fourth Circuit is careful to rule out quackery as a source of substantiation. If no reasonable study exists in support of a proposition, then the plaintiff meets their burden of proof in literal falsity cases. Additionally, Judge Floyd noted that “[p]laintiffs who cannot meet the burden of proving literal falsity may avail themselves of a claim regarding misleading representations.” This is helpful to plaintiffs who cannot or do not challenge the scientific legitimacy of a claim, but consider the messaging to consumers to be deceptive. Plaintiffs may then rely on survey evidence to establish consumer deception or confusion regarding an ad claim.

4. Jury Instructions

Finally, a crucial issue is not addressed in the Amicus Brief, but is relevant to the alternative outcome that Amici support: if the GNC case were assigned to a jury, what would the jury instructions look like? Juries undeniably serve an important fact-finding role in courtrooms across the United States, but play no part in the GNC story. Amici aptly draw attention to this procedural predicament, but serious questions remain if a panel of jurors would have reached a better outcome in the glucosamine case.

GNC is procedurally significant because the Court ruled, on a motion to dismiss, that a literal falsity case could be resolved on the pleadings. The Fourth Circuit articulated a very specific pleading standard with respect to plausibility in falsity cases. To recall, future plaintiffs must allege that no reasonable study (or scientist) exists or supports the challenged advertising claims; reliance on the so-called “vast weight of evidence” is insufficient to survive a motion to dismiss. In so ruling, the Fourth Circuit held that a jury would not resolve conflicting disagreements among experts.

One could say, as Plaintiffs argued, that a battle of opinions among qualified and competent experts creates a genuine issue of material fact, and that juries can handle highly technical scientific evidence. The involvement of juries seems even more urgent when considering the resource limitations of the FTC and FDA. GNC’s resolution at the plausibility stage usurped the jury of its central province,[96] and corporate defendants can more easily evade liability from the FTC, FDA, and courts alike.

While plaintiffs’ argument prevails in principle, it has less purchase in practice. When there is reasonable evidence on both sides of a scientific controversy, why should six jurors decide if a product cannot be sold or advertised? Reserving judgment for juries beyond the pleadings stage would overestimate juries’ abilities to resolve highly technical scientific controversies. However, if plaintiffs plead issues related to the credibility or reliability of the defendant’s studies (which the GNC plaintiffs did not), a jury’s intervention seems far more befitting. In such case, if the evidence on one side is unreliable, there is no “battle of the experts” to begin with, and we can trust juries to side with the (only) party bearing substantiation. GNC preserves this crucial distinction beyond the pleadings stage.

Lastly, the GNC holding should be cabined to the dietary supplement area. Judges, academics (including Amici), and others would likely agree with this assertion. The GNC ruling does not rob the jury of its fact-finder role in cases involving product liability, wrongful death, and related matters. The District Court specifically addressed this concern, distinguishing the question in GNC from other burden of proof issues. In the words of Judge Motz:

“I have considered whether the issue is one of burden of proof, and I have concluded that it is not. Rather, the basis of my holding lies in the nature of the claims asserted by plaintiffs that rely upon the falsity, deceptiveness, or unfairness of defendants’ advertisements. In contrast, for example, in a product liability case in which a plaintiff must establish that a product is defective, it would be entirely appropriate for the jury to decide the defect on the basis of expert testimony that, to a reasonable degree of scientific certainty, a product is defective.”[97]

As is evident in the Court’s language, the decision is meant to be narrowly construed, and this message appears to have been received by other courts. As of February 2018, the GNC holding has not been applied outside of advertising cases.

B. Additional Merits of the Fourth Circuit’s Decision

There is useful criticism of the GNC ruling from Amici and others.[98] On the one hand, the GNC ruling seems like a massive victory for corporate defendants — and a massive loss for consumer plaintiffs — on both substantive and procedural grounds. GNC arguably imposes a high hurdle on consumer plaintiffs in literal falsity cases; without alleging perfect scientific consensus or attacking defendant’s study, plaintiff’s case can no longer survive a motion to dismiss. But this is only part of the story.

Prior to the GNC decision, the question of what constituted false advertising during a period of scientific controversy was unanswered by the case law. Despite the prevailing criticism, the Fourth Circuit’s position is a persuasive solution to a previously unresolved legal dilemma. The arguments that follow address the policy merits of the GNC standard for literal falsity in supplement cases. Specifically, this Section argues that (i) the Fourth Circuit’s standard fits neatly into the patchwork of pre-existing consumer protection measures, namely those of the FTC and FDA, (ii) the decision promotes fair competition and preserves consumer choice, and (iii) the res judicata effect in these cases is limited, preserving opportunities for future plaintiffs to take a bite at the proverbial apple as scientific knowledge evolves.

1. FTC, FDA, and Fourth Circuit Parity

The falsity standard articulated in GNC is consistent with other consumer protection measures, namely, the FTC and FDA’s approaches to truth-in-advertising. The Fourth Circuit’s holding reflects the policy rationales underlying the FTC’s prior substantiation doctrine and the FDA’s disclosure regime. Both agencies, which are most directly involved in regulating consumer communications about supplements, would not take issue with the TriFlex ads.

Under the FTC’s advertising standards, the TriFlex claims are truthfully advertised. The FTC’s prior substantiation rule, discussed in Section I.B., states that an advertiser must have a “reasonable basis” for making objective claims and must “possess substantiation, prior to running the ad, for affirmative product claims.”[99] GNC cited to a particular study in its possession on the bottle of one of the TriFlex products. Plaintiffs nowhere alleged that GNC did not have a reasonable basis for making the joint health improvement claims; they failed to allege this deficiency even after the District Court granted them leave to amend their complaint. While the FTC has investigated other glucosamine-chondroitin products, the author has no information indicating that the FTC acted (or would need to act) with respect to the TriFlex claims.

GNC was also compliant with the FDA’s supplement labeling requirements, since each TriFlex label included the ingredients in each bottle, the standard disclaimer, and other required information. In broader perspective, the Fourth Circuit’s ruling is consistent with the FDA’s position on supplement labeling and advertising. Consider the evolution of the FDA’s approach to regulating the supplement industry. The 1906 Federal Food and Drugs Act used the label as a tool to empower consumers to have a much better conception of what they were putting into their bodies. In the 1930s, the FDA confronted the question of allowable representations in the face of scientific uncertainty, further extending the “informative labeling” approach: representations could be made, even if not reflective of the consensus of scientific opinion, as long as there was reliable scientific basis behind them. In such cases, the statements would have to be qualified with a disclaimer that reliable scientific opinion differed on such claims.[100] The goal was to preserve freedom of consumer choice, with the agency’s primary concern being the safety of the products. The Fourth Circuit’s ruling follows the hands-off approach that the FDA has taken towards safe and properly labeled dietary supplements.

Sources of truth-in-advertising law are too numerous to recount here, but the Fourth Circuit’s position achieves congruity across axes. Both the District Court and the Fourth Circuit interpreted the state consumer protection laws similarly; the fact that the laws come from different states is a distinction without a difference.[101] The overall objective of these statutes remains the same: protecting consumers from false and misleading advertising. It seems reasonable that a federal court seeking guidance on false advertising issues would look to the Lanham Act on regulating advertising and consumer communications. In view of these considerations, an ad that is false under the Lanham Act should likewise be deemed false under a state consumer deception statute. Furthermore, both industry and consumers benefit from consistent interpretations of state consumer protection statutes, which provide adequate notice to both parties about pleading requirements and possible defenses.

2. Fair Competition and Consumer Choice

Over the last decade, dozens of false advertising lawsuits have been brought against purveyors of glucosamine-chondroitin. The claims typically reflect the conventional wisdom about improving joint health and flexibility, just as GNC’s TriFlex did. These cases across the United States are undoubtedly expensive for advertisers to defend. Ultimately, the price is borne by the consumer who continues to “gamble” on glucosamine because, in her subjective opinion, it works. Both GNC decisions consider this economic dimension, limiting litigation beyond the motion to dismiss stage for cases in which there are two legitimate medical understandings of a supplement’s efficacy. Furthermore, from a policy perspective, it seems unadvisable to “put out of business” an approach for which there is a sound medical view.

As Judge Motz aptly noted in his Memorandum Decision, “It is unfair to consumers who wish to gamble that glucosamine and chondroitin may be effective if lay juries can effectively ban the sale of glucosamine and chondroitin simply because the evidence of their effectiveness is inconclusive.” Satisfied consumers are free to purchase the products, and dissatisfied consumers are, of course, free to seek alternatives. Unlike drugs, which operate under completely different advertising standards, consumers are not required to take supplements. The perspective of jurors adds no value to this highly individual decision. The Court continued: “After all, damage awards and even the cost of defending against high stakes litigation has the effect of increasing the cost of glucosamine/chondroitin pills or, potentially, driving the pills from the market. Should those who choose to purchase the pills have to pay more for them (or be deprived of the opportunity to purchase them at all) when the science is uncertain merely because juries disagree with their own judgment about the pills’ efficacy?”[102]

In addition to preserving consumer choice, the GNC ruling respects that whether the supplements work is an enormously subjective inquiry. In another case involving glucosamine-chondroitin products, the court neatly summarized the dilemma:

“The health and comfort of joints is probably influenced by a number of variables. Did [plaintiff] keep all of them constant, adjust for ones that can’t be kept constant (like aging), and then somehow have her cartilage and joints examined? Did she keep precise records of how much [glucosamine-chondroitin] she took, why she took it, and just how long she took it for? Can she document what her physical condition was before and after she took [glucosamine-chondroitin]? Probably not. What’s more likely is that she took [glucosamine-chondroitin] casually and just didn’t feel much better, but that makes her own claims just as speculative as she alleges [the supplement’s] benefits are.”[103]

We could, as Amici argue, send these cases to juries and let them decide if the minority view does not hold water. But should we? The Court asked and answered this very question, stating: juries serve as “a proper check on expert elitism. However, in this case the question is not whether the views of jurors should prevail over the views of asserted experts and judges. Rather the question is whether the views of jurors should prevail over the views of those who choose to purchase glucosamine/chondroitin pills. What is ‘democratic’ in one instance may be tyrannical in another. . . .”[104]

Finally, there is a hidden narrative beneath these lawsuits. At first glance, it may seem that consumers are fired up about wasting money on useless products. However, a closer look at the court dockets suggests an alternative story: many of the glucosamine-chondroitin lawsuits seem to be brought by the same lawyers, not consumers. Bonnett, Fairbourn and Denlea & Carton have been heavily involved in various glucosamine-chondroitin product lawsuits. The results have been lucrative for law firms. In the Plaintiffs’ Memorandum supporting its Motion for Reconsideration, counsel noted “at least three nationwide settlements against manufacturers of similar joint relief supplements are in various stages of review.”[105] Should law firms be able to line their pockets from consumers’ purses? The FDA, FTC, state attorneys general, and corporate competitors are better safeguards of truth-in-advertising than plaintiffs’ firms would care to admit.

3. Res Judicata Effects

Critics of the GNC ruling may rest assured that claim preclusion in false advertising cases is limited to the named plaintiff(s). The res judicata effect does not bind anyone to the result aside from the person or persons who brought the suit. If a party sued GNC for its TriFlex claims in Texas today, nothing is settled, and the court is well within its discretion to hear the case. It is particularly important to preserve these opportunities for litigation as scientific knowledge evolves and the conventional wisdom shifts.

On the other hand, the limits of the res judicata effects in these cases reveal a troubling pattern. As mentioned previously, there have been dozens of lawsuits across the United States involving glucosamine-chondroitin supplements, many of which were brought within the last ten years. These cases, which have not utilized the GNC pleading standard, have resulted in disparate verdicts and settlements. For example, the glucosamine-chondroitin cases in California have come out all over the place: it is entirely possible that a Los Angeles jury would find the claims to be truthful, and a jury in San Francisco would deem them falsely advertised. As a result, glucosamine products may bear dissimilar advertising claims depending solely on the location where the product is purchased. This result seems arbitrary and premature, given the conflicting scientific evidence on the claims at issue.

Conclusion

During periods of scientific controversy, how should advertisers, regulators, and courts address truth-in-advertising dilemmas? As the GNC case has shown, this is a complex and interesting issue that is worth examining. The Fourth Circuit’s answer to this question is a fair and reasonable standard, relying on expert consensus to establish literal falsity. While respected academics and courts have greeted the Fourth Circuit’s ruling with caution, advertisers and consumers may be more satisfied with its outcome. Corporate defendants are once again reminded of the prior substantiation requirement in articulating advertising claims and can, with assurance, hang their hats on reasonable scientific testing. Consumers enjoy the continued availability of supplements that, in their subjective opinions, provide symptom relief – without paying for the extra costs associated with consumer class actions. Consumer plaintiffs are also given clear guidance on surviving a motion to dismiss, as the Fourth Circuit neatly articulated the pleading requirements in alleging literal falsity.

The novelty and significance of the GNC decision are only beginning to be understood, but it offers compelling policy advantages to proposed alternatives. The Fourth Circuit’s ruling fits into the preexisting patchwork of consumer protection measures, announcing similar principles to the FTC’s substantiation theory and the FDA’s disclosure theory of liability. The solution is well suited to the nature of scientific evidence, which is continually changing in response to new research and technology. It is hard to argue that, if qualified scientists disagree about the efficacy of a dietary supplement, lay juries would achieve a better outcome in determining truth from falsity. Elevating the opinions of six jurors over experts and consumers does not provide any more certainty in arriving at the truthful result.

Questions remain about what impact, if any, the GNC decision should have on false advertising law. The author hopes that this unanimous decision by a panel of respected appellate judges will receive thoughtful consideration. In broader perspective, the standard does no damage to the existing falsity doctrines, and can be carefully confined to the dietary supplement space. The new standard articulated in GNC may seem like a big pill to swallow, but it is an effective remedy to the truth-in-advertising question that plagued the dietary supplementary industry.


*J.D. Candidate, New York University School of Law, 2018; B.A., Political Science, Columbia University, 2011. The author would like to thank Kenneth A. Plevan for his guidance and support, as well as the invitation to explore this research topic. She thanks Professor Barton Beebe, her faculty advisor, for his edits and insights, and her fellow JIPEL Notes Program participants: Julian Pymento, Ryan Jin, Vincent Honrubia, and Neil Yap.

[1] National Institutes of Health, Dietary Supplements: What You Need To Know, U.S. Dep’t of Health & Hum. Servs. (June 17, 2011), https://ods.od.nih.gov/HealthInformation/DS_WhatYouNeedToKnow.aspx.

[2] See National Institutes of Health, Multivitamin/mineral Supplements: Fact Sheet for Health Professionals, U.S. Dep’t of Health & Hum. Servs. (July 8, 2015), https://ods.od.nih.gov/factsheets/MVMS-HealthProfessional/ (“In 2014, sales of all dietary supplements in the United States totaled an estimated $36.7 billion.”).

[3] See Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505 (4th Cir. 2015), reh’g denied Ct. Order Den. Mot. for Reh’g and Reh’g En Banc (July 27, 2015), ECF No. 47.

[4] There is a well-publicized association between glucosamine-chondroitin and joint health. An article on WebMD states that the natural glucosamine in our bodies “helps keep up the health of your cartilage – the rubbery tissue that cushions bones at your joints.” As we age, levels of the natural compound begin to drop, which leads to the gradual breakdown of the joint. WebMD reports that there is “some evidence” that glucosamine sulfate supplements help counteract this problem, though experts “aren’t sure how.” There are a plethora of glucosamine supplements advertising joint health benefits, such as Osteo Bi-flex and Nature’s Bounty glucosamine-chondroitin compound. The widespread use of glucosamine-chondroitin has even reached our pets, with supermarket giant Trader Joe’s and others proffering a line of the supplement for dogs. Is Glucosamine Good for Joint Pain?, WebMD (Jan. 17, 2018), https://www.webmd.com/vitamins-and-supplements/supplement-guide-glucosamine.

[5] The glucosamine-chondroitin lawsuits are too numerous to list here, but are discussed later in Section III.B. See, e.g., Lerma v. Schiff Nutrition Int’l, Inc., No. 11-cv-1056 (S.D. Cal. filed May 13, 2011); Padilla v. Costco Wholesale Corp., No. 11-C-7686 (N.D. Ill. filed Oct. 28, 2011); Quinn v. Walgreen Co., No. 12-cv-8187 (S.D.N.Y. filed Nov. 9, 2012). According to TruthInAdvertising.org, at least nine class action lawsuits had been filed by October 2013 claiming that companies were falsely marketing the health benefits of glucosamine supplements. Consumers Claim This Joint Is Not Jumping, Truth in Advertising Organization (Oct. 22, 2013), https://www.truthinadvertising.org/consumers-claim-joint-jumping/. Some of the lawsuits have resulted in settlements. See, e.g., McCrary v. The Elations Company, LLC, No. 13-cv-00242 (C.D. Cal. filed Feb. 07, 2013); Pearson v. NBTY, Inc., No. 1:11-cv-07972 (N.D. Ill. filed Nov. 09, 2011). Additionally, there is no indication that these lawsuits will stop being filed. As of December 2017, glucosamine-chondroitin is still a hot topic in false advertising. According to a consumer class action blog, plaintiffs’ firms have commenced investigations into Osteo Bi-flex, Schiff Move Free and Glucosamine, Walmart’s Spring Valley Glucosamine, and Nature Made Triple Flex, among others. Tracy Colman, Different Brands of Glucosamine Chondroitin May Be Falsely Advertised, Top Class Actions (Dec. 21, 2017), https://topclassactions.com/lawsuit-settlements/lawsuit-news/828289-different-brands-of-glucosamine-chondroitin-may-be-falsely-advertised/.

[6] It is the author’s suggestion that the facts of these cases offer support for the latter. Section III.B. offers commentary on this aspect of the glucosamine lawsuits.

[7] Procedurally, these cases are as complex and interesting as the ruling itself. Ultimately, according to the Fourth Circuit’s order, there were five GNC plaintiffs (Howard, Toback, Lerma, Calvert, and Gaatz) and three Rite Aid plaintiffs (Flowers, George, and Gross). GNC, 789 F.3d at 509 n.1. The underlying lawsuits were consolidated in the U.S. District Court for the District of Maryland. The consolidated cases are docketed as: Howard v. GNC Corp., No. 14-cv-00002 (D. Md. filed Jan. 3, 2014); Toback v. GNC Holdings, Inc., No. 14-cv-00122 (D. Md. filed Jan. 14, 2014); Lerma v. GNC Corp., No. 14-cv-00120 (D. Md. filed Apr. 18, 2013); Calvert v. GNC Corp., No. 14-cv-00123 (D. Md. filed Jan. 16, 2014). The Rite Aid product case was Flowers v. Rite Aid, No. 14-cv-00465 (D. Md. filed Feb. 18, 2014). Flowers was effectively a lawsuit against GNC, as the products at issue were manufactured for Rite Aid by GNC, and GNC was contractually obligated to indemnify Rite Aid for the claims at issue in the litigation. Consolidated Amended Complaint at ∂ 2, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No.20. To the best of the author’s knowledge, GNC did not contest this assertion. There are multiple related lawsuits that were resolved separately, such as Galvin v. GNC, No. 14-cv-00810 (D. Md. filed Mar. 21, 2014). Although Brown v. GNC Corp., No. 13-05890 (N.D. Cal. filed Dec. 19, 2013), was also transferred to the district court by the Multidistrict Litigation Panel, the Consolidated Amended Complaint does not include Yvonne Brown (the plaintiff in that action) among the named plaintiffs. GNC, 789 F.3d at 509 n.2. Galvin was voluntarily dismissed in October 2015, and therefore did not proceed with the other consolidated cases.

[8] Warren Teichner & Megan Lesko, Cashing in on the booming market for dietary supplements, McKinsey & Company Marketing & Sales Insights (Dec. 2013), https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/cashing-in-on-the-booming-market-for-dietary-supplements.

[9] Council for Responsible Nutrition, The Dietary Supplement Consumer: 2015 CRN Consumer Survey on Dietary Supplements, CRN USA (2015), http://www.crnusa.org/CRNconsumersurvey/2015/.

[10] Country Report: Vitamins in the US, Euromonitor International (Nov. 2017), http://www.euromonitor.com/vitamins-and-dietary-supplements-in-the-us/report. This insight into the brutally competitive landscape offers some explanation for GNC’s insistence on keeping its joint health tag line. Marketing and advertising claims, such as “promotes joint health,” are valued shortcuts for consumers as they navigate supplement shelves. The alternative is a sea of supplements that are labeled and identified solely by their active ingredient(s), like a bottle that simply reads “Vitamin D” or “Glucosamine-Chondroitin” on the front, without further description of health benefits. A consumer who is unfamiliar with glucosamine-chondroitin may not buy the product, were it not for the “promotes joint health” byline. The explanation provides quick information and incentive to buy.

[11] See National Institutes of Health, supra note 2.

[12] FDA 101: Dietary Supplements, U.S. Food & Drug Admin. (Nov. 6, 2017), http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm050803.htm.

[13] Id.

[14] See National Institutes of Health, supra 2.

[15] For more information about the FDA and FTC’s roles in policing supplement labeling and advertising, see Section I.B., infra.

[16] Kenneth A. Plevan, Recent Trends in the Use of Surveys in Advertising and Consumer Deception Disputes, 15 Chi.-Kent J. Intell. Prop. 49, 61 (2016) (commenting on the “recent explosion of consumer deception lawsuits brought as putative class actions, filed by private plaintiffs under state consumer protection laws . . .”); see also Theodore V.H. Mayer, Recent Developments and Current Trends in United States Class Action Law, 826 PLI/Lit 313, 325 (May 24, 2010) (citing Federal Judicial Center, The Impact of the Class Action Fairness Act of 2005 on the Federal Courts 4 (4th interim report, 2008)) (“Among the most remarkable trends from the period between 2001 and 2007 [was] . . . the continuing growth of consumer-protection or consumer-fraud class actions, which increased by more than 150 percent and now account for 20 percent of all federal class actions.”) Private plaintiffs have increasingly availed themselves of consumer protection statutes. According to one study of over 17,000 reported federal district and state appellate decisions, “[b]etween 2000 and 2007 the number of [consumer protection act] decisions reported in federal district and state appellate courts increased by 119%. This large increase in CPA litigation far exceeds increases in tort litigation as well as overall litigation during the same period.” See Searle Civil Justice Institute, State Consumer Protection Acts: An Empirical Investigation of Private Litigation Preliminary Report (Dec. 2009). An additional concern is the “double litigation” frontier: “There is nothing to prevent a private litigant from filing suit against a consumer product advertiser or manufacturer after a federal regulatory agency, such as the Federal Trade Commission, takes action against the same company and obtains full monetary redress for consumers.” Dana Rosenfeld & Daniel Blynn, The “Prior Substantiation” Doctrine: An Important Check On the Piggyback Class Action, 26 Antitrust 1, 68 (Fall 2011). Rosenfeld and Blynn state that there is an emerging trend of plaintiffs filing class action complaints that are “virtually identical to or rely heavily upon” FTC complaints or FDA warning letters. Id.

[17] Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505, 515 (4th Cir. 2015).

[18] Plaintiffs may seek redress from the Federal Trade Commission under the FTC Act, 15 U.S.C. §§ 41-58. Barton Beebe, Trademark Law: An Open-Source Casebook, Part IV, 2 (Jul. 20, 2017), http://tmcasebook.org/wp-content/uploads/2017/08/BeebeTMLaw-4.0-Introduction.pdf.

[19] Lanham Act § 43(a)(1)(B) is codified at 15 U.S.C. § 1125(a)(1)(B).

[20] The state consumer deception statutes are also known as “little” or “baby” FTC Acts. See Beebe, supra note 18.

[21] Denise E. DeLorme, Jisu Huh, Leonard N. Reid & Soontae An, Dietary supplement advertising in the US: A review and research agenda, 31 Int’l J. of Advert. 547, 555 (2012).

[22] See Beebe, supra note 18. See also Joshua M. Dalton & Jared A. Craft, What You Should Know About NAD False Advertising Claims, Law360 (Jan. 4, 2013), https://www.law360.com/articles/403099/what-you-should-know-about-nad-false-advertising-claims.

[23] Note that the FDA and FTC are agencies of different stature. Unlike the FTC, the FDA is not an independent entity of the U.S. government. The FDA is nestled under the Department of Health and Human Services and funded by the Department of Agriculture.

[24] Advertising Dietary Supplements, Consumer Healthcare Products Association, http://www.chpa.org/DS_Advertising.aspx (last visited Mar. 23, 2017).

[25] Rebecca Tushnet, Advertising and Marketing Law 1289 (3rd ed. 2014).

[26] U.S. Food & Drug Admin. Guidance for Industry: A Food Labeling Guide, (revised Jan. 2013), https://www.fda.gov/Food/GuidanceRegulation/GuidanceDocumentsRegulatoryInformation/LabelingNutrition/ucm2006828.htm.

[27] Mark Nichter & J.J. Thompson, For my wellness, not just my illness: North Americans’ use of dietary supplements, 30 Culture, Med. & Psychiatry 175, 176 (2006). Unlike drugs, supplements can be readily purchased without a prescription in a wide variety of brick-and-mortar stores and online.

[28] 15 U.S.C. § 45 (2012).

[29] Pfizer, Inc., 81 F.T.C. 23 (1972).

[30] Lesley Fair, Federal Trade Commission Advertising Enforcement, Fed. Trade Comm’n (revised Mar. 1, 2008), https://www.ftc.gov/sites/default/files/attachments/training-materials/enforcement.pdf; see, e.g., Brake Guard Products, Inc., 125 F.T.C. 138 (1998); ABS Tech Sciences, Inc., 126 F.T.C. 229 (1998).

[31] See, e.g., Removatron International Corp., 111 F.T.C. 206 (1988), aff’d 884 F.2d 1489 (1st Cir. 1989) (“adequate and well-controlled…clinical testing” is required to substantiate claims for hair removal product); Schering Corp., 118 F.T.C. 1030 (1994) (consent order) (tests and studies relied upon as “reasonable basis” must employ appropriate methodology and address specific claims made in the advertisement).

[32] Dietary Supplement Health and Education Act of 1994, Pub. L. No. 103-417, 108 Stat. 4325 (codified in scattered sections of 21 U.S.C.).

[33] Questions and Answers on Dietary Supplements, U.S. Food & Drug Admin., https://www.fda.gov/Food/DietarySupplements/UsingDietarySupplements/ucm480069.html (last updated Nov. 29, 2017).

[34] In its current form, section 43(a)(1)(B) states: (1) Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which — . . . (B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. 15 U.S.C. § 1125(a)(1)(B) (2018).

[35] See Beebe, supra note 18, at Part IV, 2.

[36] 134 S. Ct. 1377, 1395 (2014).

[37] Id. at 1389; see also J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 27.30 (5th ed. 2017).

[38] See Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505, 514 (4th Cir. 2015) (noting that, although consumers cannot invoke the protections of the Lanham Act, the “considerable body of federal common law construing the Act is instructive in construing the state laws at issue here”).

[39] Puffery is a safe harbor for advertisers who proffer exaggerated and unsupported (or, perhaps, unsupportable) claims. It is a non-actionable carve-out from the false advertising provisions of the Lanham Act, since the statements are typically so exaggerated that no reasonable consumer could be deemed to rely on them. To fall out of the test for false advertising, statements of puffery are not considered to be statements of fact; consequently, a plaintiff would fail to meet the first element of the test. Courts have different definitions of puffery. In Time Warner Cable, Inc. v. DIRECTV, Inc., the Second Circuit described one party’s internet ads as “inaccurate descriptions” of the television service, but “so grossly distorted and exaggerated that no reasonable buyer would take them to be accurate depictions.” 497 F.3d 144, 159 (2d Cir. 2007). In United Industries Corp. v. Clorox Co., “[p]uffery is ‘exaggerated advertising, blustering, and boasting upon which no reasonable buyer would rely and is not actionable under § 43(a).’” 140 F.3d 1175, 1180 (8th Cir.1998) (quoting Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1145 (9th Cir. 1997)). In other iterations, the puffery doctrine has protected purveyors of “The Best Beer in America,” In re Bos. Beer Co., 198 F.3d 1370 (Fed. Cir. 1999), “The Most Advanced Home Gaming System in the Universe,” Atari Corp. v. 3D0 Co., No. C 94-20298 RMW (EAI), 1994 U.S. Dist. LEXIS 8677 (N.D. Cal. May 16, 1994), and “Better Ingredients. Better Pizza,” Pizza Hut, Inc. v. Papa John’s Int’l, Inc., 227 F.3d 489 (5th Cir. 2005).

[40] Under National Basketball Ass’n v. Motorola, Inc., the test for materiality is whether the statement “misrepresent[s] an inherent quality or characteristic of a product.” 105 F.3d 841, 855 (2d Cir. 1997).

[41] Schick Mfg., Inc. v. Gillette Co., 372 F.Supp.2d 273, 276 (D. Conn. 2005).

[42] See Tushnet, supra note 25, at 259; see also Coca-Cola Co. v. Tropicana Prods., Inc., 690 F.2d 312, 317 (2d Cir. 1982) (“[T]he Court may grant relief without reference to the advertisement’s [actual] impact on the buying public.”), abrogated on other grounds by Fed. R. Civ. P. 52(a)(6), as recognized in Johnson & Johnson v. GAC Int’l, Inc., 862 F.2d 975, 979 (2d Cir. 1988).

[43] Consumer surveys are not valid supporting evidence in a falsity case, discussed further in Section I.B.2. The GNC case fits neatly within the question of literally false advertising, as the TriFlex ads and packaging presented explicit, unambiguous statements, and no evidence of consumer deception was presented. See generally GNC, 789 F.3d 505.

[44] See generally Coca-Cola, 690 F.2d 312.

[45] See Time Warner Cable, Inc. v. DIRECTV, Inc., 497 F.3d 144, 158 (2d Cir. 2007).

[46] Id. at 152.

[47] See id. at 158. Note that the Second Circuit ruled on numerous commercials and Internet ads in this case, and some of the district court’s opinion was reversed.

[48] Where an advertisement is literally true but misleading, the advertisement “has left an impression on the listener that conflicts with reality[;]” with proof of consumer confusion, the representations are considered misleading. See id. at 153.

[49] 661 F.2d 272 (2d Cir. 1981). See also 2-7 Gilson on Trademarks § 7.02 (2017).

[50] Carolyn L. Carter, Consumer Protection in the States: A 50-State Report on UDAP Statutes, 5 (Feb. 2009), http://www.nclc.org/images/pdf/udap/report_50_states.pdf.

[51] 2-7 Gilson on Trademarks § 7.02 (2017).

[52] Carter, supra note 50, at 5.

[53] See Kenneth A. Plevan & Angela Colt, Consumer Surveys: Certification, Bloomberg BNA Prod. Safety & Liab. Rep. 4 (Sept. 12, 2016).

[54] See Consolidated Amended Complaint at ∂ 26-35, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014) ECF No.20. For reference, the four GNC products at issue, according to the Plaintiffs, were TriFlex, TriFlex Sport, TriFlex Fast-Acting, and TriFlex Complete Vitapak. The six Rite Aid products at issue are Rite Aid Glucosamine/Chondroitin, Rite Aid Natural Glucosamine/Chondroitin, Rite Aid Glucosamine Chondroitin Advanced Complex, Rite Aid Glucosamine Chondroitin, Triple Strength + MSM, Rite Aid Glucosamine Chondroitin + MSM, and Rite Aid Glucosamine Chondroitin Advanced Complex with HA. The court does not distinguish between the GNC and Rite Aid brands, nor does it distinguish between the individual products at issue.

[55] See Consolidated Amended Complaint at ∂ 26-37, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. Jun. 20, 2014) ECF No.20; see also In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014). The claims on the labels, as presented by Plaintiffs and GNC, are as follows. The GNC TriFlex Dietary Supplement label contains “Maximum strength now with hyaluronic acid” and “Promotes joint mobility and flexibility.” The GNC TriFlex Sport label contains: “Protects joints from wear and tear of exercise,” “Maximum strength joint comfort for active individuals,” and “Clinical strength for daily long-term use.” TriFlex Fast-Acting label contains: “Now with a joint cushioning blend including hyaluronic acid and vitamin C,” “Maximum strength, fast-acting support – works in days,” and “Clinical strength for daily long-term use.” Lastly, the TriFlex Complete Vitapak label contains: “Maximum strength, fast-acting joint comfort – works in days,” “Rebuilds cartilage and lubricates joints,” and “Supports natural anti-inflammatory response.” The Rite Aid Glucosamine/Chondroitin Dietary Supplement label contains “helps rebuild cartilage and lubricate joints.” Each label contains an FDA disclaimer: “This statement has” or “these statements have” “not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.” It appears that the only product to include a “here’s proof” claim is TriFlex Fast-Acting. There is a reference to a scientific study that supports GNC’s representations: “Clinically studied doses of glucosamine and chondroitin combined with MSM and a proprietary herbal blend, which is shown to improve joint comfort and function. In a 12-week multi-center, randomized, double blind, placebo controlled study of 60 adults, subjects taking 250 mg/day of the GNC TriFlexTM Fast-Acting Blend showed statistically significant improvements in measures of joint function and joint flexibility within 30 days compared to subjects on placebo.”

[56] See Defendant’s Memorandum in Support of its Motion to Dismiss Class Action Complaint, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014) ECF No.38; see also Rebecca Tushnet, Fourth Circuit Destroys Literal Falsity, Rebecca Tushnet’s 43(B)log (June 30, 2015), http://tushnet.blogspot.com/2015/06/fourth-circuit-destroys-literal-falsity.html. The GNC study was not published or otherwise publicly available, and there is currently no law requiring such disclosure.

[57] Some of the state consumer protection laws at issue include the California False Advertising Law, § 17500, et seq. (“FAL”), the California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq. (“UCL”), the Florida Deceptive and Unfair Trade Practices Act, Fla. Stat. §§ 501.201, et seq. (“FDUTPA”), Illinois Consumer Fraud and Deceptive Business Practice Act, 815 Ill. Comp. Stat. 502/1, et seq. (“ICFA”), the New York Consumer Protection From Deceptive Acts and Practices Law, N.Y. Gen. Bus. Law § 349, et seq. (“NYGBL”), Ohio Rev. Code Ann. § 1302.26, the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1, et seq. (“NJCFA”), Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa. Stat. Ann. §§ 201-1, et seq. (“PUTPCPL”).

[58] In re GNC Corp. TriFlex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-120, 2014 U.S. Dist. LEXIS 84184 at *1 (D. Md. June 20, 2014).

[59] Consolidated Amended Complaint at ∂ 38, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014) ECF No.20.

[60] Id.

[61] The studies can be found in the Consolidated Amended Complaint at ∂∂ 39-48, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014) ECF No.20.

[62] Consolidated Amended Complaint at ∂ 32, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014) ECF No.20.

[63] Since this case is considered procedurally significant, it is important to say a word about the legal standard on a motion to dismiss. A Rule 12(b)(6) motion to dismiss challenges the legal sufficiency of a complaint. Fed. R. Civ. P. 12(b)(6); see also Presley v. City of Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006). The court has drawn a line between the “mere possibility” and “plausibility” that a defendant has acted unlawfully; plaintiff must meet the latter to survive a motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The issue is whether plaintiff has stated enough factual matter, rising above the speculative level, to warrant a claim for relief. To defeat a 12(b)(6) motion, a complaint’s factual allegations must be sufficient to “raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The complaint must contain “sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face.” Ashcroft, 556 U.S. at 678. The “mere possibility of misconduct” is insufficient to avoid dismissal. Id. at 679. Likewise, “[l]abels and conclusions” and “naked assertion devoid of further factual enhancement” will fail to show that plaintiff is entitled to relief. Id. at 678. Ultimately, Plaintiffs’ bare assertions were insufficient to establish that the representations are false.

[64] Notably, similar and even predicate cases challenging the efficacy of glucosamine-chondroitin had been dismissed on similar grounds. See, e.g., Toback v. GNC Holdings, Inc., No. 13-80526, 2013 U.S. Dist. LEXIS 131135, at *16 (S.D. Fla. Sept. 13, 2013) (“Plaintiff’s allegations regarding the inefficacy of glucosamine and chondroitin simply fail to address the efficacy of the TriFlex Vitapak’s multifarious composition in promoting joint health . . .”); Eckler v. Wal-Mart Stores, Inc., No. 12-727, 2012 WL 5382218, at *6 (S.D. Cal. 2012) (plaintiff’s studies did not assess the “overall formulation that’s behind the representations at issue,” and so “the Court would be left with no facts from which to infer that [defendant] is liable for false advertising.”).

[65] Defendants’ Memorandum in Support of their Motion to Dismiss Consolidated Amended Complaint at 5, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No.25.

[66] The Consolidated Amended Complaint repeatedly described the TriFlex advertising as “false, misleading, and reasonably likely to deceive the public.” Consolidated Amended Complaint, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No.20. However, to plead that an advertisement is misleading, the allegation must be supported by evidence of consumer confusion. Since Plaintiffs did not provide any evidence of consumer confusion, the Court appropriately limited its analysis to a claim of literal falsity.

[67] Memorandum at 7, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 38.

[68] Id.

[69] Id. (emphasis added).

[70] Id. at n.2.

[71] See id.; see also Memorandum at 4 n.4, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 51. The significance of this carve-out for advertising cases is discussed further in Part III, supra.

[72] Memorandum at 7, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 38. An obvious issue, then, becomes whether Plaintiffs could so allege without appropriate discovery. Judge Motz addressed this question in his second Memorandum Decision, denying the motion for reconsideration: “[I]f plaintiffs can specify discovery requests that would aid them in alleging the above facts, they should file a motion setting forth the discovery that they request. Presumably, however, if plaintiffs’ experts are of the view that no reasonable expert would reach the conclusion reached by the expert upon whom defendant relies, they are already, by virtue of their asserted expertise, in possession of the relevant factual information.” Memorandum at 5, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 51.

[73] Memorandum at 4, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 51.

[74] Memorandum at 8, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 38.

[75] Exhibit 1 to Plaintiffs’ Memorandum of Law in Support of Motion to Correct Mistake of Law Pursuant to F.R.C.P. 60, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 44-1.

[76] See Plaintiffs’ Motion to Correct Mistake of Law Pursuant to F.R.C.P. Rule 60, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 43; Plaintiffs’ Memorandum of Law in Support of Motion to Correct Mistake of Law Pursuant to F.R.C.P. 60, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 44.

[77] Memorandum at 4, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 51; see also Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505, 512 (4th Cir. 2015).

[78] There are some important differences between the District Court’s Memorandum Decision and the Fourth Circuit’s Order. First, the Court included alternative grounds for affirming the District Court, noting that Plaintiffs “failed to allege that all of the purportedly active ingredients in each product are ineffective at promoting joint comfort, health, and flexibility.” Second, the Fourth Circuit disagreed with Judge Motz that specific formulations of the GNC and Rite Aid products needed to be tested to assess the truth of the labels’ representations; instead, at the motion to dismiss stage, the scientific studies in the CAC could render the claim facially plausible. Lastly, the court found that the factual dispute regarding the effectiveness of glucosamine-chondroitin for non-arthritic users was not appropriate for resolution on a motion to dismiss. The Fourth Circuit declined to adopt the latter grounds for affirming the District Court’s Order. See Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505 (4th Cir. 2015).

[79] See GNC, 789 F.3d at 516.

[80] Id.

[81] Id. at 514 n.7.

[82] See generally id. at 515-16.

[83] Id. at 515.

[84] Id.

[85] Id.

[86] See Brief of Law Professors as Amici Curiae in Support of Plaintiffs-Appellants’ Petition for Rehearing and for Rehearing En Banc, and in the Alternative, for Modification of Opinion and Judgment, Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505 (4th Cir. 2015) (No. 14-1724) ECF No.45.

[87] Id. at 1.

[88] Professor Rebecca Tushnet, whose advertising textbook is extensively cited in this Note, appears to have been the lead academic on the Amicus Brief. It is co-signed with Brian Wolfman, then a Visiting Professor at Stanford Law School. Other Amici include Mark Lemley of Stanford Law School, Jessica Litman of the University of Michigan Law School, and Barton Beebe of New York University School of Law, who supervised this Note’s completion. Notably, Professor Eric Goldman of Santa Clara University School of Law is not a signatory to the Amicus Brief, although he co-authored the seminal textbook on advertising law, Advertising & Marketing Law, with Professor Tushnet.

[89] Brief of Law Professors as Amici Curiae in Support of Plaintiffs-Appellants’ Petition for Rehearing and for Rehearing En Banc, and in the Alternative, for Modification of Opinion and Judgment at 1-2, Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505 (4th Cir. 2015) (No. 14-1724) ECF No.45. The brief is inexplicably wrought with references to consumer messaging in literal falsity cases. As Amici later state, “To determine if an ad makes a false claim, a court must determine what message consumers will perceive . . . .”

[90] Perhaps there is some suggestion that Plaintiffs’ should have argued that the joint health claims were misleading, rather than literally false. The argument would appear to be that glucosamine-chondroitin is particularly attractive to osteoarthritis patients, who seek to alleviate the pain of their condition. Plaintiffs offered numerous studies that allegedly prove that glucosamine-chondroitin is not beneficial to osteoarthritis sufferers. On that basis, and with an allegation of consumer confusion, the claims could have been deemed misleading to a segment of consumers. However, a claim of misleading advertising would, too, seem to fail, as the District Court noted that “the TriFlex labels expressly disclaim any ability to ‘diagnose, treat, cure, or prevent any disease.” (citations omitted). In re GNC Corp. TriFlex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 at *3-4 (D. Md. June 20, 2014).

[91] Brief of Law Professors as Amici Curiae in Support of Plaintiffs-Appellants’ Petition for Rehearing and for Rehearing En Banc, and in the Alternative, for Modification of Opinion and Judgment at 5, Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505 (4th Cir. 2015) (No. 14-1724) ECF No.45.

[92] Id at 2.

[93] In the discussion that follows that quote, the C.B. Fleet Court states: “Fleet challenges the district court’s determinations of no literal falsity on the grounds that the court imposed upon Fleet a wrong– overly stringent– ‘burden of proof’ on the issue, and, relatedly, that both of the ultimate fact findings were clearly erroneous[;]” “[W]e think that whether an advertising claim implicitly, though not expressly, asserts that it is test-validated must be considered a question of fact whose resolution is subject to clearly erroneous review[;]” “Our standard of review of district court fact findings is greatly deferential under controlling authority[]” (emphasis added). C.B. Fleet Co. v. SmithKline Beecham Consumer Healthcare, L.P., 131 F.3d 430, 434-436 (4th Cir. 1997).

[94] L&F Prods. v. Procter & Gamble Co., 45 F.3d 709, 712 (2d Cir. 1995).

[95] Brief of Law Professors as Amici Curiae in Support of Plaintiffs-Appellants’ Petition for Rehearing and for Rehearing En Banc, and in the Alternative, for Modification of Opinion and Judgment at 3, Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505 (4th Cir. 2015) (No. 14-1724) ECF No.45.

[96] Plaintiffs’ Reply Memorandum of Law in Further Support of Motion to Correct Mistake of Law Pursuant to F.R.C.P. 60 at 4, In re GNC Corp. TriFlex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014) ECF No.50.

[97] Defendant’s Memorandum in Support of its Motion to Dismiss Class Action Complaint at n.2, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014) ECF No.38.

[98] See generally Brief of Law Professors as Amici Curiae in Support of Plaintiffs-Appellants’ Petition for Rehearing and for Rehearing En Banc, and in the Alternative, for Modification of Opinion and Judgment, Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505 (4th Cir. 2015) (No. 14-1724) ECF No.45; Olamide Orebamjo, Comment, Brown v. GNC Corp.: The Fourth Circuit’s New Standard for Literal Falsity, 12 J. Bus. & Tech. L. Proxy 1 (2017).

[99] Pfizer, 81 F.T.C. at 29 (1972).

[100] John P. Swann, The history of efforts to regulate dietary supplements in the USA, 8 Drug Testing & Analysis 271, 275 (2016).

[101] Brown v. GNC Corp. (In re GNC Corp.), 789 F.3d 505, 514 (4th Cir. 2015) (“In construing the diverse state statutes at issue here, we apply this broadly shared understanding of the difference between false and misleading representations.”).

[102] See Memorandum at 4 n.4, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 51.

[103] Eckler v. Wal-Mart Stores, Inc., No. 12-727, 2012 WL 5382218, at *8 n.2 (S.D. Cal. 2012.

[104] Memorandum at 4 n.4, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 51.

[105] Plaintiffs’ Memorandum of Law in Support of Motion to Correct Mistake of Law Pursuant to F.R.C.P. 60, In re GNC Corp. Triflex Prods. Mktg. & Sales Practices Litig. (No. II), No. 14-2491, 2014 U.S. Dist. LEXIS 84184 (D. Md. June 20, 2014), ECF No. 44.

Think Big! The Need for Patent Rights in the Era of Big Data and Machine Learning

Think Big! The Need for Patent Rights in the Era of Big Data and Machine Learning
By: Hyunjong Ryan Jin*

Download a PDF version of this article here

 

Introduction

With AlphaGo’s triumph over the 9-dan Go professional Lee Sedol in March 2016, Google’s DeepMind team conquered the last remaining milestone in board game artificial intelligence.[1] Just nineteen years after IBM Deep Blue’s victory over the Russian chess grandmaster Garry Kasparov,[2] Google’s success exceeded expert predictions by decades.[3]

AlphaGo demonstrated how machine learning algorithms could enable processing of vast amounts of data. Played out on a 19 by 19 grid, the number of possible configurations on a Go board is astronomical.[4] With near-infinite number of potential moves, conventional brute-force comparison of all possible outcomes is not feasible.[5] To compete with professional level human Go players, the gaming artificial intelligence requires a more sophisticated approach than the algorithms employed for chess — machine learning. The underlying science and implementation of machine learning was described in a Nature article two months prior to AlphaGo’s match with Lee. In the article, the Google team described how a method called “deep neural networks” decides between the insurmountable number of possible moves in Go.[6] The AlphaGo model was built by reinforcement learning from a database consisting of over thirty million moves of world-class Go players.[7] This allowed the algorithm to optimize the search space of potential moves, therefore reducing the required calculations to determine the next move.[8] In other words, the algorithm mimics human intuition based on the “experience” it gained from the database “fed” into the algorithm, which drastically increases computational efficiency by eliminating moves not worth subsequent consideration. This allows the algorithm to devote computational resources towards the outcomes of “worthwhile” moves.

The advent of such powerful analytical tools, capable of mimicking human intuition alongside massive computation power, opens endless possibilities—early stage cancer detection[9], accurate weather forecasting,[10] prediction of corporate bankruptcies,[11] natural event detection,[12] and even prediction of elections.[13] For information technology (“IT”) corporations, investment in such technology is no longer an option, but a necessity. The question that this Note addresses is whether the current state of intellectual property law is adequate to harness the societal benefits that we hope to enjoy through the advances in machine learning. In particular, are patents necessary in the age of big data? And if they are, how should we apply patent protection in the field of big data and machine learning?

Part I of this Note examines the need for intellectual property rights in machine learning and identifies the methods by which such protection may be achieved. The differences between trade secret, copyright and patent protection in software are discussed, followed by the scope of protection offered by each means. This background provides the basis to discuss the effectiveness of each method in the context of machine learning and big data innovations.

Part II discusses the basics of the underlying engineering principle of machine learning and demonstrates how the different types of intellectual property protection may apply. Innovators may protect their contributions in machine learning by defending three areas—(1) the vast amount of data required to train the machine learning algorithm, (2) innovations in the algorithms itself including advanced mathematical models and faster computational methods, and (3) the resulting machine learning model and the output data sets. Likewise, there are three distinct methods of protecting these intellectual properties: patents, copyright, and secrecy.[14] This Note discusses the effectiveness of each method of intellectual property protection with three principles of machine learning innovation in mind: facilitating data sharing, avoiding barriers to entry from data network effects, and providing incentives to address the key technological challenges of machine learning. This Notes proposes that patents on computational methods adequately balance the concern of patent monopoly and promoting innovation, hence should be the primary means of intellectual property protection in machine learning.

Part III then visits the legal doctrine of patentable subject matter starting with the United States Supreme Court’s Alice decision. While Alice imposed a high bar for software patents, the post-Alice Federal Circuit decisions such as Enfish, Bascom, and McRO suggest that certain types of software inventions are still patentable. Specifically, this section will discuss the modern framework pertinent to subject matter analysis: (1) inventions that are directed to improvements of computer functionality rather than an abstract idea, (2) inventions that contain an inventive concept, and (3) inventions that do not improperly preempt other solutions. The Note will apply this framework to innovations in machine learning.

The Note proposes that patents for computational methods balance the need for intellectual property protection while permitting data sharing, paving the pathway for promoting innovation in machine learning. The Note further argues that machine learning algorithms are within patentable subject matter under 35 U.S.C. §101.

I. Need for Intellectual Property Rights in Machine Learning

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.

– Thomas Jefferson

I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this. They are scared to death, because they know they are guilty.

– Steve Jobs

The two quotes above demonstrate the conflicting views on protecting intangible ideas with intellectual property law. Thomas Jefferson implied that the free circulation of inventive ideas and thoughts would not dampen the progress of innovation nor disadvantage innovators. On the other hand, Steve Jobs exhibited fury over the similarity between the iOS and the Android OS. Why? Was it because his company was worse off due to the similarity between the two products? Would Apple have refrained from inventing the iPhone had it known others would enter the smartphone market?

This section discusses the motives behind the grant of intellectual property rights and whether such protection should be extended to machine learning innovations. Basics of patent law, copyright law, and trade secret are introduced to provide the analytical tools for subsequent discussion on which type of intellectual property protection best promotes the socially-beneficial effects of machine learning.

A. Do We Need Intellectual Property Rights for Machine Learning?

The primary objectives of intellectual property rights are to encourage innovation and to provide the public with the benefits of those innovations.[15] In the context of machine learning, it is not clear whether we need any additional incentives to promote participation in this field. Machine learning is already a “hot field,” with countless actors in industry and academia in active pursuit to keep pace.[16] Hence investment incentivizing may not be a valid justification for granting intellectual property rights in machine learning. Rather, such protection is crucial to promote competition and enhance public benefits.

The quality of inferences that may be drawn from a given data set increases exponentially as the aggregation diversifies, which is why cross-industry data aggregation will greatly enhance the societal impact of machine learning.[17] Companies will need to identify new data access points outside of their own fields to gain access to other data sets to further diversity their data. Yet the incentive structures of behemoth corporations may not be well-suited to identify and grow niche markets.[18] It would be up to the smaller, specialized entities to find the gaps that the larger corporations overlooked and provide specialized services addressing the needs of that market. Protective measures that assist newcomers to compete against resource-rich corporations may provide the essential tools for startups to enter such markets. Sufficient intellectual property protection may serve as leverage that startups may use to gain access to data sets in the hands of the Googles and Apples of the world, thus broadening the range of social benefits from machine learning.

B. The Basics of Patent Law

To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries” – United States Constitution, Article I, § 8

The United States Constitution explicitly authorizes Congress to promote useful arts by granting inventors the exclusive rights of their discoveries. Such constitutional rights stems from two distinct bases — (1) a quid pro quo where the government issues a grant of monopoly in exchange for disclosure to society, and (2) property rights of the inventor. The purpose for such rights is explicitly stated in the Constitution—to promote new inventions. The goal is to prevent second arrivers who have not invested in the creation of the initial invention from producing competing products and services at a lower price, undercutting the innovator whose costs are higher for having invested to create the invention. As an incentive for innovators willing to invest in new, useful arts, the patent system provides the innovator rights to exclude others from practicing the invention. Another purpose of such rights is the concept of “ “mining rights.” Akin to the grant of mining rights to the owner in efforts to suppress aggressive mining, the inventor should have the right to define and develop a given field by excluding other people from the frontiers of that knowledge. Considering the importance of industry standards in modern electronics, such a purpose acknowledges the importance of early stage decisions that may define the trajectory of new technological advances.

C. The Thin Protection on Software Under Copyright Law

The Copyright Act defines a “computer program” as “a set of statements or instructions to be used directly or indirectly in a computer to bring about a certain result.”[19] Though it may be counterintuitive to grant copyright protection for “useful arts” covered by patents, Congress has explicitly mandated copyright protection for software.[20] However, as will be discussed below, copyright protection of software has been significantly limited due to case law.

Copyright protects against literal infringement of the text of the program. Source code, code lines that the programmers “author” via computer languages such as C++ and Python, is protected under copyright as literary work.[21] In Apple v. Franklin Corp., the Third Circuit Court of Appeals held that object code, which is the product of compiling the source code, is also considered a literary work.[22] Given that compiled code is a “translation” of the source code, this ruling seems to be an obvious extension of copyright protection. Removing the copyright distinction between source code and object code better reflects the nature of computer languages such as Perl, where the source code is not translated into object code but rather is directly fed into the computer for execution. However, the scope of protection on either type of code is very narrow. The copyright system protects the author against literal copying of code lines. This leaves open the opportunity for competitors to avoid infringement by implementing the same algorithm using different text.

Fortunately, in addition to protection against literal copying of code, copyright law may provide some protection of the structure and logical flow of a program. Equivalent to protecting the “plot” of a novel, the Second Circuit Court of Appeals ruled that certain elements of programming structure are considered an expression (copyrightable) rather than idea (not copyrightable), extending copyright protection to non-literal copying.[23] The Computer Associates International v. Altai court applied a three-step test to determine whether a computer program infringes other programs—(1) map levels of abstraction of the program; (2) filter out protectable expression from non-protectable ideas; and (3) compare which parts of the protected expression are also in the infringing program.[24]

The merger doctrine is applied to step two of the Altai test to limit what may be protected under copyright law. Under the merger doctrine, code implemented for efficiency reasons is considered as merged with the underlying idea, hence not copyrightable.[25] Since most algorithms are developed and implemented for efficiency concerns, the Altai framework may prevent significant aspects of software algorithms from receiving copyright protection. This means that for algorithms related to computational efficiency, patents may provide significantly more meaningful protection than copyright. The Federal Circuit, in the 2016 case McRO Inc. v. Bandai Namco Games America Inc., ruled that patent claims with “focus on a specific means or method that improves the relevant technology” may still be patentable.[26] Although preemption concerns may impede patentability, exemption of patent right by preemption is narrow compared to that of copyright by the merger doctrine.

Scène à faire doctrine establishes yet another limitation on copyright for computer programs. Aspects of the programs that have been dictated by external concerns such as memory limits, industry standards and other requirements are deemed as non-protectable elements.[27] For mobile application software, it is difficult to imagine programs that are not restricted by form factors such as mobile AP computation power, battery concerns, screen size, and RAM limitations. As for machine learning software, the algorithms determine the “worthiness” of computation paths based on conserving computational resources. The external factors that define the very nature and purpose of such machine learning algorithms may exempt them from copyright protection.

D. Comparing Trade Secret and Non-disclosures with Patents

The crucial distinction between trade secret and patent law is secrecy. While patent applicants are required to disclose novel ideas to the public in exchange for a government granted monopoly, trade secret requires owners to keep the information secret. Though trade secret protection prevents outsiders from acquiring the information by improper means, it does not protect the trade secret against independent development or even reverse engineering of the protected information. In trade secret doctrine, the existence of prior disclosed art is only relevant for discerning whether the know-how is generally known, a different and simpler analysis than the issue of novelty in patent law.[28]

The United States Supreme Court has specified in Kewanee Oil that all matters may be protected under trade secret law, regardless whether it may or may not be patented.[29] The Kewanee Oil court predicted that inventors would not resort to trade secret when offered a presumptively stronger protection by patent law:

"The possibility that an inventor who believes his invention meets the standards of patentability will sit back, rely on trade secret law, and after one year of use forfeit any right to patent protection, 35 U.S.C. § 102(b), is remote indeed."[30]

Trade secret is an adequate form of protection for innovators that are concerned with the limits of what may be patentable. The secrecy requirement of trade secret inherently provides protection that may potentially outlive any patent rights, provided a third party does not independently acquire the secret. This coincides with an interesting aspect of machine learning and big data—the need for massive amounts of data. Developers need data to “train” the algorithm, and increase the accuracy of the machine learning models. Companies that have already acquired massive amounts of data may opt to keep their data secret, treating the aggregated data as a trade secret.

In addition to the amount of amassed data, companies have all the more reason to keep their data secret if they have access to meaningful, normalized data. Even if a company amasses an enormous amount of data, the data sets may not be compatible with each other. Data gathered from one source may have different reference points or methodologies that are not immediately compatible with data from another source. This raises the concern of “cleaning” massive amounts of data.[31] Such concerns of data compatibility mean that parties with access to a single, homogenous source of high quality data enjoy a significant advantage over parties that need to pull data from multiple sources.

However, data secrecy may not be a suitable strategy for companies that are aiming for cross-industry data aggregation. Institutions such as Global Alliance for Genomics and Health are promoting data sharing between research participants. The Chinese e-commerce giant Alibaba announced a data sharing alliance with companies such as Louis Vuitton and Samsung to fight off counterfeit goods.[32] To facilitate the development of technology and to mitigate risks, various companies and research institutions across diverse fields are engaging in joint development efforts and alliances. Seeking protection under trade secret runs against this trend of engaging in effective cross-industry collaboration. Yet there are countervailing arguments that trade secret promotes disclosure by providing legal remedies that can replace the protection of secrets.[33] Parties can sidestep the limitations of trade secrets by sharing proprietary information under the protection of contract law. While data sharing practices may void trade secret protection, the nature of continued accumulation of data and carefully drafted contractual provisions may provide sufficient protection for the data owners.

II. Placing Machine Learning within Intellectual Property Law

Learning is any process by which a system improves performance from experience.

– Herbert Simon, Nobel Prize in Economics 1978.

The concept of machine learning relates to computer programs that have the capability to improve performance based on experience, with limited intervention of the programmer.[34] Machine learning models have the capability to automatically adapt and customize for individual users, discover new patterns and correlations from large databases, and automate tasks that require some intelligence by mimicking human intuition.[35] This section dissects the mechanics of machine learning to identify the aspects of machine learning innovations that are at issue as intellectual property.

A. Machine Learning Basics

Machine learning methods are divided into two different approaches—supervised machine learning and unsupervised machine learning. For supervised machine learning, models are typically established by applying “labeled” sets of data to a learning algorithm. Labeled data refers to data sets that have both relevant features and the target results that the programmer is interested in. For example, we may be interested in developing a machine learning model that classifies images with dogs in them. The data sets for supervised machine learning would indicate whether a given images has dogs or not. The learning process begins with the algorithm fitting trends found in the training data set into different types of models. The algorithm compares the prediction errors of the models by inputting the validation set data into each model, measuring their accuracy. This allows the algorithm to decide which of the various models is best suited as the resulting machine learning model. Finally, the machine learning model is then evaluated by assessing the accuracy of the predictive power of the model. The developed model is then applied to data without a correct answer to test the validity of the model. In unsupervised machine learning, the data sets are “unlabeled” data, which may not contain the result that the programmer is interested in. Returning to our dog image classification example, data sets for unsupervised machine learning will have pictures of various animals that are not labeled—the computer does not know which pictures are associated with dogs. The unsupervised machine learning algorithm develops a model that extracts common elements from the picture, teaching itself the set of features that makes the subject of the picture a dog. In essence, unsupervised machine learning uses data sets that do not have specific labels fed into the algorithm for the purpose of identifying common trends embedded in that data set.

The objective of developing such machine learning models varies. Sometimes the goal is to develop a prediction model that can forecast a variable from a data set. Classification, which assigns records to a predefined group, is also a key application of the algorithm. Clustering refers to splitting records into distinct groups based on the similarity within such group. Association learning identifies the relationship between features.



Figure 1. Overview of Machine Learning Model Development


Figure 1 illustrates the overall process of machine learning model development. The learning process of machine learning algorithms begins with aggregation of data. The data originates from an array of diverse sources ranging from user input, sensor measurement, or monitoring of user behavior.[36] The data sets are then preprocessed. The quality of data presents a challenge in improving machine learning models—any data that has been manually entered contains the possibility of error and bias.[37] Even if the data is collected through automatic means, such as health monitoring systems or direct tracking of user actions, the data sets require preprocessing to account for systematic errors associated with the recording device or method.[38] This includes data skews due to difference between individual sensors, errors in the recording or transmission of data, and incorrect metadata about the sensor.[39] Simply put, the data sets may have differing reference points, embedded biases, or differing formats. The “cleaning” process accommodates for the data skews.

The objective of machine learning models is to identify and quantify “features” from a given data set. The term “feature” refers to individually measurable property of an observed variable.[40] From the outset, there may be an extensive list of features that are present in a set of data. It would be computationally expensive to define and quantify each feature, and then to identify the inter-feature relationships, from massive amounts of data. Due to the high demand for the computational power required for processing massive amounts of data, dedication of computational resources to features that are outside the scope of the designer’s interest would be a waste of such limited computational capacity.[41] The machine learning algorithm reduces waste of computational resources by applying dimensionality reduction to the pre-processed data sets.[42] The algorithm can identify an optimal subset of features by reducing the dimension and the noise of the data sets.[43] Dimensionality reduction allows the machine learning model to achieve higher level of predictive accuracy, increased speed of learning, and improves the simplicity and comprehensibility of the results.[44] However, the reduction process has limitations—reducing dimensionality inevitably imposes a limit on the amount of insights and information that may be extracted from the data sets. If the machine learning algorithm discerns a certain feature, the model would not be able to draw inferences related to said feature.

Following dimensionality reduction, the machine learning algorithm attempts to fit the data sets into preset models. Typically, three different types of data are fed into the machine learning model—training set, validation set, and test set.[45] The machine learning algorithm “trains” the model by fitting the training set data into various models to evaluate the accuracy of each selection. Then the validation set is used to estimate error rates of each model when applied to data outside the training set that was used to develop each model. Through this process, the machine learning algorithm selects the model that best describes the characteristics and trends of the target features from the test and validation sets.[46] The test set is then used to calculate the generalized prediction error, which is reported to the end user for proper assessment of the predictive power of the model.[47] Simply put, the training test and validation set is used to develop and select a model that reflects the trends of the given data set, and the test set is used to generate a report on the accuracy of the selected model.

The crucial elements in developing a machine learning model are (1) training data, (2) inventions related to the machine learning algorithm such as the method of preprocessing the training data, the method of dimensional reduction, feature extraction, and the method of model learning/testing, and (3) the machine learning model and output data.[48] An ancillary element associated with the three elements above is the human talent that is required to implement such innovation.[49] Innovators in the field of machine learning may protect their investments by protecting one or more of the elements listed above.

The difference between training data and output data, as well as the difference between the machine learning algorithm and the machine learning model, are best illustrated with an example. Let us assume a credit card company wants to use machine learning to determine whether the company should grant a premium credit card to a customer. Let us further assume that the company would prefer to grant this card to customers that would be profitable to the company while filtering out applicants that are likely to file for bankruptcy. Data sets about prior applicant information would correspond to training data. The company would apply a mathematical method of extracting insight about the correlation between features and the criteria that the company wants to evaluate (e.g., profitable for the firm or likely to file bankruptcy). The mathematical methods are referred as machine learning algorithms. The resulting mechanism, such as a scoring system, that determines the eligibility of card membership is the machine learning model. The credit card applicant’s personal data would be the input data for the machine learning model, and the output data would include information such as expected profitability of this applicant and likelihood of bankruptcy for this applicant.

B. Industry Trends in Machine Learning

Discussing incentive structures and trends behind the machine learning industry is essential in identifying adequate methods of intellectual property rights. The current trends in the world of machine learning will predict what intellectual property regime is most useful to companies to protect their work.

The United States has chronically struggled to maintain adequate supply of talent in the high-tech industry, a deficit of talent that continues in the field of machine learning.[50] From a report by the McKinsey Global Institute, the United States’ demand for talent in deep learning “could be 50 to 60 percent greater than its projected supply by 2018.”[51] Coupled with the dearth of machine learning specialists, the short employment tenure of software companies further complicates the search for talent. Software engineers from companies such as Amazon and Google have reported an average employment tenure of one year.[52] While some parts of the high attrition rate may be attributed to cultural aspects of the so-called “Gen Y” employees, the “hot” demand for programming talent has significant impact on the short employee tenure.[53] Job mobility within the software industry is likely to increase as the “talent war” for data scientist intensifies. Employee mobility and California’s prohibition against “covenants not to compete” have been accredited as a key factor behind the success of Silicon Valley.[54] Another trend in the field is the rapid advances in machine learning methods. Due to the fast-paced development of the field, data scientists and practitioners have every reason to work with companies that would allow them to work at the cutting edge of machine learning, using the best data sets. This may influence the attrition rates and recruiting practices of the software industry mentioned above.[55] Eagerness of employees to publish scientific articles and contribute to the general machine learning committee may be another factor of concern.

To accelerate innovation by repurposing big data for uses different from the original purpose, and to form common standards for machine learning, more industries are joining alliances and collaborations.[56] Cross-industry collaborations may enable endless possibilities. Imagine the inferences that may be drawn by applying machine learning methods to dietary data from home appliances, biometric data, and data on the weather patterns around the user. Putting privacy nightmares aside, machine learning with diverse data sets may unlock applications that were not previously possible. More companies are attempting to capitalize on commercial possibilities that data sharing may unlock.[57]

C. Machine Learning Innovators – Protect the Data or Inventions?

Though it may seem intuitive that patent protection may be the best option, innovations in machine learning may not need patent protection. Trade secret protection on the data sets may be sufficient to protect the interests of practicing entities while avoiding disclosure of their inventions during the patent prosecution process. Furthermore, numerous software patents have been challenged as unpatentable abstract subject matter under 35 U.S.C. §101 since the Alice decision in 2014.[58] Though subsequent decisions provided guidelines for types of software patents that would survive the Alice decision, it is not clear how the judiciary will view future machine learning patents. Such issues raise the question about the patentability of machine learning – should we, and can we, resort to patents to protect machine learning inventions?

Following the discussion on the building blocks of machine learning and recent emerging trends in the field, this section discusses the mode and scope of protection that current legal system provides for each element pertinent to innovation in machine learning. The possible options for protecting innovations are (1) non-disclosure agreements and trade secret law, (2) patent law, and (3) copyright. The three options for protection may be applied to the three primary areas of innovation—(1) training data, (2) inventions related to computation, data processing, and machine learning algorithms, and (3) machine learning models and output data. This discussion will provide context about the methods of protection for innovations in machine learning by examining the costs and benefits of the various approaches.

1. Protecting the Training Data—Secrecy Works Best

Access to massive amounts of training data is a prime asset for companies in the realm of machine learning. The big data phenomenon, which triggered the surge of interest in machine learning, is predicated on the need for practices to analyze large data resources and the potential advantages from such analysis.[59] Lack of access to a critical mass of training data prevents innovators from making effective use of machine learning algorithms.

Previous studies suggest that companies resent sharing data with each other.[60] Michael Mattioli discusses the hurdles against sharing data and considerations involved with reuse of data in his article Disclosing Big Data.[61] Indeed, there may be practical issues that prevent recipients of data from engaging in data sharing. Technical challenges in comparing data from different sources, or inherent biases embedded in data sets may be reasons that complicate receiving outside data.[62] Mattioli also questions the adequacy of the current patent and copyright system to promote data sharing and data reuse—information providers may prefer not to disclose any parts of their data due to the rather thin legal protection for databases.[63]

Perhaps this is why secrecy seems to be the primary method of protecting data.[64] The difficulty of reverse engineering to uncover the underlying data sets promotes the reliance on non-disclosure.[65] Compared to the affirmative steps required to maintain trade secret protection if the data is disclosed, complete non-disclosure may be a cost effective method of protecting data.[66] Companies that must share data with external entities may exhibit higher reliance on contract law rather than trade secret law. In absence of contract provisions, it would be a challenge to prove that the trade secret has been acquired by misappropriation of the recipient party.

The “talent war” for data scientists may also motivate companies to keep the training data sets secret. With a shortage of talent to implement machine learning practices and rapid developments in the field, retaining talent is another motivation for protecting against unrestricted access to massive amounts of data. Companies may prefer exclusivity to the data sets that programmers can work with — top talents in machine learning are lured to companies with promises of exclusive opportunities to work with massive amounts of data.[67] The rapid pace of development in this field encourages practitioners to seek opportunities that provide the best resources to develop their skill sets. This approach is effective since a key limitation against exploring new techniques in this field is the lack of access to high quality big data. Overall, secrecy over training data fits well with corporate recruiting strategies to retain the best talents in machine learning.

Non-disclosure and trade secret protection seems to be the best mode of protection. First, despite the additional legal requirements necessary to qualify as trade secrets, trade secret protection fits very well with non-disclosure strategy. On the other hand, patent law is at odds with the principle of non-disclosure. While trade secret law provides companies protection without disclosing information, patent law requires disclosure in exchange for monopolistic rights. Furthermore, neither patent nor copyright provide adequate protection for underlying data. Patent law rewards creative concepts and inventions, not compiled facts themselves. Copyright may protect labeling or distinct ways of compiling information, but does not protect underlying facts. Also, as a practical matter, the difficulty of reverse engineering of machine learning models does not lend well to detecting infringement. Analysis of whether two parties used identical training data would not only be time consuming and costly, but may be fundamentally impossible.

If companies were to seek protection of training data, it would be best to opt for secrecy by non-disclosure. This would mean companies would opt out of the cross-industry collaborations that were illustrated above. This may be less of a concern for innovation, as companies may still exchange output data as means of facilitating cross-industry collaboration.

2. Protecting the Inventions—Patent Rights Prevail

Adequate protection over inventive approaches in processing data is becoming increasingly important as various industries begin to adopt a collaborative alliance approach in machine learning. Cross-industry collaboration requires implementation of methods such as preprocessing diverse data sets for compatibility. As the sheer amount of data increases, more processing power is required. The machine learning algorithm needs to maintain a high degree of dimensionality to accurately identify the correlations between a high number of relevant features. The need for more innovative ideas to address such technological roadblocks will only intensify as we seek more complex applications for machine learning.

The three primary areas where novel ideas would facilitate innovations in machine learning are pre-training data processing, dimensional reduction, and the machine learning algorithm.

Access to massive amounts of data alone is not sufficient to sustain innovation in machine learning. The raw data sets may not be compatible with each other, requiring additional “cleaning” of data prior to machine learning training.[68] The data provided to the machine learning algorithm dictates the result of the machine learning model, hence innovations in methods to merge data with diverse formats is essential to enhancing the accuracy of the models. As cross-industry data analysis becomes more prominent, methods of merging data will have more significant impact on advancing the field of machine learning than mere collection of large data sets. Cross-industry data sharing would be useless unless such data sets are merged in a comparable manner.[69]

Companies can opt to protect their inventive methods by resorting to trade secret law. The difficulty of reverse engineering machine learning inventions, coupled with the difficulty of patenting software methods provides incentives for innovators to keep such inventions secret from the public. However, two factors would render reliance on non-disclosure and trade secret ineffective—frequent turnover of software engineers and rapid speed of development in the field.

Rapid dissemination of information from employment mobility may endanger intellectual property protection based on secrecy. Furthermore, while the law will not protect former employees that reveal trade secrets to their new employers, the aforementioned fluid job market coupled with general dissemination of information make it difficult to distinguish between trade secrets from former employment and general knowledge learned through practice. The difficulties of reverse engineering machine learning models work against the trade secret owner as well in identifying trade secret misappropriation—how do you know others are using your secret invention? The desire for software communities to discuss and share recent developments in the field does not align well with the use of secrecy against innovations in machine learning. Secrecy practices disincentivize young data scientists from joining due to the limits against gaining recognition.[70]

The rapid development of machine learning technology also presents challenges against reliance on trade secret law. Secret methods may be independently developed by other parties. Neither trade secret law nor non-disclosure agreements protect against independent development of the same underlying invention.[71] Unlike training data, machine learning models, or the output data, there are no practical limitations that impedes competitors from independently inventing new computational methods of machine learning algorithms.

With such a fluid employment market, high degree of dissemination of expertise, and rapid pace of development, patent protection may provide the assurance of intellectual property protection for companies developing inventive methods in machine learning. Discussions on overcoming the barriers of patenting software will be presented in later sections.[72]

3. Protecting the Machine Learning Models and Results—Secrecy Again

The two primary products from applying the machine learning algorithms to the training data are the machine learning model and the accumulation of results produced by inputting data into the machine learning model. The “input data” in this context may refer to individual data that is analyzed by the insights gained from the machine learning model.

In a recent article, Brenda Simon and Ted Sichelman discuss the concerns of granting patent protection for “data-generating patents,” which refers to inventions that generate valuable information in their operation or use.[73] Exclusivity based on patent protection may be extended further by trade secret protection over the data that has been generated by the patented invention.[74] Simon and Sichelman argue that the extended monopoly over data may potentially overcompensate inventors since the “additional protection was not contemplated by the patent system[.]”[75] Such expansive rights will cause excessive negative impact on downstream innovation and impose exorbitant deadweight losses.[76] The added protection over the resulting data derails the policy rationale behind the quid pro quo exchange between the patent holder and the public by excluding the patented information from public domain beyond the patent expiration date.[77]

The concerns addressed in data-generating patents also apply to machine learning models and output data. Corporations may obtain patent protection over the machine learning models. Akin to a preference for secrecy for training data, non-disclosure would be the preferred mode of protection for the output data. The combined effect of the two may lead to data network effects where users have strong incentives to continue the use of a given service.[78] The companies that have exclusive rights over the machine learning model and output data gather more training data, increasing the accuracy of their machine learning products. The reinforcement by monopoly over the means of generating data allows few companies to have disproportionately strong dominance over their competitors.[79]

Market dominance by data-generating patents becomes particularly disturbing when the patent on a machine learning model preempts other methods in the application of interest. Trade secret law does not provide protection against independent development. However, if there is only one specific method to obtain the best output data, no other party would be able to create the output data independently. The exclusive rights over the only methods of producing data provides means for the patent holder to monopolize both the patent and the output data.[80] From a policy perspective, the excessive protection does seem troubling. Yet such draconian combinations are less feasible after the recent rulings on patentable subject matter of software, which will be discussed below.[81] Mathematical equations or concepts are likely directed to an “abstract concept,” thus will be deemed directed to a patent ineligible subject matter.[82] Furthermore, though recent cases in the Federal Circuit have found precedents where software patents passed the patentable subject matter requirement, those cases expressed limitations against granting patents that would improperly preempt all solutions to a particular problem.[83] The rapid pace of innovation in the field of machine learning compared to the rather lengthy period required to obtain patents may also dissuade companies from seeking patents. Overall, companies have compelling incentives to rely on non-disclosure and trade secrets to protect their machine learning models instead of seeking patents.

The secrecy concerns regarding training data applies to machine learning models and the output data as well. Non-disclosure would be the preferred route of obtaining protection over the two categories. However, use of non-disclosure or trade secrets to protect machine learning models and output data presents challenges that are not present in the protection of training data. The use of secrecy to protect machine learning models or output data conflicts with recruiting strategies to hire and retain top talent in the machine learning field. The non-disclosure agreements limit the employee’s opportunity to gain recognition in the greater machine learning community. In a rapidly developing field where companies are having difficulty hiring talent, potential employees would not look fondly on corporate practices that limit avenues of building a reputation within the industry.[84]

Companies have additional incentives to employ a rather lenient secrecy policy for machine learning models and the output data. They have incentives to try to build coalitions with other companies to monetize on the results. Such cross-industry collaboration may be additional source of income for those companies. The data and know-how that Twitter has about fraudulent accounts within their network may aid financial institutions such as Chase with novel means of preventing wire fraud. The reuse of insights harvested from the large amount of raw training data can become a core product the companies would want to commercialize. Data reuse may have an incredible impact even for applications ancillary to the primary business of the company.

Interesting aspects of disclosing machine learning models and output data are the difficulty of reverse engineering and consistent updates. If the company already has sufficient protection over the training data and/or the computational innovations, competitors will not be able to reverse engineer the machine learning model from the output data. Even with the machine learning model, competitors will not be able to provide updates or refinements to the model without the computational techniques and the sufficient data for training the machine learning algorithm. In certain cases, the result data becomes training data for different applications, which raises concerns of competitors using the result data to compete with the innovator. Yet the output data would contain less features and insights compared to the raw training data that the innovator possesses, and therefore would inherently be at a disadvantage when competing in fields that the innovator has already amassed sufficient training data.

Grant of patents on machine learning models may incentivize companies to build an excessive data network while preempting competitors from entering competition. This may not be feasible in the future, as technological preemption is becoming a factor of consideration in the patentable subject matter doctrine. Companies may use secrecy as an alternative, yet may have less incentives to keep secrecy compared to the protection of training data.

D. Need of Patent Rights for Machine Learning Inventions in the Era of Big Data

The current system, on its surface, does not provide adequate encouragement for data sharing. If anything, companies have strong incentives to avoid disclosure of their training data, machine learning model, and output data.

Despite these concerns, data reuse may enable social impacts and advances that would not be otherwise possible. Previous studies have pointed out that one of the major barriers preventing advances in machine learning is the lack of data sharing between institutions and industries.[85] Data scientists have demonstrated that they were able to predict flu trends with data extracted from Twitter.[86] Foursquare’s location database provides Uber with the requisite data to pinpoint the location of users based on venue names instead of addresses.[87] Information about fraudulent Twitter accounts may enable early detection of financial frauds.[88] The possibilities that cross-industry data sharing may bring are endless.

To encourage free sharing of data, companies should have a reliable method of protecting their investments in machine learning. At the same time, protection based on non-disclosure of data would defeat of purpose of promoting data sharing. Hence protection over computation methods involved with machine learning maintains the delicate balance between promoting data sharing and protecting innovation.

Protection over inventions in the machine learning algorithm provides one additional merit other than allowing data sharing and avoiding the sort of excessive protection that leads to a competitor-free road and data network effects. It incentivizes innovators to focus on the core technological blocks to the advancement of technology, and encourages disclosure of such know-how to the machine learning community.

Then what are the key obstacles in obtaining patents in machine learning inventions? While there are arguments that the definiteness requirement of patent law is the primary hurdle against patent protection of machine learning models due to reliance on subjective judgment, there is no evidence that the underlying inventions driving big data faces the same challenge.[89] Definiteness may be overcome by providing reasonable certainty for those skilled in the art of defining what the scope of the invention is at the time of filing.[90] There is no inherent reason why specific solutions for data cleaning, enhancement of computation efficiency, and similar inventions would be deemed indefinite by nature.

Since the United States Supreme Court invalidated a patent on computer implemented financial transaction methods in the 2014 Alice decision, the validity of numerous software and business method patents were challenged under 35 U.S.C. §101.[91] As of June 8th, 2016, federal district courts invalidated 163 of the 247 patents that were considered under patentable subject matter—striking down 66% of challenged patents.[92] The U.S. Court of Appeals for the Federal Circuit invalidated 38 of the 40 cases it heard.[93]

Arguably, the public benefits more from such high rates of post-issuance invalidity. The public still has access to the disclosures from the patents and patent applications. In reliance on granted patents, companies may have already invested in growing related businesses, catering to the need of consumers. At the same time, the patent holder’s monopolistic rights have been shortened as the result of litigation. Effectively, the price that the public pays to inventors in exchange for the benefits of disclosure is reduced.

Yet the high degree of invalidity raises several concerns for the software industry. Smaller entities, lacking market influence and capital, have difficulty competing against established corporations without the monopolistic rights granted through the patent system. Investors become hesitant to infuse capital into startups for fear that invalidity decreases the worth of patents. Reliance on trade secret has its own limitations due to the disclosure dilemma—the inventor needs to disclose the secret to lure inventors, but risks losing secrecy in the process. Copyright law does not provide appropriate protection. The restrictions imposed by the merger doctrine and scène à faire doctrine constrain copyright protection of software. Though copyright provides an alternative method of protecting literal copying of code, it does little to protect the underlying software algorithms and innovation.

Ultimately, the increase of alliances and collaboration provides incentives for parties to obtain patent rights. Reliance on trade secret or copyright are not suitable methods of protecting their intellectual property. Furthermore, market power or network effects alone cannot sufficiently mitigate the risks involved with operating a business. Patents become even more important for startups since patents provide investors with assurance that in the worst case, the patents may still serve as potential collateral.





III. Patentability of Machine Learning Innovations in the Era of Big Data


Patentable subject matter continues to be a barrier for patenting innovations in software. Additional doctrines such as enablement, written description, and obviousness are also serious obstacles against obtaining patents, yet such requirements are specific to each claimed invention and the draftsmanship of claims. Subject matter is considered a broader, categorical exclusion of patent rights. This section explores the current landscape of the patentable subject matter doctrine in the software context.

A. Alice: The Legal Framework of Patentable Subject Matter in Software

The complexity involved with software, coupled with the relatively broad scope of software patents, has presented challenges in identifying the boundaries of the claims.[94] Many members of the software community detest imposing restrictions on open source material and attest that many key innovations in algorithms are rather abstract.[95] Such hostility against patenting software has raised the question of whether patent rights should be the proper method of protecting innovations in software.

Alice was a case that embodied such opposition to the grant of software patents. The case involved patents on computerized methods for financial trading systems that reduce “settlement risk” when only one party to financial exchange agreement satisfies its obligation.[96] The method proposed the use of a computer system as a third-party intermediary to facilitate the financial obligations between parties.[97] The United States Supreme Court ruled that the two-step test established from Mayo governed all patentable subject matter questions.[98] In particular, for the abstract idea context, the Supreme Court established the following two-step framework for patentable subject matter of software inventions:


1. Step one: “[D]etermine whether the claims at issue are directed to a patent-ineligible concept. If so, the Court then asks whether the claim’s [additional] elements, considered both individually and ‘as an ordered combination,’ ‘transform the nature of the claim’ into a patent-eligible application.”[99]

2. Step two: “[E]xamine the elements of the claim to determine whether it contains an ‘inventive concept’ sufficient to ‘transform’ the claimed abstract idea into a patent-eligible application. A claim that recites an abstract idea must include ‘additional features’ to ensure that the [claim] is more than a drafting effort designed to monopolized the [abstract idea]” which requires “more than simply stat[ing] the [abstract idea] while adding the words ‘apply it.’”[100]

The Alice Court found that the patent on financial transaction was “directed to a patent-ineligible concept: the abstract idea of intermediated settlement,” and therefore failed step one.[101] Furthermore, the Court ruled that the claims did “no more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer” and did not provide an inventive concept that was sufficient to pass step two.[102]

B. The post-Alice cases from the Federal Circuit

The Alice framework was considered as a huge setback for the application of patentable subject matter doctrine to software. It was a broad, categorical exclusion of certain inventions that were deemed “directed to” an abstract idea, natural phenomenon, or law of nature. The biggest misfortune was the lack of guidance in the Alice decision on the threshold for such categorical exclusion—we were left without any suggestions on the type of software patents that would be deemed as patentable subject matter.

The recent line of cases in the Federal Circuit provides the software industry with the much-needed clarification on the standards that govern patentability of software inventions. Enfish v. Microsoft, decided on March 2016, involved a “model of data for a computer database explaining how the various elements of information are related to one another” for computer databases.[103] In June 2016, the Federal Circuit decided another case on the abstract idea category for patentable subject matter. Bascom Global v. AT&T Mobility is on a patent disclosing an internet content filtering system located on a remote internet service provider (ISP) server.[104] Shortly after Bascom, the Federal Circuit decided McRO v. Bandai Namco Games in September 2016.[105] The case ruled that an automated 3D animation algorithm that renders graphics in between two target facial expressions is patentable subject matter.[106]

The rulings from the Federal Circuit on the aforementioned three cases provide guidelines along the two-step Alice test of patentable subject matter. The software patents in Enfish and McRO were deemed “directed to” a patent eligible subject matter, informing the public of what may pass the first set of the Alice test. Bascom failed the first step.[107] Yet the court ruled that those patents had inventive concepts sufficient to transform a patent ineligible subject matter into a patent eligible application. Combined together, the three cases give more certainty in what may pass the 35 U.S.C. §101 patentable subject matter inquiry.

Reiterating the Alice test, whether an invention is a patentable subject matter is determined by a two-step process—(1) is the invention directed to, rather than an application of, an abstract idea, natural phenomenon, or law of nature, and even if so, (2) do the elements of the claim, both individually and combined, contain an inventive concept that transforms this invention into a patent-eligible application? The Federal Circuit fills in the gaps that were left unexplained from the Alice ruling.

1. The Federal Circuit’s Standard for Alice Step One

The Enfish court discussed what constitutes an abstract idea at the first step of the Alice inquiry. Judge Hughes instructs us to look at whether the claims are directed to a specific improvement rather than an abstract idea. In this case, the patent provides the public with a solution to an existing problem by a specific, non-generic improvement to computer functionality. The Enfish court ruled that such invention is patent eligible subject matter.[108]

McRO also ruled that the facial graphic rendering for 3D animation was not an abstract concept. Here, the Federal Circuit again emphasized that a patent may pass step one of the Alice test if the claims of the patent “focus on a specific means or method that improves the relevant technology.”[109] The McRO court also noted that preemption concerns may be an important factor for the 35 U.S.C. §101 subject matter inquiry—that improper monopolization of “the basic tools of scientific and technological work” is a reason why such categorical carve outs against granting patents on abstract ideas exist.[110]

Bascom provides the standards on what would fail step one of the Alice patentable subject matter inquiry. If the patent covers a conventional, well-known method in the field of interest, then the invention would be considered abstract. This is akin to the inventive concept considerations conducted at the second phase of the 35 U.S.C. §101 subject matter inquiry.

The main takeaway from Enfish and McRO is that in the first step of the Alice test, a patent application is not directed to an abstract idea if (1) the invention addresses an existing problem by specific improvements rather than by conventional, well-known methods and (2) the claims do not raise preemption concerns. This encourages practitioners to define the problem as broadly as possible, while defining the scope of improvement in definite terms.

2. The Federal Circuit’s Standard for Alice Step Two, and the Overlap with Step One

The second step of the Alice test is an inquiry of whether the patent application, which is directed to a patent ineligible subject, still contains a patent-worthy inventive concept. Bascom ruled in favor of granting the patent following the second step of the Alice test.[111] While the patent at hand was considered directed to patent ineligible subject matter, the Bascom court found that the content filter system invention still had an inventive concept worthy of a patent.[112] Even if elements of a claim are separately known in prior art, an inventive concept can be found in the non-conventional and non-generic arrangement of known, conventional pieces. This inquiry seems like a lenient standard compared to the 35 U.S.C. §103 obviousness inquiry; hence, it is not clear if this step has an independent utility for invalidating or rejecting a patent. Nonetheless, the court found that merely showing that all elements of a claim were already disclosed in prior art was not sufficient reason to make an invention patent ineligible.[113]

While it is possible to infer sufficient reasons of ruling out inventive concepts from the Bascom case, it is still unclear what would warrant an invention to pass the second step of the Alice test. Cases such as DDR Holdings v. Hotels.com have suggested that the second step of Alice is satisfied since it involved a solution to a specific technological problem that “is necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.”[114]

This interpretation of inventive concept becomes perplexing when comparing the two steps of Alice—both steps look to whether the proposed solution addresses problems that are specific to a given field of interest. While we would need additional cases to gain insight on whether the two steps have truly distinct functions, at the very least the Federal Circuit provided essential guidelines on what may be deemed as patentable software.

C. Applying Patentable Subject Matter to Machine Learning Inventions

As the Bascom court has taught, the first step in the Alice inquiry is to ask whether an invention (1) provides a solution to an existing problem by (2) a specific, non-generic improvement that (3) does not preempt other methods of solving the existing problem. Applying this test to inventions in machine learning, mathematical improvements and computational improvements would be treated differently.

As mentioned before, a key aspect of machine learning is the “noise” associated with the data sets.[115] Another concern is the fitting of a given algorithm to a certain model. Methods that facilitate the computations of the training process may be deemed as a specific improvement. However, machine learning algorithms themselves, including the base models that the algorithm fits the training into would not be pertinent to just a specific improvement. Hence, generic mathematical methods applicable to various problems are directed to an abstract idea. For example, an invention that addresses the issue of normalizing data from different sources would be a computational issue and hence would pass the Alice test given that it did not preempt other solutions to the problem of data normalization. On the other hand, a specific mathematical equation that serves as a starting model for the machine learning algorithm would be mathematical and hence directed to an abstract idea. Even if the mathematical starting model is only good for a specific application, the model is not a specific improvement pertinent to that application. Although the model may not necessarily be a good starting model for other applications, it is nonetheless a generic solution that applies to other applications as well.

Conclusion

While highly restrictive, the guidelines from the Federal Circuit still allow the grant of patent rights for the computational aspects of machine learning algorithms. The guidelines also would prevent highly preemptive mathematical innovations, including data-generating patents such as machine learning models.

The narrow range of patentability makes a patent regime appealing for computational methods. The recent emphasis on preemption concerns acts in favor of preventing data network effects based on data-generating patents. While not discussed in this paper, other patentability requirements such as obviousness or definiteness would further constraint the grant of overly broad data-generating patents.

Such an approach strikes the appropriate balance between promoting innovation and encouraging data reuse for societal benefits. Compared to other approaches of providing protection over innovations in machine learning, the narrowly tailored approach for patent rights for computational inventions fits best with the policy goal of promoting innovation through data reuse. The industry trends in collaboration and recruiting also matches the proposed focus on patent law protection.


* J.D. Candidate, New York University School of Law, 2018; Ph.D. in Electrical and Computer Engineering, University of Illinois at Urbana-Champaign, 2012. The author would like to thank Professor Katherine Jo Strandburg for her guidance; fellow JIPEL Notes Program participants Julian Pymento, Gia Wakil, Neil Yap, and Vincent Honrubia for their comments and feedback; and Dr. Sung Jin Park for her support throughout the process.

[1] Sang-Hun Choe & John Markoff, Master of Go Board Game Is Walloped by Google Computer Program, N.Y. Times (March 9, 2016), https://www.nytimes.com/2016/03/10/world/asia/google-alphago-lee-se-dol.html (reporting the shocking defeat of Go Master Lee Se-dol to Google DeepMind’s AlphaGo).

[2] Laurence Zuckerman, Chess Triumph Gives IBM a Shot in the Arm, N.Y. Times (May 12, 1997), http://politics.nytimes.com/library/cyber/week/051297ibm.html (detailing IBM’s highly publicized win through Deep Blue’s victory over world chess champion Garry Kasparov).

[3] See Choe & Markoff, supra note 1.

[4] David Silver et al., Mastering the game of Go with deep neural networks and tree search, 529 Nature 484, 484 (2016).

[5] Id.

[6] Id.

[7] Id. at 485.

[8] Id.

[9] See Andre Esteva et al., Dermatologist-level classification of skin cancer with deep neural networks, 542 Nature 115 (2017).

[10] See Sue Ellen Haupt & Branko Kosovic, Big Data and Machine Learning for Applied Weather Forecasts, (2015).

[11] See Wei-Yang Lin et al., Machine Learning in Financial Crisis Prediction: A Survey, 42 IEEE Transactions on Systems, Man, and Cybernetics 421 (2012).

[12] See Farzindar Atefeh & Wael Khreich, A Survey of Techniques for Event Detection in Twitter, 31 Computational Intelligence 132 (February 2015).

[13] See Corey Blumenthal, ECE Illinois Students Accurately Predicted Trump’s Victory, ECE Illinois (Nov. 18, 2016), https://www.ece.illinois.edu/newsroom/article/19754.

[14] For the purpose of this Note, secrecy refers to the use of trade secret and contract based non-disclosure agreements.

[15] Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets As IP Rights, 61 Stan. L. Rev. 311, 332 (2008) ("Patent and copyright law do not exist solely to encourage invention, however. A second purpose — some argue the main one — is to ensure that the public receives the benefit of those inventions.”).

[16] Andrew Ng et al., How Artificial Intelligence Will Change Everything, Wall Street Journal (March 7, 2017), https://www.wsj.com/articles/how-artificial-intelligence-will-change-everything-1488856320.

[17] Limor Peer, Mind the Gap in Data Reuse: Sharing Data Is Necessary But Not Sufficient for Future Reuse, London Sch. Econ. & Poli. Sci. (Mar. 28, 2014) http://blogs.lse.ac.uk/impactofsocialsciences/2014/03/28/mind-the-gap-in-data-reuse (“The idea that the data will be used by unspecified people, in unspecified ways, at unspecified times . . . is thought to have broad benefits”).

[18] See Saeed Ahmadiani & Shekoufeh Nikfar, Challenges of Access to Medicine and The Responsibility of Pharmaceutical Companies: A Legal Perspective, 24 DARU Journal of Pharmaceutical Sciences 13 (2016) (discussing how “pharmaceutical companies find no incentive to invest on research and development of new medicine specified for a limited population . . .”).

[19] 17 U.S.C. §101 (2012).

[20] Id.

[21] 17 U.S.C. §102(a) (Copyright exists “in original works of authorship fixed in any tangible medium of expression . . .”).

[22] Apple Comput., Inc. v. Franklin Comput. Corp., 714 F.2d 1240 (3d Cir. 1983).

[23] Comput. Assocs. Int’l v. Altai, 982 F.2d 693 (2d Cir. 1992).

[24] Id.

[25] See id. at 707-09.

[26] 837 F.3d 1299, 1314 (Fed. Cir. 2016).

[27] Altai, 982 F.2d at 698.

[28] See Dionne v. Se. Foam Converting & Packaging, Inc., 240 Va. 297 (1990).

[29] Kewanee Oil v. Bicron Corp., 416 U.S. 470 (1974).

[30] Id. at 490.

[31] Nikolay Golova & Lars Rönnbäck, Big Data Normalization For Massively Parallel Processing Databases, 54 Computer Standards & Interfaces 86, 87 (2017).

[32] Jon Russell, Alibaba Teams Up with Samsung, Louis Vuitton and Other Brands to Fight Counterfeit Goods, TechCrunch (Jan. 16, 2017) https://techcrunch.com/2017/01/16/alibaba-big-data-anti-counterfeiting-alliance.

[33] Lemley, supra note 15, at 33

[34] See Lior Rokach, Introduction to Machine Learning, Slideshare 3 (July 30, 2012), https://www.slideshare.net/liorrokach/introduction-to-machine-learning-13809045.

[35] Id. at 4.

[36] Id. at 10.

[37] See Lars Marius Garshol, Introduction to Machine Learning, Slideshare 26 (May 15, 2012) https://www.slideshare.net/larsga/introduction-to-big-datamachine-learning.

[38] Id.

[39] Id.

[40] See Lei Yu et al., Dimensionality Reduction for Data Mining – Techniques, Applications and Trends, Binghamton University Computer Science 11, http://www.cs.binghamton.edu/~lyu/SDM07/DR-SDM07.pdf (last visited Feb. 23, 2018).

[41] Id.

[42] See Rokach, supra note 34, at 10.

[43] Yu et al., supra note 40.

[44] Laurens van der Maaten et al., Dimensionality Reduction: A Comparative Review, Tilburg Centre for Creative Computing, TiCC TR 2009-005, Oct. 26, 2009, at 1 (“In order to handle such real-world data adequately, its dimensionality needs to be reduced. Dimensionality reduction is the transformation of high-dimensional data into a meaningful representation of reduced dimensionality. Ideally, the reduced representation should have a dimensionality that corresponds to the intrinsic dimensionality of the data. The intrinsic dimensionality of data is the minimum number of parameters needed to account for the observed properties of the data”).

[45] Andrew Ng, Nuts and Bolts of Applying Deep Learning (Andrew Ng), YouTube (Sept. 27, 2016), https://www.youtube.com/watch?v=F1ka6a13S9I.

[46] Andrew Ng, Model Selection and Train/Validation/Test Sets, Machine Learning, https://www.coursera.org/learn/machine-learning/lecture/QGKbr/model-selection-and-train-validation-test-sets (last visited Feb. 23, 2018).

[47] Id.

[48] See Rokach, supra note 34, at 10.

[49] Alex Rampell & Vijay Pande, a16z Podcast: Data Network Effects, Andreesen Horowitz (Mar. 8, 2016), http://a16z.com/2016/03/08/data-network-effects/.

[50] James Manyika et. al., Big Data: The Next Frontier for Innovation, Competition, and Productivity, McKinsey Global Inst., May 2011, at 11, available at https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/McKinsey%20Digital/Our%20Insights/Big%20data%20The%20next%20frontier%20for%20innovation/MGI_big_data_exec_summary.ashx.

[51] Id.

[52] Leonid Bershidsky, Why Are Google Employees So Disloyal?, Bloomberg (July 13, 2013, 11:41 AM), https://www.bloomberg.com/view/articles/2013-07-29/why-are-google-employees-so-disloyal-.

[53] Id.

[54] Rob Valletta, On the Move: California Employment Law and High-Tech Development, Federal Reserve Bank of S.F. (Aug. 16, 2002), http://www.frbsf.org/economic-research/publications/economic-letter/2002/august/on-the-move-california-employment-law-and-high-tech-development/#subhead1.

[55] Id.

[56] See Quentin Hardy, IBM, G.E. and Others Create Big Data Alliance, N.Y. Times (Feb. 15, 2015), https://bits.blogs.nytimes.com/2015/02/17/ibm-g-e-and-others-create-big-data-alliance.

[57] See, e.g., Finicity and Wells Fargo Ink Data Exchange Deal, Wells Fargo (Apr. 4, 2017), https://newsroom.wf.com/press-release/innovation-and-technology/finicity-and-wells-fargo-ink-data-exchange-deal.

[58] Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014).

[59] Karen E.C. Levy, Relational Big Data, 66 Stan. L. Rev. Online 73, 73 n.3 (2013), https://review.law.stanford.edu/wp-content/uploads/sites/3/2013/09/66_StanLRevOnline_73_Levy.pdf (explaining that the big data phenomenon is due to the need of practices to analyze data resources).

[60] Christine L. Borgman, The Conundrum of Sharing Research Data, 63 J. Am. Soc’y for Info. Sci. & Tech. 1059, 1059-60 (2012) (discussing the lack of data sharing across various industries).

[61] See Michael Mattioli, Disclosing Big Data, 99 Minn. L. Rev. 535 (2014).

[62] See id. at 545-46 (discussing the technical challenges in merging data from different sources, and issue of subjective judgments that may be infused in the data sets).

[63] See id. at 552 (discussing how institutions with industrial secrets may rely on secrecy to protect the big data they have accumulated).

[64] See id. at 570 (“[T]he fact that these practices are not self-disclosing (i.e., they cannot be easily reverse-engineered) lends them well to trade secret status, or to mere nondisclosure”).

[65] Id.

[66] Id. at 552.

[67] Patrick Clark, The World’s Top Economists Want to Work for Amazon and Facebook, Bloomberg (June 13, 2016, 10:47 AM), https://www.bloombergquint.com/technology/2016/06/09/the-world-s-top-economists-want-to-work-for-amazon-and-facebook (“If you want to be aware of what interesting questions are out there, you almost have to go and work for one of these companies”).

[68] Bill Franks, Taming the Big Data Tidal Wave 20 (2012) (discussing that the biggest challenge in big data may not be developing tools for data analysis, but rather the processes involved with preparing the data for the analysis).

[69] See Borgman, supra note 60, at 1070 ("Indeed, the greatest advantages of data sharing may be in the combination of data from multiple sources, compared or "mashed up’ in innovative ways." (citing Declan Butler, Mashups Mix Data Into Global Service, 439 Nature 6 (2006))).

[70] Jack Clark, Apple’s Deep Learning Curve, Bʟᴏᴏᴍʙᴇʀɢ Bᴜsɪɴᴇssᴡᴇᴇᴋ, (Oct 29, 2015) https://www.bloomberg.com/news/articles/2015-10-29/apple-s-secrecy-hurts-its-ai-software-development.

[71] Kewanee Oil v. Bicron Corp., 416 U.S. 470, 490 (1974).

[72] See infra Section III-B.

[73] Brenda Simon & Ted Sichelman, Data-Generating Patents, 111 Nw. U.L. Rev. 377 (2017).

[74] Id. at 379.

[75] Id. at 414.

[76] Id. at 415 (“[B]roader rights have substantial downsides, including hindering potential downstream invention and consumer deadweight losses . . .”).

[77] Id. at 417.

[78] Rampell & Pande, supra note 49.

[79] Lina Kahn, Amazon’s Antitrust Paradox, 126 Yale L.J. 710, 785 (2017) (“Amazon’s user reviews, for example, serve as a form of network effect: the more users that have purchased and reviewed items on the platform, the more useful information other users can glean from the site”).

[80] Simon & Sichelman, supra note 73, at 410.

[81] See infra Section III-A.

[82] Id.

[83] See infra Section III-B.

[84] Jack Clark, Apple’s Deep Learning Curve, Bʟᴏᴏᴍʙᴇʀɢ Bᴜsɪɴᴇssᴡᴇᴇᴋ (Oct 29, 2015), https://www.bloomberg.com/news/articles/2015-10-29/apple-s-secrecy-hurts-its-ai-software-development.

[85] Peer, supra note 17 (“The idea that the data will be used by unspecified people, in unspecified ways, at unspecified times . . . is thought to have broad benefits”).

[86] See Harshavardhan Achrekar et al., Predicting Flu Trends using Twitter data, IEEE Conference on Comput. Commc’ns. Workshops 713 (2011), http://cse.unl.edu/~byrav/INFOCOM2011/workshops/papers/p713-achrekar.pdf.

[87] Jordan Crook, Uber Taps Foursquare’s Places Data So You Never Have to Type an Address Again, TechCrunch, (May 25, 2016) https://techcrunch.com/2016/05/25/uber-taps-foursquares-places-data-so-you-never-have-to-type-an-address-again/.

[88] See Rampell & Pande, supra note 49.

[89] See Mattioli, supra note 61, at 554 (“A final limitation on patentability possibly relevant to big data is patent law’s requirement of definiteness”).

[90] See Nautilus, Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014).

[91] See Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014).

[92] Robert R. Sachs, Two Years After Alice: A Survey of the Impact of a "Minor Case" (Part 1), Bilski Blog (June 16, 2016), http://www.bilskiblog.com/blog/2016/06/two-years-after-alice-a-survey-of-the-impact-of-a-minor-case.html.

[93] Id.

[94] Stephanie E. Toyos, Alice in Wonderland: Are Patent Trolls Mortally Wounded by Section 101 Uncertainty, 17 Loy. J. Pub. Int. L. 97,100 (2015).

[95] Id.

[96] Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2349 (2014).

[97] Id.

[98] Id.

[99] Id. at 2350 (emphasis added) (citation omitted).

[100] Id. at 2357 (emphasis added) (alteration in original) (citation omitted).

[101] Id. at 2350.

[102] Id. at 2351.

[103] Enfish, LLC v. Microsoft Corp., 822 F.3d 1327, 1330 (Fed. Cir. 2016).

[104] Bascom Glob. Internet Servs. v. AT&T Mobility LLC, 827 F.3d 1341, 1349 (Fed. Cir. 2016).

[105] McRO, Inc. v. Bandai Namco Games Am. Inc., 837 F.3d 1299, 1308 (Fed. Cir. 2016).

[106] Id.

[107] Bascom, 827 F.3d at 1349.

[108] Enfish, 822 F.3d at 1330.

[109] McRO, Inc., 837 F.3d at 1314.

[110] Id.

[111] Bascom, 827 F.3d at 1349.

[112] Id.

[113] Id.

[114] See Toyos, supra note 94, at 121; DDR Holdings, LLC v. Hotels.com, 773 F.3d 1245, 1257 (Fed. Cir. 2014).

[115] See supra Section II-A.

The ‘Enhanced No Economic Sense’ Test: Experimenting with Predatory Innovation

The ‘Enhanced No Economic Sense’ Test: Experimenting with Predatory Innovation
By Dr. Thibault Schrepel*


Download a PDF version of this article here

 

Introduction

“To evaluate is to create.

Hear this, you creators!”

– Friedrich Nietzsche

This paper originates from a long-standing anachronism of antitrust law with regard to high-tech markets. Conventional wisdom assumes that antitrust law mechanisms are well suited to the study of practices in technology markets and that only adjustments should be made to these mechanisms, and sparingly at that.[2] This is untrue. Several practices fall outside the scope of antitrust law because the mechanisms for assessing the legality of practices are not adequate. In fact, no one can accurately identify a typical legal approach for non-price strategies, a truth which gives way for a chaotic jurisprudence to emerge from this lack of universal understanding, which we will show.[3]

This article further aims to contribute to the literature by advancing a new test, the “enhanced no economic sense” (“ENES”) test, to be applied to non-price strategies.[4] We show why applying it with consistency will help to simplify the law while avoiding legal errors – two goals that all of the tests aiming to assess the legality of practices under antitrust law should reach.[5] Some of these tests, which are too permissive, generate many type-II errors but are easily understandable, and thus, increase legal certainty. Others, which are better suited and, in theory, allow avoidance of legal errors, are too complex to be applied by the courts and, above all, to be understood by laymen.[6] But one must not give up. Antitrust law is not condemned to remain blind to certain technical problems or, on the contrary, to be incomprehensible to the ordinary man. The “ENES” test brings a solution of reason to this long-standing issue.

We should not adopt a new test without first ensuring that it would allow courts and antitrust authorities to take a position in each individual case and that rulings would benefit consumers as a result.[7] Here again, the “enhanced no economic sense” test meets this double objective. It also helps to understand why several decisions made in the past are, we will argue, legal errors. The Microsoft case[8] is one of them.

In turn, this paper makes a proposal to rethink the way most of the new practices implemented in technology markets are actually evaluated. This study is particularly timely because the development of the issues related to these markets, and the growing interest shown by competition authorities[9] calls for an identified position; one which will not hinder their extraordinary growth.

This paper proceeds in three parts. The first part presents the “enhanced no economic sense” test, ranging from its foundations up to detail of its implementation. The second part probes the test’s empirical efficiency, exploring the most important predatory innovation cases on non-price strategy reassessing them through the prism of the “enhanced no economic sense” test, which helps to establish the test’s effectiveness. The last part expands these empirical findings and presents our conclusions.

I. THE IMPROVED VERSION OF THE “NO ECONOMIC SENSE” TEST

The “no economic sense” test is best suited to assess non-price strategies—in other words, all those which are unrelated to pricing changes. It complies with most of the characteristics that a test should have—its mechanism is easily understood and most of its criticisms fall short. And yet, the test may be improved to create less type-II errors while retaining its best features. This section details, accordingly, how to design a new version of it.

A. How to Determine Which Test to Apply

Determining which test is best-suited to assess non-price strategies implies considering which goals are to be assigned to antitrust law, and, accordingly, which characteristics the ideal test should have.

1. Regarding the Goals of Antitrust Law

The choice of which test is the most suitable for analyzing non-price strategies involves considering several elements. The first element is related to the goals that must be assigned to antitrust law.[10] These objectives may be grouped into three theories:

1. The “efficiency theory”:[11] according to this theory, antitrust law’s primary goal is to increase economic efficiency. Type-I errors[12] are seen as the greatest evil because they deter investments. Under this theory, there is no presumption of anti-competitive practices simply because a company holds a monopoly power.

2. The “consumer protection theory”:[13] this theory is based on the idea that the ultimate objective of antitrust law is to benefit consumers, not necessarily to increase economic efficiency. It contemplates criteria other than pure economic ones, such as preventing big mergers or overprotecting small businesses.[14]

3. The “growth-based theories”:[15] these related theories aim to enhance economic efficiency and prevent unwarranted transfers of consumers’ surplus. As a result, innovation is at the center of the debate, unlike theories which are only centered on economic efficiency and which do not necessarily involve the protection of innovation in and of itself.[16]

Most non-price strategies assume there are technological aspects directly related to innovative fields.[17] Accordingly, while evaluating practices’ efficiencies, courts must take great care not to impair innovation. For that reason, choosing a test included in the growth-based theories is ideal. The “no economic sense” test evaluates the reason a company has implemented practices and also makes it possible to take innovation and technological breakthroughs into account.

2. In Terms of its Efficiency

The second key component to be studied in order to identify the most appropriate test to detect anti-competitive practices is efficiency.[18] It cautions against multiplying the situations in which the courts are unable to judge whether some practices must be condemned.[19] It also means avoiding type-I and II errors.

In its 2005 study entitled “Competition on the Merits,”[20] the Organization for Economic Co-operation and Development (“OECD”) identified six criteria for evaluating various tests’ efficiencies.[21] The first relates to their accuracy: the tests must be based on accepted economic theories and, meanwhile, must avoid type-I and II errors. The second is linked to their administrability, understood as ease of applicability.[22] The third refers to their applicability: the tests should cover all of the issues raised by one type of anti-competitive practice. The fourth relates to their consistency, which should lead to homogeneous solutions.[23] As underlined by one author, the tests applied to predatory innovation are plural.[24] This should be changed. The fifth emphasizes their objectivity. The sixth and final criterion is related to their transparency. The tests must aim at defending the goals that have been identified as being the most crucial to antitrust law, i.e. the growth-based theories. The ENES test will meet these criteria, as explained below.

B. On Why the “No Economic Sense” Test Is Suitable

1. Its Main Characteristics

The “no economic sense” test is based on the simple idea that a practice should be regarded as anti-competitive if it makes sense from an economic point of view only because of its tendency to eliminate or to restrict competition.[25]

While this test is often presented as being close to the “profit sacrifice” test,[26] the fact of the matter is that it differs greatly from it. For instance, when applying the “no economic sense” test, a practice may be sanctioned if it makes no sense—besides creating anti-competitive effects—even though it did not involve any losses for the company.[27] At the same time, a practice that involves losses may still be seen as being pro-competitive if it is justified by potential gains in economic efficiency.[28] To the contrary, the profit sacrifice test condemns all practices that involve significant short-term sacrifices.[29] In short, the “no economic sense” test raises the question of why the defendant agreed to bear losses, which the profit-sacrifice test does not.

Gregory J. Werden, one of the “no economic sense” test’s greatest defenders, also underlined that, according to this test, practices are seen as being anti-competitive when, in addition of having no objectives other than eliminating or restricting competition, they also have the potential effect of restricting competition.[30] Establishing whether the practices have the potential to eliminate the competition is then a prerequisite,[31] and the burden of proof lies on the complainant.[32]

Also, the “no economic sense” test does not imply an ex-post evaluation of a practice’s effects. Rather the court’s duty is to evaluate the practice by taking into account all of the elements available to the dominant firm at the time of its implementation.[33] A practice may have been extremely profitable for reasons that were not anticipated by the company and this should not lead to a finding that the practice is pro-competitive. Also, as Werden notes,[34] a practice may have anti-competitive effects that were unpredictable at the time of its implementation and it should not be used as a means of late condemnation.

In fact, not evaluating the ex-post effects produced by a practice and not focusing on its costs are the reasons why the “no economic sense” test—even though it may be used to address non-price and price strategies[35]—is even more efficient for practices involving low costs, which is an important difference from the profit sacrifice test. It is then particularly suitable for evaluating predatory innovation, which is why it has led many jurisdictions to apply it in related cases.[36]

Another test called the “sham test” could also be suitable because its grounds are similar to the “no economic sense” test.[37] If we consider that innovation is an economic justification in itself, then, applying the “no economic sense” test asks whether the “innovation” is genuine or a “sham.”[38] An “innovation” will be considered a “sham” if it exists only for its negative effects on competition.[39] In other words, the definition of a “sham innovation” is any product modification that does not improve the consumer’s well-being in the short or the long term. The similarity of the two tests is particularly enlightening on the definition to be given for predatory innovation. In assessing whether innovation is real,[40] these two tests stand as opposing the vision of pioneer scholars Janusz Ordover & Robert Willig: that even genuine innovations can be anti-competitive.[41]

In short, unlike several other tests, which lead to a finding of anti-competitiveness in genuine innovations that improve the consumer welfare whenever anti-competitive effects are significant,[42] the “sham” and the “no economic sense” tests do not. The reason why the “no economic sense” test is preferable to the sham test is because it also encompasses non-price strategies that are not directly linked to products’ modifications, like those related to “low-cost exclusion” as a “refusal to deal”.[43] Further, its terminology is self-explanatory to the extent that the terms indicate its analysis mechanism, which can only increase legal certainty.

All of these reasons led to the application of the “no economic sense” test in the US courts[44] in Aspen Skiing,[45] Matsushita Industrial Co., Ltd. v. Zenith Radio Corp. and Brooke Group,[46] and US v. AMR Corp.[47] The Department of Justice and the Federal Trade Commission also argued for applying it in Trinko.[48] Instead, the Court applied the profit sacrifice test, without naming it, by deciding that the dominant company aimed to sacrifice short-term profits in order to compensate for long term ones.[49] Accordingly, criticisms of that decision are irrelevant to the “no economic sense” test.

European courts have also applied the test on several occasions, although they rarely use the exact terms to describe it. For instance, the Court of Justice implemented it in British Airways[50] and the General Court of the European Union did the same in UFEX[51] and Telefónica, referring to practices as “irrational from an economic point of view.”[52] The test was also applied by national competition authorities in France in British Airways v. Eurostar.[53]

2. Inoperative Criticisms

As we have shown, when dealing with predatory innovation, the “no economic sense” test is the best alternative. For that reason, Herbert Hovenkamp proposes applying it to all cases of this kind.[54] The vast majority of criticisms raised against it fall short.

As for consumer protection. Some have denounced all tests based on analyzing predatory innovation’s effects on the company that implemented it in any given instance.[55] They argue that antitrust law is about addressing the direct effect of practices on consumers[56] and that the “no economic sense” test does not protect consumer welfare.[57] But this criticism is based on false premises. Assessing whether a practice makes economic sense for reasons other than its anti-competitive aspects is the same as protecting consumer welfare because factors favoring consumer welfare align with economically sensible reasons for modifying an existing product. In fact, only two situations exist under the “no economic sense” test:

1. If the practice does not pass the test and thus is deemed to be unlawful, the damage to the consumer is certain since the anti-competitive effects of the practice have driven its implementation;

2. If the practice passes the test and is thus considered to be lawful, it may be:

a. entirely pro-competitive, a situation in which the consumer welfare is necessarily increased;

b. pro and anti-competitive at the same time (the practice is “hybrid”), but the practice is deemed legal as a whole in order not to discourage investments that ultimately benefit the consumer. There is a real danger in micro-analyzing innovation, practice by practice,[58] and applying this test avoids this pitfall to the extent that when practices are considered together a practice may be justified by the presence of another practice that is linked to it.

As for type-II errors.[59] One of the strongest criticisms[60] made to the “no economic sense” test is the courts’ supposed inability to evaluate hybrid practices that produce both positive and negative effects on competition.[61] Situations where a practice is economically justified but also involve anti-competitive features are indeed problematic. Predatory innovation is a good example of this; it would be easy for a company to modify one of its products in a small, pro-competitive way, while also implementing a very effective anti-competitive strategy. In fact, creating an analytical framework for this type of situation is the raison d’être of the “no economic sense” test.[62] This test seeks to avoid balancing the positive and negative effects to the extent that such a process is expensive and uncertain. The ENES test allows for some type-II errors rather than engendering type-I errors that discourage innovation.[63] In short, the “no economic sense” test prefers a result with type-II errors[64] to the possibility of implementing a more intricate test without consistency and accuracy.[65]

As for its simplistic features. Several authors have stressed[66] that some practices could be anti-competitive while being justified from an economic standpoint. This may be the case, for instance, when a company decides not to reveal the existence of several of its patents during a standardization process.[67] In such a case, the firm is implementing an anti-competitive practice although it is economically justified by the fact that it won’t necessitate providing extensive information about its patent—which may be a long and expensive process. In essence, the idea is that the “no economic sense” test is too Manichean,[68] and that a dichotomy between practices that are economically justified and practices that are not is far too removed from economic reality to hold true.[69]

Once again, this criticism seems to disregard the very foundations of the “no economic sense” test. The latter does not advocate for penalizing all practices that do not make economic sense, but only does for those that do not make economic sense without anti-competitive reasons behind them.[70] The example in which a company refuses to provide information to standard organizations is then covered.[71] In fact, let us ask the following question: why condemn the implementation of a practice that a company can justify? Antitrust law is not about imposing on all companies to have an overview of the markets on which they operate. Whenever they can justify a practice, it should be authorized, irrespective of its effects on competition.

As for its manageability. Some have pointed out that the “no economic sense” test was inapplicable when predatory practices involved low costs.[72] This statement is incorrect, however, to the extent that this test condemns practices that exclude competitors, regardless of the costs incurred.[73] Similarly, the criticism related to the inability to implement the test in situations where a company would have mixed intentions must be rejected since this test is indifferent to the subjective intention of the company.[74] One may think, finally, that the test is unsuitable for disruptive innovations in which development makes “no economic sense” because they are, for example, driven by an extravagant philanthropist’s irrational desire. But the “no economic sense” test does not lead to condemning such innovations either if they do not have solely anti-competitive consequences.[75]

As for giving leeway to the judge. The “no economic sense” test is said to create “safe harbors”[76] which would deprive judges of their utility. In this way, the application of the “no economic sense” test could be contravening the spirit of the rule of reason because it would create per se legalities. In reality, applying the “no economic sense” test does not remove the judge from the decision-making process. The judge remains in charge of deciding, according to the law, what constitutes a valid economic justification.[77] Such a role is particularly important as it gives legitimacy to the test as a whole.

As for subjective intent. A distinction should be made between objective and subjective intent. The first—objective intent—is the result of hard evidence, for instance, emails in which the company’s CEO has confirmed his intention to modify a product for the sole purpose of reducing competition.[78] The second one—subjective intent—implies inferring executives’ intentions by analyzing the facts. Some European authors argue for taking subjective intention into account[79] and the Chicago School’s scholars have also done so by stressing that the intention is important[80] when evidence of anti-competitive harm cannot be provided by other means.[81] Courts could adopt three different approaches:[82]

1. not taking subjective intent into account;

2. taking subjective intent into account only when it is proved to be useful and without asking for the anti-competitive intent to be shown in order to condemn a practice;

3. taking subjective intent into account so to establish a violation of antitrust law.

In fact, taking subjective intent into account is championed by Phillip Areeda & Herbert Hovenkamp.[83] Courts have taken subjective intent into account in the C.R. Bard v. M3 Systems[84] case. It was also the position adopted in the Microsoft case.[85] Other cases have followed since then.[86] In fact, several of the tests assessing the legality of unilateral practices take subjective intent into account. The “no economic sense” test does not, which is fortunate for our purposes.[87] In our review, only hard facts and empirical data should be used to establish practices’ illegality. In fact, taking a company’s subjective intent into account is far too unpredictable because it requires frameless control by the judge. Antitrust law is about pursuing economic efficiency. It should lead to imposing penalties only when the evidence of damage is indisputable.[88] Also, because innovation is inherently predatory,[89] taking subjective intention into account makes little sense.

Accordingly, some of the European and North American doctrine on this topic opposes the inclusion of subjective intent.[90] Frank H. Easterbrook, for instance, particularly highlighted the fact that analyzing intention did not allow one to distinguish between true monopolization and attempts to monopolize.[91] He stressed that evaluating a company’s subjective intention was expensive and had the effect of reducing legal certainty.[92] Further, distinguishing anti-competitive intent from pro-competitive intent may be more difficult than it seems. The language used between business executives may wrongly imply an anti-competitive intention. Considering subjective intention could be particularly harmful for small businesses where the language used by the staff may be more explicit than it is in larger corporations where executives are more sensitized to antitrust rules.

As for behavioral economics. Some authors[93] advocate for incorporating “behavioral economics according to which agents sometimes show a bounded rationality.[94] But the “no economic sense” test wisely rejects any consideration of behavioral economics.[95] No one would argue that agents are rational in every situation, and further, behavioral economics lacks empirical evidence to be integrated into the decision-making process.[96] Studies of behavioral economics fail, to the best of our knowledge, to reveal consistent trends that might be integrated into the rule of law.[97] It must therefore be set aside—as least for ex ante purposes—until it becomes more sophisticated.

As for its long-run effects. Professor Salop highlighted that the “no economic sense” test could lead to legalizing practices that provide an immediate benefit to consumers, such as improving a product, but eliminate competition over the long term, for instance, by removing product compatibility.[98] This would have the effect of increasing prices and thus harming consumers.[99] Such an example, however, assumes that the dominant firm is willing to reduce the usefulness, and therefore the value, of its product by removing its compatibility with other products. This hypothesis also presumes that the company enjoys an absolute monopoly power, because, otherwise, it would be safe to say that competition would actually push it towards compatibility with the aim of creating a network effect.[100] Plus, in the absence of a monopoly power, eliminating compatibility could lead consumers to adopt competing products.[101]

This hypothesis assumes, furthermore, that the dominant firm is present on both the upstream market, concerned by the changes, and a downstream market, where compatible products are. If this is not the case, removing compatibility would be illogical.[102] The example presumes, also, that the market conditions will stay unchanged. It also excludes dynamic efficiency considerations. Indeed, it is required for the dominant firm to know that its market shares will remain at a constant level, otherwise, it may not recoup its losses.[103] With high-tech markets, where market shares are evolving very quickly, it seems unlikely that companies would take such a risk. Disruptive technologies appear abruptly and create new markets, which very often eliminate all possibilities for “locking” the consumer into a market that no longer exists.[104] This example presumes, lastly, that it is better for consumers to have compatible products of lower quality than incompatible products with a higher quality. These different assumptions put together tend to prove the ineffectiveness of this criticism.

As for empirical evidence. Part of the scholarship on this topic notes that the “no economic sense” test excludes empirical evidence on the effects of practices.[105] It seems, conversely, that it allows a fair balance between legal certainty, on the one hand, and the need to consider empirical evidence in order to improve the analysis on the other.[106] If new empirical evidence shows that a practice, previously legal, is in fact having anti-competitive effects, the “no economic sense” test will lead to condemn it. The contrary is true as well. A practice seen as illegal for years may become permissible if new economic evidence is adduced by the company.

C. How to Improve the “No Economic Sense” Test

We have shown that the “no economic sense” test is particularly efficient for analyzing non-price strategies such as predatory innovation. And yet, as explained, applying the test as it was originally designed implies a trade-off: creating some type-II errors in exchange for legal certainty. Although this could be defended, this article intends to demonstrate how this trade-off may be avoided by applying an improved version of the “no economic sense” test, which would maintain legal certainty while avoiding any type of legal errors.

The “no economic sense” test might be improved, but it is important not to create a new version that would have high implementation costs. While keeping this objective in mind, we propose an “enhanced version of the ‘no economic sense’ test,” which answers criticisms related to the underinclusivity of the test and potential difficulties with applying the test when pro and anti-competitive modifications coexist.[107] Two situations may thus be distinguished, one in which product changes are separable from one another and one in which the changes cannot be isolated.

When the changes may be separated from each other. Unlike innovations in the traditional sectors of the economy, innovations developed in high-tech markets often have the advantage of being readable[108] to the extent that it is possible to analyze each line of the source code.[109] Whether innovations introduced in high-tech sectors intend to create a new software structure, to add new features to a product, to facilitate product use, or to increase its security, most of these objectives are achieved by the means of one or more lines of code.[110] The purpose of each of these lines is clearly identifiable.[111]

The software (or product) as a whole is thus distinguished from each of the features that can be adjusted individually.[112] It may also be distinguishable from its updates if the introduction of new software always benefits to the consumer,[113] some of its updates may play against its interest. Accordingly, some authors have raised[114] the point that predatory innovation is more easily identifiable on high-tech markets than others.[115]

Consequently, the “no economic sense” test may be improved by identifying the purpose of every update of a product, and more specifically, each element of the update. Litigious situations where pro and anti-competitive effects are recorded simultaneously tend to disappear to the extent that each of these effects may be separated from the others. As a result, applying the “no economic sense” test is even more relevant. It is not for the judge to interfere with the company’s management and/or express disapproval with the strategic choices so to punish companies for not having implemented “less anti-competitive[116] practices. Rather, the judge is tasked with punishing actors that implement practices that could have been implemented without harming the consumers’ well-being.

Applying the enhanced version of the “no economic sense” test will have the following structure: in the first instance, the complainant will have to establish the injury he suffered, and in response, the defendant will try to justify each of the changes made to the product. The judge will guarantee the proper conduct of this analysis and will identify all product modifications that have a solely anti-competitive effect. This role is crucial. Consider the situation where a company decides to eliminate its products’ compatibility with those of its competitors. Imagine that the dominant firm is justifying this change by showing that the new version of its product allows geo-location. In this example, the company has an economic justification—adding a new function to its product—but because it is unrelated to the removal of compatibility, doing so is anti-competitive and should be condemned. The judge then has the responsibility to reject all economic justifications made in bad faith. When doing so, he ensures that companies cannot escape liability, as they might under the traditional “no economic sense” test, by presenting “ghost” justifications[117] unrelated to their practices.

Rules for eligibility of evidence in these inquiries can be inspired from the Daubert criteria,[118] which fit in line with the work of Karl Popper.[119] In its famous ruling, the Supreme Court held that pursuant to Rule 702 of the Federal Rules of Evidence governing expert testimony, only those using recognized “scientific method[s]” are to be taken into account. The court admitted the need to “filter” the scientific evidence produced in court. A similar filter should be implemented when applying the “no economic sense” test to invalid economic justifications, evidence or, expert reports that do not have a scientific value but have the sole purpose of obscuring the procedure.

When the changes are indivisible. Although the changes made to a technological product are generally separable from each other, that is not always the case. Let us imagine a situation in which a dominant firm decides to remove the compatibility of its products with the specific aim of increasing their safety. It would be possible to track what changes in the coding led to elimination of product compatibility. However, if the economic justification provided by the company—namely increasing products’ safety—is directly linked to the compatibility removal, the practice will be considered pro-competitive.[120] In this situation, a single line of code is added (or removed) to delete product compatibility, but it produces two consequences that cannot be separated. Imagine an alternative situation in which a company decides to increase the execution speed of its software by using Wi-Fi rather than Bluetooth. In addition, suppose that, for security purposes, all compatible devices use Bluetooth rather than Wi-Fi. Once again, the judge could easily track which lines of code have enabled the addition of new functionality, on the one hand, and the removal of product compatibility with Bluetooth on the other. Yet, the practice must be deemed pro-competitive because increasing the speed of the product is a valid economic justification caused by replacing the Bluetooth functionality. In this case, even though several lines of code are modified, they cannot be analyzed separately.

Accordingly, the judge must (1) ensure that only valid economic justifications are brought by the parties and (2) determine which modifications may be separated from each other.[121] These two steps are the keystones of a decision process free of judicial errors. This reasoning seeks to encourage investments in the short term and allow continued sophistication of antitrust law by better matching business justifications. In order words, it is about creating the smallest safe harbor possible—when practices cannot be separated—so that antitrust law is effective. It allows, at the same time, a drastic increase in the level of legal certainty by providing an understandable legal framework.

D. Modeling of the Proposed Test

The enhanced version of the “no economic sense” test is comprised of four steps. Together, the steps ensure a legal analysis that detects predatory practices as precisely as possible.

Step 1: Does the practice implemented by the dominant company tend to reduce or eliminate competition? If the answer is negative, the practice is deemed to be legal. If the answer is positive, the analysis moves on the second step.

Step 2: Does the practice provide a benefit to the dominant firm solely because of its tendency to reduce or eliminate competition?[122] If the answer is positive, the practice must be condemned. If the answer is negative, the analysis moves on the third step.

Step 3: If the judge suspects that some of the effects created by the practice are pro and anti-competitive, he must determine whether it is possible to distinguish between the modifications made to the product and their economic justifications. If the answer is negative, the practice is deemed to be legal as a whole. If the answer is positive, the analysis moves on the last step.

Step 4: Modifications that make economic sense for reasons that are not anti-competitive must be allowed, while modifications that only tend to reduce or eliminate competition must be condemned. The penalties should be proportional to the intensity/number of anti-competitive practices.

This test, by avoiding judicial errors, ensures short-term efficiency by raising the level of legal certainty for companies while eliminating practices that, without any doubt, are predatory. Moreover, allowing courts to analyze practices related to product modifications will have long-term effect of improving their expertise. Finally, it must be noted that some practices deemed to be legal will be proved to be anti-competitive in a near future. The opposite is true as well.


This graphical representation summarizes the 4 steps detailed beforehand.[123]

Image

II. APPLICATION TO MAJOR PREDATORY INNOVATION CASES

Now that the enhanced version of the “no economic sense” test has been explained, it will be applied to the major cases dealing with predatory innovation so as to demonstrate its efficiency. The same methodology is used for each case. We begin with a brief summary of the facts, then we explain the test applied by the court and the court’s decision.[124] We then apply the new test to the facts and discuss alternatives to the courts’ conclusions.[125]

A. The Berkey Photo v. Eastman Kodak case (1979)[126]

Facts. In the late 1960s, Kodak dominated the cameras and compatible products markets. In 1972, the company decided to introduce a new system, the “110 Instamatic,” as well as a new device, the “Kodacolor II film.” The new device was smaller and simpler to use than the previous ones. It was also incompatible with the products of one of its competitors in an ancillary market. Berkey brought suit against Kodak for having illegally removed the compatibility of its products.

The test applied by the court. The Second Circuit applied a “reasonableness” test[127] and centered its analysis on the fact that a single improvement could justify all modifications made to the product.

The solution. First, the Second Circuit held that an “innovation” may be prohibited by antitrust law if it is proved to be anti-competitive.[128] The court then noted that the new camera introduced by Kodak, the Kodacolor II film, had several lower quality features than its former model. In particular, the Court found that its autonomy was shorter[129] and that it generated more “red eye” in photos. The new device, however, had a better grain[130] and was smaller. The judges then held that comparing the features of the two devices was not a probative element given the different characteristics of the two, which were performing better in different areas.[131] The Court held that Kodak was not liable.[132]

Application of the enhanced version of “no economic sense” test. The Court’s holding justified a set of practices on the ground that one of them was pro-competitive.[133] But, as we have discussed, whenever it is possible to distinguish between the modifications made to a product and their justifications, the judge must condemn the anti-competitive ones. In the present case, Kodak—which initially asked for a per se legality to be applied—argued that the few improvements made to its product justified all the modifications, including those that may have anti-competitive aspects.[134] Berkey argued, on the contrary, that Kodak had introduced a less efficient camera for the sole reason that it would no longer be compatible with Berkey products, which justified holding them liable.[135] The Court found that even though some of the new features of the Kodacolor II were inferior to those of Kodacolor X, they did not translate into anti-competitive strategies in themselves because they could have reduced the attractiveness of the new camera to consumers without directly affecting competition. Berkey’s argument based on the characteristics of the Kodacolor II film was accordingly deficient.[136] In addition, Berkey failed to prove that Kodak could have marketed a smaller camera while improving all characteristics of the earlier version. Nevertheless, one must ask whether removing the new camera compatibility with Berkey’s products was a necessity in order to achieve its goal. In the present case, because Kodak did not demonstrate the causal link between the new design of its device and the need to remove it, it arguably could have been held liable.

Applying the enhanced version of the “no economic sense” test would have resulted in a different outcome from the one found by the Second Circuit. Kodak could have been held liable for having removed the compatibility of its new camera—if it was an anti-competitive strategy, which the Court did not address. Legal certainty would have been enhanced by a court decision that provides clarity and predictability to all companies on the market, which would, in turn, minimize impeding innovation by a type-II error. Not to mention, it would have also benefited consumers.

B. The North American Microsoft case (2001)[137]

The approach adopted by European and North American courts regarding predatory innovation practices differ on several points. Notably, European judges extend the essential facilities doctrine to high-tech markets while North American courts refuse to do.[138] The Microsoft case illustrates this fundamental distinction. This case also remains one of the pillars of predatory innovation doctrine. It is, in fact, the first case in which a court studies software encoding in such detail.[139]

Facts. The Microsoft case was the subject of a long series of jurisprudence, which ended in June 2001 (with “Microsoft III”) with a decision of the United States Court of Appeals for the District of Columbia.[140] One of the practices considered[141] was the way Microsoft integrated Internet Explorer into its operating system. In doing so, the company:

• deleted the function allowing one to remove the software from the operating system (practice n1);

• designed the operating system in order to override the user’s choice to use a different browser (practice n2);

• designed the operating system so that when certain files related to Internet Explorer were removed, bugs appeared (practice n3).

The plaintiffs stressed that Microsoft had set up several anti-competitive practices to eliminate Netscape, which was a browser that provided some basic functions similar to that of an operating system.[142] Moreover, the complainants denounced the fact that Microsoft had developed a Java script incompatible with Sun Microsystem’s products.[143]

The test applied by the court. This decision is one of the first related to high-tech markets to have considered the balancing test,[144] even though the court did not apply it. The burden of proof was initially on the plaintiff to demonstrate the anti-competitive effects of the practices.[145] The defendant then had to demonstrate that the pro-competitive effects prevail over anti-competitive ones.[146] In theory, if the defendant did so, the plaintiff then had to prove that the defendant was incorrect. This balancing theoretically ended once a party showed conclusively that the dominant effects were pro or anti-competitive. In the present case, even though the court was “very skeptical about claims that competition has been harmed by a dominant firm’s product design changes,”[147] it opined that applying a per se legality to such practices was inappropriate because they may have various effects on competition.[148]

The solution regarding Internet Explorer.[149] The Court held that practices n1 and n3 were illegal.[150] On the other hand, it found that the practice n2 was pro-competitive. The court ruled that the “technical reasons” provided by Microsoft were exculpatory considering that the plaintiffs failed to demonstrate a greater anti-competitive effect.[151] The Court also ruled that a company’s technical justifications may not be sufficient to establish the legality of a practice. This implies that a genuine technical innovation may be considered anti-competitive if it causes great damage to the competitive process. This reasoning was not applied in this case because the plaintiffs failed to demonstrate any anti-competitive effect,[152] but it did challenge the claim that antitrust law protects innovation.[153] The consequences in terms of disruptive innovation are particularly dangerous because they create a destructive effect on existing markets. In short, a sole pro-competitive effect was proven in practice n2, but only anti-competitive effects were argued for practices n1 and n3. As a consequence, the judges did not conduct a balancing of any of the effects[154] and the decision does not illustrate the practical application of the balancing test.[155]

The solution regarding Java. The plaintiffs also challenged the practices implemented by Microsoft in the development of Java for Windows. They complained, in particular, that Windows Java was incompatible with Sun Microsystems’ products.[156] Windows, in opposition, argued that its own Java should be allowed because of its superiority to Sun’s Java.[157] The Court found that a company’s dominant position does not prohibit it from developing products that are incompatible with those of its competitors,[158] and thus, the court justified Microsoft Java’s incompatibility with Sun because of its greater power and speed.[159]

Application of the enhanced version of “no economic sense” test. The Microsoft decision suffers from numerous flaws that would have been eliminated by applying the enhanced version of the “no economic sense” test.[160] According to the information available in the decision, Microsoft gave no pro-competitive justification for practices n1 and n3.[161] It is unclear whether Microsoft gave justifications that were rejected earlier in the procedure, but in the absence of any, these practices made sense solely because of their tendency to reduce or eliminate competition. A fine should have then been imposed.

Practice n2 was justified by Microsoft on the grounds that using Netscape’s browser prevented the use of the “ActiveX” which allowed the proper functioning of “Windows 98 Help” and “Windows Update.”[162] Microsoft also justified the forced use of Internet Explorer by explaining that when the user started Internet Explorer from “My Computer” or “Windows Explorer,” a different browser would not have enabled them to keep the same window.[163] Surprisingly, the court did not analyze the way Windows operated in more detail. Indeed, if it had been shown that the use of ActiveX was prevented when using another browser because of Microsoft’s anti-competitive desire, or, in other words, that Microsoft could have allowed Active X even with another browser, the company’s technical justification would have been nullified. Similarly, if it had been shown that another browser would have created the same ease of use with “My Computer” and “Windows Explorer,” the holding that only Internet Explorer could do it would have been refuted. In the absence of additional information, it is impossible to say whether the practice implemented by Microsoft was pro or anti-competitive. The lack of conviction in this case tends to minimize the poor reasoning led by judges, but a more detailed decision would have increased legal certainty, and ultimately would have promoted innovation.

Regarding the practices related to Java, the Court found that because Microsoft’s Java was more powerful than Sun’s, its design was de facto justified.[164] The dominance Microsoft enjoyed at the time did not create any duty to design compatible products with its competitors. It should be emphasized, however, that a different outcome would probably have been reached in the European system because of the principle of “special responsibility” for dominant firms. In any event, the application of the enhanced version of the “no economic sense” test would have resulted in an acquittal on behalf of practice n2. The application of that test would have also increased legal certainty by providing businesses a more comprehensive grid of analysis than the enigmatic one given by the Court.

C. The European Microsoft Case (2004)[165]

The Microsoft case, along with the Google case,[166] remains to this day the most iconic case in terms of abuse of dominant position. In addition to its importance regarding penalties, it is the first decision in which the Commission found that network effects could be used to strengthen the barriers to entry in high-tech markets.[167] Unlike the North American decision, the European Commission did not analyze the way[168] Microsoft integrated its software (here a media player) into its operating system. The North American judges condemned the company because the integration of Internet Explorer came along with micro-practices possessing anti-competitive effects that were distinguishable from the integration. The European decision, in contrast, disputed the integration of Windows Media Player in itself.[169]

Facts. On December 10, 1998, Sun filed a complaint against Microsoft on the grounds that Microsoft had refused to provide information allowing for the interoperability of Sun’s products with Microsoft’s PC.[170] In February 2000, the European Commission launched an investigation against Microsoft.[171] A second statement of objections against Microsoft involved interoperability and the integration of Windows Media Player within its operating system.[172] And yet another statement of objections was sent to Microsoft in 2003 following a market survey.[173]

The test applied by the court. Above all else, it should be underscored that the European Commission rejected Microsoft’s argument that antitrust law could not be applied to the New Economy.[174] The Commission pointed out that “the specific characteristics of the market in question (for example, network effects and the applications barrier to entry) would rather suggest that there is an increased likelihood of positions of entrenched market power, compared to certain ‘traditional industries’,” and required a strict application of antitrust law.[175]

In fact, the European Commission seemed to apply a similar test to the one used by the North American Federal Court, but it is difficult to say if the Commission applied a “balancing” or a “disproportionality” test[176] given that the term “proportionality” does not appear in the decision.[177] But the similarities stop here. The North American and European procedures did not use the same semantic field[178] and practically showed a will to reach different outcomes. The European Commission multiplied the references to “the prejudice of consumers,”[179] “network effects,”[180] and “interoperability,”[181] while the Department of Justice reported the “predatory”[182] nature of the practices and the need to protect “innovation.”[183] The European Commission indirectly intended to ensure consumer protection by enabling products interoperability while the Department of Justice developed a broader view through a defense of innovation that aimed not to create type-I errors.[184] Most of the European Commission’s decision is devoted to the rules of “tying,”[185] which highlights the amalgam between this notion and the one of predatory innovation.[186] It also shows why “tying” does not cover all of the issues related to predatory innovation.[187] The Commission found that Microsoft had not put forward any efficiency gain that would justify the integration of its Windows Media Player into the operating system.[188] It held, however, that anti-competitive effects may have outweighed efficiency, at least in theory.[189]

The solution. The European Commission sanctioned Microsoft for numerous antitrust violations, which were confirmed by the General Court.[190] In analyzing Microsoft’s integration of the Windows Media Player (“WMP”) into its operating system, the Commission began by observing that there were no technical means to uninstall the player.[191] This observation led the Commission to analyze whether the interdependence of Windows Media Player with the operating system was necessary, thereby avoiding one of the main pitfalls of the American decision.[192] Microsoft replied, “if WMP were removed, other parts of the operating system and third party products that rely on WMP would not function properly, or at all.”[193] Here, Microsoft intended to prove the absence of predatory innovation, which deserved to be discussed. Unfortunately, the European Commission did not answer the argument.

In fact, the European Commission did not seem to address this issue because it was described under the broader label of tying. Instead of addressing the issue, the judges were almost exclusively concerned by the fact that Microsoft did not market a version of Windows without Windows Media Player.[194] But the practice in question concerned the functionality of the operating system. And the notion of tying was unfit to be applied because there was a technical reason to combine the products into one.[195]

Here lies one major criticism[196] one can make regarding European Commission decision: by refusing to analyze the issue of predatory innovation, the Commission deprived its decision of a legal basis for examining all of the anti-competitive effects identified by the complainant. The European Commission also noted that “it can be left open whether it would have been possible to follow Microsoft’s above line of argumentation had Microsoft demonstrated that tying of WMP was an indispensable condition for simplifying the work of applications developers.”[197] It was added that “Microsoft has failed to supply evidence that tying of WMP is indispensable for the alleged pro-competitive effects to come into effect,”[198] thus concluding that it was “technically possible for Microsoft to have Windows handle the absence of multimedia capabilities caused by code removal (and the resulting effect on any interdependencies) in a way that does not lead to the breakdown of operating system functionality.”[199] In this respect, the Commission held that Microsoft had not provided tangible evidence to support their argument that the integration of Windows Media Player simplified the work of application designers.[200] Conversely, the Commission did not underline a discussion regarding whether the integration of Windows Media Player to the operating system had allowed a more complete experience of Windows. Nevertheless, it concluded “it is appropriate to differentiate between technical dependencies which would by definition lead to the non-functioning of the operating system and functional dependencies which can be dealt with ‘gracefully.’”[201] In other words, Microsoft could have kept the other functions of the operating system but all functions directly or indirectly related to the use of such a player would have been inoperable without it or another player.[202] The distinction between technical and functional interoperability held by the European Commission is, in fact, essential. It indicates a difference between the interoperability necessary to the functioning of a product on the one hand and allowing a new feature to work properly on the other.

The Commission imposed a €497 million fine on Microsoft for its practices.[203] In a press release related to the United States’ investigation of the same matter, the Department of Justice called the sizable fine regrettable, especially because unilateral competitive conduct is “the most ambiguous and controversial area of antitrust” law.[204] The Commission also required Microsoft to sell a version of its operating system free of its Windows Media Player.[205] Lastly, the Commission ordered the company to disclose information that it had refused to previously provide for the development of products compatible with its own.[206]

Application of the enhanced version of “no economic sense” test. To the extent that the integration of Windows Media Player had strong pro-competitive effects—such as providing cost and time savings to consumers—applying the proposed test would have necessarily led to not condemning Microsoft. The Microsoft decision is therefore a type-I error. It would have been helpful for the Commission to analyze the anti-competitive aspects separate from pro-competitive aspects, but the Commission did not, demonstrating how European courts and authorities deal improperly with predatory innovation.[207] Analyzed correctly, the enhanced version of the “no economic sense” test shows that it was not possible to dissociate the integration of Windows Media Player from enhanced consumer well-being. Forcing the consumer to download another media player carried a direct injury to the consumer in itself. Further, Windows Media Player was not exclusive. In other words, the integration of WMP made economic sense to Microsoft not only because of the potential anti-competitive effects, but also because it improved the user experience. Accordingly, the European Commission made a critical error by holding a real innovation anti-competitive. The fact is that it is not for judges to order functions’ removal if they benefit consumers. In such a world, the door is open for competition authorities to prevent all innovations producing a low anti-competitive effect despite having great pro-competitive effects.

D. The iPod iTunes Litigation

The iPod iTunes Litigation is the most recent case to have drawn a great deal of attention to a practice of predatory innovation. It is particularly important because it took place several years after the Microsoft and Intel cases, both of which had been influential for analyzing practices in the high-tech sector.[208] Yet, to the best of our knowledge, the iPod iTunes Litigation has never been examined closely.

Facts. On November 10, 2001, Apple introduced its portable music player, called the iPod.[209] One of its competitors, RealNetworks, analyzed the iPod’s software and managed to extract the code created by Apple for listening to downloaded files on the iPod. RealNetworks inserted this code in all MP3s sold in the RealNetworks Music Store. In 2001, Apple introduced iTunes, free software allowing users to manage audio files on the iPod. On April 28, 2003, Apple also introduced the iTunes Music Store (“iTMS”), an online store enabling direct music purchase.[210] Apple managed to modify the format of the regular audio files purchased on the iTMS by introducing a digital rights management (“DRM”) to restrict the use of regular AAC (“Advanced Audio Coding”) files.[211] This format was referred as “AAC Protected” and iTunes used a feature called FairPlay, which allowed Apple to manage this DRM. Apple also changed the iPod internal software so as to allow the proper reading of these “AAC Protected” files.[212] In July 2004, RealNetworks introduced the new version of its RealPlayer. It included a feature called Harmony that sought to imitate FairPlay compatibility and enable audio files purchased from the RealNetworks online store to be played on the iPod. In October 2014, Apple decided to release the version 4.7 of iTunes.[213] This version changed the FairPlay encryption method, removing any compatibility between Harmony and iTunes.[214] RealNetworks then restored this compatibility.[215]

A first complaint was introduced on January 3, 2005, denouncing the anti-competitive strategy implemented by Apple in order to eliminate competition on the online market for selling music.[216] On February 28, 2005, the plaintiffs also denounced the modification made by Apple of a free audio format, the AAC, into a protected audio format, the “AAC Protected.” They underlined Apple’s intention to exclude competitors from the market through an anti-competitive strategy[217]—predatory innovation. The applicants pointed out that the audio files purchased from the iTMS became incompatible with other audio players. Also, any files purchased from a store other than iTMS became incompatible with the iPod. Lastly, the complainants alleged that Apple was unlawfully tying by requiring the purchase of an iPod in order to listen to the files bought on the iTMS and by forcing users to purchase songs on the iTMS in order to be able to use the iPod.[218] On March 7, 2005, Apple responded to the complaint pointing out, in the company’s opinion, the inaccuracy of the complainants’ allegations.[219] Apple stressed that listening to the files bought on the iTMS using other music players remained possible by “burning” them into a CD-ROM and then by extracting the files from the CD on a computer to delete the protection.[220] As for tying, Apple underlined that a practice may not be condemned as such if, by buying the two products separately, it would be so expensive that no consumer would do so.[221] In September 2006, Apple released version 7.0 of iTunes, which, aside from introducing new features, once again deleted iTunes’ compatibility with Harmony.[222]

The test applied by the court regarding iTunes 4.7. Following a long process, the United States District Court for the Northern District of California was in charge of determining the legality of iTunes 4.7. Quoting Allied v. Tyco, the judges pointed out that the District Court has ruled that “there is not a per se rule barring Section 2 liability on patented product innovation.”[223] They also held that balancing the pro and anti-competitive effects of a new product was rejected in Allied.[224] The judges applied the same reasoning, holding that when a real improvement is shown, antitrust law should not condemn the modification.[225]

The solution found by the court regarding iTunes 4.7. Apple argued that the introduction of this new version of iTunes was motivated by the necessity to improve its security through the strengthening of anti-piracy protections.[226] Apple stressed, in particular, that (1) the earlier version of the software had previously been pirated, (2) that the proliferation of computer attacks that occurred at the beginning of 2004 led some music labels to require Apple to take corrective action, and, (3) that they changed the encryption method in accordance with the contractual provisions sent by music labels.[227] RealNetworks underlined that Apple’s true intention was to remove the compatibility with the audio files purchased from its online store.[228] RealNetworks also stressed that Apple began developing a new FairPlay a month after it refused to grant RealNetworks a license, proving Apple’s anti-competitive intention. RealNetworks said it had concluded numerous deals with music labels, which threatened Apple’s position on the market for selling online music.[229] The company also emphasized how it had increased its market shares after launching Harmony, whereas Apple’s market share had, for the first time, dropped below 70%.[230] RealNetworks lastly argued that Apple showed its anti-competitive intention by threatening to remove any compatibility with Harmony.[231]

The Court ultimately rejected RealNetworks’ arguments. The court ruled that the introduction of iTunes 4.7 was a real improvement that could not be condemned. In particular, they emphasized that the expert appointed by RealNetworks reported himself that the new version of FairPlay was indeed harder to hack, significantly increasing its safety.[232] The court also underlined that no other practices implemented by Apple could have been challenged under antitrust law.[233] This precision is particularly interesting because it seems to recognize the possibility of dissociating the various technical changes made by Apple, on one side, and the pro-competitive modification related to FairPlay security, on the other. But in fact, the Court merely analyzed whether Apple had breached antitrust law, without examining the technical aspects of the product in too much detail. This decision, thus, did not apply the enhanced version of the “no economic sense” test.

Application of the enhanced version of “no economic sense” test regarding iTunes 4.7. The court held that the practice implemented by Apple had the effect of reducing competition in the market for online music sales.[234] Yet, it is necessary to consider the possibility of distinguishing the improvement in terms of FairPlay’s safety from the eventual anti-competitive effects, namely, the removal of compatibility. Unfortunately, it is not possible to process this analysis as relevant expert testimonies are still covered by business confidentiality.[235] Accordingly, the merits of the decision adopted by the Northern District of California cannot be denied nor confirmed.

The litigation regarding iTunes 7.0[236] is of the same nature, though more complex. It occurred based on the fact that, in 2006, Apple introduced iTunes 7.0. Complainants highlighted similar problems to the 4.7 version.

The test applied by the court regarding iTunes 7.0. A jury was asked to evaluate the modifications made to iTunes 7.0.[237] The process that led to the question asked to the jury is to be analyzed carefully because its formulation significantly influenced the final outcome. Two points of disagreement arose between the parties. The first was related to the possibility of separating the practices from one another. The second concerned taking into account subjective intent, because even though the practices were seen as an indivisible whole, they could have been considered anti-competitive.

Regarding the modifications’ separability. In a November 18, 2014 document, which was jointly submitted by the two parties in order to define the legal issues, Apple’s counsel crystallized the case around the following questioning: was iTunes 7.0 a real improvement?[238] Apple’s counsel sought to apply the test set out in Allied Orthopedic, according to which if a product is improved, the modifications are deemed to be legal.[239] Accordingly, the new version of a product is either an improvement or a strategy seeking to eliminate competition.[240] The plaintiff noted that the way the question was formulated favored Apple.[241] They emphasized that evaluating whether the new version of iTunes included improvements was not sufficient.[242] They underlined, notably, that the changes made to the KeyBag Verification Code (“KVC”) and the Database Verification Code (“DVC”) should have been brought to the jury’s attention as being independent practices.[243] Conversely, Apple argued for these amendments to be considered as a whole along with the iTunes 7.0 improvements.[244] And indeed, Apple stressed that according to Allied v. Tyco, all the changes were to be considered as an indivisible whole,[245] and that anyway, the practices could not have been differentiated in practice. Apple also gave two technical justifications for its actions: an increase in security, as well as strengthening against product corruption.[246] Unsurprisingly, in the hearing held on December 1, 2014, plaintiff’s counsel argued that they needed to ask the jury separately about the different product modifications.[247] The Court decided mentioning coding issues to the jury would be confusing.[248] All product modifications were then presented as an indivisible whole.[249] In this regard, it should be stressed that avoiding legal errors cannot be done when the essence of the issues are not submitted to the discretion of the courts and juries. Moreover, even by assuming that mentioning coding would have confused the jury, nothing actually prevented the court from analyzing the coding beforehand and then submitting an adapted question to the jury.

Regarding subjective intent. The plaintiffs stressed that according to Allied Orthopedic, a company that has improved its product but also voluntarily created substantial anti-competitive effects should be condemned.[250] They alleged that the improvements made on iTunes had anti-competitive purposes[251] and asked for the improvements to be balanced with the anti-competitive intent. They suggested that the jury follow a two-stage approach, analyzing whether the improvements were real, and if so, whether Apple had been driven by anti-competitive intent.[252] Apple stressed that the intention did not matter considering the fact that competition by innovation is about harming competitors by introducing a new product.[253] Apple claimed that, as long as some improvements to the product were shown, it could not have been sanctioned regardless of other considerations.[254] The judges took Apple’s side, stressing that product improvements were not to be balanced with anti-competitive intent. We subscribe to this analysis.

The solution found by the court regarding iTunes 7.0. The jury was asked the following question: “Were the firmware and software updates in iTunes 7.0, which were contained in stipulated models of iPods, genuine product improvements?”[255] and answered in the positive, saying that the update of iTunes 7.0 was a real improvement, and, therefore, pro-competitive.[256] Because of the question’s wording, the modifications made to the DVC and KVC codes were not properly analyzed.

Application of the enhanced version of the “No Economic Sense” Test regarding iTunes 7.0. Both claims made by the parties are supported by precedents.[257] In fact, the diversity of the tests chosen by the various jurisdictions throughout the years and the lack of standardization of these tests have had the effect of creating a very unclear jurisprudence, resulting in hard-to-understand litigation. On the merits, Apple’s argument, according to which all modifications were indistinguishable, is not convincing. The link between allowing videos to be played on iPods and the need to enhance security is not particularly obvious, but judging whether other changes[258] did necessitate eliminating compatibility should have been performed.[259] Unfortunately, such an analysis may not be conducted in great detail as the expert testimonies are still covered by business confidentiality.[260] Let us simply underline that not analyzing each modification separately raises the possibility that a type-II error was actually pronounced. Unfortunately, the necessary information to conduct a deep analysis is not available.

CONCLUSION

This paper has examined the ENES test from a theoretical and empirical perspective. The main conclusion is that the test would improve the quality of the law for analyzing non-price strategies, which is greatly needed. More than a simple adjustment of the existing rules, it requires a new and standardized approach to these practices.

Conclusions drawn from the test cases. We have shown that the ENES test leans toward the conviction of practices that were deemed to be legal by the courts, like Berkey Photo v. Eastman Kodak. It also leads to exonerate Microsoft in the European case, contrary to what was done in the European Commission’s ruling. The same goes for CR Bard in its litigation. Lastly, applying this new test results in similar conclusions in four cases, the main difference being only that the ENES test would have greatly increased the level of legal certainty. A table in the appendix illustrates its effectiveness on a wider range of cases.

General contribution. We have demonstrated, in short, how the ENES test results in the creation of a uniform rule of law, which ultimately increases consumer welfare by encouraging companies to keep innovating. Consumer well-being is also improved by the elimination of anti-competitive strategies. As a matter of fact, the proposed test is easier to implement than most other tests, and yet, it limits legal errors more efficiently than others. Its quasi-mathematical aspect leads to a better understanding of the rule of law and it must, therefore, be implemented in all cases related to predatory innovation and other non-price strategies.





Appendix #1 – A reassessment of the major cases related to predatory innovation


A reassessment of the major cases related to predatory innovation

Name & date of the case

IBM (1979)

Berkey Photo v. Eastman Kodak (1979)

CR Bard v. M3 Systems (1998)

United States v. Microsoft Corp US (2001)

European Commission v. Microsoft Corp EU (2004)

Outcome found by the court

No conviction: The product modification is not “unreasonably anti-competitive

No conviction: Comparing the quality of two devices is not a conclusive evidence

Conviction: the new product is easier to use, but “the real reason” of the modification is anti-competitive

Conviction: Deleting the possibility to remove a software from the operating system (practice n1) and programing the operating system so to bug when certain files related to Internet Explorer are deleted (practice n3) has no pro-competitive justification


No conviction: Programing the operating system so to override the consumer choice to use another software than Internet Explorer (practice n2) is technically justified by Microsoft


No conviction: Windows’s Java is more efficient than the Sun’s Java

Conviction: The operating system may have properly functioned even in the absence of Windows Media Player

Application of the enhanced version of “no economic sense” test

No conviction: The improvements may not be separated from the anti-competitive effects


Conviction: Removing compatibility is unrelated from improving the camera




No conviction: Improving the needle system may not be done without removing compatibility

Conviction: Practices n1 and n3 made economic sense only because they produced an anti-competitive effect


Inability to judge: No information is available on the separability of the improvement with the compatibility removal


No conviction: Microsoft’s Java is better and Microsoft’s had no duty whatsoever to ensure the compatibility of new products with those of its competitors

No conviction: The integration of WMP to the operating system is not anti-competitive in itself



Name & date of the case

HDC Medical v. Minntech Corporation (2007)

Intel US (2010)

Allied c. Tyco (2010)

iPod iTunes litigation (2014)

Outcome found by the court

No conviction: Minntech provided an economic justification for its product modification that HDC could not prove to be false

Mutual agreement: Intel has agreed to amend its practices for the future

No conviction: The new design is an improvement establishing the superiority of the new product

No conviction: iTunes 4.7: this version of iTunes is a real innovation in that it increases the security of the software


No conviction: iTunes 7.0: This version of iTunes is also a real innovation in that it increases the security of the software

Application of the enhanced version of “no economic sense” test

No conviction: removing the product compatibility is inseparable from the improvement made to the product

Inability to judge: lack of information on the possibility to distinguish between the improvement and the deleting of compatibility

No conviction: Removing the product compatibility is the reason explaining the improvement

Inability to judge: The documents allowing to analyze whether changes made to iTunes 4.7 were justified for technical reasons are sealed


Inability to judge: The documents allowing to analyze whether changes made to iTunes 7.0 were justified for technical reasons are sealed






* Thibault Schrepel (Ph.D., LL.M.) is a research associate at the Sorbonne-Business & Finance Institute, University of Paris I Pantheon-Sorbonne. He leads the “innovation” team of Rules for Growth and is the Revue Concurrentialiste creator. His personal website is www.thibaultschrepel.com. Your comments on this article are more than welcome (thibaultschrepel@me.com). I would like to thank the editors of the NYU Journal of Intellectual Property & Entertainment Law for their consstructive editing.

[1] Type-I errors, also called “false positives,” occur when a court—or a competition authority—wrongly condemns a company for having implemented practices which, in fact, are not anti-competitive. On the contrary, type II errors, also known as “false negatives,” occur in the absence of condemnation of a practice that is anti-competitive and should therefore have been condemned.

[2] For an overview, see Michael L. Katz & Howard A. Shelanski, “Schumpeterian” Competition and Antitrust Policy in High-Tech Markets, 14 Cᴏᴍᴘᴇᴛɪᴛɪᴏɴ 47 (2005).

[3] OECD Policy Roundtables, Predatory Foreclosure, DAF/COMP(2005)14, at 48-59.

[4] Predatory innovation, which we previously identified as being one of the key issues in terms of high-tech markets, illustrates our point. See Thibault Schrepel, Predatory Innovation: The Definite Need for Legal Recognition, SMU Sᴄɪ. & Tᴇᴄʜ. L. Rᴇᴠ. (forthcoming 2018); see also, Thibault Schrepel, Predatory innovation: A response to Suzanne Van Arsdale & Cody Venzke, Hᴀʀᴠ. J.L. & Tᴇᴄʜ. Dig. (2017), http://jolt.law.harvard.edu/digest/digest-note-predatory-innovation.

[5] OECD Policy Roundtables, Competition on the Merits, DAF/COMP(2005)27, at 23.

[6] Id.

[7] Id.

[8] Case COMP/C-3/37.792—Sun Microsystems, Inc. v. Microsoft Corp., Comm’n Decision (Apr. 21, 2004), available at http://ec.europa.eu/competition/antitrust/cases/dec_docs/37792/37792_4177_1.pdf [hereinafter “Microsoft Decision”].

[9] The OECD has recently devoted several roundtables to the subject. See OECD Policy Roundtables, Algorithms and Collusion, DAF/COMP(2017)4; see also OECD Policy Roundtables, Big Data: Bringing Competition Policy to The Digital Era, DAF/COMP(2016)14. Most of the world-leading competition authorities have contributed to them too.

[10] See generally Nicholas S. Smith, Innovative Breakthrough or Monopoly Bullying? Determining Antitrust Liability of Dominant Firms in Exclusionary Product Redesign Cases, 84 Tᴇᴍᴘ. L. Rᴇᴠ. 995 (2012) (explaining antitrust law objectives).

[11] Id. at 1016.

[12] As a reminder, type-I errors, also called “false positives,” occur when a court—or a competition authority—wrongly condemns a company for having implemented practices which, in fact, are not anti-competitive.

[13] See Smith, supra note 10, at 1018.

[14] See John B. Kirkwood & Robert H. Lande, The Fundamental Goal of Antitrust: Protecting Consumers, Not Increasing Efficiency, 84 Nᴏᴛʀᴇ Dᴀᴍᴇ L. Rᴇᴠ. 191 (2008); see also Nicolas Petit, European Competition Law, 143 (Montchrestien, 2012) (text in French) (“the European competition law seems to have decided in favor of this theory.”).

[15] We argued that the Neo-Chicago School should seek that goal. See Thibault Schrepel, Applying the Neo-Chicago School’s Framework To High-Tech Markets, Rᴇᴠᴜᴇ Cᴏɴᴄᴜʀʀᴇɴᴛɪᴀʟɪsᴛᴇ (May 6, 2016), https://leconcurrentialiste.com/2016/05/06/neo-chicago-school-high-tech-markets. Two authors further developed the premises of that school of thought. See David S. Evans & A. Jorge Padilla, Designing Antitrust Rules for Assessing Unilateral Practices: A Neo-Chicago Approach, 72 U. Cʜɪ. L. Rᴇᴠ. 27, 33 (2005); see also Thomas A. Lambert & Alden F. Abbott, Recognizing the Limits of Antitrust, 11 J. Cᴏᴍᴘ. L. & Eᴄᴏɴ. 791, 793 (2015) (“Neo-Chicagoans reason that ‘market self-regulation is often superior to government regulation . . .’”).

[16] See Herbert Hovenkamp, ​​Antitrust and Innovation: Where We Are and Where We Should Be Going, 77 Aɴᴛɪᴛʀᴜsᴛ L.J. 749, 751 (2011) (“[T]he gains to be had from innovation are larger than the gains from simple production and trading under constant technology.”).

[17] OECD Policy Roundtables, Two-Sided Markets, DAF/COMP(2009)20, 14 (“Firms sometimes use non-price strategies, such as exclusive contracts and product tying, to limit competition or foreclose the market to rivals. These practices have been at the centre of several important competition cases involving two-sided markets.”).

[18] Mark S. Popofsky, Defining Exclusionary Conduct: Section 2, the Rule of Reason, and the Unifying Principle Underlying Antitrust Rules, 73 Aɴᴛɪᴛʀᴜsᴛ L.J. 435, 477 (2006); see Frank H. Easterbrook, Cyberspace and the Law of the Horse, 1996 U. Cʜɪ. Legal F. 207, 215 (1996) (explaining the necessity to create a straightforward legal standard).

[19] OECD Policy Roundtables, supra note 5 , at 23.

[20] Id. This study of several hundred pages is extremely rich and remains the reference on the law.

[21] Id. at 23.

[22] See John Temple Lang, Comparing Microsoft and Google: The Concept of Exclusionary Abuse, 39 Wᴏʀʟᴅ Cᴏᴍᴘᴇᴛɪᴛɪᴏɴ & Eᴄᴏɴ. Rev. 5, 5 (2016).

[23] In terms of predatory innovation, an author already underlined in 1988 that all decisions dealing with the subject had little coherence, and that remains unchanged to this day. See Ross D. Petty, Antitrust and Innovation: Are Product Modifications Ever Predatory, 22 Sᴜffᴏʟᴋ U. L. Rᴇᴠ. 997, 1028 (1988) (“The decisions to date offer little guidance on how to distinguish a predatory product innovation, if such exists, from a legitimate innovation.”).

[24] See Hillary Greene, Muzzling Antitrust: Information Products, Innovation and Free Speech, 95 B.U. L. Rᴇᴠ. 35, 72 (2015) (“Unfortunately, the courts have failed to carry over important nuances from the articulation of the legal theory of the anticompetitive product design to that theory’s practical application.”).

[25] Jonathan M. Jacobson & Scott A. Sher, “No Economic Sense” Makes No Sense for Exclusive Dealing, 73 Aɴᴛɪᴛʀᴜsᴛ L.J. 779, 782 (2006); see also Herbert Hovenkamp, ​​The Harvard and Chicago Schools and the Dominant Firm, in How the Chicago School Overshot the Mark: The Effect of Conservative Economic Analysis on US Antitrust (Robert Pitofsky ed., Oxford Univ. Press, 2008).

[26] Jonathan B. Baker, Preserving a Political Bargain: The Political Economy of the Non-interventionist Challenge to Monopolization Enforcement, 76 Aɴᴛɪᴛʀᴜsᴛ L.J. 605, 616 (2010).

[27] Gregory J. Werden, The "No Economic Sense" Test for Exclusionary Conduct, 31 J. Corp. L. 293, 301 (2006).

[28] Id.

[29] Id.

[30] OECD Policy Roundtables, supra note 5, at 28; see also Werden, supra note 27, at 301.

[31] Gregory J. Werden, Identifying Exclusionary Conduct Under Section 2: The “No Economic Sense” Test, 73 Aɴᴛɪᴛʀᴜsᴛ L.J. 413, 417 (2006).

[32] Id.

[33] Janusz Ordover & Robert Willig, An Economic Definition of Predation: Pricing and Product Innovation, 91 Yale L.J. 8, 11 (1981).

[34] Werden, supra note27 , at 304.

[35] See Richard J. Gilbert, Holding Innovation to an Antitrust Standard, 3 Cᴏᴍᴘᴇᴛɪᴛɪᴏɴ Pᴏʟ’ʏ Iɴᴛ’ʟ 47, 77 (2007).

[36] Mark S. Popofsky, Defining Exclusionary Conduct: Section 2 The Rule of Reason, and the Unifying Principle Underlying Antitrust Rules, 73 Aɴᴛɪᴛʀᴜsᴛ L.J. 435, 446 (2006); see Transamerica Computer Co. v. International Bus. Machs. Corp., 698 F.2d 1377 (9th Cir. 1983) (in which the judges agreed that “IBM had no further need for the selector[,]” although “the design choice [was] unreasonably restrictive of competition”); see also Computer Prods. v. IBM Corp., 613 F.2d 727 (9th Cir. 1979); In re IBM Peripheral Devices EDP, 481 F. Supp. 965 (N.D. Cal. 1979) (in which the court even specified that a change in the technical aspects “was adopted by IBM because it was a product improvement, and even if its effect was to injure competitors, the antitrust laws do not contemplate relief in such situations.”)

[37] For a definition of the “sham test,” see Gilbert, supra note 35, at 61.

[38] Id. at 62.

[39] Id. An author offered an alternative test in which the court has analyze whether the practice restricted innovation in the concerned industry. See Robert E. Bartkus, Innovation Competition Beyond Telex v. IBM, 28 Stan. L. Rev. 285, 327 (1976).

[40] Thomas J. Campbell, Predation and Competition in Antitrust: The Case of Nonfungible Goods, 87 Colum. L. Rev. 1625, 1626 (1987) (“[P]redatory conduct can be distinguished from economically beneficial conduct such as innovation, so that antitrust law may effectively impose sanctions on such behavior.”).

[41] Steven C. Salop, Strategy, Predation and Antitrust Analysis, Bureau of Economics & Bureau of Competition Joint Report, 302 (Sept. 1981) (“We find that antitrust scrutiny of product innovations is not a priori unwarranted. Surprisingly, we find that even genuine innovations (that is, new products that in some regards are superior to existing ones in the eyes of both engineers and consumers) can in fact be anticompetitive.”). This position differs from the one held by the Supreme Court. United States v. Grinnell Corp., 384 US 563 (1966). (The Supreme Court held that having a dominant position because of a superior product is not to be condemned: “the offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”); see Mark Furse, United States v. Microsoft Technology Antitrust, 13 Int’l Rev. L. Computers & Tech. 237, 241 (1999).

[42] Daniel A. Crane, Legal Rules for Predatory Innovation, 2013 Concurrences 4, 5 (2013).

[43] Gregory J. Werden, The “No Economic Sense” Test for Exclusionary Conduct, 31 J. Corp. L. 293, 305 (2006).

[44] This test had been applied more regularly in the United States than in Europe.

[45] Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).

[46] Matsushita Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986); see also Brief of the United States and the Appellees States Plaintiffs at 48, United States v. Microsoft Corp., 253 F.3d 34 (DC Cir. 2001) (Nos. 00-5212, 00-5213); Brief for the United States at 33-34, United States v. Dentsply International, Inc., 399 F.3d 181 (3d. Cir. 2005) (No. 03-4097); see also R. Hewitt Pate, Assistant Att’y Gen, The Common Law Approach and Improving Standards for Analyzing Single Firm Conduct, Speech at the 30th Annual Conference on International Antitrust Law and Policy (Oct. 23, 2003) (available at https://www.justice.gov/atr/speech/common-law-approach-and-improving-standards-analyzing-single-firm-conduct).

[47] See US v. AMR Corp., 335 F.3d 1109 (10th Cir. 2003).

[48] See Brief for the United States Federal Trade Commission and Amici Supporting Petitioner, Verizon Communications, Inc. v. Trinko, 540 U.S. 398 (2004) (No. 02-682). That probably explains why some authors have argued that the Supreme Court actually implemented the test in Trinko. But see U.S. Dep’t Of Justice, Competition And Monopoly. Single-Firm Conduct Under Section 2 Of The Sherman Act 40 (2008) (“Similarly, the Trinko Court, while not expressly adopting the no economic-sense test, identified the Aspen Skiing defendant’s ‘willingness to forsake short-term profits to achieve an anticompetitive end’ as a key element of the liability finding.”).

[49] See Trinko, 540 U.S. at 409-416.

[50] Case C-95/04P, British Airways plc v. Comm’n, 2007 E.C.R 1-2331, para. 126.

[51] Case T-60/05, Union Fraçaise de l’Express (Ufex) v. Comm’n, 2007 E.C.R. 3397.

[52] Case T-336/07, Telefonica and Telefonica de España v. Comm’n, not yet reported, para. 139.

[53] Conseil de la concurrence, Eurostar, Decision 07-D-39 (23 November 2007).

[54] See Herbert Hovenkamp, Post-Chicago Antitrust: A Review and Critique, 2001 Colum. Bus. L. Rev. 257, 332 (2001).

[55] Steven C. Salop, Exclusionary Conduct, Effect on Consumers, and the Flawed Profit-Sacrifice Standard, 73 Antitrust L.J. 311, 331 (2006); see Alan J, Meese, Debunking the Purchaser Welfare Account of Section 2 of the Sherman Act: How Harvard Brought Us a Total Welfare Standard and Why We Should Keep It, 85 N.Y.U. L. Rev. 659, 736 (2010).

[56] Alan J. Meese, Section 2 Enforcement and the Great Recession: Why Less (Enforcement) Might Mean More (GDP), 80 Fordham L. Rev. 1633, 1641 (2012).

[57] Jonathan Jacobson, Scott Sher & Edward Holman, Predatory Innovation: An Analysis of Allied Orthopedic v. Tyco in the Context of Section 2 Jurisprudence, 23 Loy. Consumer L. Rev. 1, 2-4 (2010).

[58] Professor Crane underlines that, in some situations, a case-by-case analysis may be insufficient, see Daniel A. Crane Does Monopoly Broth Soup Make Bad?, 76 Antitrust L.J. 663, 663 (2010) (“[D]etermining legality on a contract-by-contract or practice-by-practice basis would systematically lead to false negatives”).

[59] Type-II errors, also called “false negatives,” occur whenever the court—or a competition authority—rules not to convict a company that has implemented anti-competitive practices.

[60] Other critiques are negligible. See OECD Policy Roundtables, supra note 5, at 29: (“Finally, the NES test would seemingly require a dominant firm that owns a valuable property right to sell or license its property to any rival who needs it to survive and offers a profitable fee for it – even if the dominant firm has never sold or licensed it to anyone. That could damage the incentives to develop or acquire the property right in the first place.”).

[61] Id. at 28; see U.S. Dep’t of Justice, supra note 48, at 43; see also, Bonny E. Sweeney, An Overview of Section 2 Enforcement and Developments, 2008 Wisc. L. Rev. 231, 238 (2008).

[62] See generally Werden, supra note 31.

[63] Type-II errors created by the application of this test will be uncovered after several years, when the strength of the anti-competitive effects will be revealed. See U.S. Dept. of Justice, supra note 48, at 43. On the link between type-I errors and the willingness to invest, see Nicolas Petit, From Formalism to Effects? The Commission’s Communication on Enforcement Priorities in Applying Article 82 EC, 32 World Competition & Econ. Rev. 486, 486 (2009).

[64] Jacobson, Sher & Holman,supra note 57, at 30; contra Popofsky, supra note 18, at 443 (2006).

[65] U.S. Dept. of Justice, supra note 48, at 40. On the applicability of the test by jurors, see Bartkus, supra note 39, at 329.

[66] See Hovenkamp, supra note 25 at 115.

[67] Id.

[68] See Jacobson, Sher & Holman, supra note 57, at 7.

[69] Hovenkamp, supra note 25, at 115.

[70] See generally Werden, supra note 27.

[71] See Hovenkamp, supra note 25, at 115.

[72] Jacobson, Sher & Holman, supra note 57; see also, Jonathan B. Baker, Has Preserving Political Bargain: The Political Economy of the Non-Interventionist Challenge to Monopolization Enforcement, 76 Antitrust L.J. 605, 613 (2010). Applying the “no economic sense” test implies determining what is meant by the notion of “cost.” See Michael A. Salinger, The Legacy of Matsushita: The Role of Economics in antitrust Litigation, 38 Loy. U. Chi. L.J. 475, 486 (2007). But the notion of “cost” also is integrated into all other tests. Therefore, it is not specific to the “no economic sense” test.

[73] Werden, supra note 31.

[74] Id. at 426.

[75] Werden, supra note 31.

[76] Gilbert, supra note 35, at 61; see also, Hovenkamp, ​​supra note 54, at 329.

[77] John M. Newman, Procompetitive Justifications in Antitrust Law, 48 Ind. L.J. (forthcoming 2018).

[78] Pinar Akman, The Role of Intent in the EU Case Law on Abuse of Dominance, 39 Eur. L. Rev. 316, 318 (2014).

[79] Id. at 317; see also Tetra Pak II, Mar. 19, 1991, 1991 O.J. L 72.

[80] The authors advocating for giving a role to subjective intent underline that economic instruments do not cover the issue of innovation. They do not explain, however, how intention does. See Marina Lao, Reclaiming a Role for Intent Evidence in Monopolization Analysis, 54 Am. U. Rev. 151, 181 (2004) (“[E]conomic tools cannot predict effects on innovation.”).

[81] Id. Addressing the Chicago school learnings in generic terms is somewhat misleading insofar as it was crossed by different sensibilities. The first Chicago School was more interventionist than its second version.

[82] Smith, supra note 10, at 1022.

[83] See Salop, supra note 55, at 355.

[84] C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340 (Fed. Cir. 1998).

[85] Id., at 1372.

[86] Lao, supra note 80, at 153-54.

[87] This test takes objective intent—not subjective—into consideration. On the distinction between the two, see Ronald A. Cass & Keith N. Hylton, Antitrust Intent, 74 S. Cal. L. Rev. 657 (2001). See also Akman, supra note 78, at 317.

[88] This is one of Joshua D. Wright’s main contributions to the Federal Trade Commission. See Thom Lambert, Josh Wright and the Limits of Antitrust, Truth On The Market (August 26, 2015), https://truthonthemarket.com/2015/08/26/josh-wright-and-the-limits-of-antitrust [https://perma.cc/QL7B-V4NG].

[89] According to Frank H. Easterbrook, “Firms want (intend) to grow; they love to crush their rivals; indeed, these desires are the wellsprings of rivalry and the source of enormous benefit for consumers . . . the same elements of greed appear whether the entrepreneur wants to please customers or stifle rivals.” Frank H. Easterbrook, Monopolization: Past, Present, Future, 61 Antitrust L.J. 99, 102-03 (1992).

[90] See Akman, supra note 78, at 317.

[91] See A.A. Poultry Farms, Inc. v. Rose-Acre Farm, Inc., 881 F.2d 1396, 1402 (7th Cir. 1989).

[92] Lao, supra note 80, at 170.

[93] On behavioral economics growing popularity, see Thibault Schrepel, “Behavioral Economics” in US (Antitrust) Scholarly Papers, Concurrentialiste (April 23, 2014), https://leconcurrentialiste.com/2014/04/23/behavioral-economics-in-u-s-antitrust-scholarly-papers. Also, for a comparative study of how to incorporate behavioral economics, see Philipp Hacker, More Behavioral vs. More Economic Approach: Explaining the Behavioral Divide Between the United States and the European Union, 39 Hastings Int’l & Comp. L. Rev. 355, 355 (2016).

[94] Michal S. Gal & Spencer Weber Waller, Antitrust in High-Technology Industries: A Symposium Introduction, 8 J. Comp. L. & Econ. 449, 456 (2012).

[95] For a definition, see Joshua D. Wright & Judd E. Stone II, Misbehavioral Economics: The Case Against Behavioral Antitrust, 33 Cardozo L. Rev. 1517, 1530 (2012) (“[A]ttempts to address irrational human behavior in light of limited cognitive capacity and inherent cognitive failings.”); see also, Allan L. Shampine, The Role of Behavioral Economics in Antitrust Analysis, 27 Antitrust 65, 65 (2013).

[96] When answering the question “Are you pro or against the use of behavioral economics?, 84.13% say to be in favor. See Schrepel, supra note 93.

[97] Doctrinal principles often are the excuse to justify applying a certain policy. For instance, the “error-cost” analysis justifies creating type-II errors so as to avoid type-I errors. Behavioral studies pursue a political objective as well as more interventionist theories. Wright & Stone, supra note 95; see also Alan Devlin & Michael Jacobs, The Empty Promise of Behavioral Antitrust, 37 Harv. J.L. & Pub. Pol’y 1009, 1057 (2014).

[98] Salop, supra note 55, at 322.

[99] Werden, supra note 31, at 427.

[100] Daniel F. Spulber, Unlocking Technology: Antitrust and Innovation, 4 J. Comp. L. & Econ. 915, 948 (2008).

[101] Michael L. Katz & Carl Shapiro, Antitrust in Software Markets, in Competition, Innovation And The Microsoft Monopoly: Antitrust In The Digital Marketplace 29, 66 (Jeffrey A. Eisenach & Thomas M. Lenard eds., 1999).

[102] Christopher S. Yoo & Daniel F. Spulber, Antitrust, the Internet, and the Economics of Networks, in The Oxford Handbook of International Antitrust Economics, Volume 1 380, 390 (Roger D. Blair & D. Daniel Sokol eds., 2014).

[103] Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 589–90 (1986).

[104] Gönenç Gürkaynak et al., Antitrust on the Internet: A Comparative Assessment of Competition Law Enforcement in the Internet Realm, 14 Bus. L. Int’l 51, 78 (2013).

[105] William J. Kolasky, Jr., Reinvigorating Antitrust Enforcement in the United States: A Proposal, 22 Antitrust 85, 89 (2008).

[106] Jacobson & Sher, supra note 25, at 785.

[107] The test may be used to protect consumers while protecting competition through innovation. This is the objective assigned by John McGaraghan to antitrust law: “By changing the focus, the courts can provide more meaningful protection for consumers by protecting competition through innovation.” See John McGaraghan, A Modern Analytical Framework for Monopolization in Innovative Markets for Products with Network Effects, 30 Hastings Comm. & Ent. L.J. 179, 200-01 (2007).

[108] Michael J. Madison, Law as Design: Objects Concepts and Digital Things, 56 Case W. Res. L. Rev. 381, 396 (2005). One author notes the differences between the “source code” and “object code,” the first being set by humans while the second refers to the processing of data by the computer. See John M. Newman, Anticompetitive Product Design in the New Economy, 39 Fla. St. U. L. Rev. 681, 695 (2012); see also Greene, supra note 24, at 85 (2015) (“If one can establish that the conduct at issue can be isolated to a portion of the redesign that is functionally separable from other segments of the redesign, a court may narrow its focus accordingly. In so doing, an innovation-based defense would then require the defendant to demonstrate the existence and size of the innovation associated with the component, rather than rely on innovation that characterizes the redesign as a whole.”).

[109] “In computing, source code is any collection of computer instructions, possibly with comments, written using a human-readable programming language, usually as plain text. The source code of a program is specially designed to facilitate the work of computer programmers, who specify the actions to be performed by a computer mostly by writing source code. The source code is often transformed by an assembler or compiler into binary machine code understood by the computer. The machine code might then be stored for execution at a later time. Alternatively, source code may be interpreted and thus immediately executed.” See Wikipedia, Source code, https://en.wikipedia.org/wiki/Source_code.

[110] According to Wikibooks, coding is “the process of designing, writing, testing, debugging / troubleshooting, and maintaining the source code of computer programs.” See Wikibooks, Introduction to Software Engineering/Implementation, https://en.wikibooks.org/wiki/Introduction_to_Software_Engineering/Implementation.

[111] As it was underlined by Greene, supra note 24, at 85 (“In some cases a question arises as to the scope of the redesign at issue. More specifically, is the redesign more appropriately analyzed as a bundle of relatively unrelated innovations, or should it be analyzed as an integrated whole?”); see also Newman, supra note 108, at 712-714 (“Since the elements and functionality of a software update are relatively easily conceived of as separate from the elements of the base software program affected by the update, courts are more competent to address their effects on competition than the same courts would be in the stereotypical product-design case . . . [A]lleged innovative justifications are much more capable of judicial scrutiny in code-based product markets than in traditional, physical product markets.”).

[112] Newman, supra note 108, at 712 (“And as a result, even if a software update contains multiple design changes, the lines of code that dictate functions within the update are separable, allowing direct analysis of what those respective functions are.”).

[113] On the per se legality when introducing a new product, see Werden, supra note 31, at 414 (noting that conduct such as introducing a new product should not be subjected to any test for legality for such conduct can derive significant consumer benefits).

[114] Newman, supra note 108, at 711 (“[S]ections of code perform specific functions and are separable from surrounding sections, again facilitating the ability of courts to discern between exclusionary and innovative design elements.”).

[115] See Jay Dratler, Microsoft as an Antitrust Target: IBM in Software?, 25 Sw. U. L. Rev. 671, 698 (1996) (underlining the difficulty of analyzing the practices other than those whose sole effect is reducing competition).

[116] See Communication from the Commission – Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, COM (2009) 45 final (Feb. 24, 2009) (showing that the European Commission uses the term “less anti-competitive”).

[117] Werden, supra note 27, at 305.

[118] Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993).

[119] Karl R. Popper, Conjectures and Refutations: The Growth of Scientific Knowledge (1962).

[120] If this was not the case, this would entrust the judge to interfere with companies’ decision-making, which we have previously rejected.

[121] David A. Heiner, Assessing Tying Claims in the Context of Software Integration: A Suggested Framework for Applying the Rule of Reason Analysis, 72 U. Chi. L. Rev. 123, 144 (2005); see also United States v. Microsoft Corp., 253 F.3d 34, 87 (D.C. Cir. 2001) (the court admits that “bundling can also capitalize on certain economies of scope. A possible example is the ‘shared’ library files that perform OS and browser functions with the very same lines of code and thus may save drive space from the clutter of redundant routines and memory when consumers use both the OS and browser simultaneously”).

[122] It should be noted that several decisions dealing with predatory innovation have insisted on the fact that the dominant firm had maintained the old version of the product on the market, alongside with the new one. They have concluded, accordingly, that related practices were not to be condemned. The enhanced version of the “no economic sense” test does not take direct account of the existence of these two offers but it should be emphasized that the maintenance on the market of the product version as it existed before the various changes tends to show that the company intended to improve its product. Companies are hoping for consumers to buy the newest version because it is better, but they remain free not to do so. In short, the presence of the old and the new version does not constitute a proof in itself of the pro-competitive nature of the modifications made to the product, but it presumes a good-will that the courts will have to investigate before ruling. In addition, it should be noted that the “no economic sense” test takes place in two steps, the first being the demonstration of the anti-competitive nature of the practice which will be complicated to show if the old version of the product still is on the market.

[123] Available in a wide format at the following address: https://perma.cc/97A2-4Q2L.


[124] See European Commission Press Release IP/10/1006, Antitrust: Commission Initiates Formal Investigation against IBM in Two Cases of Suspected Abuse of Dominant Market Position (Jul. 26, 2010).

[125] This is the first step of the reasoning. See the graphical representation above for further information. We presume, for each of these cases, that the practices had an actual tendency to eliminate or reduce competition.

[126] Berkey Photo v. Eastman Kodak, 603 F.2d 263 (2d Cir. 1979).

[127] Id. at 302.

[128] Id. at 284.

[129] Id. at 278.

[130] Id.

[131] Id. at 289.

[132] Id. at 285.

[133] See Daniel J. Gifford, The Damaging Impact of the Eastman Kodak Precedent Upon Product Competition: Antitrust Law in Need of Correction, 72 Wash. U. L. Rev. 1507, 1535 (1994) (the author contends that the ruling did not provide enough legal certainty).

[134] See Eastman Kodak, 603 F.2d at 286.

[135] Id. at 294.

[136] Id. at 286.

[137] United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001).

[138] Daniel J. Gifford, The European Union, the United States, and Microsoft: A Comparative Review of Antitrust, CLEA 2009 Annual Meeting Paper (2009).

[139] George L. Priest, Rethinking Antitrust Law in an Age of Network Industries, Ctr. for Studies in L., Econ. & Pub. Pol., n. 352 (2007); see also Toshiaki Takigawa, A Comparative Analysis of US, EU, and Japanese Microsoft Cases: How to Regulate Exclusionary Conduct by Dominant Firm in a Network Industry, 50 Antitrust Bull. 237 (2005).

[140] Microsoft remains the most important US decision—outside of the Supreme Court’s decisions—in terms of antitrust law. In addition, over 200 private actions followed. See Gavil & Harry First, The Microsoft Antitrust Cases: Competition Policy for the Twenty-first Century 133 (2014) (“In the wake of the governments’ cases against Microsoft, the firm faced more than 200 civil actions by private parties alleging they were injured by its conduct”); see also Keith N. Hylton, Microsoft’s Antirust Travails, The Antitrust Source 3 (2014) (reviewing Gavil & Harry First, The Microsoft Antitrust Cases: Competition Policy for the Twenty-first Century (2014)); see also Keith N. Hylton, Microsoft’s Antitrust Travails, The Antitrust Source 3 (2014).

[141] It was alleged that Windows was trying to eliminate competition through contractual and technical means. The former falls outside predatory innovation contrary to the latter, which is part of it.

[142] See William H. Page & John E. Lopatka, The Microsoft Case: Antitrust, High Technology, and Consumer Welfare (2007) (suggesting that the challenge was to develop a browser that allows to run applications and software regardless of the operating system).

[143] See Wikipedia, Java (programming language), https://en.wikipedia.org/wiki/Java_(programming_language) (“Java is a general-purpose computer-programming language that is concurrent, class-based, object oriented, and specifically designed to have as few implementation dependence as possible . . . compiled Java code can run on all platforms that support Java without the need for recompilation . . . Java was originally developed by James Gosling at Sun Microsystems . . . and released in 1995 as a core component of Sun Microsystem’s Java platform”); see also United States v. Microsoft Corp., 253 F.3d 34, 137 (DC Cir. 2001).

[144] Heiner, supra note 121, at 123 (“In the United States, the D.C. Circuit has held that the rule of reason governs the legality of alleged tying arrangements involving platform software.”).

[145] Microsoft, 253 F.3d at 65.

[146] Id.

[147] Id.; see also Alan Devlin & Michael Jacobs, Anticompetitive Innovation and the Quality of Invention, 27 Berkeley Tech. L. J. 1, 15 (2012) (“Beyond putting the initial burden of proof on the plaintiff – an allocation common to all civil cases – the D.C. Circuit’s test created an analytic framework equally conducive to findings of legality and illegality”).

[148] Microsoft, 253 F.3d at 65.

[149] See Renata B. Hesse, Section 2 Remedies and US v. Microsoft: What is to be Learned?, 75 Antitrust L. J. 847, 868 (2009) (noting that the original proposal to split Microsoft into two companies has created high expectations in terms of sanctions).

[150] Microsoft, 253 F.3d at 67.

[151] Id.

[152] Id. at Section II.B.

[153] See Hovenkamp, supra note 16.

[154] See Devlin & Jacobs, supra note 147, at 14; see also Gavil & First, supra note 140, at 184 (stressing that “[i]n the end, it is difficult to assess the costs and benefits of these cases, both for the parties and, more broadly, for the institutions charged with deciding them—the federal and state courts.”).

[155] See Alan Devlin & Michael Jacobs, The Empty Promise of Behavioral Antitrust, 37 Harv. J. L. & Pub. Pol’y 1009 (2014) (pointing out that balancing properly between the pro and anti-competitive effects would have anyway been impossible).

[156] Microsoft, 253 F.3d at 34, 74-75.

[157] Id. at 76.

[158] Id. at 75.

[159] Id.

[160] Thomas A. Piraino, Jr., A Proposed Approach to Antitrust High Technology Competition, 44 WM. & Mary L. Rev. 65, 104 (2002).

[161] Id. at 113.

[162] Microsoft, 253 F.3d at 67.

[163] Id.

[164] Id. at 75.

[165] See generally Microsoft Decision, supra note 8; see also Kudrle, The Atlantic Divide In Antitrust: An Examination Of US And EU Competition Policy 15 (2015) (explaining that the Microsoft case is the perfect illustration of the differences in antitrust law on the two sides of the Atlantic).

[166] See European Commission Press Release IP/17/784, Antitrust: Commission fines Google €2.42 Billion for Abusing Dominance as Search Engine by Giving Illegal Advantage to own Comparison Shopping Service (June 27, 2017).

[167] See Lopatka, supra note 142 (emphasizing that the Microsoft case is the epitome of the Post-Chicago school).

[168] Microsoft, 253 F.3d at 65.

[169] Microsoft Decision, supra note 8, para. 5, at 5.

[170] Id. para. 3, at 5.

[171] Id.

[172] Id.

[173] Id. para. 10, at 7.

[174] Id. para. 470, at 129; see also New Economy, Investopedia, http://www.investopedia.com/terms/n/neweconomy.asp (“New economy is a buzzword describing new, high growth industries that are on the cutting edge of technology”).

[175] Microsoft Decision, supra note 8, para. 5, at 5.

[176] One author underlined that the test applied by European judges in the Microsoft case is directly deducted from the Jefferson Parish test. See Daniel J. Gifford, The European Union, the United States, and Microsoft: A Comparative Review of Antitrust, CLEA 2009 Annual Meeting Paper, 29 (2009).

[177] The term “proportionalityis absent from the European Commission’s decision.

[178] See Thibault Schrepel, The Microsoft Case By The Numbers: Comparison Between US and EU, Concurrentialste (February 10, 2014), https://leconcurrentialiste.com/2014/02/10/the-microsoft-case-by-the-numbers-comparison-between-u-s-and-e-u (providing a statistical study on the subject).

[179] Microsoft Decision, supra note 8, para. 693, at 186.

[180] See, e.g., id. para. 422, at 117; id. para. 622, at 167; id. para. 946, at 260.

[181] See, e.g., id. paras. 30-32, at 11; id. paras. 32-34, at 12; id. para. 1064, 294.

[182] United States v. Microsoft Corp., 253 F.3d 34, 68 (D.C. Cir. 2001).

[183] Id. at 89.

[184] In terms of philosophy, the European decision is closer to the consumer protection theories while the North American decision is related to growth-based theories. See generally Microsoft Decision, supra note 8; see also United States v. Microsoft Corp., 253 F.3d.

[185] Microsoft Decision, supra note 8, paras. 792-799, at 209-211.

[186] See generally Legal Recognition, supra note 4, at 40 (describing the similarity in function and aim of rules directed at tying and rules directed at predatory innovation).

[187] Id. at 40-43 (emphasizing that tying is inadequate framework to address software-related issues in antitrust).

[188] Microsoft Decision, supra note 8, para. 970, at 269.

[189] Id.

[190] Case T-201/04, Microsoft Corp. v. Comm’n, 2007 E.C.R. II-3601.

[191] Microsoft Decision, supra note 8, para. 829, at 219.

[192] Id. para. 1027, at 284.

[193] Id. para. 829, at 219.

[194] See, e.g., Case T-201/04, Microsoft Corp. v. Comm’n, 2007 E.C.R. II-3601, para. 1149.

[195] Some authors noted that “very early in the case Microsoft built upon that commentary to argue that its “integration” strategy shouldn’t even be analyzed as tying[.]” See Gavil & First, supra note 140, at 316.

[196] The European ruling in the Microsoft case is opposed to the more-economic based approach to antitrust law. See Christian Ahlborn & David S. Evans, The Microsoft Judgment and Its Implications for Competition Policy Towards Dominant Firms in Europe, 75 Antitrust L.J. 887, 889 (2009).

[197] Microsoft Decision, supra note 8, para. 963, at 267.

[198] Id.

[199] Id. para. 1028, at 284-285.

[200] Id.

[201] Id. para. 1033, at 287.

[202] Id.

[203] It being specified that the penalty was decreased by 50% to reflect the duration of the infringement. Id. para. 1078, at 297 (the Commission noted that duration and gravity of Microsoft’s antitrust infringement led to a 50% increase in the standard fine, resulting in the reported number).

[204] Dep’t of Justice, Assistant Attorney General for Antitrust, R. Hewitt Pate, Issues Statement on The EC’s Decision In Its Microsoft Investigation, at 2 (March 24, 2004), https://www.justice.gov/archive/atr/public/press_releases/2004/202976.htm.

[205] For a critical view on the sanction, see Keith N. Hylton, Remedies, Antitrust Law and Microsoft: Comment on Shapiro, 75 Antitrust L.J. 773, 786 (2009). Only a single manufacturer has chosen to offer for sale the version that excluded Windows Media Player, and had no success doing so. This shows, in this regard, the failure of the sanction imposed by the judges. See William H. Page, Mandatory Contracting Remedies in the American and European Microsoft Cases, 75 Antitrust L.J. 787, 799 (2009); see also Ahlborn & Evans, supra note 196, at 922.

[206] Microsoft Decision, supra note 8, para. 999, at 277.

[207] See generally Legal Recognition, supra note 8 (describing the difficulties European and United States courts have especially had with separating anti and pro-competitive effects of software innovation).

[208] For an in-depth background on the effects and developments immediately following the Microsoft cases, see Marina Lao, Reclaiming a Role for Intent Evidence in Monopolization Analysis, 54 Am. U. L. Rev. 151 (2004).

[209] Apple Presents iPod, Ultra-Portable MP3 Music Player Puts 1,000 Songs in Your Pocket, Apple (Oct 23, 2001), https://www.apple.com/newsroom/2001/10/23Apple-Presents-iPod [https://perma.cc/B7ER-2USA]; Apple’s iPod Available in Stores Tomorrow, Apple (Nov. 9, 2001), https://www.apple.com/newsroom/2001/11/09Apple-s-iPod-Available-in-Stores-Tomorrow/.

[210] See In re Apple iPod iTunes Antitrust Litigation, 796 F. Supp. 2d 1137, 1139-40 (N.D. Cal. 2011); Apple Launches the iTunes Music Store, Apple (April 28, 2003), https://www.apple.com/newsroom/2003/04/28Apple-Launches-the-iTunes-Music-Store/.

[211] Newman, supra note 108, at 699.

[212] Apple iPod iTunes Antitrust, 796 F. Supp. 2d at 1140; see generally Amended Complaint – Second Amended Class Action Complaint at 2, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Aug. 28, 2006).

[213] Apple iPod iTunes Antitrust, 796 F. Supp. 2d at 1140.

[214] Id.

[215] See id.

[216] See Amended Complaint – Second Amended Class Action Complaint at 2-3, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Aug. 28, 2006).

[217] See Memorandum in Opposition to Defendant’s Motion to Dismiss Class Action at 3-5, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Feb. 28, 2005).

[218] See Apple iPod iTunes Antitrust, 796 F. Supp. 2d at 1141; see also Memorandum of Points and Authorities in Support of Plaintiffs’ Opposition to Defendant’s Motion to Dismiss Counts IV and VII of The Second Amended Complaint at 12, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Oct. 30, 2006). (Apple summarized the arguments from the complaint as: “[t]hey allege that Apple changed the ACC format to the AAC Protected format not for any technological benefit, but to exclude competing portable hard-drive digital music player from playing iTMS songs. They also allege that Apple again changed its format once RealNetworks began selling iTMS compatible files for play on the iPod so that RealNetworks would be locked out”).

[219] See Response in Support of Its Motion to Dismiss Class Action Complaint filed by Apple Computer, Inc. at 1, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Mar. 7, 2005).

[220] Apple used this argument from the beginning of the proceedings. See, e.g., NOTICE by Mariana Rosen re 965 Administrative Motion to File Under Seal Notice of Filing Public Documents Regarding Plaintiffs Opposition to Apple Inc.’s Motion, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 7, 2014).

[221] See Apple iPod iTunes Antitrust, 796 F. Supp. 2d at 1141.

[222] Id. at 1140. Part of the North American doctrine particularly underlined that the high-tech markets for new technologies allowed the dominant undertaking to compensate for losses arousing from the implementation of an anti-competitive practice expensive faster than in other markets. See Newman, supra note 108, at 703-4.

[223] Allied Orthopedic Appliances, Inc. v. Tyco Health Care Grp., 592 F.3d 991 (9th Cir. 2010).

[224] Id.

[225] Id.; see also In re Apple iPod iTunes Antitrust Litigation, 796 F. Supp. 2d 1137.

[226] Id.

[227] Id.

[228] Id.

[229] Id.

[230] Id.

[231] Id.

[232] Id.

[233] Id.

[234] Id.

[235] See, e.g., Order on Administrative Motion to File Under Seal Declaration of David F. Martin in Support of Plaintiff’s Opposition to Apple’s Motion for Summary Judgment, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Mar. 17, 2011); Order on Administrative Motion to File Under Seal Declaration of Augustin Farrugia in Support of Defendant’s Renewed Motion for Summary Judgment, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Mar. 17, 2011); Administrative Motion to File Under Seal portions of Apple’s Renewed Motion for Summary Judgment, and the Declarations of Jeffery Robbin, Augustin Farrugia, John Kelly, and certain exhibits to the Declaration of David Kiernan in support thereof, in accordance with General Order 62, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Jan. 18, 2011).

[236] See In re Apple iPod iTunes Antitrust Litigation, No. 05-CV-0037 YGR, 2014 U.S. Dist. LEXIS 165254 (N.D. Cal. Nov. 25, 2014).

[237] Proposed Jury Instructions, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Nov. 19, 2014) (“(i) the issue to be tried is whether the issuance and activation of the software and firmware changes in iTunes 7.0 and 7.4 were genuine product improvements and (ii) Apple’s conduct with respect to the development of the iPod and its integration with iTunes and the iTunes Store prior to these particular changes is not at issue in this trial and has been held to be legal.”).

[238] Id.

[239] Letter from William A. Isaacson regarding the appropriate preliminary instruction on the issue of whether the conduct at issue in this case involved a genuine product improvement, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Nov. 22, 2014); see also Joint Proposed Jury Instructions by Apple, Inc. and Plaintiffs, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Oct. 22, 2014).

[240] Letter from Bonny E. Sweeney in response to Apple Inc.’s November 22, 2014 Letter to the Court (ECF 919) regarding preliminary instructions on genuine product improvement, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Nov. 23, 2014).

[241] Letter from Bonny E. Sweeney, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 7, 2014) (“Apple must defend the claim as asserted and not as reconfigured by Apple into something more easily defended.”).

[242] Id. (“Instruction on genuine product improvements does not properly reflect the narrow factual issue to be decided by the jury.”).

[243] Id.; see also Letter from Bonny E. Sweeney, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 11, 2014).

[244] Letter from Bonny E. Sweeney, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 11, 2014).

[245] Letter from Karen L. Dunn, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 8, 2014).

[246] Id.; see also Joint Proposed Jury Instructions by Apple, Inc. and Plaintiffs, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Oct. 22, 2014).

[247] Transcript of Proceedings held on December 1, 2014, before Judge Yvonne Gonzalez Rogers, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 8, 2014).

[248] Id.

[249] Id.

[250] Joint Proposed Jury Instructions by Apple, Inc. and Plaintiffs, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Oct. 22, 2014).

[251] Proposed Jury Instructions. Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Nov. 19, 2014); see also Letter from Bonny E. Sweeney in response to Apple Inc.’s November 22, 2014 Letter to the Court (ECF 919) regarding preliminary instructions on genuine product improvement, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Nov. 23, 2014) (The complainant raised that, “[i]n short, there is ample legal authority and evidentiary predicate for the Court to instruct the jury that it ‘must decide whether the software and firmware changes in iTunes 7.0 and 7.4 were genuine product improvements or not genuine product improvements but evidence of a pretext,’ as it indicated it would do at the hearing on November 19, 2014.”).

[252] Letter from Bonny E. Sweeney Regarding Proposed Jury Instructions, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 10, 2014).

[253] Joint Proposed Jury Instructions by Apple, Inc. and Plaintiffs, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Oct. 22, 2014); see Letter from William A. Isaacson regarding the appropriate preliminary statement on the issue of whether the conduct at issue in this case has involved genuine product improvement, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Nov. 22, 2014).

[254] Revised Proposed Jury Instructions by Apple, Inc. Nos. 17 and 31, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Nov. 18, 2014).

[255] Jury Verdict, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 16, 2014); see also Final Jury Instructions, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 15, 2014).

[256] For one of the only comments of the decision, see Laurence Popofsky, Product Redesign and the Abuse of Dominance: The Apple iPod iTunes Antitrust Litigation, speech given at the Center for Competition Law & Policy Lecture Series at Pembroke College (May 7, 2015).

[257] Joint Pretrial Conference Statement by Apple Inc. and Plaintiffs, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Oct. 14, 2014).

[258] Letter from Karen L. Dunn, Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Dec. 8, 2014).

[259] It should be noted, on this point, that Steve Jobs would have fallen in all likelihood. The introduction of DRM does not prevent the music from being pirated, proving the weakness of one of Apple’s justifications. See Mike Musgrove, Jobs Calls for Open Music Sales, Wash. Post (Feb. 7, 2007), http://www.washingtonpost.com/wp-dyn/content/article/2007/02/06/AR2007020601764.html. The testimony of Steve Jobs, however, was excluded from the procedure.

[260] See, e.g., Order on Administrative Motion to File Under Seal Declaration of Augustin Farrugia in Support of Defendant’s Renewed Motion for Summary Judgment by Apple Inc., Apple iPod iTunes Antitrust Litigation, No. C05-00037 (N.D. Cal. Mar. 17, 2011) (“This document is currently Under Seal and not available to the general public.”). More than 50 documents of the proceedings are sealed.


The Hybrid Trademark and Free Speech Right Forged From Matal v. Tam

The Hybrid Trademark and Free Speech Right Forged From Matal v. Tam
By Timothy T. Hsieh*

Download a PDF version of this article here

 

Introduction

Before the U.S. Supreme Court case of Matal v. Tam, trademarks could not be registered if they “disparage[d] or [brought]…into contemp[t] or disrepute” any “persons, living or dead.”[1] The U.S. Supreme Court concluded in Tam that the “Disparagement Clause” violated the Free Speech Clause of the First Amendment and also offended “a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.”[2] This legal development has integrated the First Amendment Free Speech right with the traditional rights that a registered trademark possesses. In other words, a new hybrid form of trademark intellectual property has been forged by the U.S. Supreme Court case of Matal v. Tam, a form that combines trademark rights with the Free Speech rights under the First Amendment and no longer restricts the registration of a trademark on any content-based justifications. That is, a trademark can now be registered on any content that the trademark owner desires.

This may seem on the surface to improve the vigor of a competitive trademark market place by removing government restrictions and allowing participants to engage in the free-flowing exchange of ideas, but there are concerns that this new hybrid form of trademark will be abused. The United States Patent and Trademark Office (“USPTO”) may start granting registrations to a barrage of offensive racial slurs, sexist terms or other profanities designed to insult individuals on the basis of their ethnicity, gender, sexual orientation, age, and other aspects of their identity.

One immediate cause of concern is the “Washington Redskins” trademark and the corresponding litigation over the trademark in federal courts.[3] Because the Disparagement Clause has been struck down, the Washington Redskins now have the right to pursue registration of their mark, which Native American tribes argue is disparaging. In the aftermath of the Matal v. Tam decision, can organizations (like the Washington Redskins) or individuals now register such offensive marks? Will the USPTO be flooded by such “disparaging” trademark applications as a result? This paper proposes that such an outcome is unlikely, or that concern is simply blown out of proportion. Sound marketing practices and goodwill advise against or mitigate that outcome.[4] Common business sense would also suggest that such offensive marks would not be successful in the marketplace.

On the other hand, Free Speech in trademarks gives certain artists or organizations, like “The Slants” or “Dykes on Bikes”, the ability to express themselves fully without censorship. Such organizations show that some trademark holders wish to register a mark to “self-disparage” a class that he or she belongs to for an artistic, political or other expression-based purpose. This paper argues that any concern of this new hybrid Free Speech trademark right is outweighed by the right of expression by groups who should be able to exercise the First Amendment in an intellectual property or trademark context.

In addition, this paper argues that this new hybrid form of trademark and Free Speech right is now in sync with parallel fields of intellectual property which do not usually recognize “content-based” limitations, such as Copyright Law (being able to copyright anything, even if it is offensive) and Patent Law (the hardly invoked provision preventing the patenting of inventions used for atomic weapons).[5] The comparison to roughly equivalent doctrines in these related fields of intellectual property is to suggest that the effect of removing content-based restrictions (e.g. in the arena of Copyright Law) or attempting to enforce outdated content-based limitations (e.g. in Patent Law) has minimal effect, if any, on the robustness of the underlying intellectual property right. In fact, this paper contends that removing restrictions and infusing trademark rights with Free Speech rights can only lead to benefits.

Part II of this Article will survey the cases leading up to and cited by the Matal v. Tam case and analyze relevant law. Part III of this Article will aver that broader business concerns will likely suppress the filing and registration of offensive marks, leaving only exceptional cases, marks having years of built-up history and tradition, such as the Washington Redskins. Part III of this article will additionally argue that the interest of groups in “self-disparaging” for expression-based reason outweighs any concern that the filing and registration of disparaging trademarks will get out of hand. Part IV of this Article compares the new hybrid Free Speech and Trademark right with other approximate equivalents in Copyright Law and Patent Law to argue that the trademark right will not suffer any detriment in being merged with Free Speech rights and may in fact see positive benefits. Finally, Part V of this Article provides a summary of the arguments and points made throughout.

I. The Matal v. Tam U.S. Supreme Court Case

Simon Tam is the lead singer of a band named “The Slants,”[6] which specializes in a brand of music influenced by other 80s pop-synth bands such as Depeche Mode, Joy Division, The Cure, and New Order termed “Chinatown Dance Rock.”[7]

In an interview with The New York Times, Tam explains how he decided to name the band “The Slants”:

My first real lesson on the power of language was at the age of 11. On the basketball courts at school in San Diego, I was tormented by other students. They’d throw balls, punches, rocks and insults, while yelling “gook” and “Jap.” One day, I had enough. I threw back, “I’m a chink, get it right.” Stunned, they didn’t know what to do. Confused, they stopped.
The act of claiming an identity can be transformational. It can provide healing and empowerment. It can weld solidarity within a community. And, perhaps most important, it can diminish the power of an oppressor, a dominant group.
The idea of reappropriation isn’t new. The process of turning negative words, symbols or ideas into positive parts of our own identity can involve repurposing a racial epithet or taking on a stereotype for sociopolitical empowerment. But reappropriation can be confusing. Sometimes people can’t figure out the nuances of why something is or isn’t offensive — government bureaucrats in particular.[8]

Tam goes on to state that The Slants “toured the country, promoting social justice, playing anime conventions, raising money for charities and fighting stereotypes about Asian-Americans by playing bold music. Never once, after performing hundreds of shows across the continent, did [they] receive a single complaint from an Asian-American. In fact, [the band’s] name [‘The Slants’] became a catalyst for meaningful discussions with non-Asians about racial stereotypes.”[9]

A. The Rejection by the USPTO and the TTAB Appeal

Acting on their attorney’s recommendation to register “The Slants” as a trademark, Tam filed a trademark application for the mark because that was “something that’s commonly done for national acts” and “a critical step in a music career, not only to protect fans from inadvertently purchasing tickets to another band with a similar name but also because most major record labels and licensing agencies won’t work with acts that can’t register their names.”[10]

When Tam sought registration of “THE SLANTS” on the principal register, the Examining Attorney at the USPTO rejected the registration, applying the two-part framework for disparagement under the Disparagement Clause and the Trademark Manual of Examining Procedure (“TMEP”). The Examining Attorney found that there was “a substantial composite of persons who find the term in the applied-for mark offensive.”[11] The Disparagement Clause is a provision of the Lanham Act at 15 U.S.C. § 1052(a) that prohibits the registration of a trademark “which may disparage . . . persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute.”[12]

The two-part framework in determining whether a mark is disparaging first considers “the likely meaning of the matter in question, taking into account not only dictionary definitions, but also the relationship of the matter to the other elements in the mark, the nature of the goods or services, and the manner in which the mark is used in the marketplace in connection with the goods or services.”[13] “If that meaning is found to refer to identifiable persons, institutions, beliefs or national symbols,” the examining attorney moves to the second step, which asks “whether that meaning may be disparaging to a substantial composite of the referenced group.”[14] After these two steps, if the examining attorney finds that a “substantial composite, although not necessarily a majority, of the referenced group would find the proposed mark…to be disparaging in the context of contemporary attitudes,” a prima facie case of disparagement is made out, and the burden shifts to the trademark applicant to prove that the mark is not disparaging.[15]

In Tam’s rejection, the examining attorney relied in part on the fact that “numerous dictionaries define ‘slants’ or ‘slant-eyes’ as a derogatory or offensive term”[16] and according to Simon Tam, the examiner also “used sources like UrbanDictionary.com, a photo of Miley Cyrus pulling her eyes back in a mocking gesture and anonymous posts on internet message boards to ‘prove’ that [the mark] was offensive.”[17]

Tam then contested the USPTO examining attorney’s denial of registration before the Trademark Trial and Appeal Board (“TTAB”), but was not successful.[18] Thereafter, Tam appealed the TTAB’s decision to the Federal Circuit.

B. The Federal Circuit In re Tam Case

The U.S. Court of Appeals for the Federal Circuit took up Tam’s appeal from the TTAB. According to Tam, for the past seven years, he has “supplied thousands of pages of evidence, including letters of support from prominent community leaders and organizations, independent national surveys that showed that over 90 percent of Asian-Americans supported our use of the name and an expert report from a co-editor at the New American Oxford Dictionary.”[19] In response, the USPTO called Tam’s effort “laudable, but not influential” and further stated in a 2011 decision that “[i]t is uncontested that applicant is a founding member” of a band “composed of members of Asian descent,” and afterwards pointed to Asian imagery on The Slant’s official website, “including photographs of Asian people and an album cover with a ‘stylized dragon.’”[20] According to Tam, “it was as if because we were Asian, because we were celebrating Asian-American culture, we could not trademark the name the Slants. Yet ‘slant’ is an everyday term—one that has been registered as a trademark many times, primarily by white people.”[21]

The Federal Circuit, sitting en banc, rendered a majority opinion authored by Judge Moore ruling that the Disparagement Clause was facially unconstitutional under the First Amendment because the Disparagement Clause engaged in viewpoint based discrimination, regulated the expressive component of trademarks and consequently could not be treated as commercial speech—and that the Disparagement Clause was subject to and could not satisfy strict scrutiny.[22] The Federal Circuit also rejected the USPTO’s argument that registered trademarks constituted government speech, as well as the USPTO’s assertion that federal registration was a form of government subsidy.[23] Furthermore, the Federal Circuit held that even if the Disparagement Clause were to be analyzed under the “intermediate scrutiny” standard applied to commercial speech, it would still fail.[24]

In a concurring opinion, Judge O’Malley agreed with Judge Moore’s majority opinion but also added that the Disparagement Clause was unconstitutionally vague.[25] Judge Dyk’s opinion concurred in part and dissented in part, opining that trademark registration was a government subsidy and that the Disparagement Clause was facially constitutional, but unconstitutional as applied to “THE SLANTS” mark because it constituted “core expression” and was not adopted for the purpose of disparaging Asian Americans.[26] Judge Lourie delivered a dissenting opinion where he agreed with Judge Dyk that the Disparagement Clause was facially constitutional but concluded for a variety of reasons that it was also constitutional as applied to the “THE SLANTS” mark in this case.[27] Finally, Judge Reyna also posited a dissenting opinion, contending that trademarks are commercial speech and that the Disparagement Clause survives the intermediate scrutiny test for commercial speech because it “directly advances the government’s substantial interest in the orderly flow of commerce.”[28] In the aftermath of the Federal Circuit’s en banc decision of In re Tam, the USPTO filed a petition for certiorari with the U.S. Supreme Court.

C. The Supreme Court’s Majority Opinion in Matal v. Tam

The U.S. Supreme Court granted the USPTO’s petition for certiorari to ultimately decide whether the Disparagement Clause “is facially invalid under the Free Speech Clause of the First Amendment.”[29]

In Justice Alito’s majority opinion, before reaching the question of whether the Disparagement Clause violated the First Amendment, the Court considered Tam’s argument that the Disparagement Clause did not cover marks that disparage racial or ethnic groups, an argument that was not raised before the TTAB or the Federal Circuit.[30] The Court held that Tam’s argument about the definition of “persons” (that racial and ethnic groups were neither natural nor “juristic” persons) was meritless; by the plain terms of the Disparagement Clause, a mark that disparages a “substantial” percentage of the members of a racial or ethnic group necessarily disparages many “persons,” namely, members of that group. Moreover, the Disparagement Clause also applied not to just “persons” but also to “institutions and “beliefs”—implying that it extends to members of any group who share particular “beliefs” such as political, ideological and religious groups, “institutions” and “juristic” persons such as corporations, unions, and other unincorporated associations. Thus, the Disparagement Clause was not limited to marks that disparage a particular natural person.[31]

The Court also found unpersuasive Tam’s arguments that his interpretation of the Disparagement Clause was supported by its legislative history and by the USPTO’s willingness for many years to register marks that were offensive to African-Americans and Native Americans because: (i) the statutory language of the Disparagement Clause is unambiguous thereby precluding any analysis of the legislative history, (ii) even if the legislative history were to be examined, Tam did not bring to the Court’s attention any evidence in the legislative history showing that Congress meant to adopt his interpretation, and (iii) the registration of offensive marks Tam cited is “likely attributable not to the acceptance of his interpretation of the clause but to other factors—most likely the regrettable attitudes and sensibilities of the time in question.”[32]

1. Government Speech/Subsidy/Program Analysis

Turning to the main question of whether the Disparagement Clause violates the First Amendment, the Court analyzed three arguments advanced by the USPTO: (1) trademarks are government speech, not private speech, (2) trademarks are a form of government subsidy, and (3) the constitutionality of the Disparagement Clause should be tested under a new “government-program” doctrine.[33]

i. Trademarks are Not Government Speech

Justice Alito recited the rule that the Free Speech Clause does not require the government to maintain viewpoint neutrality when its officers and employees speak about a course of action a government entity embarks on, where it necessarily takes a particular viewpoint and rejects others.[34] One simple example was when the Federal Government produced and distributed posters during the Second World War to promote the war effort (e.g., by urging enlistment, the purchasing of war bonds and the conservation of scarce resources) and expressed a viewpoint; “the First Amendment did not demand that the Government balance the message of the posters by producing and distributing posters encouraging Americans to refrain from engaging in these activities.”[35]

Justice Alito mentioned that the government-speech doctrine is susceptible to “dangerous misuse” because if “private speech could be passed off as government speech by simply affixing a government seal of approval, [the] government could silence or muffle the expression of disfavored viewpoints.”[36] Furthermore, the Court noted that even though trademarks are registered by the USPTO, an arm of the Federal Government, the Federal Government does not “dream up these marks” and “it does not edit marks submitted for registration;” further, other than the Disparagement Clause, “an examiner may not reject a mark based on a viewpoint that it appears to express.”[37] As a result, “an examiner does not inquire about whether any viewpoint conveyed by a mark is consistent with Government policy or whether any such viewpoint is consistent with that expressed by other marks already on the principal register.” If a mark meets the Lanham Act’s other viewpoint-neutral requirements, then registration is mandatory. If an examiner finds that a mark is eligible for placement on the principal register, that decision is not reviewed by any higher official unless the registration is challenged. Also, “once a mark is registered, the USPTO is not authorized to remove it from the register unless a party moves for cancellation, the registration expires, or the Federal Trade Commission initiates proceedings based on certain grounds.”[38]

With all of this in mind, Justice Alito concluded that it is “far-fetched to suggest that the content of a registered mark is government speech” because if the federal registration of a trademark makes the mark government speech, the Federal Government is “babbling prodigiously and incoherently,” “saying many unseemly things,” “expressing contradictory views,” “unashamedly endorsing a vast array of commercial products and services,” and “providing Delphic advice to the consuming public.”[39] The Court then gives several examples of conflicting and variegated registered marks to ask what the Government has in mind when it advises Americans to “make.believe” (Sony), “Think different” (Apple), “Just do it” (Nike), “Have it your way” (Burger King), or was the Government warning about a coming disaster when it registered the mark “EndTime Ministries”?[40]

The Court went on to state that the USPTO “has made it clear that registration does not constitute approval of a mark,” “it is unlikely that more than a tiny fraction of the public has any idea what federal registration of a trademark means,” and “[n]one of [the Court’s] prior government speech cases even remotely supports the idea that registered trademarks are government speech.”[41]

The Court discussed and distinguished the case on which the USPTO relies on most heavily, Walker v. Texas Division, Sons of Confederate Veterans, Inc., which the Court declares as likely marking “the outer bounds of the government-speech doctrine.”[42] In Walker, the Court held that messages on Texas specialty license plates bearing the confederate flag were government speech by applying the three factors from the Summum case: (1) whether the medium historically communicated the message of the state, (2) whether the public closely associates the message with the State, and (3) whether the government maintains direct control over the message.[43] First, license plates have long been used by the States to convey state messages; second, license plates “are often closely identified in the public mind” with the State, since they are manufactured and owned by the State, generally designed by the State and serve as a form of “government ID”; and third, Texas “maintain[ed] direct control over the messages conveyed on its specialty plates.”[44] The Court then held that none of the above mentioned factors were present in the current case pertaining to trademark registration, that federal trademark registration is “vastly different” from the government speech found it previous U.S. Supreme Court cases. The Court opined that if the registration of a trademark converted the mark into government speech, this “would constitute a huge and dangerous extension of the government-speech doctrine” for “if the registration of trademarks constituted government speech, other systems of government registration could easily be characterized in the same way.”[45]

As will be discussed later on in the paper, the Court addressed the concern of extending the USPTO’s application of government speech to copyrights. The Court responded to this concern by stating that trademarks often also have expressive content, and companies spend huge amounts to create and publicize trademarks that convey a message. “It is true that the necessary brevity of trademarks limits what they can say. But powerful messages can sometimes be conveyed in just a few words.”[46]

Thus, the Court concluded that trademarks are private, not government speech.[47]

ii. Trademarks Are Not Government Subsidies

The Court addressed the USPTO’s argument that trademarks are government subsidized speech by stating that all the cases that the USPTO relies on involved cash subsidies or the equivalent.[48] The Court stated that the federal registration of a trademark is nothing like the programs at issue in those cases because the USPTO “does not pay money to parties seeking registration of a mark”; to the contrary, applicants must pay the USPTO a filing fee of $225-$600 and Tam himself paid the USPTO a fee of $275 to register “THE SLANTS.”[49] Indeed, the Federal Circuit has stated that those fees have fully supported the trademark registration system for the past 27 years.[50]

In response to the USPTO’s argument that trademark “registration provides valuable non-monetary benefits that ‘are directly traceable to the resources devoted by the federal government to examining, publishing, and issuing certificates of registration for those marks,’” the Court stated that “just about every government service requires the expenditure of government funds” such as police and fire protection, the adjudication of private lawsuits and the use of public parks and highways.[51] The Court also mentioned that trademark registration is not the only government registration scheme—there are also federal patents and copyrights. State governments also register titles to real property and security interests in addition to issuing driver’s licenses, motor vehicle registrations, and hunting, fishing and boating licenses and permits.[52] Thus, the Court declined to interpret federal trademark registration as a government subsidy because the case law cited by the USPTO (as well as the universe of case law involving government subsidies) was not instructive.

iii. Trademarks are Not Government Programs

Finally, in response to the USPTO’s argument that the disparagement clause would apply to “government program” cases—a merger of government speech cases and government subsidy cases with “[t]he only new element . . . of two cases involving a public employee’s collection of union dues from its employees,” the Court stated that trademark registration was far removed from that area because “those cases occupy a special area of First Amendment case law.”[53]

The Court further mentioned a potentially more analogous line of cases in which a unit of government creates a limited public forum for private speech.[54] When the government creates such a forum, in either a literal or “metaphysical” sense, some content and speaker based restrictions may be permitted.[55] In such cases however, “viewpoint discrimination” is forbidden.[56] Extending the viewpoint discrimination test, where the word “viewpoint” is applied broadly, the Court concluded that the Disparagement Clause discriminates on the basis of “viewpoint” because it “evenhandedly prohibits disparagement of all groups,” it “applies equally to marks that damn Democrats and Republicans, capitalists and socialists, and those arrayed on both sides of every possible issue” and “denies registration to any mark that is offensive to a substantial percentage of the members of any group.”[57]

The Court concluded that the Disparagement Clause is viewpoint discrimination because “[g]iving offense is a viewpoint” and that it cannot be saved by analyzing it as a type of government program in which some content and speaker based restrictions are permitted.[58]

2. Commercial Speech Analysis

Justice Alito’s majority opinion then turned to whether trademarks are commercial speech and are thus subject to the relaxed scrutiny test as outlined by the Central Hudson case.[59] The USPTO and the amici that supported the USPTO’s position argued that trademarks are commercial speech because the central purposes of trademarks are commercial and that federal law regulates trademarks to promote fair and orderly interstate commerce, while Tam and his amici argued that many, if not all, trademarks have an expressive component beyond simply identifying the source of a product or service and go on to say something more, either about the product or service or some broader issue (such as “THE SLANTS” mark at issue in the case, which not only identifies the band, but also expresses a view about social issues).[60] The Court determined that the debate need not be resolved because the Disparagement Clause did not withstand even relaxed scrutiny review under Central Hudson, which requires that a restriction of speech serve a “substantial interest” and be “narrowly drawn” in order to be constitutional under the First Amendment. This means that “[t]he regulatory technique may extend only as far as the interest it serves.”[61]

The Court reached the conclusion that the Disparagement Clause failed Central Hudson relaxed scrutiny review because even though the Disparagement Clause served two interests—the first being the Government’s interest in preventing speech expressing ideas that offend[62] and the second being protecting the orderly flow of commerce[63]—the Disparagement Clause was not “narrowly drawn” to those interests. That is, the Disparagement Clause was not “narrowly drawn” to drive out trademarks that support “invidious discrimination” because it reached any trademark that disparaged “any person, group, or institution,” applying to trademarks such as “Down with racists”, “Down with sexists”, “Down with homophobes.”[64] In that respect, the Disparagement Clause was not an anti-discrimination clause, it was a “happy-talk clause” and in this way, it went “further than is necessary to serve the interest asserted.”[65] The Court also stated that the Disparagement Clause was overly broad because it protected every person living or dead as well as every institution.[66] The Court finally addressed a “deeper problem” with the argument that commercial speech may be cleansed of any expression likely to cause offense because

[t]he commercial market is well stocked with merchandise that disparages prominent figures and groups and the line between commercial and non-commercial speech is not always clear, as this case illustrates. If affixing the commercial label permits the suppression of any speech that may lead to political or social ‘volatility,’ free speech would be endangered.[67]

For all the above reasons, the Court majority held that the Disparagement Clause violated the Free Speech Clause of the First Amendment.

D. Justice Kennedy’s Concurring Opinion

Justice Kennedy’s concurring opinion, which Justices Ginsburg, Sotomayor and Kagan joined, stated that the Court correctly held that the Disparagement Clause engaged in viewpoint discrimination, but explains in greater detail why the First Amendment’s protections against viewpoint discrimination apply to “THE SLANTS” trademark here. Justice Kennedy submitted further that the viewpoint discrimination rationale renders unnecessary any extended treatment of other questions raised by the parties.[68]

First, Justice Kennedy explained that the First Amendment guards against laws “targeted at specific subject matter,” a form of speech suppression known as content based discrimination, which includes a subtype of laws that are aimed at the suppression of “particular views…on a subject.” Furthermore, a law found to discriminate based on viewpoint is an “egregious form of content discrimination,” which is “presumptively unconstitutional.”[69] Justice Kennedy went on to state that, at its most basic, the test for viewpoint discrimination is whether—within the relevant subject category—the government has singled out a subset of messages for disfavor based on the views expressed. In the present case, the Disparagement Clause reflected the Government’s disapproval of a subset of messages it found offensive, which is the essence of viewpoint discrimination.[70]

Justice Kennedy dismissed the Government’s argument that the Disparagement Clause was viewpoint neutral because it applied in equal measure to any trademark that demeans or offends, noting that it missed the point because a “subject that is first defined by content and then regulated or censored by mandating only one sort of comment is not viewpoint neutral,” and to “prohibit all sides from criticizing their opponents makes a law more viewpoint based, not less so.”[71] In response to the Government’s argument that the Disparagement Clause was viewpoint neutral because it applied to trademarks regardless of the applicant’s personal views or reasons for using the mark, Justice Kennedy stated that the Government may not insulate a law from charges of viewpoint discrimination by tying censorship to the reaction of the speaker’s audience.[72] Justice Kennedy stated:

[i]ndeed, a speech burden based on audience reactions is simply government hostility and intervention in a different guise. The speech is targeted, after all, based on the government’s disapproval of the speaker’s choice of message. And it is the government itself that is attempting in this case to decide whether the relevant audience would find the speech offensive. For reasons like these, the Court’s cases have long prohibited the government from justifying a First Amendment burden by pointing to the offensiveness of the speech to be suppressed.[73]

Justice Kennedy summarized the contradictory folly of the Disparagement Clause by stating that “the dissonance between the trademark’s potential to teach and the Government’s insistence on its own, opposite, and negative interpretation confirms the constitutional vice of the statute.”[74]

Second, turning to the commercial speech and government subsidy analysis, Justice Kennedy stated that, to the extent that trademarks qualify as commercial speech, they are an example of why that term or category does not serve as a blanket exemption from the First Amendment’s requirement of viewpoint neutrality, and in the realm of trademarks, the metaphorical marketplace of ideas becomes a tangible, powerful reality.[75] Justice Kennedy stated that the question here is not how other provisions of the Lanham Act square with the First Amendment. Rather, the Court’s precedents recognized just one narrow situation in which viewpoint discrimination is permissible: where the government itself is speaking or recruiting others to communicate a message on its behalf.[76] Justice Kennedy also pointed out that this case does not involve the situation where private speakers are selected for a government program to assist the government in advancing a particular message.[77] Finally, Justice Kennedy concluded by stating that a law like the Disparagement Clause can be directed against speech found offensive to some portion of the public and can be turned against minority and dissenting views to the detriment of all.[78] The “First Amendment does not entrust that power to the government’s benevolence” and “[i]nstead, our reliance must be on the substantial safeguards of free and open discussion in a democratic society.”[79]

Justice Thomas, in his concurring opinion, joined in all aspects of Justice Alito’s majority opinion except with respect to Part II, rejecting Tam’s interpretation arguments on “persons” within the Disparagement Clause, because he saw no reason to address this legal question in the first instance.[80]

Justice Thomas also wrote separately because he continued “to believe that when the government seeks to restrict truthful speech in order to suppress the ideas it conveys, strict scrutiny is appropriate, whether or not the speech in question may be characterized as ‘commercial.’”[81] However, Justice Thomas joined in Part IV of Justice Alito’s opinion because he opined that it correctly concluded that the Disparagement Clause was unconstitutional even under the less stringent test of Central Hudson review.[82]

II. Predictions on The Aftermath of Matal v. Tam

Simon Tam had this to say about the period leading up to and after the Supreme Court opinion was delivered in Matal v. Tam:

After we won our case in a federal court, the Trademark Office asked the Supreme Court to review the case. That very same week, the office granted another new registration for “slant” to a company that makes industrial coils. I may be the only person denied a registration for “slant” because it was deemed offensive to Asian-Americans.
This week, the Supreme Court reversed the Trademark Office’s decision, striking down the law that denied trademark protection to names deemed derogatory. Some supporters of that law claim that offensive names will now routinely receive trademark protection. (The Washington Redskins is a widely cited example.) But my response is that the Trademark Office doesn’t have the cultural understanding to determine what is or isn’t racist.[83]

Now that the Disparagement Clause has been ruled unconstitutional, will there be a flood of offensive trademarks filed with the USPTO? What about other marks previously denied or cancelled under the Disparagement Clause, such as the Washington Redskins mark? This paper predicts that there will not be a substantial increase in offensive mark filings, due to goodwill concerns and common business sense. Additionally, the fact that the Disparagement Clause survived for nearly 70 years despite major First Amendment concerns suggests that issues with disparaging marks are relatively uncommon.

Only in rare cases where businesses have successfully built up goodwill in a mark, despite the mark being potentially disparaging or offensive—such as the Washington Redskins trademark—would the mark be worth registering with the USPTO. This leaves the opportunity to register trademarks for “self-disparagement,” political, or artistic reasons or to reappropriate or reclaim a term, which encourages the free-flow of expression in an ever-changing marketplace of ideas. Encouraging freedom of expression from these groups outweighs any concerns raised by potential, though unlikely, excessive filing of offensive marks.

A. Low Probability of Highly Offensive Mark Filings

An immediate knee-jerk prediction to Matal v. Tam might be a sharp increase in the filing of offensive or derogatory marks with the USPTO. One attorney remarks that the “Trademark Official Gazette may soon require a parental advisory on the cover.”[84] But there is reason to believe this concern is blown out of proportion.

The main reason why offensive filings likely will not increase is that there is no indication that there were many offensive mark filings awaiting registration (or were denied registration due to the Disparagement Clause) to begin with. Why else would it have taken nearly 70 years for a trademark applicant to challenge the statute?[85] Simon Tam and The Slants also challenged the statute at roughly the same time as the Washington Redskins did (give or take several years). It appears that the interest in obtaining a disparaging mark is not high amongst brands, companies or groups. In other words, there may not be many trademark applicants who wish to register offensive marks generally.

To see why this may be the case, we should look to underlying psychological concerns and motivations of both purchasing consumers and businesses that wish to thrive. Common business sense would dictate that naming one’s company, group, or brand after an offensive word or slur would not exactly be good marketing.[86]

Other factors potentially preventing an increase in the registration of marks are the burdens of acquiring registration of a mark, which are rigorous and not to be underestimated.[87] To register a mark, applicants must show that they will actually use the mark in commerce – which may be unlikely for holders of offensive marks.[88] Furthermore, “merely ornamental” marks that do not serve the source identifying purpose behind trademarks will also likely not be registered.[89] The other barriers present in the registration process will likely discourage many applications from registering offensive marks. Many will likely give up after realizing the difficulty.

Beyond the registration process, there are other business reasons to not adopt disparaging marks. The “shock factor” of such marks are often temporary or transient at best. Building goodwill, brand loyalty, and trust in the marketplace would prove difficult by relying solely on such a gimmick. There have been examples of marks from French Connection United Kingdom (who stylized their shirts as “fcuk” to mimic the word “fuck”), but that company registered a mark on a misspelling of a cuss word that also happened to be the acronym for its company. One can hardly imagine that company or a similarly situated one now being able to register a mark for “fuck” and generating substantial business from it.

Additionally, the post-Matal Federal Circuit case of In re Brunetti reversed the rejection of the mark “FUCT” for various items of clothing under Section 2(a) because the Lanham Act’s ban on registering immoral or scandalous trademarks was unconstitutional on First Amendment grounds, as held by Tam.[90] There may be individuals or companies out there who believe registering offensive marks can lead to promising business opportunities.[91] This may be a new, exciting, and wide-open market, as some commentators suggest that the Brunetti case further expands the realm of potentially offensive subject matter now protectable by federal trademark registration.[92]

In the context of racial slurs or words considered insulting to a group (be it political, religious, cultural, etc.), there is even less motivation for a company to brand themselves or a product after such disparaging terms. Not only could they risk alienating large segments of customers with such a choice, but that decision would also chip away and deteriorate whatever sense of reputation or goodwill that company has already built up. Therefore, the scenario in which companies will flock to the USPTO to register disparaging marks seems highly unlikely, unless the company wishes to commit a form of brand suicide. Scandalous, “shocking” advertising campaigns can be achieved through marks like FUCT, now permissible in light of In re Brunetti. Individuals and companies can achieve the same or similar marketing results without using disparaging marks, which run the risk of alienating potential consumers.

B. The Washington Redskins Mark

One class of now-registerable disparaging or offensive marks is the type of mark that has already built up years of goodwill, brand recognition and notoriety. A perfect example of this group of marks is the Washington Redskins mark, which was challenged in litigation both in federal courts and the TTAB.[93] However, as even Justice Alito mentioned in the majority opinion of Matal v. Tam, there have been many other marks considered derogatory, offensive and/or disparaging to minority groups registered due to the nature of the times.[94] The difference with this class of marks is that they have already spent years of time, resources and money building up their brand with an already registered mark—whereas potential trademark owners wishing to now register offensive marks in the wake of Matal v. Tam have to start from nothing, and will likely acquire nothing to build their brand, due to the analysis discussed above in Part III(A).

Even though marks like the Washington Redskins trademark or “FUCT” are valid after the Matal v. Tam and In re Brunetti cases, there is some solace for groups disparaged by such marks. These marks are few and far between. The other offensive marks registered according to the condition of standards at the time (as mentioned by Justice Alito), have either expired or are not used by any businesses or enterprises considered even remotely successful.

C. Free Speech Interests Outweigh Offensive Mark Filings

Regardless, a compelling countervailing interest outweighs the concern of increased filing of offensive marks. That interest is our ability to give certain artists or organizations like “The Slants” or “Dykes on Bikes” the right to “self-disparage.” By allowing such groups to fully exercise their Free Speech rights under the First Amendment, the robustness of speech will increase and the marketplace of ideas will be diversified. Groups like The Slants will also be able to reclaim and reappropriate previously offensive terms in order to gain cultural or political ground in other arenas. As mentioned before by the New York Times article penned by Simon Tam, there is power in reappropriation. The possibilities that this hybrid Free Speech trademark right gives to individuals and groups like The Slants and Dykes on Bikes is limitless, and should be encouraged in order to fully reach the potential envisioned by the First Amendment.

Notably, filers after the Matal v. Tam case have been primarily aiming to “take back” racial slurs and reappropriate them—from an African American applicant attempting to register “nigga” in order to “reclaim the word” and “sell T-shirts that celebrate themes such as unity and brotherhood” to a patent lawyer in Alexandria, Virginia trying to register the swastika in order to “put it in a drawer and make sure nobody uses it” by selling merchandise such as blankets, shirts, and flags for the exorbitantly expensive price of a thousand dollars each.[95] These examples suggest that the Tam decision has sparked reappropriation of disparaging terms and images, rather than promoted disparagement of minority groups.

III. Comparisons to Patent Law & Copyright Law

This new hybrid Free Speech and Trademark right can also be compared with approximate equivalents in Copyright Law and Patent Law to argue that the trademark right, by itself, will not suffer any detriment in being merged with Free Speech rights and may in fact see positive benefits.

Taking copyright law as the first example, copyrights can be obtained and registered for offensive material, mainly because copyrights are so closely tied to expression and are in fact “an engine of free expression.”[96] Being able to copyright anything, even if it is offensive, makes the copyright form of intellectual property stronger, more diverse, and more robust. The same effect will likely occur for this new Trademark and Free Speech right created in the wake of Matal v. Tam.

As for Patent Law, there is an outdated and hardly invoked provision from the Atomic Energy Act of 1954 that prohibits the patenting of inventions used for atomic weapons.[97] This provision is somewhat of a “moral” clause, comparable to the Disparagement Clause. This provision has hardly ever been used or cited by the USPTO, or challenged by courts, and thus has a limited impact on patent rights. Thus, the Atomic Energy Act in Patent Law, which runs “parallel” to the Disparagement Clause, goes to show the limited impact such moral provisions have on intellectual property rights.[98]

Conclusion

For the reasons described above, this paper asserts that there will not be a substantial increase in the filings of offensive marks post-Matal v. Tam, and that the free speech interests of groups like The Slants and Dykes in Bikes is sufficient justification for the Free Speech Trademark hybrid right to exist. In addition, upon comparisons to roughly equivalent fields such as Copyright and Patent Law, infusing Free Speech rights into the Trademark intellectual property right can only make trademarks stronger.

Perhaps it would be fitting to end with Simon Tam’s final comments on the case and the outcome of Matal v. Tam in the U.S. Supreme Court, in the op-ed he penned for The New York Times:

Social theorists say that our identity can both be influenced by as well as influence the world around us. Every scientific study confirms that the stigma of derogatory terms like “queer” and “bitch” are mediated by perceived power when the referenced groups own them. The role of the government shouldn’t include deciding how members of a group define themselves. That right should belong to the community itself.
The battles about hate speech shouldn’t be waged at the Trademark Office, decided by those who have no connections to our communities. Those skirmishes lead to arbitrary, inconsistent results and slowly chip away at the dignity and agency of oppressed people to decide appropriateness on our terms. A person’s quality of life, opportunities and rights may hinge on that person’s identity. Those rights should not hinge on the hunch of a government employee armed with wiki-joke websites. It’s suppression of speech in the most absurd manner.
Americans need to examine our systems of privilege and the ways unconscious bias affects our attitudes. But that discussion begins with the freedom to choose our language. As we sing on “From the Heart” on our latest album, “The Band Who Must Not Be Named”:
So sorry if you take offense
But silence will not make amends
The system’s all wrong
And it won’t be long
Before the kids are singing our song.[99]

* Visiting Scholar & Senior Researcher, University of California Berkeley School of Law. LL.M., University of California Berkeley School of Law, 2017. J.D., University of California, Hastings College of the Law, 2007. I would like to thank Professor Sonia Katyal, Professor John Haskell, Simon Tam, Tina Loza, and Jennifer Lantz for their contributions to this article.

[1] 15 U.S.C. § 1052(a) (2006). Also cited as § 1052(a), § 2(a) or “Section 2(a)”.

[2] Matal v. Tam, No. 15-1293, slip op. at 1-2 (U.S. June 19, 2017).

[3] See Pro-Football, Inc. v. Harjo, 415 F.3d 44 (D.C. Cir. 2005); Blackhorse v. Pro-Football, Inc., 111 U.S.P.Q.2d 1080 (T.T.A.B. 2014) (Trademark Trial and Appeal Board (“TTAB”) case involving the Washington Redskins trademark).

[4] See Bill Donahue, Post-Slants, Is USPTO Going To Be Flooded With Bad Words?, Law360 (June 22, 2017, 5:30 PM), https://www.law360.com/articles/937110 (“In the wake of the U.S. Supreme Court’s Slants ruling striking down the government’s ban on offensive trademark registrations, some have worried about a flood of ugly language at the trademark office, but experts say those concerns could be overblown.”).

[5] 42 U.S.C. § 2181 (2012) (“No patent shall hereafter be granted for any invention or discovery which is useful solely in the utilization of special nuclear material or atomic energy in an atomic weapon.”).

[6] In re Tam, 808 F.3d 1321, 1331 (Fed. Cir. 2015).

[7] See Wikipedia, The Slants, https://en.wikipedia.org/wiki/The_Slants (last visited Mar. 17, 2018).

[8] Simon Tam, The Slants on the Power of Repurposing a Slur, N.Y. Times (June 22, 2017), https://www.nytimes.com/2017/06/23/opinion/the-power-of-repurposing-a-slur.html.

[9] Id. Tam goes on to later state: “We had called ourselves the Slants as a way of seizing control of a racial slur, turning it on its head and draining its venom. It was also a respectful nod to Asian-American activists who had been using the epithet for decades.”

[10] Id.

[11] Matal v. Tam, No. 15-1293, slip op. at 7 (U.S. June 19, 2017).

[12] Id. at 5-6 (quoting 15 U.S.C. § 1052(a) (2006)).

[13] Id. at 6 (citing TMEP § 1203.03(b)(i)).

[14] Id.

[15] Id. The USPTO has also specified in the TMEP that “[t]he fact that an applicant may be a member of that group or has good intentions underlying its use of a term does not obviate the fact that a substantial composite of the referenced group would find the term objectionable.” Id.

[16] Id. at 7. The “examining attorney also relied on a finding that ‘the band’s name has been found offensive numerous times’ – citing a performance that was canceled because of the band’s moniker and the fact that ‘several bloggers and commenters to articles on the band have indicated that they find the term and the applied-for mark offensive.” Id.

[17] Tam, supra note 8

[18] Tam, slip op. at 7.

[19] Tam, supra note 8

[20] Id.

[21] Id.

[22] In re Tam, 808 F.3d 1321, 1334-39 (Fed. Cir. 2015).

[23] Id. at 1339-55.

[24] Id. at 1355-57.

[25] Id. at 1358 (O’Malley, J., concurring).

[26] Id. at 1363-74 (Dyk, J., concurring in part, dissenting in part).

[27] Id. at 1376-82 (Lourie, J., dissenting).

[28] Id. at 1376 (Reyna, J., dissenting).

[29] Matal v. Tam, No. 15-1293, slip op. at 8 (June 19, 2017).

[30] Id. at 8-9.

[31] Id. at 9-10.

[32] Id. at 11-12.

[33] Id. at 12.

[34] Id. at 13.

[35] Id.

[36] Id. at 13-14.

[37] Id. at 14.

[38] Id. (citing 15 U.S.C. §§1052(a), 1058(a), 1059, 1062(a), 1064, 1071; 37 CFR §§2.111(b), 2.160, 41.31(a) (2016)).

[39] Id. at 14-15.

[40] Id. at 15 (citing make.believe, Registration No. 4,4342,903; Think Different, Registration No. 2,707,257; Just Do It, Registration No. 1,875,307; Have It Your Way, Registration No. 0,961,016; and EndTime Ministries, Registration No. 4,746,225).

[41] Id. at 15-17 (discussing and distinguishing the government speech in Johanns v. Livestock Mktg. Ass’n, 544 U.S. 550, 560-61 (2005) (holding that government ads promoting the sale of beef products were government speech) and Pleasant Grove City v. Summum, 555 U.S. 460, 464 (2009) (holding that monuments in a city park represented government speech due to many factors) from trademarks).

[42] Id. at 17 (citing Walker v. Tex. Div., Sons of Confederate Veterans, Inc., 576 U.S. __ (2015)).

[43] Id. at 17. See Cong. Research Serv., Legal Sidebar, License Plates and Public Signs: Government First Amendment Speech (2015), available at https://fas.org/sgp/crs/misc/license.pdf (summarizing the three factors from Summum, 555 U.S. 464-65).

[44] Tam, slip op. at 17.

[45] Id. at 17-18.

[46] Id. at 18.

[47] Id.

[48] Id. at 18-19 (citing Rust v. Sullivan, 500 U.S. 173 (1991); Nat’l Endowment for the Arts v. Finley, 524 U.S. 569 (1998); U.S. v. Am. Library Ass’n, 539 U.S. 194 (2003); Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983); Cammarano v. U.S., 358 US. 498 (1959)).

[49] Id. at 19 (citing 37 C.F.R. §2.6(a)(1) (2016) and 15 U.S.C. §1059(a) (2012)).

[50] In re Tam, 808 F.3d 1321, 1353 (Fed. Cir. 2015).

[51] Tam, slip op. at 19-20.

[52] Id. at 20.

[53] Id. The government program cases are: Davenport v. Washington Educ. Ass’n, 551 U.S. 177, 184-90 (2007) (holding a law constitutional that did not allow an employer to collect a portion of union dues that would be used in election activities, because the law imposed a “modest limitation” on an “extraordinary benefit,” e.g. taking money from the wages of non-union members and turning it over to the union free of charge; refusing to confer a greater benefit did not upset the market-place of ideas and did not abridge the union’s free speech rights); Ysura v. Pocatello Educ. Ass’n, 555 U.S. 353, 355 (2009) (holding constitutional an Idaho law that allowed public employees to elect to have union dues deducted from their wages but did not allow such a deduction for money remitted to the union’s political action committee because “The First Amendment…does not confer an affirmative right to use government payroll mechanisms for the purpose of obtaining funds for expression. Idaho’s law does not restrict political speech, but rather declines to promote that speech by allowing public employee checkoffs for political activities.”); Abood v. Detroit Bd. of Educ., 431 U.S. 209, 224-26 (1977) (more similar to a government cash subsidy case, where the laws conferred a benefit because it was thought that this arrangement served important government interests).

[54] Tam, slip op. at 20. See e.g. Good News Club v. Milford Central Sch., 533 U.S. 98, 106-107 (2001); Rosenberger v. Rector & Visitors of Univ of Va., 515 U.S. 819, 831 (1995); Lamb’s Chapel v. Center Moriches Union Free Sch. Dist., 508 U.S. 384, 392-93 (1993); Legal Services Corp. v. Velazquez, 531 U.S. 533, 541-44 (2001).

[55] See Rosenberger, 515 U.S. at 830-31.

[56] See id. at 831.

[57] Tam, slip op. at 22.

[58] Id. at 22-23. The Court states that they have “said time and again that ‘the public expression of ideas may not be prohibited merely because the ideas are themselves offensive to some of their hearers.’” Id. at 22-23 (citations omitted).

[59] Id. at 23 (citing Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557 (1980)).

[60] Tam, slip op. at 23-24.

[61] Id. at 24 (citing Cent. Hudson, 447 U.S. at 564-65).

[62] Tam, slip op. at 24. The court points out that one way to achieve this interest is to prevent “underrepresented groups” from being “bombarded with demeaning messages in commercial advertising.” Id. at 24-25 (citing In re Tam, 808 F.3d 1321, 1364 (2015) (Dyk, J., concurring in part and dissenting in part)). It also notes that an amicus supporting the USPTO suggests that the disparagement clause serves this interest by “encouraging racial tolerance and protecting the privacy and welfare of individuals.” Id. at 24-25 (citing Brief for Native American Organizations as Amici Curiae at 21, Matal v. Tam, 582 U.S. __ (2017) (No. 15-1293)). Nonetheless, the court states that “[s]peech that demeans on the basis of race, ethnicity, gender, religion, age, disability, or any other similar ground is hateful; but the proudest boast of our free speech jurisprudence is that we protect the freedom to express ‘the thought that we hate.’” Tam, slip op. at 25 (citing United States v Schwimmer, 279 U.S. 644, 655 (1929) (Holmes, J., dissenting)).

[63] Tam, slip op. at 25 (citing Tam, 808 F.3d at 1380-81 (Reyna, J., dissenting)) (“Commerce, we are told, is disrupted by trademarks that ‘involv[e] disparagement of race, gender, ethnicity, national origin, religion, sexual orientation, and similar demographic classification.’ . . . . Such trademarks are analogized to discriminatory conduct, which has been recognized to have an adverse effect on commerce.”)). See Brief for Petitioner at 49, Matal v. Tam, 582 U.S. __ (2017) (No. 15-1293); see also Brief for Native American Organizations as Amicus Curiae, supra note 62

[64] Tam, slip op. at 25.

[65] Id.

[66] Id. at 25-26. “Is it conceivable that commerce would be disrupted by a trademark saying: ‘James Buchanan was a disastrous president’ or ‘Slavery is an evil institution’?” Id. at 26.

[67] Id. at 26.

[68] Matal v. Tam, No. 15-1293, slip op. at 1 (U.S. June 19, 2017) (Kennedy, J., concurring).

[69] Id. at 2.

[70] Id. at 2-3.

[71] Id. at 3 (“The logic of the Government’s rule is that a law would be viewpoint neutral even if it provided that public officials could be praised but not condemned. The First Amendment’s viewpoint neutrality principle protects more than the right to identify with a particular side. It protects the right to create and present arguments for particular positions in particular ways, as the speaker chooses. By mandating positivity, the law here might silence dissent and distort the marketplace of ideas.”).

[72] Id. at 3-4 (“The danger of viewpoint discrimination is that the government is attempting to remove certain ideas or perspectives from a broader debate. That danger is all the greater if the ideas or perspectives are ones a particular audience might think offensive, at least at first hearing. An initial reaction may prompt further reflection, leading to a more reasoned, more tolerant position.”).

[73] Id. at 4.

[74] Id. at 4-5.

[75] Id. at 5-6 (“Here that real marketplace exists as a matter of state law and our common law tradition, quite without regard to the Federal Government. These marks make up part of the expression of everyday life, as with the names of entertainment groups, broadcast networks, designer clothing, newspapers, automobiles, candy bars, toys and so on. Nonprofit organizations – ranging from medical research charities and other humanitarian causes to political advocacy groups – also have trademarks, which they use to compete in a real economic sense for funding and other resources as they seek to persuade others to join their cause. To permit viewpoint discrimination in this context is to permit Government censorship.”).

[76] Id. at 6-7.

[77] Id. at 7.

[78] Id. at 8.8

[79] Id.

[80] Matal v. Tam, No. 15-1293, slip op. at 1 (U.S. June 19, 2017) (Thomas, J., concurring).

[81] Id. (citing Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 572 (2001) (Thomas, J., concurring in part and concurring in judgment); 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 518 (1996) (same)).

[82] Tam, slip op. at 1 (Thomas, J., concurring).

[83] Tam, supra note 8

[84] Donahue, supra note 4 (quoting attorney Christopher Larus of Robins Kaplan LLP).

[85] See id. (“That’s one of the reasons it took 70 years for the disparagement bar to fall; there just have never been that many companies clamoring to use revolting phrases as trademarks on their products. ‘As a practical matter, I don’t think I’ve ever filed an application that falls into these categories, and I’ve been doing this for over 20 years,’ said Cynthia Walden, the head of the trademark group at Fish & Richardson PC. ‘It just doesn’t really come up much.’”).

[86] See id. (“First and foremost is the fact that offensive subject matter, even if you can now technically register it, is simply bad branding—sort of a big deal when talking about trademarks. ‘You still have to live in the world and you still have to deal with public opinion,’ said Timothy J. Kelly, a partner with McCarter & English LLP. ‘If people are going to look at that [registered] term and be turned off immediately, you’re not going to sell much.’”).

[87] See id. (“As for those who do rush to file applications for objectionable subject matter in the wake of the ruling, experts say they will still face big hurdles at the trademark office, even in a post-Slants world. Many of them will be shot down for the same reason as applications for ‘Covfefe,’ ‘Nasty Woman’ and other trending terms: The applicant fundamentally misunderstands what a trademark registration is. ‘Registration requires more than just filing an application to register registrable matter and paying a fee,” said Alexandra Roberts, a professor at the University of New Hampshire School of Law. Applicants who race out to register must show that they have a bona fide intent to use the name on a particular set of goods and services.”).

[88] See id. (“To get fully registered, they then need to have the capacity to actually use the term as a trademark in commerce. Some of the folks who descend on the USPTO in the wake of the high court’s decision might certainly meet those requirements, but many more likely won’t. ‘The applicants often aren’t serious about making the kind of use necessary to acquire trademark rights,’ Roberts said.”).

[89] See id. (“The trademark office will also refuse to register any mark that’s ‘merely ornamental,’ as well as widespread terms that are used by numerous third parties, because neither serves the source-designating function that’s required of a trademark. Those are two more big sticking points that could stem the tide. ‘Post-Tam, we can expect producers who have long used disparaging marks to register them with little fanfare,’ Roberts said. ‘But when it comes to individuals looking to capitalize on a controversial phrase, many of their applications won’t pass muster.’”).

[90] In re Brunetti, 877 F.3d 1330, 1335 (Fed. Cir. 2017) (“Erik Brunetti appeals from the decision of the Trademark Trial and Appeal Board (“Board”) affirming the examining attorney’s refusal to register the mark FUCT because it comprises immoral or scandalous matter under 15 U.S.C. § 1052(a) (‘§ 2(a)’). We hold substantial evidence supports the Board’s findings and it did not err concluding the mark comprises immoral or scandalous matter. We conclude, however, that § 2(a)’s bar on registering immoral or scandalous marks is an unconstitutional restriction of free speech. We therefore reverse the Board’s holding that Mr. Brunetti’s mark is unregistrable.”); Dennis Crouch, We are all FUCT, Patentlyo, (December 15, 2017), https://patentlyo.com/patent/2017/12/we-are-all-fuct.html (“Here, the Federal based its decision on content-based discrimination (rather than viewpoint based) which is also reviewed for strict scrutiny. In reaching its decision, the Federal Circuit rejected two particular arguments, holding: 1. Trademark Registration is Not a Government Subsidy Program: If it were a subsidy, then the government could place conditions on the program without violating free speech principles (so long as those are not unconditional conditions). 2. Trademark Registration is more than commercial speech because it does “more than propose a commercial transaction” and often involve expressive conduct. If it were pure commercial speech, then restrictions would be reviewed under a looser standard. However, here the court holds that the immoral or scandalous mark provision ‘is unconstitutional even if treated as a regulation of purely commercial speech.’”).

[91] Indeed, the Federal Circuit commented on this issue. See Brunetti, 877 F.3d at 1354 (“Even marks that reference the indisputably vulgar term ‘fuck,’ like the mark at issue here, are not always rejected as a matter of course. The PTO registered the mark FCUK, but rejected the marks FUCT and F**K PROJECT as scandalous. It allowed the registration of MUTHA EFFIN BINGO, Reg. No. 4,183,272, and IF WE TOUCH IT, IT’S FN GOLDEN, Reg. No. 4,100,978, but not F ALL F’S APPAREL FOR THE F’N ANGRY, Appl. No. 78,420,315.”).

[92] See Beth Goldman, Diana Rutowski, Kristin Cornuelle & Chris Civil, Federal Circuit Makes Way for FUCT, Striking Down the Statutory Bar on Immoral or Scandalous Trademark Registrations as Unconstitutional, Orrick Intellectual Property Alert (Dec. 20, 2017), https://www.orrick.com/Insights/2017/12/Federal-Circuit-Makes-Way-for-FUCT (“On December 15, the U.S. Court of Appeals for the Federal Circuit struck down the Lanham Act’s ban on registering immoral or scandalous trademarks as unconstitutional on First Amendment grounds in In re Brunetti, — F.3d —- (Fed. Cir., Dec. 15, 2017, No. 2015-1109). This decision followed just a few months after the Supreme Court’s significant holding in Matal v. Tam, 137 S. Ct. 1744 (2017), which invalidated the disparagement clause of the Lanham Act on the same grounds. In re Brunetti further expands the new world of potentially offensive subject matter now eligible for federal trademark protection. At issue was Erik Brunetti’s application to register the mark FUCT for various items of clothing. The Examining Attorney refused registration under Section 2(a) of the Lanham Act, finding that the mark comprised immoral or scandalous subject matter because FUCT is the past tense of the vulgar verb ‘fuck.’ The Trademark Trial and Appeal Board affirmed the Examining Attorney’s refusal, citing dictionary definitions uniformly characterizing the word ‘fuck’ as offensive and several images showing Brunetti using the mark in connection with explicit sexual imagery. The Federal Circuit agreed that the mark was vulgar and scandalous, but then turned to examine the constitutionality of the immoral or scandalous clause of Section 2(a) . . . The potential subject matter of registrable trademarks has, for the second time in just a few months, expanded considerably. It will be interesting to see how these new court interpretations affect trademark application filings in the New Year.”).

[93] See Pro-Football, Inc. v. Harjo, 415 F.3d 44 (D.C. Cir. 2005); Blackhorse v. Pro-Football, Inc., 111 U.S.P.Q.2d 1080 (T.T.A.B. 2014) (Trademark Trial and Appeal Board (“TTAB”) case involving the Washington Redskins trademark).

[94] Such marks were “likely attributable not to the acceptance of his interpretation of the clause but to other factors – most likely the regrettable attitudes and sensibilities of the time in question.” Tam, slip. op at 12.

[95] Ailsa Chang, After Supreme Court Decision, People Race To Trademark Racially Offensive Words, NPR Planet Money (Jul. 21, 2017, 4:25 PM), http://www.npr.org/2017/07/21/538608404/after-supreme-court-decision-people-race-to-trademark-racially-offensive-words.

[96] Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 558 (1985).

[97] 42 U.S.C. § 2181 (2012) (“No patent shall hereafter be granted for any invention or discovery which is useful solely in the utilization of special nuclear material or atomic energy in an atomic weapon”).

[98] Being able to patent anything does not translate exactly to being able to say or express anything, due to the fact that the moral implications of technology might be a complicated subject that goes beyond Free Speech First Amendment rights. On a related note, there does not appear to be any free speech restrictions on what to title a patent or particular words that can be placed within a patent (e.g. in the specification, claims and/or abstract). Therefore, from a strictly verbal basis — the expressive content of a patent application can be viewed now as being equivalent to the expressive content in copyrights and now, trademarks.

[99] Tam, supra note 8

JIPEL Vol. 7, No. 1 – Fall 2017

The NYU Journal of Intellectual Property and Entertainment Law is proud to present Volume 7 Issue 1 of the Journal. While PDFs of the individual articles may be found accompanying their respective posts, you may view and download a PDF of the complete issue here

From Mailroom to Courtroom: The Legality of Unpaid Internships In Entertainment After Glatt v. Fox Searchlight Inc.

From Mailroom to Courtroom: The Legality of Unpaid Internships In Entertainment After Glatt v. Fox Searchlight Inc.
Vincent P. Honrubia*

Download a PDF version of this article here

Introduction

The entertainment industry has engendered an almost-mythical culture surrounding unpaid internships. Though highly romanticized, the journey from unpaid intern to Hollywood executive is well known and has spawned some of Hollywood’s most famous players.[1] Michael Ovitz,[2] David Geffen,[3] Rich Ross,[4] and countless others – the list of Hollywood moguls who began their careers as unpaid interns in the infamous "mailroom" is striking.[5] Perhaps these were the career paths envisioned by plaintiffs Eric Glatt, Alexander Footman, and Eden Antalik when they agreed to work as unpaid interns for Fox Searchlight’s blockbuster film, Black Swan, before filing a class action lawsuit demanding wages and challenging their status as unpaid interns.

Indeed, the controversy surrounding the legality of unpaid internships has only grown louder in recent years, and for good reason.[6] In an increasingly competitive job market, internships have become a crucial aspect of the modern employment process in the United States as a way for students to obtain valuable experience and training in the field of their choosing.[7] For employers, internships provide access to a deep hiring pool of students who demonstrate talent. Because internships play such a key role in education, most universities now offer academic credit for participation in them.[8] In 2015, a survey of college graduates revealed that nearly sixty percent of college students have participated in an internship program and that students who participate in internships are far more likely to receive job offers after graduating from their undergraduate institutions.[9]

However, not all internships are created equal. While most internship programs are now paid, nearly forty percent of internships are unpaid.[10] In fact, somewhere between 500,000 and 1 million people intern for free each year.[11] In industries like entertainment, where demand for available jobs far outweighs the supply, unpaid internships are hardly uncommon.[12] Unsurprisingly, there are many critics who view the practice of unpaid internships as illegal, claiming that interns should be considered “employees” who are owed at least minimum wage under the Fair Labor Standard Act (“FLSA”). As the discussion has progressed, so have the number of lawsuits filed by unpaid interns asserting that they were unlawfully denied wages, especially in the entertainment industry.[13] In the midst of a circuit split[14] about how to interpret the question of whether interns must be paid, the Department of Labor (“DOL”) has informally promulgated Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act (“Fact Sheet #71“): an “all-or-nothing” six factor test to help with the inquiry.[15]

In Glatt v. Fox Searchlight Pictures,[16] overturning the district court’s decision, the Second Circuit neglected to adopt the FLSA test regarding when it is lawful to classify employees as “unpaid interns.” Instead, the Second Circuit adopted a flexible, individualized test allowing for an employer to maintain an unpaid internship program so long as the potential intern is the “primary beneficiary” of the test.[17] The touchstone of this test, as instructed by the Second Circuit, is to consider the totality of the circumstances regarding the “economic realities” of the intern-employer relationship.[18]

This Note will argue that the “primary beneficiary” test adopted by the Second Circuit is well-suited for the entertainment industry because the individualized assessment of the employer-intern relationship helps to preserve the cultural role of unpaid internships in the entertainment industry while simultaneously providing a flexible and contemporary framework that helps to ensure the integrity of the modern internship. Analysis proceeds in three parts.

Part I provides context to the argument with a brief history and overview of internships in the entertainment industry. Although unpaid internships are common in other industries, they hold special significance in the entertainment business due to the high demand and low supply of entrance level opportunities. A brief discussion on the background and cultural significance of these internships will help to frame the proceeding legal analysis.

Part II discusses both the judicial and administrative legal frameworks that precipitated the Second Circuit’s decision in Glatt. This will necessarily include a discussion on the FLSA, Fact Sheet #71, and Walling v. Portland Terminal.[19] Only by thoroughly analyzing what preceded the Glatt decision can its significance be fully understood.

Lastly, through the lens of the entertainment industry, Part III defends the Glatt decision as a crucial step forward in unpaid internship jurisprudence because its flexibility provides the best framework for balancing the diverse set of interests involved in each unique internship. This section necessitates a close analysis of the unworkability of Fact Sheet #71, a comparison between the circumstances that inspired Portland Terminal and those of the modern entertainment internship, and an examination of the practical effects since the Second Circuit’s decision. This paper will conclude that the Second Circuit’s “primary beneficiary” test in Glatt provides a practical amount of flexibility in assessing unpaid internships without sacrificing its ability to protect the integrity of the modern employment relationship in the entertainment industry.

I. UNPAID INTERNSHIPS IN ENTERTAINMENT

“The best advice anyone ever gave to me is, ‘Take the job. Get in the door and you’ll meet somebody who’ll get you in the next door.’” [20]

This quote from Kristieanne Groelinger, a director of production for Jerry Bruckheimer Films, reflects the very real quandary those hoping to gain access to the entertainment industry face: everybody almost always starts at the bottom, and even entry-level positions are difficult to come by. It is within this context of a high demand for jobs and a low supply of opportunities that the problem of the unpaid intern arises.[21]

Unpaid internships, and internships in general, are not a unique concept to the entertainment industry. No other industry, however, depends so intensely on free labor.[22] Because “getting your foot in the door” is the key to finding long-term employment in the industry, internships are among the only viable options for those without connections to bypass the metaphoric myrmidon guarding the industry doors.[23] Unpaid internships are so pervasive in entertainment that in the late 1990s nearly 100% of internships in the entertainment industry were unpaid.[24]

Including industries other than entertainment, it is apparent that internships have become an integral part of the modern-day educational and recruiting experience.[25] In fact, internships have become even more pervasive and important than ever before. As increasing numbers of college graduates and young professionals flood the hiring pools, interning to gain the requisite experience necessary for one’s dream job has become nearly mandatory. Employers have come to expect new hires to have internship experience as a prerequisite for getting hired, and human resource professionals have recently ranked internship experience as the single most important factor in hiring a candidate.[26] As the significance of obtaining an internship grows, companies are now utilizing internship programs as recruiting tools to attract the best students.[27] In other words, across all industries, internships have become a necessary part of any job seeker’s resume.[28]

This growth and dependency on internships has reached a fever pitch over the last decade.[29] The Great Recession of 2008 caused hiring levels to plummet, and thus, internships became essential for most students and recent graduates.[30] Although the hiring market has steadily improved since 2008, it has still not returned to pre-recession hiring levels.[31] As jobs were reduced, the unemployment pool grew with experienced workers who were now also seeking entry-level positions.[32] To the detriment of students and recent graduates, employers often choose to hire workers with more experience.[33] Thus, internships became even more pervasive as the only means for a student or recent graduate to gain the necessary experience employers demand.

In the entertainment industry in particular, internships such as unpaid “mailroom” jobs, have become deeply embedded in the industry’s culture as an irreplaceable rite of passage.[34] Indeed, “uncompensated minions are as central to the movie business as private jets, splashy premieres and $200 lunches.”[35] Competition for unpaid internships in the entertainment sector is particularly intense, as entry-level positions in the industry indicate a potential for upward mobility.[36] Entry-level mailroom interns become assistants, who then become agents, managers, and executives. One prominent entertainment industry publication even issues an annual list of “10 Assistants to Watch,” to spotlight those assistants likely to be promoted in the near future.[37] Historically, unpaid internships have been the first step toward becoming a mogul and have become essentially prerequisites for assistant positions.[38]

Thus, the relationship is ideally mutually beneficial. For students in higher education seeking jobs in the entertainment, media, and arts industries, internships are a necessary stepping-stone to full-time employment.[39] Internships provide students with an experiential learning opportunity that introduces them to the industry, enables them to develop workplace skills, and fosters professional networking that could lead to full-time employment. Alternatively, an employer benefits from the internship by having access to motivated students, and the ability to evaluate their performance as potential employees in a non-binding environment with a reduced, or non-existent, financial commitment. Research indicates that the majority of students interning in the entertainment sector are not paid for their work.[40]

Accordingly, it is no surprise that the first unpaid internship case to reach a U.S. court of appeals involved the entertainment industry.[41] The notoriety of unpaid internships in entertainment might be blamed for the current debate surrounding unpaid internships across all industry sectors – and with good cause.[42] Internships, whether paid or unpaid, are typically offered as a one-time work or service experience related to the student’s major or career goals.[43] An internship program generally involves students working in professional settings under the supervision of practicing professionals.[44] In many cases where the internship is unpaid, students are often offered academic credit for their services.[45] Essentially, in an ideal world, internships offer students opportunities to learn practical skills in a professional environment in industries of their choosing while improving their resume and gaining valuable industry connections.[46] It is the former category where entertainment internships flounder and the latter that they flourish.

While Hollywood internships have certainly spawned some of the industry’s biggest players, it has also spawned some of its more infamous stories.[47] There are a plethora of films, television shows, and literature documenting and highlighting the life of interns in entertainment.[48] Take for example a famous excerpt from Ross Perlin’s book, Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy:

The curtain rises on Disney World, interns are everywhere. The bellboy carrying luggage up to your room, the monorail “pilot” steering a Mark VI train at forty miles per hour, the smiling young woman scanning tickets at the gate. Others corral visitors into the endless line for Space Mountain, dust sugar over funnel cake, sell mouse ears, sweep up candy wrappers in the wake of bewitched four-year olds. Even Mickey, Donald, Pluto and the gang – they may well be interns, boiling in their furry costumes in the Florida heat.
Visiting the Magic Kingdom recently, I tried to count them, scanning for the names of colleges on the blue and white name tags that all “cast members” wear . . . They came from public schools and private ones, little-known community colleges and world-famous research universities, from both coasts and everywhere in between. International interns, hailing from at least nineteen different countries, were also out in force. A sophomore from Shanghai, still bright-eyed a week into her internship, greeted customers at the Emporium on Main Street, U.S.A. She was one of hundreds of Chinese interns, she told me, and she was looking forward to “earning her ears.”
. . .
Disney runs one of the world’s largest internship programs. Each year, between 7,000 and 8,000 college students and recent graduates work full-time, minimum-wage, menial internships at Disney World.[49]

Certainly, the mentioned sophomore from Shanghai was not learning practical skills that she could use to further her perceived career in entertainment. Yet the concept of “earning her ears” – getting a foot in the door in one of the most prestigious companies in the business – is why internship experiences at Disney and other entertainment titans are not just tolerated, but celebrated.[50] It is also why, however, these internships are often criticized as sham programs driven by the company’s manpower needs.[51] Even the academic credit that is offered, Perlin argues, results in a financial windfall for the schools – schools are paid for the credit, by the students, and provide almost nothing to enhance the experience.[52]

However, not all internship programs are as bleak as Disney’s colloquially, and infamously, coined “Mousecatraz,”[53] at least on the surface. In this Note’s principal case, Eric Glatt, the named plaintiff, worked in the production phase of Black Swan, performing menial tasks but actually gaining an understanding of how a production office works.[54] In fact, Glatt’s first stint as an unpaid intern led him to receive a second job in the post-production phase of the film. In an industry where companies would seemingly offer unpaid internship opportunities or no internship opportunities at all,[55] those opportunities may never have been made available to Eric Glatt and the hundreds of other interns working to find their niche in an ultra-competitive industry.

II. THE LEGAL FRAMEWORK GOVERNING UNPAID INTERNSHIPS

When the Fair Labor Standards Act (FLSA) was adopted in the early 20th century, Congress presumably did not contemplate unpaid internships. Because the increase in pervasiveness and criticism of unpaid internships is fairly recent, federal employment regulations do not directly address internships. Before analyzing the Glatt case, it is important to understand the underlying legal framework that Glatt sought to clarify, beginning with the Fair Labor Standards Act of 1938.

A. The Fair Labor Standards Act

Congress enacted the FLSA in 1938 in response to the exploitation of employees during the Great Depression.[56] Initially controversial, the FLSA’s goals were to establish better working conditions and provide more protections to the American worker.[57] The law, authored by charismatic Alabama senator and eventual Supreme Court Justice Hugo Black, stated its aim – the “elimination of labor conditions detrimental to the maintenance of the minimum standards of living necessary for health, efficiency, and well being (sic) of workers.”[58] When President Franklin Roosevelt signed the FLSA into law, he proudly called the FLSA “the most far reaching, far-sighted program for the benefit of workers ever adopted in this or any other country.”[59]

The effects of the FLSA have, indeed, been far reaching. For example, the FLSA outlaws most forms of child labor,[60] establishes maximum working hours,[61] guarantees extra pay for overtime work, and finally establishes a minimum wage.[62] Specifically regarding wage protections, the FLSA purports “to insure that every person whose employment contemplated compensation should not be compelled to sell his services for less than the prescribed minimum wage.”[63] As Ross Perlin eloquently puts it, “[i]t was a dizzying triumph for unions and progressives – the culmination of a half-century’s struggle to protect America’s new legions of industrial laborers.”[64]

For the last 79 years, the FLSA has been remarkably resilient in maintaining its status as a far-reaching law. With little conflict, its underlying architecture has become a bedrock consensus, as “few people would openly advocate the return of young children to factories.”[65] The law’s stated aim – the elimination “of labor conditions detrimental to the maintenance of the minimum standards of living necessary for health, efficiency, and well-being of workers”[66] – still sounds heroic, but the FLSA’s vague definitions have led to major problems with consistently achieving its purpose.[67] Historically, however, judges have interpreted the FLSA very broadly.[68]

Congress has expressly delegated executive authority over the FLSA to the Secretary of Labor.[69] The FLSA grants the Secretary broad power to “define and delimit the scope of [wage requirements] for executive, administrative, and professional employees.”[70] Included within this broad authority, the Secretary has oversight over internal investigations of violating employers.[71] Investigators from the “Wage and Hour Division” (WHD), present in every jurisdiction across the United States, are specifically responsible for enforcing the act.[72] However, some argue that the Department of Labor fails to “use its full authority to enforce the FLSA with respect to unpaid internships.”[73] As a result, Courts have recognized a private right of action in employee lawsuits, which can be quite costly to employers if a plaintiff is successful due to awards of liquidated damages and back pay.[74] Accordingly, the utmost clarity on which employees are covered by the FLSA is owed to employers, as misclassifying an employee can have expensive consequences.

Under the FLSA, the term “[e]mploy” is defined as “to suffer or permit to work.”[75] An “employee” is broadly defined as “any individual employed by an employer.”[76] Hence, unless a person is an “employee” under the FLSA, he or she will not receive the plethora of protections guaranteed by the FLSA.[77] The broad definitions of “employee” and “employ” provide courts with little guidance to determine whether student interns are entitled minimum wage and overtime benefits when agreeing to participate in an unpaid internship program with an employer.[78] The lack of clarity on this point has led to a variety of issues in classifying student workers under the FLSA.

Where the act may be vague in some areas, in others it is clearer. Congress has amended the FLSA to exempt individuals who volunteer their time at a government agency, for example.[79] According to this 1985 amendment, those who volunteer to work at a public state agency, an interstate governmental agency, or a subdivision of the state may do so without being classified as “employees” for purposes of the FLSA.[80] Thus, the term “employee” specifically excludes some workers by classifying them as volunteers. Additionally, the FLSA implicitly exempts some nonprofits and food banks, because these workers can also be classified as volunteers.[81] Lastly, an employee cannot waive his right to minimum wage or overtime pay because doing so would “nullify the purposes of the [FLSA] and thwart the legislative policies it was designed to effectuate.”[82]

The FLSA does not specifically exempt, or even define, interns. Rather, as stated above, the Act’s protections apply to employees. Thus, the threshold question in considering the legality of unpaid internships is whether or not interns should be classified as an “employee” for purposes of the FLSA.[83] The circular definition provided by the FLSA – “any individual employed by an employer” – cannot answer the question, as it is clear that while interns and employees share many commonalities, interns also differ from employees in many respects.[84] While the Supreme Court has never directly addressed the question, the Department of Labor and the lower courts have wrestled with it.[85] Unfortunately, all three sources of interpretation have only served to muddy the doctrine.

B. Pre-FLSA “Employee” Determinations by the Supreme Court

Before delving into the Court’s analysis of the term “employees” as it applies to the FLSA, it is important to discuss the early Supreme Court cases that help to frame the proceeding analysis. Although the FLSA was enacted in 1937, debate surrounding the scope of the term “employee” was hardly considered until 1947.[86] A few cases, which predated the FLSA, help to frame the scope of the definitional analysis of “employee” within the context of federal labor statutes such as the National Labor Relations Act and the Social Security Act.

In NLRB v. Hearst Publications,[87] the Supreme Court considered the term “employees” under the National Labor Relations Act as it applied to newspaper boys. In this case, the Court held that the scope of the term “employee” was “to be determined not exclusively by reference to common-law standards, local law, or legal classifications made for other purposes, but with regard also to the history, context and purposes of the Act and to the economic facts of the particular relationship.”[88] The Court considered a number of factors in determining that the newspaper boys were employees, including the fact that wages earned served as the newspaper boy’s primary income, the hours of supervised work, the sales equipment provided to the newspaper boys for the principal’s (Hearst’s) benefit, and the regularity of the individual’s work.[89] No factor was dispositive in itself.[90]

Likewise, in United States v. Silk,[91] the Supreme Court examined the term “employees” under the Social Security Act. In this case, the Court considered whether a particular group of coal workers should be classified as employees.[92] In determining that the coal workers were employees under the act, the Court focused on the skill required to perform the job, the permanency of the employment relationship, as well as the degree of control the employer exercised over the coal workers.[93] Both this case and NLRB v. Hearst Publications are important because similar factors were considered when the Court finally considered the term “employee” in the context of the FLSA.

C. Walling v. Portland Terminal Co.

Initially, the FLSA declared only well-paid, white-collar workers to be exempt from the law’s provisions: the familiar distinction between exempt and nonexempt employees.[94] Although the Supreme Court has yet to directly consider the issue of whether unpaid interns should be considered employees under the FLSA, it provided some guidance in an unpaid trainee case.[95] In Portland Terminal, a 1947 case, the Department of Labor’s WHD brought an action against Portland Terminal Company, a railroad company, on behalf of a group of unpaid brakeman trainees for not providing them with minimum wage or overtime compensation while participating in a practical training program to become yard brakemen.[96] The training program, which was required for potential railroad brakemen, typically lasted a week or more without any compensation other than the training.[97] This training required applicants to shadow the yard crew before qualifying for the position due to the dangerous nature of the position.[98] Applicants who participated in this program did so with the express purpose of qualifying for employment as railroad brakemen.[99] After the training, trainees were not automatically hired but put on a list and subsequently hired as became necessary for the company.[100] Although immediate employment was not guaranteed, only individuals placed on the aforementioned list were considered for employment.[101]

The Supreme Court’s question was whether these railroad trainees should be considered “employees” for purposes of the FLSA.[102] Accordingly, if the individuals were deemed employees, the railroad company would be compelled to pay minimum wages for the time spent in the training program.[103] As noted above, the FLSA provides little clarity in this area, providing only a broad definition of “employee” as “any individual employed by an employer.”[104] The vague definition of “employ,” “to suffer or to permit to work,” only serves to obstruct congressional intent further.[105] Working with the limited guidance provided by the statute, the Court, in an opinion written by the FLSA’s own author in Hugo Black, ruled that “the definition of ‘suffer or permit to work’ was obviously not intended to stamp all persons as employees who, without express or implied compensation agreement, might work for their own advantage on the premises of another.”[106]

Thus, the Supreme Court in Portland Terminal created what is now known as the “trainee exception.” The Court stated that:

The [FLSA] cannot be interpreted so as to make a person whose work serves only his own interest an employee of another person who gives him aid and instruction . . . . [Because the FLSA] was not intended to penalize [employers] for providing, free of charge, the same kind of instruction [as a vocational school] at a place and in a manner which most greatly benefit the trainees.[107]

Essentially, the Court noted that what the training program provided was similar to what one might pay for in a vocational school course. The fact that the training program did not lead to guaranteed employment, and instead only created a labor pool, was not necessarily dispositive, especially in light of the hands-on, practical learning experience provided to the trainees. The most important factor the Court recognized was that Portland Terminal Co., the defendant-railroad company, did not receive an “immediate advantage” from these trainees. The Court noted that because the trainees required regular employee supervision, the training program actually impeded the regular employees’ daily work.[108] The Court also considered the fact that the trainees did not displace any of the regular employees.[109] It is important to highlight that, in reaching their decision, none of the aforementioned factors were dispositive, and the Court instead looked to the totality of the circumstances of the training program to determine that the railroad brakemen trainees were not employees for purposes of the FLSA.[110]

D. Fact Sheet #71

As noted above, the FLSA does not exempt, or even define, interns. Since Portland Terminal, it has been difficult for courts to determine the appropriate test to apply to interns under the FLSA. Before creating a test for unpaid internships, the Department of Labor first issued informal guidelines to provide a framework for analyzing whether certain employees fall into the trainee exception.[111] In 1967, the Department of Labor issued informal guidance on trainees as part of its Field Operations Handbook.[112] The handbook enumerated six criteria, which must all be met in order for a trainee to not be considered an employee. [113]

The tests within the informal guidelines merely restate the factors noted in Portland Terminal, and apply them to trainees via administrative guidance.[114] Because of the similarities between internships and trainee programs, the Department of Labor applied the same test to analyze both employment relationships.[115] However, to avoid ambiguity, and likely in response to the political climate, the Department of Labor finally issued an informal opinion letter in 2010, which essentially applied the same trainee analysis to more specifically deal with internships.[116] The informal opinion letter is known as “Fact Sheet #71.”[117]

In cases concerning unpaid internships, courts sometimes look to Fact Sheet #71.[118] Published in 2010, Fact Sheet #71 was the major precursor to the recent boom in unpaid intern litigation.[119] The Fact Sheet’s guidelines merely attempt to codify the holding in Portland Terminal and apply it to determinations of whether interns are owed pay.[120] Although Fact Sheet #71 merely restates the law that has been in effect since 1947 Portland Terminal, and rigidly applies the trainee test to interns, the issuance of Fact Sheet #71 was widely seen as the Department of Labor cracking down on unpaid internships.[121]

Within Fact Sheet #71, the Department of Labor has published an “all-or-nothing” six-factor test to determine whether or not an intern should be classified as an employee.[122] If any one factor is not met, the Department of Labor will consider the intern to be an employee. Thus, in order for the trainee exception to apply under the Department of Labor’s six-factor test, each of the following factors must be met:

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.[123]

Although it is well settled that some administrative actions are granted judicial deference, Fact Sheet #71 is not owed any deference. The term “Chevron deference” applies to administrative actions that are intended to carry the force of law.[124] Fact Sheet #71 specifically states that it is not intended to carry such force: “This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations.”[125] Accordingly, courts generally agree that Fact Sheet #71 is not entitled to Chevron deference.[126]

Even if some agency decisions are not entitled to Chevron deference, the decision may be entitled to a lower level of deference under Skidmore v. Swift.[127] Under Skidmore, agency interpretations should be given deference when they are persuasive, meaning they had “all those factors which give [the agency interpretation] power to persuade, if lacking power to control.”[128] According to the Court, the factors giving an agency’s interpretation “power to persuade” include the (1) consistency in the agency’s interpretation over time, (2) the thoroughness of the agency’s consideration, and (3) the soundness of the agency’s reasoning.[129] In other words, the more thoroughly considered and reasoned an agency’s interpretation is, the more a court should defer to that interpretation. As will be discussed below, the reasoning behind Fact Sheet #71 has been subject to much scrutiny and criticism.[130]

E. Examining the Circuit Split

Because Fact Sheet #71 is not a formal agency regulation, courts disagree about whether to adopt the test at all and to what level its analysis is owed deference.[131] This confusion has led to a circuit split and therefore a lack of uniformity in the analysis of exempted employees. Before examining the Second Circuit’s Glatt decision more closely, it is important to consider how the decision compares to those of its sister circuits. The circuit courts generally take one of two approaches. While some circuits have instituted a “totality of the circumstances” test, as opposed to the all-or-nothing test from Fact Sheet #71, others have adopted their own versions of the “primary beneficiary” test in place of Fact Sheet #71.

1. Totality of the Circumstances Approach

Some circuit courts utilize the “totality of the circumstances” approach in determining employee status under the trainee exception. Under this approach, courts will balance the factors proposed by the WHD of the Department of Labor considering the totality of the circumstances.

In an illustrative case, Reich v. Parker Fire Protection Dist.,[132] the Tenth Circuit analyzed an opinion letter from the WHD identical to Fact Sheet #71, except as applied to trainees. The Tenth Circuit rejected the argument that the Court was bound to the all-or-nothing standard advocated by the Secretary of Labor in determining when certain trainees could be classified as “employees.”[133] In Reich, potential fire fighters underwent a ten-week training program with no pay.[134] This training program involved classroom learning, as well as practical training with the fire department’s equipment. [135]Although a job was not guaranteed upon completion of the program, the training was a necessary prerequisite for employment.[136]

After performing a Chevron analysis to determine that the WHD’s opinion letter was not entitled to deference, the Tenth Circuit elected to utilize a totality of the circumstances approach and assessed the proposed factors for employee-trainee distinctions.[137] Noting that “determinations of employee status under FLSA in other contexts are not subject to rigid tests but rather to consideration of a number of criteria in their totality,” the court rejected the WHD’s all-or-nothing approach and instead examined the proposed six-factors in totality.[138] In doing so, the Tenth Circuit ruled that the trainees were not employees. The Fifth Circuit, in Donovan v. American Airlines, Inc., has taken a similar approach.[139]

2. Pre-Glatt Primary Beneficiary Test

Although some circuits have adopted the WHD’s approach in a totality of the circumstances form, many circuits have rejected the proposed approach, inventing their own balancing analysis to determine who is the “primary beneficiary” of the employment relationship. Under this approach, an intern will only be considered an “employee” for purposes of the FLSA when the employer, and not the intern, is the primary beneficiary of the employment relationship. Conversely, if the intern is the primary beneficiary of the relationship, then they are not considered to be employees under the FLSA and thus can continue on an unpaid basis.

The Sixth Circuit’s approach in Solis v. Laurelbrook Sanitarium & School, Inc.[140] provides a representative example. In Solis, the Department of Labor was investigating child labor law violations at a boarding school.[141] The issue addressed was whether or not the children, who received “practical training” in many real world skills, could be classified as employees for purposes of the FLSA.[142] Again, the “trainee exception” was examined.[143] Instead of deferring to the WHD’s proposed factored approach to the inquiry, the Sixth Circuit relied on its own assessment of the totality of the circumstances, noting the WHD’s test to be inconsistent with Portland Terminal.[144]

The Sixth Circuit in Solis adopted a “primary beneficiary” analysis to review the employment relationship. The court’s analysis circled around the “benefits flowing to each party.”[145] Considering factors such as whether the relationship displaces employees, whether there is educational value derived from the relationship, and the amount of supervision imposed on the supposed trainees, the Court ultimately held that the students were the primary beneficiary of the relationship and therefore not employees for purposes of the FLSA.[146]

The Sixth Circuit thought this approach, where the focus of the analysis is centered on the benefits the intern receives, was more consistent with Portland Terminal:

Courts have read Portland Terminal as focusing principally on the relative benefits of the work performed by the purported employees. See, e.g., Isaacson v. Penn Cmty. Servs., Inc., 450 F.2d 1306, 1309 (4th Cir.1971) (“The rationale of Portland Terminal would seem to be that the railroad received no ‘immediate advantage’ from the trainees’ services. To state it otherwise, the principal purpose of the seemingly employment relationship was to benefit the person in the employee status.”). [147]

The court also mentioned that the primary beneficiary test “provides a helpful framework for discerning employee status in learning or training situations.”[148] It is precisely under this line of logic that the Second Circuit in Glatt outlined their analysis.

F. Glatt v. Fox Searchlight Pictures, Inc.

Prior to Glatt, the Second Circuit had not addressed the “trainee” exception to the FLSA as it applied to interns.[149] In Glatt, the Second Circuit overturned the district court’s summary judgment determination that the plaintiffs had been illegally classified as interns by Fox Searchlight Pictures.[150] At the district court level, the court used a totality of the circumstances approach to analyze the factors under Fact Sheet #71 and ruled that the plaintiffs should have been classified as employees.[151] Finding that the interns satisfied four of the conditions, but failed two, the district court found that the test in Fact Sheet #71 could not be met.[152] In overturning the district court’s decision, the Second Circuit remanded their claims back to the district court for further proceedings under the newly formulated “primary beneficiary” test.[153] The court noted that it agreed with defendants “that the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” [154]

In analyzing the district court’s decision, the Court first noted the ambiguity in this area of the law, recognizing that the Supreme Court has yet to definitively address the issue of internships in regards to the FLSA.[155] The bulk of the Second Circuit’s analysis, however, was related to the district court’s incorrect reliance on Fact Sheet #71 in making its decision.[156] The Second Circuit declined to adopt the test advocated by the plaintiffs, the district court, and the Department of Labor because Fact Sheet #71’s rigid all-or-nothing approach is inconsistent with Portland Terminal, as it “attempts to fit Portland Terminal’s particular facts to all workplaces.”[157]

Instead of adopting the rigid approach, the Second Circuit implemented a flexible test that better encompasses the nature and circumstances of the “modern internship.”[158] Accordingly, the Second Circuit adopted the flexible “primary beneficiary” because of “three salient features.”[159] First, the court liked that the primary beneficiary test focuses on what the intern receives in exchange for his work.[160] This factor recognizes that interns may receive intangible benefits for their work. Next, the Second Circuit highlighted the flexibility of the test, arguing that employment is a “flexible concept to be determined on a case-by-case basis by review of the totality of the circumstances.” [161] This flexible review allows courts to better examine the “economic reality as it exists between the intern and employer.”[162] In fact, the “economic reality” of the employment relationship is the “touchstone of the analysis.”[163] Lastly, because unpaid internships require an understanding between employer and intern that the intern will not be paid, the Second Circuit argues that the primary beneficiary test better “acknowledges that the intern-employer relationship should not be analyzed in the same manner as the standard employer-employee relationship because the intern enters into the relationship with the expectation of receiving educational or vocational benefits that are not necessarily expected with all forms of employment[.]”[164] This factor recognizes that the issue of paying interns is fundamentally different from whether or not an employee is protected by the FLSA because, as internships have become a more important part of the employment process, individuals now enter unpaid internships with the expectation of experience rather than payment. Together, these three factors illustrate the flexibility and individualized approach the Second Circuit embraces in the primary beneficiary test.

The Second Circuit, however, did not leave their flexible test unalloyed.[165] The court articulated a non-exhaustive set of considerations to consider when discerning the primary beneficiary of the employment relationship. Considering these factors requires balancing and weighing of all the circumstances. The list of factors includes:

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.[166]

The Court noted that no one factor was dispositive, and, in stark contrast to Fact Sheet #71, “every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage.”[167] Additionally, in certain cases, the Second Circuit allows for consideration of the internship program as a whole rather than the experience of a specific intern.[168]

Finally, the Second Circuit restricts this test to analyzing unpaid internships, noting its factors do not apply to training programs in other contexts.[169] In doing so, the Court therefore acknowledges the growing difference between modern internships and trainee programs of the past.[170] In fact, the Second Circuit specifically distinguishes the situation in Portland Terminal from internships of today.[171] Although the circuit court declined to rule on the specific situation of the plaintiffs in Glatt, it is because of the flexibility of the primary beneficiary test that internships in entertainment, like those of the Glatt plaintiffs, have better chances to survive FLSA challenges moving forward.

III. IMPROVING WITH GLATT

The Second Circuit’s primary beneficiary test stands as an important step forward in internship jurisprudence. By adopting the primary beneficiary test to analyze unpaid internships, the Second Circuit introduced a workable standard that is clear, flexible, and practical enough to equitably analyze internships. Critics of the test argue that it is “overly subjective” and that “application of the primary beneficiary test in the unpaid internship context will prove an unpredictable undertaking.”[172] What these critics fail to consider, however, is that the subjective nature of the test empowers courts to consider a wider array of internships. Internships across industries, and even within the same industry, vary wildly. Similarly, students may have varying goals and reasons in agreeing to an unpaid internship. Thus, a flexible standard like the primary beneficiary test allows the courts to better consider all the relevant facts and circumstances surrounding an internship.

In a competitive industry like entertainment, where unpaid internships are major means of access to full-time employment, the Second Circuit’s decision helps to preserve unpaid internships within the industry without sacrificing its ability to police exploitative programs. This is even more apparent when comparing it to Fact Sheet #71.

A. Fact Sheet #71: Impractical, Inconsistent, and Illogical

Before being overturned by the Second Circuit, the district court had used Fact Sheet #71 to rule that the plaintiffs were improperly classified as interns.[173] As the Second Circuit revealed, Fact Sheet #71’s six-factor test is not consistent with Portland Terminal nor practical in application. This becomes even more apparent when applied to the entertainment industry.

1. Impractical: Fact Sheet #71 is Too Rigid

Because interns must be paid unless every factor is met, the Department of Labor’s six-factor test becomes an insurmountable obstacle for most companies who would want to provide unpaid internship opportunities.[174] In fact, in regards to Fact Sheet #71, Department of Labor Deputy WHD Administrator Nancy Leppink admitted, “[t]here aren’t going to be many instances where you can have an internship for a for-profit employer and not be paid and still be in compliance with the law.”[175] Indeed, it is difficult to envision any internship in the entertainment industry that would survive such rigid scrutiny.

Consider the fourth factor, for example, that “the employer . . . derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impede.”[176] This factor is overinclusive and senseless, especially when considered in the context of Fact Sheet #71’s rigid test. For example, assume an unpaid production intern assists with an editing project for his major television studio employer. It is undoubtedly valuable experience unobtainable outside a production office, yet this experience would almost certainly fail the fourth factor and the unpaid internship would be ruled illegal. By applying this factor, an internship devolves into a job shadowing experience.[177] While job shadowing certainly provides benefits to an intern, it certainly is not as beneficial as an internship.[178] Revisiting the hypothetical production office intern, it is far better for him or her to actively participate in the editing process under the supervision of professionals than to simply observe it from afar.

Accordingly, it is apparent that the primary beneficiary test is better suited for analyzing internships in the entertainment industry. By considering all the benefits an intern may receive, and balancing them against the benefits an employer receives, the primary beneficiary test demands a more flexible, yet still applicable, inquiry into the unpaid internship program. Additionally, instead of focusing on benefits toward the employer, the Second Circuit’s test centers the inquiry on the benefits the intern receives. Thus, if the hypothetical production intern had learned how to use complex video editing software, made valuable industry connections, and gained hands-on experience through participating on an editing project, it could easily be said that the intern benefitted more from the employment relationship than the employer. The problem with Fact Sheet #71 is that it would rule this invaluable internship experience illegal because no amount of benefit to the hypothetical production intern could save the internship program if any single factor were lacking. Such a narrow view of internships severely undercuts their effectiveness, as hands-on experience is among the most valuable aspects of an internship.[179]

2. Inconsistent: Fact Sheet #71 Is Inconsistent with the FLSA, Portland Terminal, and Itself

Fact Sheet #71 is riddled with inconsistencies that undermine its effectiveness. Fact Sheet #71 is inconsistent with the FLSA, Portland Terminal, and itself. For example, Fact Sheet #71’s fifth factor, that the “intern is not necessarily entitled to a job at the conclusion of the internship,” runs contrary to one of the FLSA’s primary purposes – increasing opportunities for gainful employment.[180] Indeed, this requirement as applied in Fact Sheet #71 undermines this purpose in favor of ensuring a minimum wage – in contravention of the Supreme Court’s guidance in Portland Terminal. As the Supreme Court explained in Portland Terminal:

Many persons . . . have so little experience in particular vocations that they are unable to get and hold jobs at standard wages. Consequently, to impose a minimum wage as to them might deprive them of all opportunity to secure work, thereby defeating one of the Act’s purposes, which was to increase opportunities for gainful employment.[181]

Thus, in the principal case from which Fact Sheet #71 is derived, the Supreme Court expressly made superior the FLSA’s goal of increasing opportunities for gainful employment as opposed to wage regulations. Furthermore, although Fact Sheet #71 replicates the factors Portland Terminal and applies them to interns, courts criticize it for being inconsistent with Portland Terminal because Portland Terminal calls for a totality of the circumstances approach, whereas Fact Sheet #71 demands an all-or-nothing standard.[182] This inconsistency raises major issues for interns.

Indeed, across all industries, students participate in internship programs to improve their chances at long-term employment.[183] In fact, internships are often seen as an extensive interview process.[184] Furthermore, if employers are discouraged from hiring interns at the conclusion of their internship, then employers may not be incentivized to spend the time and resources on training and educating potential new hires through internship programs at all. In the entertainment industry, where internships are seen as a prerequisite to employment, this requirement would have undesirable effects on an industry already considered difficult to access.[185] The Second Circuit’s test also includes a similar factor, but, unlike Fact Sheet #71, no one factor is dispositive.[186] As seen from this example, Fact Sheet #71 runs contrary to both of its sources of authority: the FLSA and Portland Terminal. It is, however, also internally inconsistent.

For example, it is difficult to reconcile Fact Sheet #71’s fourth factor, that “the employer . . . derives no immediate advantage from the activities of the intern” (discussed above), with its second factor, that “[t]he internship is for the benefit of the intern.”[187] These two requirements make it illegal for an intern to participate meaningfully in the employer’s business and therefore eliminate perhaps the most important benefit of internships: practical, hands-on experience.[188] Through this inconsistency, one can see that the test in Fact Sheet #71 does not adequately embrace the realities of the modern internship. Internships are intended to introduce students to industries and to give them an opportunity to study a career.[189] Disallowing a student from participating in any activity that benefits the employer, while demanding that the internship benefit the intern, is a counterintuitive combination that does little to serve the goals and interests of the modern intern.

3. Illogical: Fact Sheet #71 Illogically Extends a Test Regarding Trainees to Interns

The problems with Fact Sheet #71 extend further than its own rigidity inconsistencies. However, even if these inconsistencies were cured, the test still should not be used to analyze internship programs. Even if one applies a totality of the circumstances approach to the factors present in Fact Sheet #71, as the district court did in Glatt,[190] the test would still fail to adequately account for internships with substantial intangible benefits – such as those in the entertainment industry. Indeed, one of the most significant problems with Fact Sheet #71 is its overreliance, however incorrect, on the holding of Portland Terminal.

Portland Terminal dealt with trainees, not interns, and the word “intern” is never used in the opinion. Nevertheless, it is well settled that Portland Terminal is the seminal case on the legality of unpaid internships. Fact Sheet #71 simply replicated the factors considered by the Court in Portland Terminal, replacing the word “trainee” with “intern.”[191] The differences between railroad trainees in 1947 and a modern-day internship at a major entertainment corporation could not be starker. Where internships had not yet even gained traction in 1947,[192] they are an integral part of today’s education system.[193] Altogether, applying the trainee test to interns, especially in the entertainment industry, is like trying to fit a square peg in a round hole.

For example, internships today are often inextricably tied into one’s college education.[194] Indeed, one of the plaintiff-interns in Glatt entered the internship as part of her degree program through her university.[195] This is not uncommon, as academic credit is often offered for internships through a student’s university.[196] Despite the significant connection between an intern’s academic progress and her internship, the issue is not even remotely considered in Portland Terminal. This only accentuates the problem with basing a test for modern-day internships on a 1947 Supreme Court opinion about railroad brakemen. The primary beneficiary test, as applied by the Second Circuit, focuses on the educational aspects of internships because this “approach better reflects the role of internships in today’s economy than the Department of Labor Factors, which were derived from a 68-year old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.”[197] By including factors that force employers to “accommodate[] the intern’s academic commitments by corresponding to the academic calendar”[198] and provide “significant educational benefits to the intern,”[199] the primary beneficiary test provides sufficient protection against exploitive employment relationships, while viewing the internship relationship through a modern lens.

Partly because of the educational aspects of internships, the goals of trainee programs like the one in Portland Terminal are totally different than those of modern-day students seeking internships. For instance, the trainees in Portland Terminal underwent the training program for the purpose of obtaining a specific job within the Portland Terminal Railroad Company.[200] Trainee program benefits were thus narrow in scope. Today many interns enter their programs for the purpose of learning about entire industries.[201] Internships provide a broad array of invaluable intangible benefits to students without any real work experience by providing them with experiential opportunities in a professional environment, basic work skills, and a foray into the industry they may wish to eventually find full-time employment. Compared to internships, the trainee program in Portland Terminal was extremely narrow in its benefit to participants. The Department of Labor, because of its overreliance on Portland Terminal, simply fails to account for many of the benefits interns may receive through an unpaid internship.

The primary beneficiary test, on the other hand, serves the entertainment industry well by encapsulating these intangible benefits. Its flexibility and ability to consider a wide array of factors allows entertainment companies to continue to offer unpaid internship opportunities. For example, in the entertainment industry, one of the most important benefits of an unpaid internship is that it gets the intern’s proverbial foot in the door.[202] Relevant experience in the industry, whether paid or unpaid, is invaluable for those looking for full time employment.[203] Adopting the test advanced by Fact Sheet #71, as the district court did in Glatt, would eliminate several unpaid internship programs and thus eliminate a student’s ability to find employment in the entertainment industry at all. In fact, after the district court used Fact Sheet #71 to rule against Fox Searchlight in Glatt, Condé Nast, a major mass media company with brands such as GQ and Vogue, abruptly shut down its internship program.[204] However, in adopting the primary beneficiary test, the Second Circuit has made it easier for entertainment companies to maintain their unpaid internship programs, so long as they are implemented in a way that benefits the intern.

B. Post-Glatt Landscape

The Second Circuit’s decision in Glatt changed the legal landscape for analyzing unpaid internships, and indeed, its effects are already being felt. Following the Glatt decision, two cases out of the Southern District of New York illustrate the effect the primary beneficiary test is having in entertainment and media companies. The first, Wang v. Hearst Corp.,[205] involves the Hearst Corporation – the magazine empire that includes Esquire, Marie Claire, Seventeen, and Good Housekeeping. The second, Mark v. Gawker Media LLC,[206] involves Gawker Media Company, the parent company for several popular blogs such as Deadspin, Gizmodo, Kotaku, and Jezebel. Through a brief overview of both cases, one can see the effects of Glatt in action.

The facts in Wang are very similar to those of Glatt. The plaintiffs, unpaid interns for various Hearst Corporation magazines, brought suit against their former employer claiming they were improperly classified as interns during their time there.[207] Across a variety of departments, interns performed various jobs, from menial administrative tasks, errands, and cataloging, to holding casting calls, interacting with clients, and writing blurbs and blog posts for the publication.[208] After conducting the primary beneficiary analysis, the district court concluded that the interns were the primary beneficiaries of the relationship because the interns had learned practical skills and gained the benefit of job references, hands-on training, and exposure to the inner workings of industries in which they had expressed an interest.”[209]

In conducting the primary beneficiary balancing act, the court noted that the internships “involved varying amounts of rote work” and that the internship “could have been more ideally structured,” but decided that each Plaintiff benefitted in tangible and intangible ways.[210] Additionally, the Court was sure to emphasize the educational focus of the internships, as most of the interns provided proof that they were receiving academic credit to the employers.[211] The court made this determination after a very in-depth look at all the facts and circumstances surrounding the intern’s experiences, as the primary beneficiary test demands. This decision likely saved Hearst’s internship program, which had utilized more than 3,000 interns over the past six years.[212]

Under Fact Sheet #71, this internship program likely would have been ruled illegal. The fact that interns were benefitting Hearst at all would have been sufficient, as any benefits the interns may have obtained are irrelevant so long as the employer received a benefit. Not only did the Hearst interns gain the tangible and intangible benefits above, the court also made note of the lasting benefits some interns received as a result of being able to list Hearst on their resume as they continued to seek jobs in fashion and publishing.[213]

In a similar case, Mark v. Gawker Media LLC,[214] former unpaid interns for Gawker Media brought suit alleging that they were improperly classified as interns during their time at Gawker. Again, the primary beneficiary test was applied. In its analysis, the district court primarily focused on “what the intern receives in exchange for his work.”[215] The court noted several benefits received by the interns. For example, the court noted that the journalism student interns were supervised by mentors who helped them produce a full reported piece for their portfolio that was published on Gawker’s websites.[216] Even though the interns indeed benefitted the company, as one of the intern’s reporting “garnered thousands of page views with attendant advertising revenue,” the Court recognizes that this exposure “benefitted Mark as a journalism student at least as much.”[217] Unsurprisingly, the court ruled that Gawker’s internship program was legal, as the interns were indeed the primary beneficiaries of the relationship. Just as with Glatt and Wang, if this internship program had been examined under Fact Sheet #71 it would have assuredly been condemned as an illegal labor practice.

Together, these cases illustrate the substantial effect the Glatt decision is having in unpaid internship jurisprudence. Both cases highlight the courts’ newfound flexibility in analyzing unpaid internship programs. Although, in both cases, the employers benefitted from the intern’s work, the court reasoned that the organizations were not taking advantage of their interns simply by that fact. The primary beneficiary test instead directed the court’s attention to the benefits the interns were receiving for their work as well as the extent to which the internship complemented the intern’s education program. Although interns in both cases did some rote work for their employer, they also obtained invaluable hands-on experience and significantly bolstered their resume. In allowing the court to consider both these tangible and intangible benefits, the primary beneficiary test allows courts to protect internship programs and interns alike by only legitimizing those programs that truly benefit the intern. In the entertainment industry, this means the likely preservation of a key institution, as the intangible benefits of unpaid internships are often substantial.[218]

Conclusion

The debate over the legality of unpaid internships has surely intensified over the past few years.[219] As internships in general are beginning to play a larger role in today’s economy and education, there are questions as to how interns are to be compensated. While most internships are paid, many remain unpaid. This is especially true in the entertainment industry, where unpaid internships are pervasive, but create thousands of opportunities per year for students pursuing an entertainment-related career. In the entertainment industry, unpaid internships serve a valuable purpose to students looking for full-time employment. Not only do they provide the relevant experience largely seen as a prerequisite to finding employment, but they also provide knowledge of the inner-workings of the industry, valuable industry connections, and a wide variety of skills specific to their prospective careers.[220]

Fact Sheet #71, created by the Department of Labor, provided an unworkable framework for examining internship programs for the entertainment industry. Opportunities to access the industry would have dwindled as internship programs would have been found illegal under the strict standards of Fact Sheet #71. Prior to the Second Circuit’s decision in Glatt v. Fox Searchlight Pictures, the future of these unpaid internship programs was in jeopardy.[221]

Indeed, after the district court used Fact Sheet #71 to rule Fox Searchlight’s internship program illegal, many companies such as Condé Nast shut down their internship programs for fear of liability.[222] This consequently led to fewer opportunities for students hoping to find employment in entertainment.[223] However, the Second Circuit overturned the district court’s decision, and created a new test to analyze unpaid internships: the primary beneficiary test. In doing so, the Second Circuit adopted a flexible, individualized test allowing an employer to maintain an unpaid internship program so long as the potential intern is the “primary beneficiary” of the relationship.[224] This flexible test empowers courts to take an in-depth analysis of unpaid internship programs to ensure the intern is receiving benefits for his or her work, even though he or she may not be paid.[225]

Unlike Fact Sheet #71, the primary beneficiary test keenly recognizes that those who agree to unpaid internships are not volunteers, “trainees,” or employees.[226] Instead, it creates its own modern test to analyze internships in today’s economy.[227] In doing so, the Second Circuit respects the varied goals and interests students may have in agreeing to an internship.[228] By considering all of the benefits an unpaid internship provided an intern, and balancing this against the benefit to the employer, the court ensures interns are receiving value for their work while protecting them against the potential for an exploitative employment relationship. In the entertainment industry, this analysis helps preserve opportunities for potential interns moving forward, while preserving the integrity of the intern-employer relationship.

The effects of Glatt are already becoming apparent. A few cases have utilized the primary beneficiary test, and the results have been favorable for interns and employers alike.[229] Interns are able to benefit from invaluable experience, training, and knowledge, while employers are able to maintain their unpaid internship programs. Indeed, the law should strive for such mutually beneficial solutions. For the entertainment industry, the primary beneficiary test allows for the preservation of a tradition that has created countless opportunities for thousands of students.


* J.D.Candidate, New York University, 2018; B.A., University of California, San Diego, 2015. The author would like to thank Professor Day Krolik for his expertise and guidance. He would also like to thank his fellow JIPEL Notes Program participants Julian Pymento, Gia Wakil, Neil Yap, and Ryan Jin for their support throughout the process.

[1] See generally, David Rensin, The Mailroom (2003).

[2] Michael Ovitz co-founded Creative Artists Agency and later served as President of the Walt Disney Company.

[3] David Geffen is the founder of Asylum Records, Geffen Records, and the namesake of the UCLA David Geffen School of Medicine.

[4] Rich Ross is the Group President of Discovery Channel, Animal Planet, and Science Channel. He is the former president of entertainment of Disney Channel, and chairman of Walt Disney studios.

[5] Ramona Rosales, The Secrets of Hollywood Agency Mailrooms, The Hollywood Reporter, http://www.hollywoodreporter.com/news/hollywood-mailroom-secrets-caa-icm-uta-wme-257222 (Nov. 11, 2011).

[6] See Amanda Becker, Unpaid Intern Lawsuit ‘Trend’ Is Likely To Expand, Legal Experts Say, The Huffington Post, http://www.huffingtonpost.com/2013/06/14/unpaid-intern-lawsuit_n_3443430.html (Aug. 14, 2013).

[7] See infra note 8-9.

[8] See generally Kathrin Neyzberg, Unpaid Internships in Entertainment: Unethical Pages Behind a Glossy Cover, Berkeley Media Review (Nov. 22, 2015).

[9] Nat’l Ass’n of Colls. and Emp’rs, The Class of 2015 Executive Summary 5 (2015), https://www.naceweb.org/uploadedFiles/Content/static-assets/downloads/executive-summary/2015-student-survey-executive-summary.pdf

[10] Id.

[11] Blair Hickman, What We Learned Investigating Unpaid Internships, Pro Publica (July 23, 2014).

[12] Ross Perlin, Intern Nation: How to Earn Nothing And Learn Little In the Brave New Economy 170 (2011).

[13] Eriq Gardner, How All Those Intern Lawsuits Are Changing Hollywood, The Hollywood Reporter (Nov. 6, 2014).

[14] See infra Part II.

[15] available at https://www.dol.gov/whd/regs/compliance/whdfs71.htm [hereinafter Fact Sheet #71].

[16] 811 F.3d 528 (2d. Cir. 2015).

[17] Id. at 536.

[18] Id.

[19] 330 U.S. 148 (1947).

[20] Frederick Levy, Hollywood 101: How to Succeed in Hollywood Without Connections 31 (2000).

[21] See id.

[22] Id. at 38.

[23] Id.

[24] Dawn Gilbertson, Glamour Internships With a Catch: There’s No Pay, N.Y. Tɪᴍᴇꜱ, Oct. 19, 1997, at BU16, available at http://www.nytimes.com/1997/10/19/business/earning-it-glamorous-internships-with-a-catch-there-s-no-pay.html.

[25] See generally Phil Gardner, et al., Recruiting Trends 2012-2013 33 (42d ed. 2012), available at http://www.ceri.msu.edu/wp-content/uploads/2012/11/FRecruiting-Trends-2012-2013.pdf.

[26] See Joanna Venator & Richard Reeves, Unpaid Internships: Support Beams for the Glass Floor, BROOKINGS INSTITUTE (July 7, 2015 2:18 PM). https://www.brookings.edu/blog/social-mobility-memos/2015/07/07/unpaid-internships-support-beams-for-the-glass-floor/.

[27] See Andrew Soergel, Paid Interns More Likely to Get Hired, U.S. Nᴇᴡꜱ (May 5, 2015, 5:30 PM), https://www.usnews.com/news/articles/2015/05/05/study-suggests-college-graduates-benefit-more-from-paid-internships.

[28] Andrew Mark Bennett, Unpaid Internships & The Department of Labor: The Impact of Underenforcement of the Fair Labor Standards Act on Equal Opportunity, 11 U. Md. L.J. Race, Religion, Gender & Class 293, 296 (2011).

[29] See generally Gardner, supra note 25, at 33.

[30] See Kathryn Anne Edwards & Alexander Hertel-Fernandez, Not-So-Equal Protection –Reforming the Regulation of Student Internships, Eᴄᴏɴ. Pᴏʟ’ʏ Iɴꜱᴛ. (Apr. 9, 2010), http://www.epi.org/publication/pm160/ (“The increasingly competitive labor market for college graduates, combined with the effects of the recession, has intensified the trend of replacing full-time workers with unpaid interns.” (citations omitted)).

[31] See Bureau of Labor Statistics, Household Data Annual Averages: Employment Status of the Civilian Noninstitutional Population, 1943 to Date 2, available at http://www.bls.gov/cps/cpsaat01.pdf.

[32] See, e.g., Cliff Collins, Slowly but Surely: Lawyer Hiring is Returning-Tentatively-After the Downturn, Oʀ. Sᴛ. B. Bᴜʟʟ. (Apr. 2012), http://www.osbar.org/publications/bulletin/12apr/slowly.html.

[33] Id.

[34] See Rensin, supra note 1, at xii.

[35] Daniel Miller & John Horn, Lawsuit challenges a Hollywood pillar: Unpaid internships, L.A. Tɪᴍᴇꜱ (Apr. 6, 2014), http://articles.latimes.com/2014/apr/06/business/la-fi-ct-hollywood-interns-unpaid-internships.

[36] See Rensin, supra note 1, at xii.

[37] See Ramona Rosales, Hollywood’s New Leaders: 10 Assistants to Watch, Vᴀʀɪᴇᴛʏ (Oct. 23, 2013, 8:30 AM), http://variety.com/2013/biz/news/hollywoods-new-leaders-10-assistants-to-watch-1200752599/.

[38] See generally Rensin, supra note 1, at xiii.

[39] Id. at xvii-xviii.

[40] Daniel, R. & Daniel, L., Enhancing the transition from study to work: Reflections on the value and impact of internships in the creative and performing arts, Arts & Humanities in Higher Educ. (2013), http://journals.sagepub.com/doi/pdf/10.1177/1474022212473525.

[41] Raquel Nieves, Still A Hot Topic: Unpaid Internships In The Entertainment Industry, DLR Reporter (Aug. 26, 2014), http://archive.is/quTNY.

[42] Eriq Gardner, How All Those Intern Lawsuits Are Changing Hollywood, The Hollywood Reporter (Nov. 6, 2014).

[43] What is an Internship? Internships.com, http://www.internships.com/student/resources/basics/what-is-an-internship (last visited 1/29/2017).

[44] Id.

[45] See Perlin, supra note 12, at 8.

[46] See What is an Internship?, supra note 43.

[47] See generally Perlin, supra note 12, at 1.

[48] Id.

[49] Id. at 1-2.

[50] Id.

[51] Id. at 2.

[52] Id. at 8.

[53] See generally Wesley Jones, Mousecatraz (2006).

[54] See Glatt v. Fox Searchlight Pictures Inc., 293 F.R.D. 516, 531 (S.D.N.Y. 2013).

[55] See generally, Dana Schuster & Kirsten Fleming, Condé Nast Intern: ‘I Cried Myself To Sleep, N.Y. Pᴏꜱᴛ (Nov. 21, 2013, 6:36 AM), http://nypost.com/2013/11/21/conde-nast-interns-speak-out-on-program-shutdown.

[56] Fair Labor Standards Act of 1938, Pub. L. No. 75-718, § 2(a)-(b), 52 Stat. 1060, 1060 (discussing the policy behind adopting the Act as providing greater protections for the average worker) [hereinafter “FLSA”].

[57] See Perlin, supra note 12, at 65.

[58] Id.

[59] Id. at 64-65.

[60] 29 U.S.C. § 212 (2016).

[61] 29 U.S.C. § 207 (2016).

[62] 29 U.S.C. § 206 (2016).

[63] Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947); see also Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 707 n.18 (1945) (stating that Congress enacted the FLSA “to aid the unprotected, unorganized and lowest paid of the nation’s working population; that is, those employees who lacked sufficient bargaining power to secure for themselves a minimum subsistence wage”).

[64] Perlin, supra note 12, at 64.

[65] Id. at 65.

[66] § 2, 52 Stat. at 1060.

[67] Perlin, supra note 45, at 64.

[68] See, e.g., Falk v. Brennan, 414 U.S. 190, 205 n.3 (1973); Tenn. Coal, Iron & R.R. Co. v. Muscoda Local No. 123, 321 U.S. 590, 597-98 (1944); Bureerong v. Uvawas, 922 F. Supp. 1450, 1466 (C.D. Cal. 1996).

[69] See 29 U.S.C. § 202 (2012).

[70] Auer v. Robbins, 519 U.S. 452, 456 (1997).

[71] Fair Labor Standards Act Advisor: Enforcement Under the Fair Labor Standards Act, U.S. Dep’t of Lab., http://webapps.dol.gov/elaws/whd/flsa/screen74.asp (last visited Apr. 15, 2016).

[72] Id.

[73] Rachel P. Willer, Waging the War Against Unpaid Labor: A Call to Revoke Fact Sheet #71 in Light of Recent Unpaid Internship Litigation, 50 U. Rich. L. Rev. 1361 (2016) (quoting Andrew M. Bennett, Unpaid Internships & The Department of Labor: The Impact of Underenforcement of the Fair Labor Standards Act on Equal Opportunity, 11 U. Md. L.J. Race Relig. Gender & Class 293 (2011)).

[74] See 29 U.S.C. § 216(b) (2012).

[75] 29 U.S.C. § 203(g) (2012).

[76] § 203(e)(1).

[77] See, e.g., Walling v. Portland Terminal Co., 330 U.S. 148 (1947).

[78] Id.

[79] Fair Labor Standards Amendments of 1985, Pub. L. No. 99-150, § 4(a), 99 Stat. 787, 790 (1985) (amending the Act to exclude public service volunteers).

[80] See 29 U.S.C. § 203(e)(4)(A).

[81] See 20 U.S.C. § 203(e)(5).

[82] Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 740 (1981) (quoting Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 707 (1945)).

[83] See, e.g., Portland Terminal, 330 U.S. 148.

[84] See Glatt v. Fox Searchlight Pictures Inc., 811 F.3d 528, 534 (2d Cir. 2016).

[85] See infra Part IIB.

[86] See Portland Terminal, 330 U.S. at 148.

[87] 322 U.S. 111 (1944).

[88] Id. at 111-12.

[89] Id. at 131.

[90] See id.

[91] 331 U.S. 704 (1947).

[92] Id.

[93] Id. at 716.

[94] See Perlin, supra note 12, at 65.

[95] See Walling v. Portland Terminal Co., 330 U.S. 148 (1947).

[96] Id. at 151.

[97] Id. at 149.

[98] Id.

[99] Id. at 150.

[100] Id.

[101] Id.

[102] Id. at 149.

[103] Id. at 150.

[104] 29 U.S.C. § 203(e)(1) (2012).

[105] § 203(g).

[106] Portland Terminal, 330 U.S. at 152.

[107] Id. at 152-53.

[108] Id. at 150.

[109] Id. at 149-50

[110] Id.

[111] See Fact Sheet #71, supra note 15.

[112] See U.S. Dᴇᴘ’ᴛ ᴏꜰ Lᴀʙᴏʀ, Wᴀɢᴇ & Hᴏᴜʀ Dɪᴠ., Fɪᴇʟᴅ Oᴘᴇʀᴀᴛɪᴏɴꜱ Hᴀɴᴅʙᴏᴏᴋ, Ch. 10, ¶ 10b11 (1993), http://www.dol.gov/whd/FOH/FOH_Ch10.pdf.

[113] Id.

[114] Gregory S. Bergman, Unpaid Internships: A Tale of Legal Dissonance, 11 Rutgers J.L. & Pub. Pol’y 551, 569 (2014).

[115] See U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter on FLSA Status of Student Interns (May 17, 2004), http://www.dol.gov/whd/opinion/FLSANA/2004/2004_05_17_05FLSA_NA_internship.htm (applying the six-factor trainee framework to analyze a student internship inquiry and noting that the Department of Labor “has consistently applied this test in response to questions about the employment status of student interns”).

[116] See Fact Sheet #71, supra note 15.

[117] Id.

[118] See, e.g., Glatt v. Fox Searchlight Pictures Inc., 293 F.R.D. 516, 531 (S.D.N.Y. 2013), vacated, 791 F.3d 376 (2d Cir. 2015), vacated, 811 F.3d 528 (2d Cir. 2016); Xuedan Wang v. Hearst Corp., 293 F.R.D. 489, 493 (S.D.N.Y. 2013), aff’d in part, vacated in part, remanded, 617 F. App’x 35 (2d Cir. 2015).

[119] See Stephen Suen & Kara Brandeisky, Tracking Intern Lawsuits, ProPublica, http://projects.propublica.org/graphics/intern-suits#corrections (last updated July 2 , 2014).

[120] See Reich v. Parker Fire Prot. Dist., 992 F.2d 1023, 1026 (10th Cir. 1993) (“The six criteria in the Secretary’s test were derived almost directly from Portland Terminal and have appeared in Wage and Hour Administrator opinions since at least 1967.”).

[121] Steven Greenhouse, The Unpaid Intern, Legal or Not, N.Y. Tɪᴍᴇꜱ (Apr. 2, 2010), http://www.nytimes.com/2010/04/03/business/03intern.html.

[122] See Fact Sheet #71, supra note 15.

[123] Id.

[124] See Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984) (giving “substantial weight to an agency’s interpretation of a statutory scheme” when Congress “leaves a gap” for the agency to fill).

[125] Fact Sheet #71, supra note 15, at 2.

[126] See, e.g., Owsley v. San Antonio Indep. Sch. Dist., 187 F.3d 521, 525 (5th Cir. 1999) (citing Kilgore v. Outback Steakhouse of Fla., Inc., 160 F.3d 294, 302 (6th Cir. 1998)); Reich v. Parker Fire Prot. Dist., 992 F.2d 1023, 1026 (10th Cir. 1993) (finding Fact Sheet #71’s test was not entitled to Chevron deference); but see Atkins v. Gen. Motors Corp., 701 F.2d 1124, 1128 (5th Cir. 1983) (stating that the DOL’s interpretation in Fact Sheet #71’s predecessor was entitled to substantial deference).

[127] 323 U.S. 134 (1944).

[128] Id. at 140.

[129] Id.

[130] See infraPart III.

[131] Compare Atkins v. Gen. Motors Corp., 701 F.2d 1124, 1128 (5th Cir. 1983) (holding that the Department of Labor guidelines are entitled to “substantial deference”), with Solis v. Laurelbrook Sanitarium & Sch., Inc., 642 F.3d 518, 525 (6th Cir. 2011) (holding that the Department of Labor guidelines were not entitled to deference because they were a “poor method for determining employee status in a training or educational setting”).

[132] Reich v. Parker Fire Prot. Dist., 992 F.2d 1023 (10th Cir. 1993).

[133] Id. at 1026-27.

[134] Id. at 1025.

[135] Id.

[136] Id.

[137] Id. at 1026-27.

[138] Id.

[139] See Donovan v. Am. Airlines, Inc., 686 F.2d 267, 272 (5th Cir. 1982).

[140] Solis v. Laurelbrook Sanitarium & Sch., Inc., 642 F.3d 518 (6th Cir. 2011).

[141] Id. at 519.

[142] Id. at 521 (noting that, in order to teach real world skills, the school provided practical training for four hours a day in jobs such as working in a cafeteria).

[143] Id. at 524.

[144] Id. at 525.

[145] Id. at 529.

[146] Id. at 530-32.

[147] Id. at 526.

[148] Id. at 528.

[149] Glatt v. Fox Searchlight Pictures, Inc., 293 F.R.D. 516, 531 (S.D.N.Y. 2013), vacated, 791 F.3d 376 (2d Cir. 2015), vacated, 811 F.3d 528 (2d Cir. 2016).

[150] 811 F.3d 528, 536 (2d Cir. 2016).

[151] Glatt, 293 F.R.D. at 531-32.

[152] Id. at 539.

[153] Glatt, 811 F.3d at 538.

[154] Id. at 536.

[155] Id. at 534.

[156] Id.

[157] Id. at 536.

[158] Id. at 537 (“This approach we adopt also reflects a central feature of the modern internship–the relationship between the internship and the intern’s formal education[.]”).

[159] Id. at 536.

[160] Id.

[161] Id. (citing Barfield v. NYC Health & Hosps. Corp., 537 F.3d 132, 141-42 (2d. Cir. 2008)).

[162] Id.

[163] Id. at 537.

[164] Id. at 536.

[165] Id.

[166] Id. at 537.

[167] Id.

[168] Id.

[169] Id.

[170] See id. at 537-538 (“The approach we adopt also reflects a central feature of the modern internship—the relationship between the internship and the intern’s formal education—and is confined to internships and does not apply to training programs in other contexts. The purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real-world setting, and, unlike the brakemen at issue in Portland Terminal, all of the plaintiffs were enrolled in or had recently completed a formal course of post-secondary education. By focusing on the educational aspects of the internship, our approach better reflects the role of internships in today’s economy than the DOL factors, which were derived from a 68–year old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.”).

[171] Id.

[172] Michael A. Hacker, Comment, Permitted to Suffer for Experience: Second Circuit Uses “Primary Beneficiary” Test to Determine Whether Unpaid Interns Are Employees Under the FLSA in Glatt v. Fox Searchlight Pictures, Inc., 57 B.C. L. Rev. E. Sᴜᴘᴘ. 67, 83 (2016).

[173] See Glatt, 811 F.3d at 528-29.

[174] See Brief for American Council on Education, et al. as Amicus Curiae Supporting Neither Party, Glatt v. Fox Searchlight Pictures Inc., 811 F.3d 528 (2d Cir. Apr. 3, 2014) (No. 13-4478).

[175] John R. Carrigan Jr., Overworked, Underpaid, Illegal? Hollywood Interns Fight Back, Hᴏʟʟʏᴡᴏᴏᴅ Rᴇᴘ., (Oct. 24, 2012, 2:00 PM), http://www.hollywoodreporter.com/thr-esq/hollywood-interns-overworked-underpaid-illegal-382190.

[176] Fact Sheet #71, supra note 15.

[177] Joseph E. Aoun, Protect Unpaid Internships, Inside Higher Educ. (July 13, 2010), http://www.insidehighered.com/views/2010/07/13/aoun #ixzz2fUhBdQm7.

[178] Id.

[179] Sarah Braun, The Obama “Crackdown”: Another Failed Attempt to Regulate the Exploitation of Unpaid Internships, 41 Sw. L. Rev. 281, 294 (2012).

[180] See Fair Labor Standards Act of 1938, 29 U.S.C. § 202 (2015).

[181] Walling v. Portland Terminal Co., 330 U.S. 148, 151 (1947).

[182] See id.

[183] Braun, supra note 179, at 296.

[184] Id. at 284.

[185]supra Part I.

[186] See Glatt v. Fox Searchlight, Inc., 811 F.3d 528, 537 (2d Cir. 2014).

[187] Fact Sheet #71, supra note 15.

[188] Braun, supra note 179, at 294.

[189] See supra Part I.

[190] Glatt, 811 F.3d at 535.

[191] See Walling v. Portland Terminal, 330 U.S. 148, 148 (1947) (applying the term “trainee” to persons training for a railroad job); Fact Sheet #71, supra note 15.

[192] See Meaghan Haire & Kristi Oloffson, Brief History: Interns, Tɪᴍᴇ (July 30, 2009), http://content.time.com/time/nation/article/0,8599,1913474,00.html.

[193] Phil Gardner, et al., Recruiting Trends 2012-2013 33 (42d ed. 2012), available at http://www.ceri.msu.edu/wp-content/uploads/2012/11/FRecruiting-Trends-2012-2013.pdf.

[194] See generally Kathrin Neyzberg, Unpaid Internships in Entertainment: Unethical Pages Behind a Glossy Cover, Berkeley Media Rev. (Nov. 22, 2015).

[195] Glatt, 811 F.3d at 532.

[196] See supra Part I.

[197] Glatt, 811 F.3d at 537.

[198] Id.

[199] Id.

[200] See Walling v. Portland Terminal, 330 U.S. 148, 150 (1947).

[201] See Heather Huhman, Why You Should Get A Summer Internship, U.S. News and World Report (Apr. 29, 2011), http://money.usnews.com/money/blogs/outside-voices-careers/2011/04/29/why-you-should-get-a-summer-internship.

[202] See Daniel Miller & John Horn, Showbiz Interns in Legal Spotlight, L.A. Times, Apr. 6, 2014, at A16.

[203] See id.

[204] Dana Schuster & Kirsten Fleming, Condé Nast Intern: ‘I Cried Myself To Sleep’, N.Y. Post (Nov. 21, 2013, 6:36 AM), http://nypost.com/2013/11/21/conde-nast-interns-speak-out-on-program-shutdown.

[205] Xuedan Wang v. Hearst Corp., 203 F. Supp. 3d 344 (S.D.N.Y. 2016).

[206] No. 13-CV-4347(AJN), 2016 WL 1271064 (S.D.N.Y. Mar. 29, 2016).

[207] Wang, 203 F. Supp. 3d at 346-49.

[208] Id.

[209] Id. at 355.

[210] Id.

[211] Id. at 352.

[212] Xuedan Wang v. Hearst Corp., 293 F.R.D. 489, 491 (S.D.N.Y. 2013).

[213] 203 F. Supp. 3d. at 355.

[214] Mark v. Gawker Media LLC, No. 13-CV-4347(AJN), 2016 WL 1271064 (S.D.N.Y. Mar. 29, 2016).

[215] Id. at *8.

[216] Id. at *13.

[217] Id.

[218] See supra Part I.

[219] See supra Part I.

[220] See supra Part I.

[221] See Dana Schuster & Kirsten Fleming, Condé Nast Intern: ‘I Cried Myself To Sleep, N.Y. Post (Nov. 21, 2013, 6:36 AM), http://nypost.com/2013/11/21/conde-nast-interns-speak-out-on-program-shutdown (describing Condé Nast’s plan to shut down its internship program).

[222] Id.

[223] Id. (interviewing students affected by the elimination of the Condé Nast internship program).

[224] Glatt v. Fox Searchlight Pictures Inc., 811 F.3d 528, 536 (2d Cir. 2016).

[225] See id.

[226] Id.

[227] Id. at 537-38.

[228] Id.

[229] See, e.g., Mark v. Gawker Media LLC, No. 13-CV-4347(AJN), 2016 WL 1271064 (S.D.N.Y. Mar. 29, 2016); Xuedan Wang v. Hearst Corp., 203 F. Supp. 3d 344 (S.D.N.Y. 2016).

What Young Innovative Companies Want: Formulating Bottom-Up Patent Policy for the Internet of Things

What Young Innovative Companies Want: Formulating Bottom-Up  Patent Policy for the Internet of Things
By Roya Ghafele*<

Download a PDF version of this article here

 

I. The New Paradigms of the Internet of Things

The next wave of internet usage will disrupt a host of different industries, while at the same time opening up so far unknown opportunities to those ready to seize them. Devices and components with an internet address will be joined to each other allowing for large-scale communication embedded in gigantic sensing systems.[1] In this sense, the Internet of Things (IoT) can be understood as a means to connect objects, machines and humans in large-scale communication networks.[2] The IoT merges physical and virtual worlds by interconnecting people and objects through communication networks, sending status updates, and reporting on the surrounding environment. Applications will become more sophisticated, allowing for the emergence of services and product offerings that are beyond our imagination: IoT based toys will accompany children from early age until adulthood, IoT driven medical devices will save the lives of those suffering from a sudden stroke, and clothing with IoT technology built in will allow everything from our shirts to our shoes to customize according to daily fashion trends. Smart homes, smart cities, and even smart countries will become the norm; reducing energy wastage to a minimum. The commercial opportunities associated with the IoT will be substantial. Markets will expand into areas we have not even conceived of, thereby creating new jobs and fostering further competition between the various regions of the world.

Against this background, the European Union has recognized the need to identify a governance framework that will enable it to take advantage of the promising opportunities associated with the IoT, while mitigating risks and adverse effects to the best extent possible. An important aspect of a European IoT strategy consists of adequately addressing the interplay between competition and intellectual property law. Consequently, the European Commission itself considers it necessary to formulate policy guidelines on fair, reasonable, and non-discriminatory (FRAND) licensing. In order to accomplish this, the European Commission (E.C.) launched a series of stakeholder consultations, workshops and published two in-depth reports addressing the potentially anticompetitive effects that standard essential patents could have for the Internet of Things.[3] With the goal of offering further clarity on the licensing conditions for patents that read on standards, the E.C. issued guidelines on FRAND licensing[4] on the 29th of November 2017.[5] While these guidelines are non-binding, the E.C. will nonetheless take advantage of soft law mechanisms so to offer a transparent framework for FRAND licensing. This appears justified given the major patent wars[6] that the licensing of standard essential patents triggered in the telecommunications sector. For a quantitative analysis of the imminent rise in patent litigation in the area of speech recognition, an area closely related to IoT, see for example the below analysis by iRunway; showing a sharp increase in patent litigation since 2011.[7]

Figure 1: Patent Litigation Trend in Speech Recognition Domain (Source: iRunway analysis based on patent data from USPTO and litigation data from RPX)

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(Source: iRunway analysis based on patent data from USPTO and litigation data from RPX)

While it is laudable that the E.C. is taking ownership of a key policy area that will make or break the success of the IoT, it is regrettable that the process preceding policy formulation has been primarily driven by interaction with large corporations and industry associations having significant experience with FRAND licensing. The views, experiences and opinions of European young innovative companies, YICs, are largely missing from the policy development process. Given that young innovative companies are seeking to advance the IoT, the European Commission is hence likely to have missed out on input from those companies, who are doing their best to move the IoT forward. To fill this gap, this study undertook a series of thirty in-depth interviews with young innovative companies active in the European IoT space. In doing so, it hopes to counter policy formulation that lacks grass roots linkages and takes insufficient consideration of the needs of YICs. In doing so, this study is pleased to report that the suggestions made hereby were reflected in the E.C. Guidelines on FRAND.[8]

The study is structured in two main parts. The first part is dedicated to discussing key features of the IoT from an IP and competition policy perspective. The second part presents the findings from the field study undertaken in the summer of 2016. It concludes by urging policy makers to include young innovative companies in the policy process as it finds that there is quite a significant gap between the theoretical conceptualisation of the topic and the practical experiences of YICs.

A. Defining the Internet of Things

Identifying a working definition for the Internet of Things is complicated by the fact that the IoT is an umbrella term encapsulating a variety of different technologies. The IoT has been described as “a concept that interconnects uniquely identifiable embedded computing devices, expected to offer Human-to-Machine (H2M) communication replacing the existing model of Machine-to-Machine communication.”[9] It has also been labelled as “[I]nternet-enabled applications based on physical objects and the environment seamlessly integrating into the information network.”[10] More narrowly, the OECD defined the IoT as “Machine to Machine communication (M2M)”[11] and the European Commission describes the IoT simply as something that “merges physical and virtual worlds… where objects and people are interconnected through communication networks and report about their status and/or the surrounding environment.”[12] All of these definitions are fairly vague and it is probably for that reason that they encapsulate the gist of the IoT so well. The IoT constitutes a high growth business opportunity as its application is vast and it bears the potential to transform virtually every sector of the economy. In current IoT markets, it is not yet clear what type of business models will succeed and who will emerge as a market leader. As such, the IoT space has been described as being quite dispersed and driven to a large extent by small early stage companies.[13]

II. The Internet of Things is exposed to Network Effects …

The IoT is a network-based technology, which thrives on multilateral exchange. Similar to telecommunications networks, it constitutes an interconnected eco-system. Such systems can be associated with “network effects.” Network effects are “defined as a change in the benefit, or surplus, that an agent derives from a good when the number of other agents consuming the same kind of good changes.”[14] The more the peculiar software solution of one firm becomes adopted, the more it will benefit this specific firm, making it more difficult for new entrants to see their technological solutions adopted in the market; even if they are of higher technological quality. Network effects enable large-scale access to an interoperable software solution, whose value thrives with additional adoption.[15] The more the IoT solution is in use, the more it becomes known and even more additional users will be attracted to it. At the same time, existing users are less and less inclined to switch to another service provider.[16] Some scholars consequently associate networks with “increasing returns” to “path dependence.”[17] The initial success of one specific IoT solution is often owed to small, random events; yet once it establishes a strong position in the market, it will remain in use, even if better technological solutions are identified. This is because users cannot afford to switch, as they would have to give up the interconnectivity provided by the existing network. Thus the overall effect is to discourage technological innovations as incumbents entrench themselves through network size and technological compatibility rather than technological sophistication.[18]

Once critical mass is reached, usage of the service will grow quasi-automatically and this comes often to the detriment of other service offerings.[19] Furthermore, critical mass allows incumbents to gain significant cost advantages over new entrants who undoubtedly will face significant upfront costs because IoT solutions are complex to design, costly to deliver to the market, and accessibility to the needed know-how is often protected through patents or trade secrets. In addition, incumbents will be in a position to offer complementary services, extensions, add-ons and customer support to further strengthen their dominance in the market, making it more difficult for new entrants. Hence, network effects can reasonably be understood as the “tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage.”[20] Consequently, network effects can distort competition and adversely affect consumers.

III. Which can trigger Anticompetitive Licensing Behaviour

Adverse implications of network effects can be even more pronounced if interoperability is achieved through standardization and market participants leverage patents to protect their inventions. Standards are dynamic, in the sense that their main function is to ensure a collaborative technology development. Standards do evolve over time. However, the status quo of a technological solution does exist for a given period of time, at least until a new standard is adopted by the market that addresses the same technological challenge.

Patent protections on theses standards, particularly if held by a wide range of market participants, can incite anticompetitive behaviour. To mitigate the kind anticompetitive licensing behaviour that standard essential patents can trigger, the FRAND agreement was introduced. The FRAND promise is construed according to its core function as an irrevocable waiver of extraordinary remedies” and hence seeks to counterbalance the exclusionary aspects of patent law.[21] Because of the FRAND or RAND (in the U.S.A.) commitment, companies are obliged to license patents on a standard on fair (Europe only), reasonable and non-discriminatory terms, following the IP policies of the relevant standard setting organizations. Hence, the FRAND concept seeks to offer a governance framework for the licensing of standard essential patents. Because these patents can accrue market power to their owner and hence potentially provoke anticompetitive licensing behaviour, it is believed that standard essential patents are warranted different licensing pathway than other patents — namely, they must be licensed in a way that comports with the FRAND framework. Exactly how such a FRAND framework should be applied, and whether the scope of the application should be narrow or broad, is currently subject to international IP policy formulation. If the FRAND agreement offers adequate means to mitigate against risks associated with widely dispersed patent ownership, that will also deserve further policy attention.

A new entrant may need to hack through a host of patents held by many different IP owners, which can lead to an undesired anti-commons effect, whereby existing patents stifle rather than promote innovation and the very purpose of the patent system is undermined.[22] While it is important to note that the IoT does not yet dispose of any prominent standards, nor depend on any particular technology protected through patents, it is quite unlikely that this will remain that way. If the IoT is to evolve from its current state of infancy to a more mature technology field, it will be necessary to establish widely used standards. At this point, contributors to those standards will undoubtedly want to leverage their IP for licensing, sales purposes or blocking third party entry. Although these may be legitimate usages of IP, the licensing of standard essential patents has also been associated with an undesired behaviour known as “holdup.”

The impact of holdup can be particularly pronounced where firms benefit from first mover advantage or where firms have the necessary innovation capacity to capture the patent landscape. It is, however, incorrect to assume that patent holdup would only be an issue concerning “important” patent owners. In fact, each and every standard essential patent owner (SEP owner) could theoretically engage in holdup because its position as a gatekeeper to the standard allows him or her to do so. It is alleged that these patent holders — having claimed an important position in the patent landscape — can charge abnormally high licensing rates to standard essential patent licensees.[23]

By charging these high licencing rates, the patent holders are engaging in the practice of what is commonly called patent holdup. For instance, it has been stated that the holdup problem is particularly severe with mobile telecoms standards because the standards that are adopted are used for a long time and the costs that are associated with switching to an alternative standard are high.[24] Further it has been argued that standards holdup is both a private problem facing industry participants and a public policy problem. Privately, those who will implement the standard (notably manufacturers of standard-compliant equipment) do not want to be overcharged by patent holders. But standards hold-up is also a public policy concern because downstream consumers are harmed when excessive royalties are passed on to them.[25] Given that the IoT can be associated with network effects, it is likely that such adverse effects could occur within the context of the IoT as well.

Adverse licensing behaviour could also occur if licensees stall payment, refuse a licensing agreement all together, or take a license below the fair rate. Such holdout constitutes an equally problematic market practice as it leads to free riding problems associated with technology used. Licensees may also simply engage in a series of offers and counteroffers to further stall negotiations. Such strategic behaviour can erode the incentive to invest in R&D. Both patent holdup[26] and holdout[27] are possible in the IoT context and both can constitute undesired strategic behaviour.[28]

IV. . . . that can particularly affect Young Innovative Companies

Young innovative companies (YICs) can be particularly vulnerable to adverse licensing behaviour. YICs, which have come to be understood as small, young and highly engaged in innovation, aim “to exploit a newly found concept, stimulating in that way technological change, which is an important determinant of long run productivity.”[29] While it would appear that the very process that drives YICs would quite naturally be associated with patent protection, it has been observed that micro enterprises and SME lack IP awareness.[30]

YICs’ fear above all are the costs associated with patent protection and patent enforcement. From the perspective of YICs, IP is primarily a cost factor that diverts time and attention away from doing business. Studies undertaken by the UKIPO,[31] the IPR Helpdesk of the European Commission,[32] as well as WIPO[33] show that such firms associate IP protection with a tedious, laborious and time-consuming endeavour that offers only moderate support to business because costs associated with enforcement are often unaffordable. For the same reasons, these firms tend to be reluctant to enforce their own patents against infringers, leaving this group of firms with questionable patent proposition. This has led several observers to the conclusion that “deterred by high costs and complicated procedures, YICs tends to lack the necessary skills to take any particular advantage of the patent system.”[34] The UK Government’s Hargreaves Review “IP and Growth,” further highlighted that strategic advice would be needed to help fill this gap stating that “many SMEs have only limited knowledge of IP and the impact it may have on their businesses; they lack strategic, commercially based IP advice; have difficulties identifying the right source of advice and IP management is made impossible due to too high costs.”[35] Hence, cost and time constraints tend to discourage YICs from taking ownership of the patent system. With respect to the particular challenges associated with standard essential patents, it is very likely that the overarching lack of IP competence will overshadow any potential experiences there may be with standard essential patents. Arguably, the lack of IP skills will make YICs more prone to unreasonable licensing requests, while at the same time making them more likely to inadequately respond to licensing requests themselves. Hence, lack of knowledge will risk exposing YICs to anticompetitive IP requests, while at the same time making them more likely to stall licensing engagement payments.

V. Methodology

Is there a gap between the way European policy makers and YICs are conceptualising the role of IP in the IoT? To gain further insight into that question, a series of thirty-one in-depth interviews were undertaken with YICs during the course of 2016. In addition, four contextual interviews were carried out. Interviewees were asked to reply to a set of open ended questions, allowing them to discuss their experiences with patents and standards, present their licensing practices and the extent to which they were (if at all) exposed to licensing requests. They were also asked if they feared patent wars similar to those in telecom could occur in the IoT space and what they would expect the European policy maker to do to counter potentially anticompetitive usage of IP, while helping them to take advantage of standards and patents. The issue of software patents was deliberately excluded from the conversations as this was subject to historical policy formulation and not that of current policy thinking. Given the stance taken on software patents in the E.U., the market participants interviewed here would simply not have been in a position to comment on their experience with software patents in the E.U.[36]

The technique applied is known in social sciences as a “semi structured interviewing” process.[37] The techniques give the interviewees space to express their own perspectives and mitigates against biased research results. This approach is somewhat comparable to a study based on focus groups. Such a qualitative research method was considered suitable as it allows us to theorize about what public policy formulation could look like in an emerging field of technology, where policy guidelines are yet to be identified. In addition, this specific research approach offers the necessary insights for a bottom-up approach to public policy formulation.

The target group was identified via LinkedIn. The firms interviewed usually had no specialized lawyer dedicated to IP issues, so the most senior person in the company was interviewed. This was usually the Chief Executive Office, Chief Technology Officer, Chief Operating Office or sometimes one of the investors in the firm. The vast majority of the firms interviewed were early stage firms or start-ups. Only Italian firm ‘S.’ has been acquired by a major technology company. In addition to interviewing a core group of young innovative companies, we also undertook contextual interviews with a financial analyst, a few management consultants specialized in the IoT space, as well as a patent analyst with whom we discussed patent landscapes. Of the 350 people we reached out to, we obtained thirty-five interviews — yielding a response rate of 10%. A sample of thirty-one in-depth interviews with Young Innovative Companies and four contextual interviews is usually considered sufficient to provide meaningful insights.[38] It is recognized, however, that such a qualitative research method, cannot offer “hard facts,” but only views, opinions and impressions.[39] Yet, it is precisely this web of views and opinions that is key in politics. Language is a constitutive element of politics, shedding light on the language of those otherwise marginalized in the political process, which is conducive towards the democratic process. The FRAND debate forms no exception to that.

Table 1 offers an anonymized overview of the interview process. In order to shield the interviewees from potential exposure to patent assertion entities, it was decided not to disclose their identities publicly. The detailed transcripts of the interviews are available only in my private archive.[40]

A. Trends in Internet of Things Markets

Of the 31 firms we interviewed, no two firms had the same business proposition or sought to apply the IoT in the same manner. The firms interviewed seek to apply the IoT in areas as vast as fashion, toys, lighting, smart cities, health care, automotive and even social housing. In regards to technology, cloud services, big data, and platforms appear key to many of these early stage businesses. Social Innovation and lean management were other concepts, which were often combined with the usage of the IoT. It was surprising to hear that the majority of the firms interviewed had fairly little start-up capital. In many instances, EU grants were considered too complicated to obtain and if obtained at all, then regional funds were used. Some sought funding in the U.S., as they thought there was more capital available there.

Interviewees confirmed that the IoT was a mesmerizing and also somewhat confusing term: “The IoT is a buzz word just like big data, the market is still very early stage, but I have a feeling that we may be not far away from a break-through in the market.” (K.) This makes it quite difficult to describe the state of the market or capture industry trends. “The IoT market is still in search for adequate applications . . . many solutions are quite simple and they could just as well function without the IoT.” (J.) Overall, interviewees agreed that the market is still very early stage, with many firms still looking for an adequate business model. “The main problem is how to establish the business model around the technology . . . the market is still in a trial and error stage.” (M.) Yet, in spite of the various uncertainties surrounding the IoT, it is seen as a “mega trend” with substantial growth opportunities: “The Iot? I think it is going to happen . . . in up to five years we will be able to talk about billions.” (I.)

Overall, interviewees were sceptical about the prospects for European markets. According to them, the markets for IoT will take off in the U.S. and Europe will eventually follow. “I think we are behind the US with its Silicon Valley and its big tech firms that lead the tech industry.” (A.) “The IoT market in Europe is imagined.” (L.) “The IoT market is something we believe in, but it is not yet established in Europe.” (G.) This should be a wake-up call for policy makers in the EU and set them thinking about what can be done to promote the IoT in Europe.

B. Standardization, Patents and Standard Essential Patents Experiences

The YICs interviewed were not able to formulate particularly nuanced views on SEPs, standards, patents or licensing markets. With respect to standard essential patents they were entirely ignorant on the topic and were also not involved in the regulation processes of any of the standardisation organizations. Their experience with patents mainly pertained to difficulties associated with obtaining patents, facing high filing costs, feeling overwhelmed by legal costs and finding information on prior art. “Our patent attorney is ripping us off . . . and we don’t even know if it is really worth it.” (S.)

Alarmingly, many YICs we talked to even doubted that the patent system mattered at all for them. “The technology in this area is moving so fast that by the time you have the patent the technology is outdated. I am not sure patents are really helpful, it is only expensive for a small firm . . .” (S.) It was lead-time advantage and open source software that mattered, rather than proprietary innovation. “When you are in the Savanna and you don’t know if you are the antelope or the lion, what do you do? You run! With IP it is the same. We care about first mover advantage. The IP is so hard to enforce and so costly that we feel we are better off without it.” (F.) Equally, defensive mechanisms associated with IP were entirely ignored. The reason given was that a defence would be too expensive. There was heavy doubt that the patents had a business proposition at all. Also, there was a sense that the value proposition of the firm was to deliver customer solutions or products and there, so many agreed, IP had not really any particular meaning for them. It was products they offered that were valuable, not IP protection. “We have filed a few patents in the US and through the PCT, but we have no business usage for them.” (M.) These findings are commensurate with what has been reported in the literature and underline the need to combine overall IP measures geared towards YICs with the overarching SEPs debate.

Some of the firms we interviewed went as far as to state their discontent with the patent system openly. “In general we don’t like patents . . . we think they are very bad . . . the original idea of the patent was to protect an invention, but in the software space patents have been abused for a long time . . . just look at the patent trolls.” (W.) Patents were also mentioned as a means to slow down businesses and as leaving YICs exposed to threats of litigation. “I don’t like the IP part . . . patents slow things down . . . I would prefer never to file patents. I believe in building a lot of brand capital.” (H.) Even those firms who considered developing a patent strategy, found that costs associated with patent ownership prevented them from taking advantage of the patent system. For example, a Partner at V. presented plans for a patent strategy, but was not able to execute it because of cost constraints. “Patents are expensive and there is no point in patenting if you don’t have the money to defend your patents . . . [s]o, we are waiting.” (H.)

C. Licensing Experiences in the Internet of Things Spac

The YIC’s knowledge of European patent ameliorating efforts was no better. When asked about FRAND licensing, they were also completely uninformed and key terms had to be explained first. Following that, firms generally did not feel competent enough to comment. Similarly, the consequences they could be facing in case of patent infringement were unknown to them.

The YICs talked to were not involved in patent licensing and they generally denied having been exposed to patent licensing. If, at all, it was copyright licensing they used. This was however called by all the interviewees “software licensing,” maybe because they were not very IP savvy. This was seen as a fairly straightforward process and nobody found there was a need to discuss this at length. “Software licensing is our business strategy, not patent licensing… our business is to sell the usage of the platform.” (S.) However, interviewees were not exactly sure what the question meant. Only two firms had experience with patent licensing. N. told us that he had been exposed to licensing in another firm he worked for and there they used the out-licensing of patents as a means to manage competition. “Licensing no, not in this firm no, but in another firm, we used patent law suits to slow down our competitors.” (B.) Furthermore, the IoT sector was not considered an industry where patent licenses were needed. “In our industry nobody would want to take a license.” (T.)

The role of patents was however seen in a different light by more established firms. Here, costs mattered less and measures such as licensing did play a role. Both inbound and outbound licensing was critically reflected upon. Such firms were also often part of industry associations such as the IP Europe Alliance[41] or the Fair Standards Alliance.[42] These firms are, however, not directly engaged in the IoT space and hence their input is probably less of relevance here.

Some firms, like the Spanish University spin-off we talked to, had moved their business from producing parts of an Antenna to pursuing an active IP licensing program. They found this strategy more lucrative. (I.) Similarly, the CEO of a Danish software firm confirmed that his company is “now slowly moving from a mere defensive approach to IP to a more aggressive way of managing its IP.” In particular, this firm is interested in establishing a systematic licensing program targeting potential infringers.

However, even those who have an active licensing program in place do not find it an easy business. For example, one Danish inventor explained that it took him nearly ten years to obtain a patent family and that he also attracted significant investments so to obtain licensing revenues from firms that infringed on his patents, but he overall found it to be a very long, complicated and so far not particularly lucrative process. He concluded that “the patent system was a bit ridiculous . . . and that the return on investments in patents is not very good . . . you always have to use a lawyer, but these guys [the firms he was trying to get a license from], they shut down their business and then they open up a new one and you get to start all over again with suing them . . .” (J.) The CTO of the spin-out from the Spanish University was the only one we talked to who felt that the patents the firm had were truly beneficial to their business. His only concern was that licensees can deploy delay tactics and that can become difficult. Otherwise he considered patents an important instrument of monetization.

Additionally, the senior representatives of three SMEs were interviewed. These firms had been approached for taking a license but all of them found the process unhelpful. One firm, for example, criticised that licensing requests were not supported by adequate documentation. Many licensors do not even send claim charts or send them only very late, in an effort to pass on costs from licensor to the licensee. Also, they complained it was very common to receive unrealistically short deadlines for a legally binding reply. This situation is made even more complicated as it is a lengthy and costly procedure to determine whether some patents claimed to be standard essential, really are standard essential: “what is a standard essential patent and what not is essentially gut feeling.” (L.) According to them, it is also very costly and time consuming to negotiate licensing rates. Many times they are forced to accept a license rate simply because costs to counter the argument would be too high. They argued that it is also difficult to determine what an adequate royalty rate is in the absence of an adequately defined framework for licensing standard essential patents.

D. The Threat of Patent Wars and Lack of Defence Mechanisms

There was a general sense among interviewees that patent wars as seen in the telecom space could repeat themselves in the IoT space. “Definitely, definitely . . . I think the IoT space is a classic example . . . I would not be surprised if in 2019/2020 we would see these things.” (R.) The only reason, in their view, why this had not happened yet, was because the IoT sector was still too immature. Still, the potential emergence of patent wars is seen in a negative light. Once more, interviewees underlined that the patent system is not equally accessible to small and big players: “it is a downward spinning circle. The more cases you have, the more people will shy away from the IoT because patent litigation is really expensive . . . and then the IoT will only be for the super big ones.” (B.) Nobody expected such patent confrontations to occur any time soon, though: “Maybe in the future, when the markets are more mature, but I don’t think we will see much trolling in the next five years.” (M.)

If patent confrontations were to occur in the IoT space, it is my impression that it would leave most interviewees unprepared. Some even thought that they could not face any patent litigation because they had no patents themselves. “Probably it will happen. But I don’t think about it, but now that you say it . . . yes . . . but since we don’t have an IP for end customers or big scale use, we will not be attacked by trolls.” (A.) Some did not even know what the patent war was or thought that it would not concern them: “What is that? I have never heard of that.” (M.) YICs also felt quite powerless and that they had little to defend themselves with against potential litigation. “They are so big and if they want to break you, they can do that. As a small firm you have no chance to defend yourself.” (N.) The only firm in our sample that was not concerned with patent wars was the Spanish firm that had an active licensing program.

E. What Role for European Policy?

Many of the firms interviewed felt that the patent system would require a radical reform. Under a particularly critical light were the activities of patent assertion entities. “Patents do not help SMEs, the best would be to get rid of them . . . if that is not possible, then we would need a complete reform of the patent systems . . .” (S.) For interviewees making the patent system accessible to YICs meant also making patent enforcement accessible to them. Helping young firms obtain patents, but leaving them without the necessary financial means to protect themselves from litigation, was, according to the interviews, not of great help. “The EC should support smaller firms in enforcement and in a way that they have the right to have a patent and also a right to enforce it.” (J.) Small firms should somehow have a chance to defend themselves and the Government should provide some means to do that. “Any policy reform that helps assure that the patent system is actually used in a way to promote genuine innovation and not in a predatory way . . . that one guy invents something great and a patent troll just buys the patent to sue other people . . . the government should do something to prevent that.” (H.) In that respect, the E.C. was called upon to identify policies that would counter the inequalities between parties, something that would enable small players to level the playing field with large firms. “It would be good to make legislation that would help avoid situations where big companies use patents as a means to shield competition from small firms.” (K.) On a more practical level, there could be more information made available on the role of IP and standards in the context of the IoT.

Interviewees expressed that educational material, websites, really anything that would help to get more acquainted with the issues at stake would be very welcomed and the E.C. should do more in that respect. “What would help is to allow small firms to learn about patents . . . Are there educational materials, websites . . . we could get to learn more about IP?” (T.)

There was also a general sense in the community that open source software should be promoted and that the standard essential patents regime was not particularly fit for the IoT space. Their policy suggestion was to promote awareness about open source software and the role it can play in an IoT driven business. “Patenting software is dead and that is good . . . I would suggest that they spend more time explaining Open Source Software to common people and to business . . . they should find the European version of Open Source Software licensing, make it more common, teach about it and sponsor work to formulate Open Source Software licenses.” (B.)

In that respect it was proposed that the E.C. could identify stimulation funds, however these should be made available with as little administrative burden as possible. “Promote Open Source Software . . . maybe also subsidies for stimulation funds, but in the end it is mainly the established firms that get that and the true innovation comes from the small ones and they don’t access these funds because it is too bureaucratic to get these funds.” (A.) Equally, more training on Open Source could be an alternative to the traditional standard essential patent regime. “Anything the Government can do to assure firms win by conquering markets and not by paying expensive lawyers . . . I would suggest spending more resources in explaining Open Source Software and focus much more on training firms in Open Source Software.” (B.)

Conclusions

The E.C. is eager to approach the role of SEPs in the IoT through the lens of the FRAND agreement. Through this process the E.C.’s goals is provide further clarity of what the FRAND commitment entails. While very important, this aspect is not entirely reflective of the issues raised by the interviewees of this survey. Hence, an additional section was added to the FRAND Guidelines that address the need to raise awareness among SMEs (small and medium sized enterprises) on standard essential patents and the role of the FRAND commitment. This is entirely commensurate with the findings of this study.

Like the findings of Pikethly, Talvela and Nikzad,[43] the survey showed that young innovative firms lack IP awareness and do not understand the role that IP management could play for their firm. A good illustration of this issue is that respondents showed two apparent contradictory views on the IP system. On the one hand side they lacked awareness on IP, on the other hand, they felt that the patent system should be urgently reformed. This suggests that the senior managers in YICs have, at best, a layperson’s understanding of the IP system and it underlines the need for further IP awareness-building campaigns.


The interviewees also had a minimal understanding of standard essential patents and the accompanying FRAND debate, especially the early stage firms. This leaves them exposed to unexpected licensing requests, while depriving them of the opportunity to pursue their own licensing programs. Certainly, standard essential patent owners focus their licensing programs on companies with significant revenues, which is usually not the case of YICs. However, once YICs obtain critical mass, they could be hampered in their growth due to licensing requests they did not expect. If they do reach such a level, these licensing issues will require further policy attention and there will be a need to raise awareness among YICs about FRAND.

Against this backdrop, the FRAND guidelines will very likely be accompanied by tailored awareness-raising measures that allow YICs to adequately familiarize themselves with the peculiar challenges associated with standard essential patents. The nature of the FRAND agreement deserves further policy attention, but so does its practical applicability. This aspect was given adequate consideration in the FRAND guidelines.[44] If young innovative companies have not even heard of FRAND or standards essential patents before, it is highly unlikely that they will be prepared to formulate smart strategies as licensees or licensors. Nowhere are these concerns included in the current policy debate. The European Commission and even National Patent Offices are actively working towards raising IP awareness and enhancing the understanding of IP among young innovative companies. However, so far this has not been approached from a FRAND perspective. Adaptations are sorely needed in light of the risk of patent wars[45] spreading to the IoT.

Lastly, there is a dire need to assume governance responsibilities and identify a mediating structure between the inherent tensions prevailing between the exclusionary features of patent law and the open, collaborative nature of the Internet of Things. The interviews showed that the patent system cannot be viewed in isolation and the benefits of other innovation strategies, such as the promotion of open source software, need to be weighed against the further advancement of the patent system. Many of the firms we talked to found an open source strategy more effective than a patent strategy. They also thought that the open architecture enabled by open source was more befitting of the nature of the IoT.

Certainly, such statements need to be read with care, but at present too much policy formulation is occurring in isolation. What the IoT needs is a cross-functional, horizontal policy formulation, rather than policies developed in vertical silos. This can only be achieved by bringing all actors in the IoT space into the debate. Therefore, I urge policy makers to study further how IP can be promoted as a tool to promote openness rather than as a means of segregation.


Annex: Table 1 – Overview of Interviewees

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* Roya Ghafele is the Director of OxFirst, an Oxford based consultancy focusing on the interplay of law and economics. In addition, she has held Fellowships and Memberships with Oxford University since 2008. Until 2015 she was also a tenured Assistant Professor (called Lectureship in the UK Academy) in Intellectual Property Law with the School of Law of the University of Edinburgh. Prior to that she held a Lectureship in International Political Economy with the University of Oxford. Other than that she worked for the World Intellectual Property Organisation (WIPO), the Organization for Economic Cooperation and Development (OECD) and McKinsey. This article was made possible through a research grant made by Intel, which was accepted under the condition that Intel remain non-participatory and neutral with regards to the article’s contents. OxFirst has consulted for both licensors and licensees in patent infringement cases and licensing negotiations.

[1] See, e.g., Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property and Growth, at 14-15 (2011) (U.K.), https://www.gov.uk/government/publications/digital-opportunity-review-of-intellectual-property-and-growth.

[2] See The Internet of Things, Eur. Comm’n (last visited Sept. 4, 2017) https://ec.europa.eu/digital-single-market/en/policies/internet-things.

[3] See Communication from the Commission — Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, 2011 O. J. (C 11) 55; Chryssoula Pentheroudakis & Justus A. Baron, Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases, JRC Science for Policy Rep. (Nikolaus Thumm ed., 2017); Tim Pohlmann & Knut Blind, Landscaping study on Standard Essential Patents, IPlytics (2016), http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=8981;

Pierre Reégibeau, Raphaêl De Coninck & Hans Zenger, Transparency, Predictability, and Efficiency of SSO-based Standardization and SEP Licensing: A Report for the European Commission (2016) http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=9028&lang=en;

Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, Public Consultation on Patents and Standards – A Modern Framework forStandardisation Involving Intellectual Property Rights (2015), http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=7833;

European Competitiveness and Sustainable Industrial Policy Consortium, Patents and Standards: A Modern Framework for IPR-Based Standardization (2014), http://ec.europa.eu/DocsRoom/documents/4843/attachments/1/translations.

[4] Setting Out the EU Approach to Standard Essential Patents, European Comm’n, https://ec.europa.eu/docsroom/documents/26583.

[5] Directorate-General for Internal Mkt., Indus., Entrepreneurship and SMEs, Communication from the Commission on Standard Essential Patents for a European Digitalised Economy, Ares(2017)1906931 (2017), https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-1906931_en.

[6] See, e.g., Lea Shaver, Illuminating Innovation: From Patent Racing to Patent War, 69 Wash. &n Lee Rev. 1891, 1933 (2012); Thomas H. Chia, Fighting the Smartphone Patent War with RAND-Encumbered Patents, 27 Berkeley Tech. L. J. 209, 210, 239-238 (2012); Jeff Hecht, Winning the laser-patent war, 12 Laser Focus World 49, 49 (1994); Sonia Karakashian, A Software Patent War: The Effects of Patent Trolls on Startup Companies, Innovation, and Entrepreneurship, 11 Hastings Bus. L.J. 119, 122 (2015); Tim Bradshaw, Smartphone patent wars set to continue, Financial Times, May 28, 2013, available at https://www.ft.com/content/3eda6296-b711-11e2-a249-00144feabdc0.

[7] Aditi Das, Ashish Gupta, & Bhargav Ram, Speech Recognition Technology & Patent Landscape, iRunway, (2015), at 26, available at http://www.i-runway.com/images/pdf/iRunway-Speech-Recognition-Patent-Landscape.pdf.

[8] Setting Out the EU Approach to Standard Essential Patents, supra note4

[9] LexInnova, The Internet of Things: Patent Landscape Analysis, (Nov. 2014), available at http://www.lex-innova.com/resources-reports/?id=33.

[10] William H. Dutton, The Internet of Things, (June 20, 2013), https://dx.doi.org/10.2139/ssrn.2324902 (quoting William H. Dutton et al., A Roadmap for Interdisciplinary Research on the Internet of Things: Social Sciences’, addendum to Internet of Things Special Interest Group, A Roadmap for Interdisciplinary Research on the Internet of Things. London: Technology Strategy Board (January 5, 2013), https://dx.doi.org/10.2139/ssrn.2234664.

[11] Organisation for Economic Co-operation and Development [OECD], Machine-to-Machine Communications: Connecting Billions of Devices at 7, OECD Digital Economy Papers, No. 192 (Jan. 30, 2012), http://dx.doi.org/10.1787/5k9gsh2gp043-en.

[13] See Raph Crouan, Why are SMEs the single most important element in our Alliance for IoT today?, Eur. Comm’n (Nov. 20, 2015), https://ec.europa.eu/digital-single-market/en/blog/why-are-smes-single-most-important-element-our-alliance-iot-innovation-today; ‘Internet of Things’ has huge potential for SMEs, Knowledge Transfer Ireland, http://www.knowledgetransferireland.com/News/‘Internet-of-Things’-has-huge-potential-for-SMEs.html; The Business Drivers and Challenges of IOT for SMEs, IOTUK, https://iotuk.org.uk/the-business-drivers-and-challenges-of-iot-for-smes/; The business drivers and challenges of IoT for SMEs. https://iotuk.org.uk/the-business-drivers-and-challenges-of-iot-for-smes/.

[14] S.J. Liebowitz & Stephen E. Margolis, Network Externalities (Effects), https://www.utdallas.edu/~liebowit/palgrave/network.html.

[15] See Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8.2 J. Persp. 93 (1994).

[16] See Joseph Farrell & Paul Klemperer, Coordination and Lock In: Competition with Switching Costs and Network Effects, in 3 Handbook of Indus. Org. 1967 (Mark Armstrong & Robert H. Porter eds., 2007).

[17] Pierson Paul, Increasing Returns, Path Dependence, and the Study of Politics, 94(2) Am. Pol. Sci. Rev. 251, 251-67 (2000); see also Kenneth J. Arrow, Increasing Returns: Historiographic Issues and Path Dependence, 7(2) Eur. J. of the Econ. Thought 171, 171-80 (2000).

[18] See Vernon W. Ruttan, Induced Innovation, Evolutionary Theory and Path Dependence: Source of Technical Change, 107(444) The Econ. J. 1520, 1520-29 (1997); Robert W. Rycroft & Don E. Kash, Path Dependence in the Innovation of Complex Technologies, 14(1) Tech. Analysis & Strategic Mgmt. 21, 21-35 (2002); Arthur W. Brian, Increasing Returns and Path Dependence in the Economy, 46 (1994).

[19] See Venkatesh Shankar & Barry L. Bayus, Network Effects and Competition: An Empirical Analysis of the Home Video Game Industry, 24(4) Strategic Mgmt. J. 375, 375-84 (2003).

[20] William B. Arthur, Increasing Returns and the Two Worlds of Business, 74(4) Harv. Bus. Rev. 100, 100-09 (1996) (emphasis added).

[21] Joseph S. Miller, Standard Setting, Patents, and Access Lock-In: Rand Licensing and the Theory of the Firm, 40 Ind. L. Rev. 351, 378 (2007).

[22] See Dan Hunter, Cyberspace as Place and the Tragedy of the Digital Anticommons, 91 Calif. L. Rev. 439, 439-519 (2003); Sven Vanneste et al., From “Tragedy” to “Disaster”: Welfare Effects of Commons and Anticommons Dilemmas, 26 Int’l Rev. of L. and Econ. 104, 104-22 (2006); Clarisa Long, Patents and Cumulative Innovation, 2 Pol’y 229, 229-46 (2000).

[23] See, e.g., U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007) (addressing ‘hold up’ in the context of standard setting).

[24] Philippe Chappatte, FRAND Commitments – The Case for Antitrust Intervention, 5 Eur. Competition J. 319, 326 (2009).

[25] Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, Standard Setting Patents and Hold-Up, 74 Antitrust L. J. 603, 608 (2007).

[26] See, e.g., U.S. Dep’t of Justice & U.S. Fed. Trade Comm’n, supra note21 (addressing hold up in the context of standard setting); Mark A. Lemley & Carl Shapiro, Patent Hold-up and Royalty Stacking, 85 Texas L. Rev. 1991 (2007); Carl Shapiro, Injunctions, Hold-Up, and Patent Royalties, 12 Am. L. & Econ. Rev. 280 (2010). For a critique of Lemley & Shapiro, see Einer Elhauge, Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?, 4 J. Competition L. & Econ 535 (2008); John M. Golden, “Patent Trolls" and Patent Remedies, 85 Texas L. Rev 2111 (2007); Vicenzo Denicolò, Damien Geradin, Anne Layne-Farrar, & A. Jorge Padilla, Revisiting Injunctive Relief: Interpreting Bay In High-Tech Industries With Non-Practicing Patent Holders, 4 J. Competition L. & Econ 571 (2008); Peter Camesasca, Gregor Langus, Damien Neven, & Pat Treacy, Injunctions for Standard-Essential Patents: Justice Is Not Blind, 9 J. Competition L. & Econ 285 (2013); James Ratliff & Daniel L. Rubinfeld, The Use and Threat of Injunctions in the RAND Context, 9 J. Competition L. & Econ 1 (2013).

[27] Gregor Langus, Vilen Lipatov & Damien Neven, Standard-Essential Patents: Who Is Really Holding Up (and When)?, 9 J. Competition L. & Econ., 253 (2013); Damien Geradin, Reverse Hold-Ups: The (Often Ignored) Risks Faced by Innovators in Standardized Area The Pros and Cons of Standard Setting, (Nov. 12, 2010) (paper prepared for the Swedish Competition Authority on the Pros and Cons of Standard-Setting).

[28] Michael J. Meurer, Controlling Opportunistic and Anti-Competitive Intellectual Property Litigation, 44 B.C. L. Rev. 509 (2003).

[29] Dirk Czarnitzki & Julie Delanote, Young Innovative Companies: The New High-Growth Firms?, 1 (Ctr. for Eur. Econ. Research, Discussion Paper No. 12-030) (2012).

[30] Robert H. Pitkethly, Intellectual Property Awareness, 59 Int’l J. Tech. Mgmt. 163 (2012).

[31] Robert Pitkethly, UK Intellectual Property Awareness Survey 2006, Chronicles of Intellectual Prop., http://breese.blogs.com/pi/files/ipsurvey.pdf; Preliminary Report, Intellectual Property Awareness Survey 2015 (Feb. 11, 2016), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/500211/IP_awareness_survey_2015.pdf.

[32] See IPeuropeAware, Promoting the Benefits of greater knowledge and effective management of European SMEs & Intermediaries, https://www.dpma.de/docs/dpma/conclusion_paper_ipeuropaware.pdf; European IPR Helpdesk, https://www.iprhelpdesk.eu/ambassadors (last visited Dec. 1, 2017).

[33] See World Intellectual Property Organization, http://www.wipo.int/ip-outreach/en/tools/ (last visited Dec. 1, 2017).

[34] Intellectual Property Office, From Ideas to Growth: Helping SMEs get value from their intellectual property (Apr. 3, 2012), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/316116/ip4b-sme.pdf; Competitiveness and Innovation Framework Programme, IP Awareness and Enforcement Modular Based Actions for SMEs, http://www.obi.gr/obi/portals/0/imagesandfiles/files/abstract_en.pdf.

[35] Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property and Growth (May 18, 2011), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32563/ipreview-finalreport.pdf.

[36] Patents for software? European law and practice, Eur. Pat. Off., https://www.epo.org/news-issues/issues/software.html (“Under the EPC, a computer program claimed “as such” is not a patentable invention (Article 52(2)(c) and (3) EPC). Patents are not granted merely for program listings. Program listings as such are protected by copyright. For a patent to be granted for a computer-implemented invention, a technical problem has to be solved in a novel and non-obvious manner.”).

[37] See generally Margaret C. Harrell & Melissa A. Bradley, Data Collection Methods: Semi Structured Interviews and Focus Groups, RAND Nat’l Def. Res. Inst., at 27 (2009); Siw. E. Hove & Bente Anda, Experiences from conducting semi-structured interviews in empirical software engineering, Software Metrics, 2005, at 3.

[38] See, e.g., Mark Manson, Sample Size and Saturation in PhD Studies Using Qualitative Interviews, Forum: Qualitative Soc. Res., Sept. 2010, at 3, 9 (citing several major works recommending between 20-50 interviews and finding an average of 31 among studies included in analysis).

[39]See Florian Kohlbacher, The Use of Qualitative Content Analysis in Case Study Research, Forum: Qualitative Soc. Res., Jan. 2006, at 13.

[40] On an anonymized basis and subject to prior approval the transcripts of the interviews are available upon request.

[41] IP Europe Alliance, About Us, IP Europe,, https://www.iptalks.eu/ (last visited Nov. 9, 2017).

[42] Fair Standards Alliance, Our Vision, Fair Standards Alliancehttp://www.fair-standards.org/ (last visited Nov. 9, 2017).

[43] Robert Pitkethly, Intellectual Property Awareness, 59 Int’l J. of Tech. Mgmt. 163 (2010); Juhani Talvela, How to Improve the Awareness and Capabilities of Finnish Technology Oriented SMEs in Patent Related Matters, ResearchGate, June 2016, available at https://www.researchgate.net/profile/Juhani_Talvela/publication/316735577_How_to_Improve_the_Awareness_and_Capabilities_of_Finnish_Technology_Oriented_SMEs_in_Patent_Related_Matters/links/590f8bbea6fdccad7b126a31/How-to-Improve-the-Awareness-and-C; Rashid Nikzad, Small and medium-sized enterprises, intellectual property, and public policy, 42 Sci. & Pub. Pol’y 176, 178-179, 183 (2014); Robert Pitkethly, UK Intellectual Property Awareness Survey 2010, Intell. Prop. Office (2010), available at http://www.ipo.gov.uk/ipsurvey2010.pdf.

[44] Setting Out the EU Approach to Standard Essential Patents, supra note4

[45] Chia, supra note5

An Empirical Study of University Patent Activity

An Empirical Study of University Patent Activity
By Christopher J. Ryan, Jr. & Brian L. Frye*

Download a PDF version of this article here

Introduction

Since in the last quarter of the 20th Century, the United States patent system has been in a state of flux, influencing not only patent law but the incentives underlying invention and patent ownership. A series of legislative acts and judicial decisions, beginning in 1980, have affected the ownership, scope, and duration of patents. In 1980, the Bayh-Dole Act enabled academic institutions to patent inventions created from federally-sponsored research.[1] In 1994, Congress extended the maximum duration of a United States patent from 17 to 20 years for certain patents, increasing the monopolistic value of patent protection.[2] And in 2011, the America Invents Act shifted the patent system from a first-to-invent standard to a first-to-file system.[3] These changes have impacted all inventors but especially those at academic institutions, where research is a multi-billion dollar industry; perhaps relatedly, these changes have coincided with historic increases in patent activity among academic institutions.

This patent activity is not necessarily unexpected, inefficient, or objectionable. After all, academic institutions are charitable organizations and intended to promote the public good of innovation, among other things. Many academic institutions, especially research universities, rely on significant federal investment to support research that promotes the dissemination of knowledge, disclosure of new knowledge, and importantly, innovation. In theory, the patent system could do even more to encourage academic institutions to invest far greater resources in innovation.

However, university patent activity has important economic and normative implications. The patent system uses private economic incentives to promote innovation. Accordingly, it creates an incentive for universities to overinvest in patentable innovation and limit access to innovation, in order to internalize private economic value. This is especially troubling because universities may use publicly-funded research to generate patentable innovations for private gain. Thus, concerns about transparency and efficiency arise when considering the extent from which universities may ultimately derive private monetary benefit from public investment, especially given that universities lack the capacity to bring an invention to market.[4] That is, as a non-practicing entity, in order to internalize the economic value of their research, universities must acquire patent protection over their inventions. However, because they do not have the capacity to bring their inventions to market, universities can and do use public funds to produce research yielding patents that are worthless or, worse yet, transfer their patents rights to patent assertion entities rather than practicing entities, producing externalities and inefficiency in the patent system.[5]

While the purposes of the patent system are manifold, these sorts of behaviors undercut the argument that patents contribute to innovation. Thus, there is a founded concern that academic institutions have responded to patent incentives in ways that may actually limit access to innovation. Yet, this concern is not the only cause for unease about inefficient responses to patent incentives.[6] For example, most of the patent infringement actions heard in a handful of district courts that have been described as engaging in forum selling—being a friendly forum for cases filed by patent assertion entities that choose the forum based on its pro-plaintiff bias.[7] Many observers are concerned that the concentration of patent assertion activity in certain district courts has increased the cost of innovation.[8]

Similarly, there is legitimate concern that universities contribute to cost and inefficiency by: (1) using public funds to support research that results in often useless patents; or (2) providing the instrumentality for non-practicing entities to increase the cost of innovation. That is, universities may participate in driving up the cost of innovation by aggregating patent protection for inventions that are likely to have little market value or that they cannot bring to market and must transfer, even to other non-practicing entities. This article is the first in a series of papers to investigate the relationship between universities and the patent system. In particular, this article addresses whether universities can be said to aggregate patent protection for their inventions systematically or monopolistically, which may indicate their role in increasing the cost of innovation. The discussion and results, below, suggests that academic institutions have responded to patent policy changes not in a manner consistent with firm behavior, by accruing property rights when incentivized by patent policy changes to do so, but also by strategically holding out in order to reap greater monopolistic benefit under anticipated patent regime changes, which may have exacerbated the problem of increasing the cost of innovation.

I. The Patent System

The purposes of the patent system are several, but the primary purpose is to promote technological innovation, or rather, to &#34promote the Progress of . . . useful Arts, by securing for limited Times to . . . Inventors the exclusive Right to their respective . . . Discoveries.&#34[9] While some scholars have questioned the efficiency of the patent system, and other scholars have suggested that it may only provide efficient incentives in some industries, conventional wisdom assumes that it is generally efficient, providing a net public benefit by encouraging investment in innovation.[10] In any case, while the patent system has always provided essentially identical incentives to inventors in all industries, the demographics of patent applicants and owners have changed over time. Originally, many patent applicants and owners were individual inventors, but for quite some time, the overwhelming majority of patent applicants and owners have been both for-profit and non-profit corporations. An increasing number of those corporate patent applicants and owners are academic institutions.[11]

A. Academic Patents

Academics have always pursued patents on their inventions with varying degrees of success. But academic institutions did not meaningfully enter the patent business until the early 20th century, and even then, they did so only tentatively.[12] In 1925, the University of Wisconsin at Madison created the first university patent office, the Wisconsin Alumni Research Foundation, an independent charitable organization created in order to commercialize inventions created by University of Wisconsin professors. Similarly, in 1937, MIT formed an agreement with Research Corporation, an independent charitable organization, to manage its patents.[13] Many other schools followed MIT’s lead, and Research Corporation soon managed the patent portfolios of most academic institutions.[14]

Before the Second World War, academic institutions engaged in very limited patent activity, collectively receiving less than 100 patents. But during the war, many academic institutions adopted formal patent policies, typically stating that faculty members must assign any patent rights to the institution.[15] Gradually, some academic institutions began creating their own patent or “technology transfer” offices. But by 1980, only 25 academic institutions had created a technology transfer office, and the Patent Office issued only about 300 patents to academic institutions each year.[16]

Since then, patent law has increasingly encouraged patent activity at academic institutions. Until 1968, each federal agency that provided research funding to academic institutions had its own patent policy. Some provided that inventions created in connection with federally funded research belonged to the federal government, others placed them in the public domain, and a few negotiated institutional patent agreements with academic institutions, allowing them to own patents in those inventions. In 1968, the Department of Health, Education, and Welfare’s introduced an Institutional Patent Agreement, allowing for non-profit institutions to acquire assignment of patentable inventions resulting from federal research support for which the institution sought a patent. However, this policy was not uniformly applied. As such, in 1980, under pressure to respond to the economic malaise of the 1970s, Congress passed the Bayh-Dole Act, which enabled academic institutions to patent inventions created in connection with federally-funded research.[17] Specifically, the Act provided that, with certain exceptions and limitations, “a small business firm or nonprofit organization&rdquo could patent such inventions, if the organization timely notified the government of its intention to patent the invention and gave the government the right to use the invention.[18] The Act placed certain additional requirements on nonprofit organizations, providing that they could only assign their patents to an organization whose primary function is to manage inventions. Additionally, the nonprofit organizations must share any royalties with the inventor and use the earned royalties only for research or education. The limitation on assignment was intended to encourage academic institutions to assign their patents to charitable organizations, like Research Corporation, but in practice, it led many of them to compete over federal funds only to produce patentable inventions with little value or to assign their patents to patent aggregators or &ldquopatent assertion entities.&rdquo[19]

At about the same time, the scope and duration of patent protection began to expand. First, the Supreme Court explicitly expanded the scope of patentable subject matter to include certain genetically modified organisms and computer software.[20] Then, in 1982, Congress created the United States Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over patent cases and has adopted consistently pro-patent positions.[21] In 1984, Congress expanded the patentability of pharmaceuticals.[22] In 1994, Congress ratified the Uruguay Round of negotiations which created the World Trade Organization and extended the maximum duration of a United States patent from 17 years from the date of issue to 20 years from the filing date, marginally increasing the value of a patent.[23] And in 2011, Congress passed the Leahy-Smith American Invents Act, which amended the Patent Act by, inter alia, moving from a first-to-invent to a first-to-file patent system.[24]

All of these changes in patent protection caused an increase in overall patent activity, across all types of inventors.

X

That said, academic institutions played a role in the growth of nationwide patent activity directly related to the dramatic increases in patent applications and grants between 1980 and 2010. In response to these policy changes, many universities adopted a research model under which federal grants and other public funds were directed at the development of patentable inventions and discoveries, enabling the universities to obtain patents and claim a private benefit. By 1990, more than 200 academic institutions had created technology-transfer offices, and the Patent Office was issuing more than 1,200 patents to academic institutions each year.[30] In 1995, universities received over $15 billion in research grants from the federal government, a figure that would more than double—$35.5 billion—by 2013.[31]

Ironically, while some of the patents granted to academic institutions proved extremely valuable, the overwhelming majority of them are worthless. Most of the technology-transfer offices created by academic institutions produce little revenue when compared with expenditures, and many actually lose money.[32] In 2013, the median value among universities reporting revenues from their technology transfer offices was a mere $1.57 million; moreover, less than 1 percent of all patent licenses for patents held by universities and their technology transfer companies generate revenues reaching or exceeding $1 million.[33]

B. An Economic View of Patents

The prevailing theory of patents is the economic theory, which holds that patents are justified because they solve market failures in innovation caused by free riding. In the absence of patents, inventions are “pure public goods,” because they are perfectly non-rivalrous and nonexcludable.[34] Neo-classical economics predicts market failures in public goods, because free riding will prevent marginal inventors from recovering the fixed and opportunity costs of invention.[35] Under the economic theory, patents solve market failures in innovation by granting inventors certain exclusive rights in their inventions for a limited period of time, which provide salient incentives to invest in innovation.[36]

Patents may also cause market failures by granting inefficient rights to inventors and imposing transaction costs on future inventions.[37] In theory, patent law can increase net economic welfare by granting patent rights that are salient to marginal inventors and encourage future inventions. In practice, however, patent law may grant rights that are not salient to marginal inventors and discourage future inventions. For example, patent law may cause market failures by discouraging marginal inventors from investing in innovation.

The American patent regime has precipitated “arms race” and “marketplace” paradigms, both of which elicit firm behavior.[38] In the first instance, the benefits of patent protection incentivize innovators to aggregate under the auspices of the firm model, thereby reducing the marginal cost to each innovator of producing patentable technology. The marketplace paradigm encourages innovation, or at least innovation likely to result in patent protection. Both paradigms, however, are subject to the results of the perverse incentives that the patent regime provides, specifically that of patent stockpiling and the rent-seeking behaviors of non-practicing and patent assertion entities.[39]

The right to exclude is perhaps the most important stick in the bundle of patent protection rights and may have the effect of stifling rather than promoting innovation.[40] As the ubiquity of non-practicing and patent assertion entities in the patent market become commonplace, patent holdup, patent litigation, and patent thickets are common features of the modern patent marketplace.[41]

C. University Responses to Patent Policy Incentives

From the perspective of the theoretical literature, innovation depends upon innovators receiving the benefits of their innovation; the regime that allocates these benefits to the innovator and thereby incentivizes innovation is the most efficient.[42] For universities, a majority of which relied on federal funding to support research and development of patentable innovation during the 20th Century, the patent regime did not substantially encourage universities’ entry into the patent market until the passage of the Bayh-Dole Act in 1980.[43] Descriptive research in this area suggests that the Bayh-Dole Act—which allowed universities to patent inventions developed in connection with federally-funded research—increased the number of university participants in the patent market.[44] Some scholars have also attributed university technology transfer and patent title aggregation as being rooted in the Bayh-Dole Act.[45]

However, these developments point to the fact that universities may be responding to policy interventions—such as the extension of the duration of patents in 1995 and anticipation of the America Invents Act—and, in turn, affecting the patent landscape.[46] Examples of these responses include shifting investment in research and development toward innovation sectors that are more likely to receive patent protection, particularly those with high renewal rates, and because the US Patent and Trademark Office (PTO) derives more revenue from these sectors, it has the incentive to grant applications from high renewal rate sectors.[47] Additionally, researchers have noted that the patent regime does not privilege economic development through technological transfer, and may account for both the increase in patent litigation from non-practicing entities, such as universities, as well as rise in rent-seeking behaviors in patent licensing.[48]

University technology transfer forces academic institutions to make uncomfortable decisions about licensing and litigation.[49] Many academic institutions have responded to this ethical dilemma by assigning their patents to patent assertion entities in order to obscure their relationship to those patents and avoid the obligation to enforce them.[50] Despite universities’ status as charitable organizations, as patent owners they have a financial incentive to support their research and development enterprises by competing for federal grants, even if it results in patentable inventions for which there is little economic value and limit the use of the knowledge they generate by securing patent rights regardless of whether these inventions have economic value. Either of these scenarios exacerbates the cost of innovation.[51]

D. The University as a Firm

In response to the changes in the patent law system between 1980 and 2011, especially the Bayh-Dole Act, academic institutions increasingly adopted a research funding model under which federal research grants and other public funds were focused on the development of patentable inventions.[52] As previously observed, the total number of patents granted by the Patent Office steadily increased, and so did the percentage of those patents granted to academic institutions.[53] Soon, participants in the patent law system began expressing concerns about entities that decreased the efficiency of the patent system by merely owning and asserting patents, rather than practicing them. Of course, academic institutions that own patents are non-practicing entities almost by definition, as they exist to create and disseminate knowledge, not produce commercial products.[54] Even more troubling, many academic institutions assign most or all of their patents to patent assertion entities, the paradigmatic patent trolls. As a result, the way that academic institutions use patents presents a risk of creating “patent thickets that entangle rather than encourage inventors,” which is in tension with the charitable purpose of those institutions.[55]

But how did these patent thickets sprout from the soil of the university? The behavioral theory of the firm may help explain why academic institutions responded to incentives created by changes in this way. Unlike neoclassical economics, which uses individual actors as the primary unit of analysis, the behavioral theory of the firm uses the firm itself as the primary unit of analysis. As a consequence, the behavioral theory of the firm provides better predictions of firm behavior with regard to output and resource allocation decisions.

The field of organizational economics emerged in 1937, when Ronald Coase observed that firms emerge when the external transaction costs associated with markets exceed the internal transaction costs of the firm.[56] Coase’s theory of the firm was revolutionized in 1963, when Richard Cyert and James March provided a behavioral theory of the firm, observing that firms consist of competing coalitions with different priorities responding to different incentives.[57]

In the context of funded research, university patent activity can be read as the result of strategic firm decision-making regarding patent output and resource allocation decisions. In fact, the way that patent policy has bent toward rewarding university patent activity through conferral of rights is a direct result of lobbying and decision-making efforts by these universities with lawmakers—evidence of the bidirectional interaction between universities and external influences.[58] The behavioral theory of the firm suggests that academic institutions have responded to incentives created by patent law in a manner consistent with firm behavior.[59] Though heterogeneity of university patent activity does exist, at most intensive research universities, where decisions are made two ways—with executive administrators setting strategic goals for research which are then implemented at lower management levels—intense competition exists between intensive research universities to vie for patent rights and thus profit maximization.

Increasingly, these universities have centralized and ceded title in patents to their foundations and technology transfer offices.[60] As non-practicing entities, universities bear the transaction costs of developing patented inventions, but they transfer the transaction costs of bringing the invention to market to intermediaries—and get paid for doing so.[61] As a consequence, the goal of a university is to satisfice rather than maximize results; firms typically focus on producing good enough outcomes, rather than the best possible outcomes, as a function of compromise among internal coalitions with different priorities.

Thus, one could view increased activity immediately after the implementation of a policy conferring greater patent rights not as a random but as a very rational, profit-maximizing response. However, this activity presents issues when the firm actor is a university. Because academic institutions are necessarily non-practicing entities with strong incentives to assign their patents to patent assertion entities in order to extract their economic value—yet the research from which a patentable invention derives is funded largely by public, federal investment—the gray area which universities occupy through their patent activity makes clear that, while they might not be “patent trolls” as Mark Lemley argues, they certainly feed the patent trolls.[62]

This article aims to provide evidence of that very point. As scholars, like Jacob Rooksby, have observed: “[t]he accumulation, use, and enforcement of intellectual property by colleges and universities reflects choices to engage in a system that . . . takes knowledge and information that is otherwise subject to . . . public use and restricts it, by attaching private claims to it.”[63] The result of these restrictions produced by universities’ firm behavior through their patent activity and transfer carries real consequences for innovation. While the effects of these consequences are uncertain, the inputs are fairly clear: the prospect of wealth-maximizing motivates activity in university technology transfer.[64] Yet, the relationship between universities’ wealth-maximizing foray into patent acquisition and its connection with patent policy changes, as well as the explanatory theoretical framework of the behavioral theory of the firm for this very sort of activity, have not been established heretofore. In the sections that follow, this article makes this connection with supporting empirical analysis.

II. Empirical Analysis

A. Research Questions

While academic institutions have responded to patent incentives in a manner consistent with firm behavior, the optimal firm response does not necessarily produce the optimal social outcome. Organizational economics predicts that firms will respond to external incentives by satisficing results consistent with the consensus of internal coalitions. As a consequence, firms may or may not respond to patent incentives in a manner consistent with the patent system’s goal of maximizing innovation. It follows that if academic institutions exhibit firm behavior in relation to patent incentives, they may satisfice internal coalitions at the expense of social welfare. In the context of university patent activity, this behavior could take the form of the pursuit of patent acquisition not because it is a wealth-maximizing or an economically efficient activity but simply because the regulatory conditions are preferable to pursue patent acquisition.

This study asks whether and how changes in patent law have affected the patent activities of academic institutions. Specifically, it asks two questions:

To what extent do universities change their patent acquisition strategy in response to changes in patent law?

To what extent do different kinds of universities respond differently to changes in patent law?

To answer these questions, this study analyzes data on the population of academic institutions that were granted one or more patents between 1969 and 2012 in order to determine the impact of policy changes on university patent activity over this time.[65] Notably, while future papers in this series may engage with such questions, this article does not determine whether academic institutions have responded to changes in patent law in a way that increases or decreases net social welfare. But it can help explain how academic institutions have responded to patent incentives and whether their responses are consistent with firm behavior, laying the foundation for future exploration of whether and how universities may play a role of increasing costs to innovation.

B. Data

This study relies primarily on a valuable, albeit limited, dataset compiled by the PTO, which records the total number of patents granted per year to each educational institution in the United States between 1969 and 2012.[66] Because of limitations with this data—for example, the data contain only one measured variable, the total number of patents granted to an institution in a calendar year—this dataset had to be merged with other datasets to include more explanatory variables for each institution observation over the same length of time. Specifically, this study relied on the available data from the Classifications for Institutions of Higher Education, a Carnegie Foundation Technical Report, which was produced in 1973, 1976, 1987, 1994, 2000, 2005, and 2010.[67] Because the first three published Carnegie Classification reports—1973, 1976, and 1987—have not been digitized, the use of this data required the authors to hand-code the classification for each observation utilized in the analytical sample.

From the merged dataset, consisting of the full population of higher-education-affiliated institutions that had been granted a patent between 1969 and 2012, an analytical sample had to be drawn from this population to focus on the main university participants in the patent market: research universities; doctoral-granting universities; medical, health, and engineering specialized institutions; and to a lesser extent, comprehensive universities; liberal arts colleges; and other specialized institutions, including schools of art, music, and design, as well as graduate centers, maritime academies, and military institutes.[68] Due to the paucity of observations in the following subgroups, 31 observations from two-year colleges, corporate entities, and spin-off research institutes were dropped from analysis, preserving 591 university observations. Additionally, given that the University of California system does not differentiate patent activity by institution, choosing instead to have reported patent activity in the aggregate in the PTO dataset, it was removed from the analytical sample.

Because the Carnegie Classifications attribute most administrative units to the parent institution, this study took the same approach, collapsing administrative units, foundations, other organizational entities, and former institutions on the current parent institution. However, each observation that received a separate classification from its parent institution in the Carnegie Classifications was preserved as a separate observation from the parent institution.[69] The process of collapsing on parent institution reduced the total number of institutions observed from 590 to 366 school observations, each with 44 year observations.

C. Limitations

It should be noted that the data are limited by two important factors: (1) a lack of explanatory covariates; and (2) a small sample of higher education institutions relative to the overall population of higher education institutions. In the first instance, because the year observations for each institution comprise a 44-year span, it is impractical to match each institution-year observation with rich, explanatory covariates over that time. Not even the Integrated Postsecondary Education Data System (IPEDS) collected comprehensive data on universities before 1993. As such, the Carnegie Classifications serve as a proxy for more detailed information about each institution during a span of years for which data is virtually impossible to find. Given that the Carnegie Classifications categorizes schools on the basis of its federal funding for academic research, production of doctorates, institutional selectivity, enrollment, and degree programs, the Carnegie Classification for each school makes an ideal proxy for a more complete set of explanatory covariates.

As for the size of the analytical sample relative to the population of institutions of higher education receiving a Carnegie Classification since 1973, this population consisted of 1,387 universities—not counting theological seminaries, bible colleges and two-year colleges—while the analytical sample used in this study comprises 366 universities—26.39 percent of the population. However, because this study analyzes university patent activity relative to patent policy change, the analytical sample size is necessarily limited to only those universities that have been granted a patent. As such, the analytical sample used in this study can be viewed as representing a nearly complete picture of the population of academic institutions that have successfully engaged in patent activity between 1969 and 2012.

D. Descriptive Results

Research universities and doctoral-granting universities dominate patenting activity and receive an overwhelming majority of patents granted to academic institutions.

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However, just under half of the analytical sample is comprised of research universities and doctoral-granting universities, which the Carnegie Classifications consider separate but component parts of its doctoral-granting institution category. The average patent totals for research universities dominate all other classification of institution and are over four times as large as the average patent total for doctoral-granting universities. While comprehensive universities account for the largest proportionate classification in the sample, the average patent total for comprehensive universities is among the smallest in the analytical sample. In fact, it is followed only by the smallest classification in proportion and average patent total—other specialized institutions. Medical, health, and engineering schools, while small in number, maintain considerable average patent totals, nearly doubling the patent totals of liberal arts colleges which account for about the same proportion of institutions analyzed in the analytical sample. Across all categories, universities that entered the patent market before the passage of the Bayh-Dole Act buoy patent totals. As such, given their high level of patent activity, the spline regression model results below will especially highlight early entrants as well as research universities, doctoral-granting universities, and medical, health, and engineering schools.

E. Research Method and Model

This study employs a spline regression approach to identify how universities reacted to changes in patent policy at key points in time between 1969 and 2012. This method is very similar to using a difference-in-differences approach to compare the activity differences between two series of years separated by a point, or knot, in time, where the intercept and slope vary before and after the knot.[70] Spline regression modeling necessitates that the location of the knots be set a priori in order to produce estimates of the non-linear relationship between the predictor and response variables. Doing this requires defining an indicator variable, using it as a predictor, but also allowing an interaction between this predictor and the response variable.[71] The analytical model employed in this study is as follows:

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Thus, the expectation of the total number of patents granted to school i (PATi) in year t (yrt) is a function of: (1) a vector of the factors attendant to school i in year t as proxied by its Carnegie Classification (CCit); (2) a dummy variable for whether or not the school engaged in patent activity before 1980 (EEi); (3) a school fixed effect (Si); (4) the year indicator variable (yrt); (5) a dummy variable for the location of the indicator year between the critical spline knots (kc, kc-1); (6) the interaction of the indicator year and the dummy variable for its location between the critical spline knots; and (7) the random error term (eit).

Spline knots were set at 1981 (k1), 1996 (k2), and 2010 (k3) to account for: (1) the passage of the Bayh-Dole Act in 1980, which incentivized universities to engage in patent activity by giving them title to inventions produced from federally-funded research; (2) the expansion of the patent protection duration from seventeen to twenty years in 1995; and (3) the introduction of the America Invents Act, which would pass into law in 2011 and change the right to the grant of a patent from a first-to-invent standard to a first-inventor-to-file standard.[72] The final spline knot was not set at 2012 for two reasons. First, because 2012 was the final year of observation in the data set, the spline regression model would not tolerate a post-2012 slope prediction without post-2012 data. Additionally, setting the knot at 2012 would not account for the possibility that universities may have begun reacting to the policy before the effective date of the policy change, as this particular policy change was in the offing for several years before its eventual passage.

From a theoretical perspective, the decision to specify the analytical model with year-after-the-intervention spline knots is defensible on the grounds that it allows an additional calendar year for universities to react to the policy intervention. However, to test the sensitivity of the model and the decision to set the spline knots one year after the policy intervention, the model was specified in multiple formats to include spline knots on the year of the policy intervention, one year before the policy intervention, and two years before the policy intervention. This sensitivity test was undertaken to ensure that the differences in slopes and intercepts throughout year observations were not evidencing a secular exponential curve. Although the year-of-the-intervention slopes and intercepts bore marginal similarities to the results discussed below, which are modeled on year-after-the-intervention spline knots, there were significant differences between the year-after-the-intervention slopes and intercepts reported below and those for year-prior- and two-years-prior-to-the-intervention. Thus, the year-after-the-intervention spline knot specification used in this study is preferable to other specifications, because it rules out the potential threat of secular trends.

F. Empirical Results

To analyze the effect of the patent policy changes on university patent activity, the regression model provided in the section above was used to calculate both the intercept before and after the policy intervention as well as the slope before and after the policy intervention. Given that the model employed a fixed effect by institution, the regression results reported below can be interpreted as providing an estimate of the intercepts (I) and effects, or slopes (E) pre-intervention, as well as the marginal intercept shift and slope change after the intervention for universities in the analytical sample. In the first regression table, Table 2, the results compare early entrants to non-early entrants, demonstrating stark differences between the two groups.

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Notably, the early entrants engaged in patent activity at a modest but steady rate, adding minimally to yearly patent totals and averaging 2.67 patents granted annually by 1980. In 1981, the intercept at this spline knot jumped by an average of nearly one and a half patents in a single year, with an accelerated slope adding to the average growth by three-quarters of a patent every year thereafter to 1994. By 1995, the intercept spiked again, this time by an additional 4.76 patents granted annually for early entrants, with even further accelerated slope gains to 2010. Finally, in 2011, thought they came close, the estimates lacked statistical significance at the p<0.05 level but indicated an added intercept bump and positive explosion in slope. The non-early entrant estimates, though mostly consistent with the statistical significance of the early entrant estimates for the same periods, pale by comparison. The direction and statistical significance of the results for all early entrants are fairly consistent with estimates for the effect of policy changes at the 1981, 1995, and 2011 spline knots among early entrants in the research and doctoral-granting universities classifications.

The results provided in Tables 3 and 4 describe patent activity among early entrant research and doctoral universities, respectively. As Table 3 indicates, research universities achieve the greatest orders of magnitude of increased patent grants at the regression spline knots. Slope changes among this group are statistically significant (or very closely approaching significance in the case of the 1995 spline), illustrating the differential response within group to the various policies while mitigating the influence of secular trends.

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Doctoral-granting institutions maintained relatively flat—until 2011, when the slope dramatically and significantly changed—but exhibit consistent growth in patent activity around the spline knots.

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Table 5 compares the activity among these two early entrant groups in terms of patents granted. Before the passage of the Bayh-Dole Act in 1980, research universities engaged in steady, relatively flat rates of patent activity, averaging about four patent grants per year. In 1981, the intercept for research universities increased by an average of about two patent grants, significantly adding an average of more than one patent grant per year thereafter. In 1995, the research university intercept jumped over seven units but had a relatively stable slope before and after this time. While the limited data after 2011 do not tolerate statistical significance, research universities and doctoral-granting universities may have undergone another upward intercept shift, but more importantly, may have also undertaken a momentous slope shift, relative to all other slope shifts observed by category, in the years since 2011.

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Among early entrant comprehensive universities, only one spline knot approaches statistical significance—the knot at 1995—but even it represents a modest increase from preceding patent activity.

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Likewise, the statistical significance of the specialty institutions’—including primarily medical, health, and engineering schools—spline knot estimates is only present around the 1981 spline knot. Yet, the results clearly indicate a considerable bump at the 2011 spline knot, despite the lack of statistical significance at that spline or the 1995 spline.

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It is likely that these two groups of institutions—comprehensive universities and specialty institutions—demonstrate relatively little change with the passage of new patent policy for a couple of reasons. First, their numbers are few, especially when compared with research and doctoral-granting universities. Second, and perhaps more important, their missions are very different from research universities.[73] Thus, these universities may not respond to the same incentives in the same way as research and doctoral universities simply because research resulting in a patent may not be an institutional priority for many of the schools in the comprehensive and specialty institution categories.

Notwithstanding these results for the comprehensive universities and specialized institutions, the statistically significant slope and intercept differentials, while controlling for explanatory covariates, indicate the strong presence of university patent activity responses among research and doctoral universities to patent regime changes at the years represented by the spline knots. There is considerable evidence that, among these two categories of universities, the passage of the Bayh-Dole Act in 1980 provided considerable incentive, and elicited considerable effect, on the engagement of major universities in patent acquisition. The shrinking but still significant effect at the 1995 policy intervention, which extended patent duration to 20 years in some but not all patents, may be direct evidence that, because this policy change was not as major a shift in the conferral of rights to universities, it did not elicit the same magnitude of response. However, the anticipation of the passage of the America Invents Act triggered a massive shift in university patent acquisition, perhaps because universities were concerned that their inventions could be scooped under the new first-inventor-to-file standard.

This behavioral pattern suggests a rational, profit-maximizing response—the result of strategic firm decisions regarding patent output and resource allocation decisions—to increase patent activity immediately after the implementation of a policy conferring greater patent rights. However, because universities do not bring these patents to market themselves, and so many of these patents are sold to patent assertion entities, the increase in university patent activity has the effect of contributing substantially to the patent thicket.

Conclusion

This study asks whether universities exhibit patent activity consistent with firm behavior. The results of the spline regression models suggest that research universities and doctorate-granting universities increase their patent activity in direct response to incentives created by changes in patent law but may also strategically hold on to pursue patentable inventions until after the policy provides them more robust patent rights or protection. Most notably, across all university types, the Bayh-Dole Act accelerated patent activity once universities could take title in inventions produced from federally-funded research. As illustrated in the regression models and Figure 1 in the Appendix, this Act may have even incentivized research universities to disengage in patent activity prior to, and scale up patent activity just after, the passage of the act, in anticipation of the benefit that would be conferred upon them once the act had passed into law. As the patent protection duration expanded in the mid-1990s, the growth of patent activity at most universities in the analytical sample increased marginally, indicating another firm response to the patent law regime changes. Finally, preliminary results and the figures in the Appendix indicate that the anticipation of the America Invents Act may have had the largest impact in the rate of patent activity to date, evidence of a university patent activity response to protect current research against a more liberalized granting process.

These responses, evincing a move toward patent aggregation by universities, may have lasting impact not only on the patent marketplace but also on innovation. Yet, patent aggregation, in and of itself, is not necessarily problematic. However, the symptoms of patent aggregation, such as patent hold-up and rent-seeking licensing behaviors, are detrimental to the promotion of innovation. Moreover, competition for federal funds that leads to the production of patentable technology of little economic value could evince another market inefficiency to which universities may substantially contribute.

This study—the first in a series investigating how universities make decisions about their intellectual property, and whether these decisions redound to the public good—demonstrates that research universities, doctoral granting institutions, and specialized institutions respond strategically to patent policy changes in ways that carry profound consequences for innovation and the public good. It is clear that changes to patent policy are necessary to incentivize universities to reap the benefits of research and development of patentable technologies while promoting innovation.

* * *

Appendix

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* Christopher J. Ryan, Jr., American Bar Foundation & AccessLex Institute Doctoral Fellow, American Bar Foundation. Ph.D. Candidate, Vanderbilt University; J.D., University of Kentucky; M.Ed., University of Notre Dame; A.B. Dartmouth College. Brian L. Frye, Spears-Gilbert Associate Professor of Law, University of Kentucky School of Law. J.D., New York University School of Law; M.F.A., San Francisco Art Institute; B.A, University of California, Berkeley. This article was presented at the Searle Center Roundtable on Patents and Technology Standards in Chicago, IL on May 4, 2017. The authors would like to thank the organizers of the conference and the attendees whose comments were essential to the article’s refinement, including Alan Marco, as well as our colleagues at the American Bar Foundation, Vanderbilt University, and the University of Kentucky whose comments helped us improve the article in its formative stages, especially Steph Didwania, Ben Skinner, Walker Swain, Richard Blissett, and Luis Rodriguez.

[1] Patent and Trademark Law Amendments (Bayh-Dole) Act, Pub. L. No. 96-517, 94 Stat. 3015, 3019 (1980).

[2] See Uruguay Round Agreements Act, Pub. L. No. 103–465, 108 Stat. 4809, 4984 (1994) (codified at 35 U.S.C. § 154(a)(2) (1994)).

[3] See Leahy–Smith America Invents Act, Pub. L. No. 112–29, 125 Stat. 284, 285 (2011).

[4] See generally Stuart W. Leslie, The Cold War and American Science: The Military-Industrial Academic Complex at MIT and Stanford (1993); Christopher P. Loss, Between Citizens and the State: The Politics of American Higher Education in the 20th Century 224-25 (2012).

[5] See generally David Mowery, et Al., Ivory Tower and Industrial Innovation: University-industry Technology Transfer before and after the Bayh-Dole Act (2015) (noting the trend of universities to transfer patent rights to patent assertion entities in recent years); Donald S. Siegel, David Waldman & Albert Link, Assessing the Impact of Organizational Practices on the Relative Productivity of University Technology Transfer Offices: An Exploratory Study, 32 Research Pol’y 27 (2003) (analyzing productivity in university technology transfer offices and finding that many are only successful at litigating infringement, not bringing the technology to market); Matkin, Technology Transfer and the University (1990) (exploring university patent transfer after the Bayh-Dole Act).

[6] For instance, the Supreme Court recently limited the scope of patent venue in its unanimous decision in TC Heartland v. Kraft Foods, which was motivated by flagrant “forum selling” in the district courts. TC Heartland vs. Kraft Foods Group Brands, 137 S. Ct. 1514 (2017). For the Federal Circuit’s decision, which was reversed by the Supreme Court, see TC Heartland vs. Kraft Foods Group Brands, 821 F.3d 1338 (Fed. Cir. 2016). Forum selling is an issue many scholars have identified as increasing the costs to innovation. See, e.g., Brian L. Frye & Christopher J. Ryan Jr., Fixing Forum Selling, 25 U. Miami Bus. L. Rev. 1 (2017); Gregory Reilly & D. Klerman, Forum Selling, 89 S. Cal L. Rev. 241 (2016); Chester S. Chuang, Offensive Venue: The Curious Use of Declaratory Judgment to Forum Shop in Patent Litigation, 80 Geo. Wash. L. Rev. 1065 (2011); Elizabeth P. Offen-Brown, Forum Shopping and Venue Transfer in Patent Cases: Marshall’s Response to TS Tech and Genentech, 25 Berkeley Tech. L.J. 61 (2010); Yan Leychkis, Of Fire Ants and Claim Construction: An Empirical Study of the Meteoric Rise of the Eastern District of Texas as a Preeminent Forum for Patent Litigation, 9 Yale J.L. & Tech. 194 (2007).

[7] See, e.g., Mark Lemley, Where to File Your Patent Case 4-27 (Stanford Public Law, Working Paper No. 1597919, 2010), http://law.stanford.edu/wp-content/uploads/sites/default/files/publication/260028/doc/slspublic/ssrn-id1597919.pdf; Li Zhu, Taking Off: Recent Changes to Venue Transfer of Patent Litigation in the Rocket Docket, 11 Minn. J.L. Sci. & Tech. 901 (2010); Alisha Kay Taylor, What Does Forum Shopping in the Eastern District of Texas Mean for Patent Reform, 6 Intell. Prop. L. 1 (2006).

[8] See, e.g., Sara Jeruss, Robin Feldman & Joshua Walker, The America Invents Act 500: Effects of Patent Monetization Entities on US Litigation, 11 Duke L. & Tech. Rev. 357 (2012); Tracie L. Bryant, The America Invents Act: Slaying Trolls, Limiting Joinder, 25 Harv. J.L. & Tech. 697 (2011).

[9] U.S. Const. art. I, § 8, cl. 8. See also, A Brief History of Patent Law of the United States, Ladas & Parry, http://ladas.com/a-brief-history-of-the-patent-law-of-the-united-states-2/ (May 7, 2014). In this article, the term “patent” is used to refer exclusively to utility patents. While the United States Patent and Trademark Office also issues design patents and plant patents, and the United States Code provides for protection of vessel hull designs and mask works, both of which resemble design patents, all of these forms of intellectual property are outside the scope of this article.

[10] See, e.g., James Bessen & Michael J. Meurer, Patent Failure (2008) (questioning the efficiency of the patent system); William W. Fisher, The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States, in Eigentum im internationalen Vergleich 255-91 (1999) (decrying the antitrust implications of intellectual property protection at the exclusion of innovation); Dan L. Burk & Mark A. Lemley, Is Patent Law Technology-Specific?, 17 Berkeley Tech. L.J. 1155 (2002) (observing that the patent system seems to provide efficient incentives in some industries, but not others); but see, e.g., Robert P. Merges, Justifying Intellectual Property (2011) (concluding that the patent system is broadly justified).

[11] See generally Jacob Rooksby, The Branding of the American Mind (2016).

[12] See generally Leslie, supra note 4; Loss, supra note 4.

[13] Research Corporation was formed in 1912 by Professor Frederick Cottrell of the University of California to manage his own inventions, as well as those others submitted by faculty members of other educational institutions. See Frederick Cottrell, The Research Corporation, an Experiment in Public Administration of Patent Rights, 4 JIndust. & Engineering Chemistry 846 (1912).

[14] See Rooksby, supra note 11, at 130-35.

[15] By 1952, 73 universities had adopted a formal patent policy. By 1962, 147 of 359 universities that conducted scientific or technological research had adopted a formal patent policy, but 596 universities reported that they conducted “little or no scientific or technological research” and had no formal patent policy. American Association of University Professors, American University Patent Policies: A Brief History, https://www.aaup.org/sites/default/files/ files/ShortHistory.pdf (last visited Oct. 23, 2017).

[16] This increase in patent activity at universities between 1968 and 1980 is almost certainly a response to the Institutional Patent Agreement. See Rooksby, supra note 11, at 130-35; American Association of University Professors, supra note 15.

[17] Patent and Trademark Law Amendments (Bayh-Dole) Act, Pub. L. 96-517, 94 Stat. 3015, 3019 (1980).

[18] 35 U.S.C. § 202(c)(7) (2011).

[19] See Mark A. Lemley, Are Universities Patent Trolls?, 18 Fordham Intell. Prop. Media & Ent. L.J. 611 (2008). But see Jonathan Barnett, Has the Academy Led Patent Law Astray? Berkeley Tech. L.J. (forthcoming 2017), https://ssrn.com/abstract=2897728.

[20] See Diamond v. Chakrabarty, 447 U.S. 303 (1980) (holding that patentable subject matter included genetically modified organisms); Diamond v. Diehr, 450 U.S. 175 (1981) (holding that patentable subject matter included certain kinds of computer software); Patent and Trademark Law Amendments Act, Pub. L. No. 96-517, 94 Stat. 3015 (1980) (amending 35 U.S.C. § 301 and allowing universities to take title in the patentable results of funded research).

[21] See Federal Courts Improvement Act, Pub. L. No. 97-164, 96 Stat. 25 (1982) (creating an appellate-level court, the U.S. Court of Appeals for the Federal Circuit, with the jurisdiction to hear patent cases).

[22] See Drug Price Competition and Patent Term Restoration Act, Pub. L. No. 98-417, 98 Stat. 1585 (1984) (enabling generic pharmaceutical companies to develop bioequivalents to patented innovator drugs).

[23] See Uruguay Round Agreements Act, Pub. L. No. 103–465, 108 Stat. 4809, 4984 (1994) (codified at 35 U.S.C. § 154(a)(2)).

[24] See Leahy–Smith America Invents Act, Pub. L. No. 112–29, 125 Stat. 284, 285 (2011).

[25] See United States Patent and Trademark Office Patent Technology Monitoring Team, U.S. Patent Statistics Chart, Calendar Years 1963 – 2015 (2016), https://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm.

[26] Id.

[27] Id.

[29] Id.

[30] See Rooksby, supra note 11, at 130-35.

[31] Association of University Technology Managers (AUTM) STATT Database, www.autm.net/resources-surveys/research-reports-databases/statt-database-%281%29/.

[32] See Rooksby, supra note 11, at 139-50. See also Joseph Friedman & Jonathan Silberman, University Technology Transfer: Do Incentives, Management, and Location Matter?, 28 J. Tech. Transfer 17 (2003); Mowery, et. Al., supra note 5, at 24-40.

[33] See AUTM STATT Database, supra note 31; see also Rooksby, supra note 11, at 139.

[34] See Francis M. Bator, The Anatomy of Market Failure, 72 Q. J. Econ. 351, 377 (1958).

[35] See, e.g., Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in Readings in Industrial Economics, 219-36 (1972); Francis M. Bator, The Anatomy of Market Failure, 72 Q. J. Econ. 351 (1958); Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. Political Econ. 416 (1956).

[36] See Richard Posner, Economic Analysis of Law § 3.3, at 48-50 (8th ed. 2011).

[37] Because the benefits of patent protection disincentivize the inventor form further innovating the patented invention, patent law can be said to discourage innovation. This is because—from the time the invention is granted a patent—the inventor’s costs are sunk, meaning that the inventor must incur new development costs and secure a new patent in order to innovate under the patent law regime. See id. at 38-39.

[38] See generally Colleen V. Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 Hastings L. J. 297 (2010).

[39] Id. See also Thomas L. Ewing, Indirect Exploitation of Intellectual Property Rights by Corporations and Investors, 4 Hastings Sci. & Tech. L. J. 1 (2011); but see David L. Schwartz & Jay P. Kesan, Analyzing the Role of Non-Practicing Entities in the Patent System, 99 Cornell L. Rev. 425 (2014) (arguing that the debate over non-practicing entities should be reframed to focus on the merits of the lawsuits they generate, including patent system changes focusing on reducing transaction costs in patent litigation, instead of focusing solely on whether the patent holder is a non-practicing entity); Holly Forsberg, Diminishing the Attractiveness of Trolling: The Impacts of Recent Judicial Activity on Non-Practicing Entities, 12 Pitt. J. Tech. L. & Pol’y 1 (2011) (centering on the difficulties faced by legislators in attempting to solve the patent troll problem and turns to the recent judicial activity related to patent law allowing for individually-focused, closely tailored analysis is examined with an evaluation of four recent court decisions and resulting changes to the patent system).

[40] See Daniel A. Crane, Intellectual Liability, 88 Tex. L. Rev. 253 (2009). See also James Boyle, Open Source Innovation, Patent Injunctions and the Public Interest, 11 Duke L. & Tech. Rev. 30 (2012) (noting that open source innovation is unusually vulnerable to patent injunctions); John R. Allison, Mark A. Lemley & Joshua Walker, Extreme Value or Trolls on Top? The Characteristics of the Most-Litigated Patents, 158 U. Penn. L. Rev. 1 (2009); John R. Allison, Mark A. Lemley & Joshua Walker, Patent Quality Settlement Among Repeat Patent Litigants, 99 Georgetown L. J. 677 (2011); Colleen V. Chien & Mark A. Lemley, Patent Holdup, the ITC, and the Public Interest, 98 Cornell L. Rev. 1 (2012).

[41] See Chien & Lemley, supra note 40 (noting the unintended consequence of the Supreme Court’s ruling in eBay v. MercExchange, 547 U.S. 388 (2006), namely, the driving patent forces entities to a different forum, the International Trade Commission (ITC), to secure injunctive relief not available in the federal courts); Thomas F. Cotter, Patent Holdup, Patent Remedies, and Antitrust Responses, 98 J. Corp. L. 1151 (2009).

[42] See Ronald Coase, The Problem of Social Cost, 3 J. L. & Econ. 1 (1960).

[43] See Brownwyn H. Hall, Exploring the Patent Explosion, 30 J. Tech. Transfer 35 (2005); U.S. Patent and Technology Office, U.S. College and University Utility Patent Grants – Calendar Years 1969 – 2012, https://www.uspto.gov/web/offices/ac/ ido/oeip/taf/univ/univ_toc.htm (last visited Oct. 23, 2017) (examining the sources of patent growth in the United States since 1985, and confirming that growth has taken place in all technologies); Rosa Grimaldi, Martin Kenney, Donald S. Siegel & Mike Wright, 30 Years after Bayh-Dole Act: Reassessing Academic Entrepreneurship, 40 Res. Pol’y 1045 (2011) (discussing and appraising the effects of the legislative reform relating to academic entrepreneurship); Elizabeth Popp Berman, Why Did Universities Start Patenting? Institution-Building and the Road to the Bayh-Dole Act, 38 Soc. Studies of Sci. 835 (2008); Leslie, supra note 4; Loss, supra note 4, at 224-25. But see Elizabeth Popp Berman, , 38 Soc. Studies of Sci. 835 (2008) (noting that while observers have traditionally attributed university patenting to the to the Bayh-Dole Act of 1980, university patenting was increasing throughout the 1970s, and explaining the rise of university patenting as a process of institution-building, beginning in the 1960s).

[44] David C. Mowery, Richard R. Nelson, Bhaven N. Sampat & Arvids A. Ziedonis, The Growth of Patenting and Licensing by US Universities: An Assessment of the Effects of the Bayh-Dole Act of 1980, 30 Pol’y 99 (2001) (examining the effect of the Bayh-Dole Act on patenting and licensing at three universities—Columbia, Stanford, and California-Berkeley—and suggesting that the Bayh-Dole Act was only one of several important factors behind the rise of university patenting and licensing activity); see also Harold W. Bremer, The First Two Decades of the Bayh-Dole Act, Presentation to the National Association of State Universities and Land Grant Colleges (Nov. 11, 2001) (attributing the proliferation of technology transfer to the Bayh-Dole Act).

[45] See, e.g., Jennifer Carter-Johnson, Unveiling the Distinction between the University and Its Academic Researchers: Lessons for Patent Infringement and University Technology Transfer, 12 Vanderbilt J. Entertainment & Tech. L. 473 (2010) (exploring the idea that a faculty member acting in the role of an academic researcher in the scientific disciplines should be viewed in the context of patent law as an autonomous entity within the university rather than as an agent of the university, and arguing that acknowledging a distinction between the university and its academic researchers would revive the application of the experimental use exception as a defense to patent infringement for the scientists who drive the innovation economy and encourage academic researchers to participate in transferring new inventions to the private sector); Martin Kenney & Donald Patton, Reconsidering the Bayh-Dole Act and the Current University Invention Ownership Model, 38 Res. Pol’y 1407 (2009) (citing the problems with the Bayh-Dole Act’s assignment of intellectual property interests, and suggesting two alternative invention commercialization models: (1) vesting ownership with the inventor, who could choose the commercialization path for the invention, and provide the university an ownership stake in any returns to the invention; and (2) making all inventions immediately publicly available through a public domain strategy or, through a requirement that all inventions be licensed non-exclusively); Liza Vertinsky, Universities as Guardians of Their Inventions, 4 Utah L. Rev. 1949 (2012) (submitting that universities need more “discretion, responsibility, and accountability over the post-discovery development paths for their inventions,” in order to allow the public benefit of the invention to reach society, and arguing that, because universities guard their inventions, the law should be designed to encourage their responsible involvement in shaping the post-discovery future of their inventions).

[46] 35 U.S.C. §154 (1994); 125 Stat. §§ 284-341 (2011).

[47] See Kira R. Fabrizio, Opening the Dam or Building Channels: University Patenting and the Use of Public Science in Industrial Innovation (Jan. 30 2006) (working paper) (on file with the Goizueta School of Business at Emory University) (investigating the relationship between the change in university patenting and changes in firm citation of public science, as well as changes in the pace of knowledge exploitation by firms, measured using changes in the distribution of backward citation lags in industrial patents); Hall, supra note 43 (confirming that growth since 1984 has taken place in all technologies, but not in all industries, being concentrated in the electrical, electronics, computing, and scientific instruments industries); Michael D. Frakes & Melissa F. Wasserman, Does Agency Funding Affect Decisionmaking?: An Empirical Assessment of the PTO’s Granting Patterns, 66 Vanderbilt L. Rev. 67 (2013) (finding that the PTO is preferentially granting patents on technologies with high renewal rates and patents filed by large entities, as the PTO stands to earn the most revenue by granting additional patents of these types); Tom Coupe&#769, Science Is Golden: Academic R&D and University Patents, 28 J. Tech. Trans. 31 (2003) (finds that more money spent on academic research leads to more university patents, with elasticities that are similar to those found for commercial firms).

[48] See Clovia Hamilton, University Technology Transfer and Economic Development: Proposed Cooperative Economic Development Agreements Under the Bayh-Dole Act, 36 J. Marshall L. Rev. 397 (2003) (proposing that Congress amend the Bayh-Dole Act to provide guidance on how universities can enter into Cooperative Economic Development Agreements patterned after the Stevenson-Wydler Act’s Cooperative Research and Development Agreements); Lita Nelsen, The Rise of Intellectual Property Protection in the American University, 279 Science 1460, 1460-1461 (1998) (describing the inputs and outcomes of university assertion of intellectual property rights); Nicola Baldini, Negative Effects of University Patenting: Myths and Grounded Evidence, 75 Scientometrics 289 (2008) (discussing how the university patenting threatens scientific progress due to increasing disclosure restrictions, changes in the nature of the research (declining patents’ and publications’ quality, skewing research agendas toward commercial priorities, and crowding-out between patents and publications), and diversion of energies from teaching activity and reducing its quality); Lemley, supra note 7 (illustrating that universities are non-practicing entities, sharing some characteristics with trolls but somewhat distinct from trolls, and making the normative argument that the focus should be on the bad acts of all non-practicing entities and the laws that make these acts possible); Jacob H. Rooksby, University Initiation of Patent Infringement Litigation, 10 John Marshall Rev. Intell. Prop. L. 623 (2011) (revealing similarities between the litigation behavior of universities and for-profit actors, as well as complex and varied relationships between universities, their licensees, and research foundations closely affiliated with universities).

[49] See Rooksby, supra note 11, at 150-67. See also Mowery et al., supra note 5, at 24-40.

[50] See Rooksby, supra note 11, at 150-67.

[51] See generally Mowery, et al., supra note 5; Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Unpacking Patent Assertion Entities (PAEs), 99 Minn. L. Rev. 649 (2014); Sara Jeruss, Robin Feldman & Joshua Walker, The America Invents Act 500: Effects of Patent Monetization Entities on US Litigation, 11 Duke L. & Tech. Rev. 357 (2013).

[52] See, e.g., Baldini, supra note 48; Berman, supra note 43.

[53] See Hall, supra note 43.

[54] See Lemley, supra note 19.

[55] See Posner, supranote36, atee also Peter Lee, Patents and the University, 63 Duke L. J. 1 (2013).

[56] See Ronald Coase, The Nature of the Firm, 4 Economica 386 (1937).

[57] See Cyert & James G. March, A Behavioral Theory of the Firm (Herbert A. Simon ed., Prentice-Hall Inc. 1963).

[58] See Lattuca & Joan S. Stark, Shaping the College Curriculum: Academic Plans in Context 24 (2d ed. 2009) (modeling visually the interaction between universities and external influences such as governments).

[59] See Berman, supra note 43.

[60] See Bremer, supra note 44 .

[61] (2002), http://citeseerx.ist.psu.edu/viewdoc/download? doi=10.1.1.453.1958&rep=rep1&type=pdf (noting that such a duty transforms the academia-industry relationship from the traditional view of disparate entities into a Congressionally-mandated partnership, intended to advance technology and benefit the public).

[62] See Lemley, supra note 19.

[63] Rooksby, supra note 11, at 16.

[64] See Valerie L. McDevitt et al., More than Money: The Exponential Impact of Academic Technology Transfer, 16 Technology & Innovation 75 (2014).

[65] See U.S. Patent and Technology Office, supra note 43.

[66] Id.

[67] This study employs data from the Carnegie Classification of Institutions of Higher Education, U.S. College and University Utility Patent Grants – Calendar Years 1973, 1987, 1994, 2000, 2005, 2010, with years 1994, 2000, 2005, and 2010, http://carnegieclassifications.iu.edu/downloads.php (last accessed Oct. 23, 2017). However, because the Carnegie Commission on Higher Education changed its classification standards in 2010, the “basic” classification standard was used to impute these values for each classification observation from 2010 to 2012.

[68] The “basic” Carnegie Classifications split Doctoral-Granting institutions into four subgroups: Research Universities I and II, and Doctoral-Granting Universities I and II. Research universities originally were considered the leading universities in terms of federal financial support of academic research, provided they awarded a minimum threshold of Ph.D.’s and/or M.D.’s. Doctoral-granting universities were originally conceived of as smaller operations, in terms of federal funding and doctoral production, but comparable in scope to the research universities. Next, the Comprehensive Universities I and II met minimum enrollment thresholds, offered diverse baccalaureate programs and master’s programs, but lacked substantial doctoral study and federal support for academic research. The Liberal Arts Colleges I and II were selected somewhat subjectively in the first several iterations of the Carnegie Classifications; this is particularly the case for Liberal Arts Colleges II, which did not meet criteria for inclusion in the first liberal arts college category but were not selected for Comprehensive University II, either. The Liberal Arts Colleges I included colleges with the most selective baccalaureate focused liberal arts programs. As for the specialized institutions, which are divided into nine categories, the medical, health and engineering schools tended to be stand-alone institutions or institutions affiliated with a parent higher education institution but maintaining a separate campus. Last, the “other specialized institutions” included in the analytical sample are drawn from schools of art, music, and design, as well as graduate centers, maritime academies, and military institutes. Id.

[69] As an illustrative example of collapsing an administrative unit on the parent institution, Washington University School of Medicine was collapsed on Washington University. This also applied to foundations and boards of regents, which were collapsed on the flagship institution, given that the vast majority of observations in this dataset are standalone or flagship institutions; for example, the University of Colorado Board of Regents and the University of Colorado Foundation are collapsed on the University of Colorado, given that no other institution from the University of Colorado system appears in the PTO dataset. Finally, independent institutions within the same university system were treated as different observations: the University of Texas Southwestern Medical Center is distinctly observed from the University of Texas at Austin or even the University of Texas at Dallas, the city in which the University of Texas Southwestern Medical Center is located.

[70] Stata FAQ: How Can I Run a Piecewise Regression in Stata?, Univ. of Calif. Los Angeles Inst. for Digital Research and Educ. (2016), https://stats.idre.ucla.edu/stata/faq/ how-can-i-run-a-piecewise-regression-in-stata/. Effectively, calculating the slope and intercept shifts by hand using spline regression rescales the variable “year” by centering it on the location of the spline knot. For example, the first spline knot (k1) is centered on 1981, with all years before it counting up to zero and all years after—but before the next spline knot—counting up from zero. Including the centered “year” variable in the regression equation also requires adding an indicator variable of the intercept before and after the spline knot. Because the model has an implied constant—the intercepts before and after the spline knot should add up to 1—the overall test of the model will be appropriately calculated by hand. To finish estimating the slope and intercept differences by hand, this regression approach requires the use of the “hascons” option, because of the implied intercept constant. Alternatively, the “mkspline” package in Stata 13 can be used to conduct this estimation. Both approaches were used and yielded substantially similar results. The estimates from using the “mkspline” command are reported below for ease of interpretation.

[71] James H. Steiger, An Introduction to Splines, StatPower (2013), http://www.statpower.net/Content/313/Lecture%20Notes/Splines.pdf.

[72] 35 U.S.C. § 301 (2006) (permitting universities to take title in inventions and discoveries produced through federally-funded research); 35 U.S.C. § 154(a)(2) (2006) (extending the duration of patent protection from seventeen to twenty years); 35 U.S.C. § 100(i) (2006) (changing the right to the grant of patent from first-to-invent to first-inventor-to-file).

[73] Cragg & Patrick J. Schloss, Organization and Administration in Higher Education 3-25 (2017).

Patent Working Requirements and Complex Products

Patent Working Requirements and Complex Products
By Jorge L. Contreras*, Rohini Lakshané**, Paxton M. Lewis***

Download a PDF version of this article here

 

Introduction

In 2012, Natco Pharma Ltd. (“Natco”) petitioned the Indian Patent Office (“IPO”) for a compulsory license to manufacture Bayer’s patented cancer drug, Nexavar.[1] Natco cited numerous grounds in support of its petition, including Nexavar’s high cost and limited availability in India.[2] But along with these relatively common complaints in the global access to medicines debate,[3] Natco raised a less typical theory; Bayer failed to “work” the patent sufficiently in India.[4] In doing so, Natco invoked a seldom-used provision of Indian patent law that allows any person to seek a compulsory license under an Indian patent that is not actively being commercialized by its owner within three years from the issuance of the patent.[5]

Patent working requirements exist in different forms throughout the world. Broadly speaking, to “work” a patent is to practice, in some manner, the patented invention within the country that issued the patent. While patents are seen as a means to create incentives for inventors to share their ideas, working requirements are intended to mitigate the exclusivity of patent monopolies by requiring the patent holder to disseminate its invention into the local market.[6] The patent holder thereby imparts knowledge and skills to the local community, enhances economic growth, supports local manufacturing, and promotes the introduction of innovative new products into the local market.[7]

While patent working requirements have existed in various jurisdictions for more than a century, working requirements have seldom been the subject of vigorous enforcement.[8] The U.S.-Brazil dispute and the Natco case represent a revival of interest in patent working requirements. In particular, the Natco case has reintroduced questions of whether working requirements are, or should be, allowed under the TRIPS Agreement.

In prior work, Contreras and Lakshané have analyzed the domestic Indian patent landscape pertaining to mobile device technology.[9] The authors now extend that work to examine the working of those patents. This Article presents a detailed case study of the Indian patent working statutes and their procedures, particularly the requirement that all patent holders file an annual form (Form 27) to demonstrate that their patents are being worked in the country. We collected and reviewed all publicly available Forms 27 in the mobile device sector to assess the completeness and accuracy of the information disclosed. We then analyzed the results to assess the robustness of India’s patent working requirement and its utility for complex information and communication-based products and technologies.

The remainder of this Article proceeds in four principal parts. Part I.A provides a brief history of patent working requirements. Part I.B describes the development of India’s current working requirements and its novel Form 27 filing requirement. Part II describes our empirical study of India’s Form 27 filings in the mobile device sector. Part III discusses our findings and analysis. We conclude with recommendations for further study and policy.

I. Patent Working Requirements

A. History of Patent Working Requirements

The origins of patent working requirements have been traced to the 1300s, when early patent privileges were granted in jurisdictions such as feudal England and the Republic of Venice, with an expectation that foreign innovators would teach the invented art to local industry.[10] The underlying incentive for providing monopoly rights was thus tied to local industrialization.[11] This incentive to share technology was directed not only to local citizens but, even more so, to foreign inventors.[12] Countries issued patent privileges to encourage foreigners to migrate and develop or protect local industry by teaching their art to the local population.[13] Local industrialization was thus considered a central means to economic development and technological advancement.[14]

Despite these early developments, by the late 19th and early 20th centuries, developed countries’ conceptual understanding of a patentee’s obligation and its relevance to national development began to shift away from local manufacturing.[15] As a result, in many developed countries disclosure through importation became sufficient to meet the “informational goal” of patents, particularly patents that represented improvements to existing technologies.[16]

The 1883 Paris Convention for the Protection of Industrial Property prohibited the automatic forfeiture of a patent for a failure to work it locally.[17] While both developed and developing countries disputed the proper remedy for the failure to work a patent, there remained a consensus that failure to work a patent was inconsistent with the patent privilege.[18]

A half-century later, the 1925 Hague Conference, which amended the Paris Convention, recognized the failure to work a patent as an abuse that member states could “take necessary legislative measures to prevent.”[19] As a remedy for non-working, drafters viewed compulsory licensing of non-worked patents as more palatable than outright forfeiture.[20] Nevertheless, forfeiture of patent rights was still permitted under the Convention, though an action for forfeiture could not be brought until two years following the issuance of the first compulsory license covering the non-worked patent.[21] In the 1967 Stockholm amendments to the Convention, further limitations on compulsory licensing for non-working patents were introduced, notably prohibiting member states from permitting the grant of a compulsory license for failure to work until three years after the issuance of the allegedly non-worked patent.[22]

Within the flexibilities allowed by the Convention, developing countries continued to adopt strict working requirements and to resist international requirements that favored developed countries.[23] For example, in the late 1970s and early 1980s, developing countries proposed revisions to the Paris Convention that would have provided that mere importation did not satisfy local working requirements and to permit the expansion of sanctions for non-working beyond compulsory licensing.[24]

The desire of developed countries for stronger international rules relating to intellectual property led to the formation of the World Trade Organization (“WTO”) in 1994, under which the Trade Related Aspects of Intellectual Property Rights (“TRIPS”) Agreement was negotiated.[25] While the TRIPS Agreement does not explicitly address patent working requirements, Article 2.1 incorporates Article 5A of the Paris Convention (i.e. the article related to compulsory licensing and the limitations on granting compulsory licenses discussed above), and Article 2.2 reinforces the existing obligations of members of the Paris Union.[26] Additionally, Article 27.1 of the TRIPS Agreement, which establishes requirements for patentable subject matter, prohibits “discrimination as to the place of invention, the field of technology and whether products are imported or locally produced” raising a question as to whether countries with local working requirements must recognize importation as an acceptable manner of satisfying those requirements.[27] However, Article 30 of the TRIPS Agreement permits a member state to allow exceptions to the exclusive rights of a patent holder, and Article 31 allows a state to issue a “compulsory” license under one or more patents without the authorization of the patent holder “in the case of national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.”[28] Given these mixed signals, commentators are divided on whether, and how, the TRIPS Agreement may affect local working requirements.[29]

To date, the only WTO dispute challenging the validity of national working requirements has been between the United States and Brazil.[30] In 2000, the Clinton administration, responding to concerns raised by the American pharmaceutical industry, initiated a WTO dispute proceeding to challenge Brazil’s local working requirement.[31] The United States argued that Article 68 of Brazil’s 1996 Industrial Property Law violated Articles 27(1) and 28(1)[32] of the TRIPS Agreement for discriminating against U.S. owners of Brazilian patents whose products were imported, but not locally produced, in Brazil.[33]

Despite the pending WTO litigation, the Brazilian Ministry of Health adopted an aggressive stance toward reducing the price of antiretroviral medications and threatened to issue compulsory licenses for the local manufacture of two such drugs, both patented by U.S. companies, if they were not discounted by 50%.[34] In response to political and public pressures, the United States and Brazil settled the dispute before any definitive opinion was issued by the WTO.[35]

B. The Evolution of India’s Patent Working Requirement

1. Background

As a British colony, India’s pre-independence patent laws were modeled largely on then-prevailing English law.[36] India gained its independence from Great Britain in 1947 and almost immediately began to consider the adoption of patent laws reflecting emerging national goals of industrialization and economic development.[37] Thus, in early 1948, a committee known as the Tek Chand Committee was appointed to review and reconcile India’s patent laws with its national interests.[38] The committee’s efforts resulted in the Chand Report, which recommended the use of compulsory patent licenses to stimulate India’s industrial economy.[39]

A second major report commissioned by the Indian government and prepared primarily by Shri Justice N. Rajagopala Ayyangar, was issued in 1959.[40] The Ayyangar Report suggested that India should deviate from the “unsuitable patent policies of industrialized nations” because patent regimes operate differently in developing versus developed nations.[41] Recognizing that a significant weakness in developing nations “is that foreign patent owners do not work the invention locally,” the Ayyangar Report recommended compulsory licensing as “the remedy to redress the handicap of foreigners not working the invention locally.”[42]

2. The Patents Act, 1970

The India Patents Act, 1970, was enacted in 1972.[43] Among other things, it sought to address the economic repercussions resulting from foreign dominance of the patent landscape in India, as recommended by the Chand Report and the Ayyangar Report.[44] Accordingly, Section 83 of the 1970 Act provides certain policy-driven justifications for India’s working requirements, explaining:

“that patents are granted to encourage inventions and to secure that the inventions are worked in India on a commercial scale and to the fullest extent that is reasonably practicable without undue delay; [and]
that they are not granted merely to enable patentees to enjoy a monopoly for the importation of the patented article[.]”[45]

These provisions make clear that working a patent in India is both an important policy goal and consists of something more than importation of the patented article into India. Some additional knowledge transfer must occur so that manufacturing of other steps necessary for commercialization are carried out in India.

Following the Ayyangar Report’s recommendations, Section 84(1) of the 1970 Act provided for compulsory licensing of patents as follows:

“At any time after the expiration of three years from the date of the sealing of a patent, any person interested may make an application to the Controller[46] alleging that the reasonable requirements of the public with respect to the patented invention have not been satisfied or that the patented invention is not available to the public at a reasonable price and praying for the grant of a compulsory licence to work the patented invention.”[47]

These requirements, particularly the availability of the patented article to the public at a “reasonable price,” seek to address issues raised in the debate over access to medicines, and particularly the high pricing maintained by many Western pharmaceutical firms in developing countries.[48]

However, working of patents more generally is incorporated into the compulsory licensing regime through Section 90, which clarifies when the “reasonable requirements of the public” will be deemed not to have been satisfied.[49] In particular, Section 90(c) specifies that, for purposes of compulsory licensing under Section 84, “the reasonable requirements of the public shall be deemed not to have been satisfied Ö if the patented invention is not being worked in the territory of India on a commercial scale to an adequate extent or is not being so worked to the fullest extent that is reasonably practicable[.]”[50] Thus, local working of patents is tied to the public interest and has become express grounds for requesting a compulsory license in India.

In addition to giving applicants the right to seek a compulsory license under non-worked patents, the 1970 Act also gave the Controller the power to revoke a patent on the grounds that the reasonable requirements of the public were not being satisfied or the patented invention was not available to the public at a reasonable price.[51] Under Section 89(1), any interested person could apply to the Controller for such an order of revocation no earlier than two years following the grant of the first compulsory license under the relevant patent.[52]

3. India’s Current Working Requirement

India became a member of the World Trade Organization on January 1, 1995, also making India a party to the TRIPS Agreement.[53] In order to reconcile the 1970 Act with the TRIPS Agreement, India amended its Patents Act in 1999, 2002, and 2005.[54] Most relevant to this Article, the 2002 amendments modified India’s compulsory licensing and working requirements.[55]

India’s amended Patents Act retains strong working requirements, which permit the Controller to revoke unworked patents.[56] Section 83 of the Act, as amended in 2002, provides several additional justifications for India’s patent working requirement not contemplated in earlier versions of the Act. For example, the 2002 amendments recognize that patents are intended to support the “transfer and dissemination of technology . . . in a manner conducive [sic] to social and economic welfare.”[57] Several of the new justifications emphasize that patents should support, and not impair, the public interest, particularly “in sectors of vital importance for socio-economic and technological development of India.”[58]

Against this backdrop, the amended Act explicitly makes compulsory licenses available for non-worked patents. Section 89 explains that one of the “general purposes” of compulsory licenses is to ensure that “patented inventions are worked on a commercial scale in the territory of India without undue delay and to the fullest extent that is reasonably practicable.”[59] The amended Act expanded Section 84(1), which authorizes third parties to seek compulsory licenses, to include as an express basis for seeking a compulsory license “that the patented invention is not worked in the territory of India.”[60]

Thus, new section 84(1)(c) establishes working of a patent as an independent ground for seeking a compulsory license, in addition to the grounds under sections 84(a) and (b) that the patented technology fails to reasonably meet public needs. This approach contrasts with the original 1970 formulation, discussed above, in which non-working of a patent formed a basis for seeking a compulsory license, but only as an element of the “reasonable requirements of the public,” rather than an independent ground in itself.[61]

Section 84(6) specifies factors that the Controller must take into account when considering an application for a compulsory license, including:

(i) the nature of the invention, the time which has elapsed since the sealing of the patent and the measures already taken by the patentee or any licensee to make full use of the invention;
(ii) the ability of the applicant to work the invention to the public advantage;
(iii) the capacity of the applicant to undertake the risk in providing capital and working the invention, if the application were granted;
(iv) as to whether the applicant has made efforts to obtain a licence from the patentee on reasonable terms and conditions and such efforts have not been successful within a reasonable period as the Controller may deem fit [i.e., not ordinarily exceeding a period of six months] . . . . [62]

Section 84(6) appears to represent a concession to patent holders, making clear that compulsory licenses will only be granted to applicants that are able to exploit the licensed patent rights in a manner that is likely to remedy the failure of the patent holder to work the patent.

While a formal definition of working is not provided under the statute, the language of section 83 suggests that the patented invention must be manufactured locally to the extent possible and that importation would be acceptable only if local manufacturing is unreasonable.[63] Additionally, the statutory language suggests that if importation is necessary, only the patent holder or its chosen licensees may import the patented invention.[64] The statute also fails to establish any circumstances that may be excused from India’s patent working requirement. This omission may have been intentional, perhaps suggesting that any technology that is worth patenting in India should also be capable of being worked in India.

In short, India’s patent working requirement is intended to be taken seriously. The penalties for failing to work a patent include the issuance of a compulsory license beginning three years after patent issuance, and if that does not fulfill public requirements for the patented article, possible revocation of the patent. Moreover, there is evidence that Indian courts may be reluctant to grant injunctive relief to patent holders that do not work their patents.[65]

C. The Indian Working Requirement and Natco Pharma Limited v. Bayer Corporation

India’s patent working requirement was featured prominently in Natco’s recent compulsory license request with respect to Bayer’s Indian patent covering sorefanib tosylate, a kidney and liver cancer drug marketed by Bayer as NexavarTM. Bayer obtained an Indian patent covering Nexavar in 2008.[66] Despite Bayer’s estimate that more than 8,800 patients in India were eligible to take the drug, its imports were sufficient to supply only 200 patients.[67] Moreover, Bayer priced a monthly dose of the drug at more than 280,000 Rupees (approximately US$5,608), a price unaffordable to the vast majority of Indians.[68] In response, Natco, an Indian generic drug manufacturer, attempted to negotiate a license with Bayer to manufacture and sell Nexavar in India.[69] However, when negotiations were unsuccessful, Natco applied to the Drug Controller General of India for regulatory approval to manufacture a generic version of Nexavar in India.[70] The approval was granted.[71]

Natco then petitioned the Controller of Patents under section 84 of the Patents Act for a compulsory license to manufacture a generic version of Nexavar.[72] Natco offered several justifications in support of its application for a compulsory license, including Nexavar’s high cost and limited availability in India.[73] In addition, Natco argued that Bayer had failed to work its patent in India within three years of its issuance, as required under section 84(1)(c) of the Patents Act. Specifically, Natco argued that “[t]he patented product is being imported into India and hence the product is not worked in the territory of India to the fullest extent that is reasonably practicable.”[74] Additionally, Natco argued that Bayer faced “no hurdle[s] preventing [it] from working the Patent in India” because Bayer already had “manufacturing facilities in India for several products.”[75]

Bayer responded that it actively imported Nexavar into India, which demonstrated sufficient working, and argued that India’s working requirement did not require manufacture of the patented product in India.[76] In evaluating Natco’s petition, the Controller considered the legislature’s intent, the Paris Convention, the TRIPS Agreement, and India’s Patents Act.[77] In view of these authorities, the Controller interpreted the term “worked” to mean that the patented invention must be manufactured or licensed within India, reasoning that “[u]nless such an opportunity for technological capacity building domestically is provided to the Indian public, they will be at a loss as they will not be empowered to utilise [sic] the patented invention, after the patent right expires.”[78] Under this interpretation, the Controller concluded that Bayer had not worked its patent in India since importation is not sufficient to constitute “working” a patent.[79] Accordingly, in 2012 the Controller issued a compulsory license to Natco under Bayer’s patent covering Nexavar.[80]

Bayer unsuccessfully appealed the Controller’s decision to the Indian Intellectual Property Appellate Board (IPAB).[81] The IPAB affirmed the Controller’s decision, but disagreed with the Controller’s interpretation of the term “worked.”[82] Instead of ruling that working categorically excludes importation of the patented product into India, the IPAB concluded that determining whether a patented invention is worked must be considered on a case-by-case basis.[83] Thus, the term “worked” does not necessarily exclude importation, but it also does not strictly require manufacturing in India.[84]

In affirming the decision of the IPAB, the Bombay High Court opined that “[m]anufacture in all cases may not be necessary to establish working in India[.]”[85] However, the court implied that working a patent without local manufacture could be a high hurdle to clear, reasoning that the patent holder must then “establish those reasons which makes it impossible/prohibitive for it to manufacture the patented drug in India.”[86] It is only when the patent holder satisfies the authorities that “the patented invention could not be manufactured in India” that it can be considered worked by import.[87]

Apart from the working requirement, the Bombay court focused on whether Bayer had reasonably satisfied the requirements of the public, recognizing that those requirements might differ depending on the type of product covered by the patent.[88] Thus, when assessing whether demand for the patented article was met to an “adequate extent,” the considerations pertaining, for example, to a luxury article would vary significantly from those pertaining to a lifesaving medicine. In the case of medicines, the court reasoned, meeting public demand to an adequate extent should be deemed to mean it is available to 100% of the market: “Medicine has to be made available to every patient and this cannot be deprived/sacrificed at the altar of rights of [the] patent holder.”[89]

Following Natco’s successful application for, and defense of, its compulsory license, other generic drug manufacturers sought compulsory licenses to manufacture patented pharmaceutical products in India. For example, in 2013, BDR Pharmaceuticals, Ltd., an Indian manufacturer, filed an application for a compulsory license to manufacture Bristol Myers Squibb’s anti-cancer drug dasatinib (marketed as SprycelTM),[90] and the Indian Ministry of Health recommended that the Department of Industrial Policy and Promotion (DIPP) grant local manufacturers compulsory licenses for trastuzumab, a breast cancer drug marketed by Roche (HerclonTM) and Genentech (HerceptinTM) and ixabepilone (Roche’s IxempraTM).[91] To date, each of these petitions has failed for various reasons other than that pertaining to dasatinib, which remains under consideration by DIPP.[92]

D. Form 27 and India’s Reporting Requirement

The Indian patent working requirement under Section 84 of the Patents Act, as well as the availability of compulsory licenses for non-worked patents, is not unique to India, and other developing countries have adopted similar legal requirements.[93] India has, however, enacted what appears to be a unique reporting structure associated with its patent working requirement.[94] India adopted a form submission requirement as a means to regulate the patent working requirement under the India Patents Act in 1970.[95] Specifically, section 146(2) of the Patents Act provides that:

every patentee and every licensee (whether exclusive or otherwise) shall furnish in such manner and form and at such intervals (not being less than six months) as may be prescribed statements as to the extent to which the patented invention has been worked on a commercial scale in India.[96]

In support of this statutory requirement, the patent rules adopted by the Indian Ministry of Commerce and Industry provide that the required statements of working must be submitted in a prescribed format (Form 27).[97] The rules also provide that such statements must be furnished to the Controller of Patents in respect of every calendar year within three months following the end of such year.[98]

Form 27, a template of which is appended to the 2003 version of the Indian patent rules, requires the patent holder to disclose “the extent to which the patented invention has been worked on a commercial scale in India.”[99] To that end, Form 27 requires that the patent holder complete the following information:

The patented invention:

(i) { } Worked { } Not worked [Tick (✓) mark the relevant box]
a. if not worked: reasons for not working and steps being taken for the working of the invention.
b. if worked: quantum and value (in Rupees), of the patented product:
manufactured in India
imported from other countries (give country wise details)
(ii) the licenses and sub-licenses granted during the year;
(iii) state whether the public requirement[100] has been met partly/adequately/to the fullest extent at reasonable price.[101]

Under Section 122, failing to submit a Form 27 or providing false information on the form may lead to a significant fine, imprisonment, or both.[102]

Though India’s working requirement first appeared in the Patents Act in 1970, it appears to have been ignored until around 2007. In 2007, the Controller first mentioned the local working of patented inventions in his annual report.[103] The reports provided by the Controller between 2007 and 2009 indicate that, on average, less than 15 percent of Indian patents were being worked commercially.[104] In 2009, 2013 and 2015, the Controller issued public notices calling on patent owners to comply with their obligations to file statements of working on Form 27.[105]

While the penalties for failing to furnish information via Form 27 are steep, potentially resulting in fines or imprisonment,[106] local critics claim that many patent holders fail to make the required filings and that the Indian government has never taken meaningful action to penalize this non-compliance.[107]

On February 12 2013, the Indian Patent Office announced plans to make Form 27 submissions for the year 2012 available to the public via the IPO website.[108] As discussed in Part II.A below, that effort has been met with limited success.

E. Theory and Criticism of Form 27

There is little legislative or administrative history explaining the genesis of India’s unique Form 27 requirement. On one hand, a requirement that the details of patent working be disclosed by patent holders supports the goal of making unworked patents available for compulsory licensing in India, both to promote economic development and public access to patented products. A public registry of Forms 27 could also shift enforcement of India’s working requirement from the IPO and Controller to private sector entities with the greatest incentive to monitor the working of patents in their respective industries. This shift could relieve India’s resource-strapped administrative agencies of a potentially significant policing function, one that it does not appear they were actively enforcing in any event.

However, it is not clear that these goals are well served by the current Form 27 framework, which has been criticized by a number of local commentators.[109] For example, the IPAB ruled in Natco that the term worked must be decided on a case-by-case basis. How, then, should patent holders answer the first question posed in Form 27 and its sub-questions? How is a patent holder to know whether importation or licensing in a certain case will qualify as working a patent in India? If the Form is intended to increase transparency and certainty regarding the working of patents in India, it is hindered in so doing by the lack of a formal definition of working. This lack of clarity affects both patent holders, who are less able to order their affairs so as to comply with statutory working requirements, as well as potential compulsory licensees, who lack a clear assurance of when a compulsory license petition will be successful.

Commentators have raised a variety of additional critiques of the Form 27 framework. The U.S.-based Intellectual Property Owners Association, in a formal 2014 submission to the U.S. Trade Representative, has referred to the Form 27 process as “highly burdensome” and warns that the information disclosed in publicly-accessible forms could “result in even greater pressure on Indian authorities to compulsory license [patented] products.”[110] Moreover, the association argues that Form 27 does not adequately recognize that some patents may be practiced by multiple products, or that multiple patents may be practiced by a single product.[111] Thus, it may be unrealistic for patent holders to attribute a “specific commercial value” to specific patented features of complex technologies.[112]

Additionally, a number of Indian practitioners have raised concerns that the public disclosure of confidential plans for working patents through Form 27 may jeopardize or destroy valuable trade secrets and proprietary information.[113] This threat could cause patent holders to disclose as little specific or valuable information as possible in their Form 27 filings, a result that is suggested by the findings discussed in Part III below.

Based on studies of filed Forms 27, Professor Shamnad Basheer,[114] has concluded that India’s local working Form 27 submission requirements are not being taken seriously, particularly by international pharmaceutical companies.[115] As a result, in 2015 Professor Basheer initiated public interest litigation in the High Court of Delhi against the Indian government for failure to comply with India’s patent laws.[116] The suit seeks a judicial order compelling the Indian government “to enforce norms relating to the disclosure of ‘commercial working’ of patents by patentees and licensees” and to take action “against errant patentees and licensees for failure to comply with the mandate.”[117] In 2016 an Indian patent attorney, Narendra Reddy Thappeta, filed an application to intervene in Basheer’s public interest suit, among other things, in order to raise issues regarding the difficulty of complying with Form 27 requirement for information and communication technology providers.[118]

Despite its perceived problems, Form 27 has proven useful in Indian proceedings. Notably, the information disclosed in Bayer’s Form 27 filings played an important role in the Natco case by helping to establish the low number of patients having access to the drug.[119] Basheer refers to the working requirement as “a central pillar of the Indian patent regime” and views the disclosure requirements of Form 27 as essential tools to ensure that needed information is made public.[120]

II. Empirical Study of Indian Form 27 Disclosures in the Mobile Device Industry

In order to gain a better understanding of India’s patent working requirement, particularly patent holders’ compliance with the statutory requirement to declare information about the working of their patents through Form 27, we conducted an empirical study of all available Form 27 submissions for Indian patents in the mobile device sector. In this Part, we describe the objectives, background and methodology of this study.

A. Background: Existing Data and Studies

Every year, the Controller publishes an Annual Report containing statistics relating to patent filings in India. Since 2010, this report has contained data relating to Form 27 filings. This data indicates that a significant number of patent holders fail to file Form 27 as required. Below is a summary of this data as derived from the Controller’s Annual Reports from 2010 to 2016:

Table 1

Indian Controller of Patents Form 27 Filing Data (2010-2016)

X

Under the Patents Act, a Form 27 must be filed every year with respect to every issued patent in India. Accordingly, the discrepancy between the number of patents in force for a given year and the number of Forms 27 filed likely indicates non-compliance with the filing requirement. Interestingly, it appears that instances of non-compliance dropped noticeably in years immediately after the Controller issued its public reminders to file Form 27 in December 2013, February 2013 and early 2015.[122] Even so, compliance has not been complete even in these years.

As noted above, Professor Shamnad Basheer has conducted two studies of Form 27 compliance in India. The first study, released in April 2011, focused on the pharmaceutical sector.[123] The researchers selected seven pharmaceutical products directed at either cancer or hepatitis, all of which were subject either to Indian litigation or patent office oppositions and were patented in India between 2006 and 2008. They then collected Form 27 filings relating to each of these patents through a series of Right to Information (RTI) petitions to the Indian Patent Office (IPO).[124] Based on the Forms produced by the IPO in response to these requests, the researchers found significant non-compliance with Form 27 filing requirements: some firms failed to file forms in some years, while some forms that were filed were incomplete.[125]

Professor Basheer’s second study had a broader scope, covering a total of 141 patents: 52 patents held by 13 firms in the pharmaceutical sector, 52 patents held by 7 firms in the telecommunications sector, and 37 patents held by 4 institutions which are claimed to have arisen from publicly-financed research.[126] The researchers used series of RTI petitions to collect a total of 263 Forms 27 corresponding to these patents filed between 2009 and 2012.[127]

Based on a total of 141 patents, full compliance with Form 27 filing requirements would have yielded 423 Forms 27 over the three-year period studied. The total of 263 Forms identified indicates a non-compliance ratio of approximately 38%,[128] assuming that all filed forms were produced by the IPO. A review of the reported data[129] indicates that some firms, particularly in the pharmaceutical sector, were assiduous in filing Forms 27. For example, Genentech and Janssen Pharmaceuticals, with two patents each, each filed six Forms 27, suggesting full compliance. Other firms, however, fell far short of this measure. Apple, for example, with four patents, filed only one Form.

In addition to raw filing statistics, Prof. Basheer investigates the quality of the disclosures made in individual Forms 27. He finds that significant numbers of filed Forms “were grossly incomplete, incomprehensible or inaccurate.”[130] For instance, numerous forms failed to indicate how patents were being worked or the quantity, value or place of manufacture of patented products as required by the Form.[131] In addition, of forty-two Forms that disclosed non-working of a patent, twenty-eight (65%) failed to offer any reason for non-working.[132] Though the raw data underlying these conclusions does not appear to be publicly available, choice excerpts from a few Forms are offered.

While the prior studies cited above suggest that there are substantial non-compliance issues with Form 27 practice in India, additional data is required to develop a more complete understanding of this issue. The Controller’s annual report data is provided only at a gross level and lacks any detail regarding compliance. Prof. Basheer’s pioneering studies, while first alerting the public to the problems of non-compliance, cover only small, non-random samples of patents and end prior to the general online availability of Forms 27.

B. Methodology

In this study, we sought to assess annual Form 27 submissions across a comprehensive set of patents and a substantial time frame. To do so, we utilized a set of 4,052 Indian patents identified by Contreras and Lakshané as of February 2015 in a prior study of the Indian mobile device patent landscape (Landscape Study).[133] Another 367 patents pertaining to mobile device technology, which were not included in the original Landscape Study, were also identified by an independent contracted search firm. In the aggregate, we analyzed 4,419 Indian patents issued as of February 2015 in the mobile device sector, which we believe to represent the large majority of issued Indian patents in this sector as of the date selected.

We identified Form 27 filings with respect to each such patent through searches[134] of two public online databases maintained by the Indian Patent Office: Indian Patent Advanced Search System (“InPASS”) and Indian Patent Information Retrieval System (“IPAIRS”).[135] We manually eliminated duplicate results obtained from these two databases.

Our initial searches in 2015 yielded Form 27 submissions for only 1,999 out of 4,419 patents. These searches yielded no Forms 27 for some firms known to be significant patent holders in the mobile devices industry. To attempt to locate the missing forms, Lakshané, through the Centre for Internet and Society (CIS), submitted two formal requests to the IPO located in Mumbai under the Indian Right to Information (“RTI”) Act of 2005. The first RTI application was submitted on June 10, 2015, requesting Form 27 information for over 800 patents.[136] On June 17, the IPO replied with generic instructions on how to find Form 27 submissions online.[137] A second RTI application was filed on March 11, 2016.[138] The second request sought Form 27 filings pertaining to 61 of the remaining patents.[139] These 61 patents were selected to represent a sample of patents held by the full cross-section of patent holders identified in the Landscape Study. In April 2016, the IPO replied that, due to internal resource constraints, it could only provide CIS with Forms 27 for eleven (11) of the requested patents.[140]

Nevertheless, a few days after IPO’s reply, Form 27 submissions pertaining to patents in the Landscape Study started appearing on InPASS and IPAIRS. We repeated the search for Forms 27 corresponding to all 4,419 patents in our dataset in August 2016 and obtained a total of 4,935 Forms 27 corresponding to a total of 3,126 patents (an increase of 1,127 patents over the initial search).

All Forms 27 that we accessed were downloaded as PDF files or original image files and manually entered into a text-searchable spreadsheet maintained at CIS.[141] All information from the Forms 27 was transcribed into the spreadsheet, including all textual descriptions of patent working and licensing. The results were then analyzed as described in Part III.A below.

C. Limitations

The present study was limited by the technical capabilities of the IPO’s online Form 27 repository.[142] As described above, we found significant gaps in posted Forms 27 in our initial search, and it took a formal RTI application to spur the IPO to upload additional forms. Yet, we still identified 1,400 fewer Forms 27 than issued patents in the mobile devices category. The degree to which these missing forms arise from abandoned or expired patents, or additional failures of the IPO to upload filed forms, is unclear. Other than the IPO web site, there is no practical way to identify or access Forms 27 filed with the IPO. Technical issues with the InPASS and IPAIRS databases were constant challenges during this study. The databases were frequently unavailable, produced conflicting results, and were subject to numerous runtime errors and failures.

Despite these technical challenges, we believe that we have identified a large segment of filed Forms 27 covering Indian patents held by all major patent holders in the mobile device sector. We hope that this study will further encourage the IPO to improve the regularity and reliability of its Form 27 database.

III. Findings

In this Section, we describe the findings of our empirical collection analysis of Forms 27 pertaining to Indian patents in the mobile device sector.

A. Aggregated Data ñ Forms Found and Missing

As noted above, we used a dataset comprising 4,419 Indian patents in the mobile device sector issued as of February 2015. Of these, at least 107 patents were likely expired prior to the date on which a Form 27 would have been filed,[143] leaving 4,312 patents for which at least one Form 27 could have been filed.

We were able to identify and obtain a total of 4,916 valid Forms 27[144] which corresponded to 3,126 of these patents, leaving 1,186 Indian patents for which a Form 27 could have been filed, but was not found. This total represents 27.5% of the patents for which at least one Form 27 could have been filed: a significant portion of the total number of patents in the field, and within the general range of missing Forms identified by both the Controller and Basheer (2015).

Based on the year of grant of each of the 4,312 patents identified in the mobile device sector as to which a Form 27 could have been filed, we determined that a total of 24,528 Forms 27 should have been filed with respect to these patents.[145] This figure represents the sum of total Forms 27 that could have been filed for each such patent, which ranges from a low of one to a high of eight Forms 27 per patent. In our sample, no single patent was associated with more than five Forms 27. As noted above, we obtained a total of 4,935 Forms 27 filed with respect to 3,126 patents, representing only 20.1% of the total Forms 27 that should have been filed and made available with respect to the 4,312 patents studied. Figure 1 below compares the number of Forms 27 filed in each year since 2009 with the number of Forms 27 that should have been filed each year based on the number of mobile device patents in force from year to year.

Figure 1

Actual vs. Required Form 27 Filings, by year

(based on number of mobile device patents in force)

Graph of Forms Filed in 2009-2016

As shown in Figure 1, Form 27 filings have fallen well below the required number every year. In 2009, the first year in which Forms 27 were filed in any numbers, only 36 Forms were filed, representing only 2.8% of the 1,302 Forms that should have been filed based on the number of mobile device patents in force that year. By 2013, the number of Forms filed rose to 2,389, representing 70.7% of the 3,379 Forms that should have been filed. This ratio declined again in 2014 to 1,392 Forms out of a total of 3,639 (38.3%). Data for 2015 and 2016 are likely incomplete given the February 2015 cutoff for patents in our study. We also expect that many of the 1,186 “missing” Forms 27 were filed more recently and have not yet been uploaded by the IPO in a searchable format.

One possible explanation for the beginning of filings in 2009 and the significant jump in filings in 2013 may be the Controller’s public notifications of the need to file Forms 27 in 2009 and 2013.[146]

Figure 2 below illustrates the number of issued patents in the mobile device sector for which Forms 27 were found and missing, categorized by patent holder (assignee). Complete data is contained in the Appendix, Table A1.

Figure 2

Forms 27 (Identified and Missing) Per Assignee

X

As shown in Figure 2, missing Forms 27 were distributed among most holders of Indian patents in the mobile device sector. Of the 40 firms identified as holding issued mobile device patents, Forms were missing for 37 of these (92.5%). In most cases, more Forms 27 were found than missing. In a few cases, however (most notably Philips), more Forms 27 were missing than found. In the case of four large patent holders (Qualcomm, Siemens, Philips and Samsung), more than 100 Forms 27 were missing. Forms 27 were missing for patents with issuance dates ranging from 2004 to 2015.[147]

There are several possible reasons that Forms 27 may not have been identified for all issued Indian patents. One possibility, is non-compliance by the patent holder. This is likely the case with respect to the early years (2009-2010), when filing requirements were not yet normalized. However, in more recent years, the following factors suggest that patent holder non-compliance is not a significant cause of missing Forms 27 in the IPO database: (1) Forms 27 were missing for nearly all patent holders across the board, (2) large patent holders filed hundreds of Forms 27 and were clearly aware of their filing requirements, (3) the incremental cost of filing Forms 27 is minimal, and (4) in most cases, large patent holders simply copy text from one form to another (not in itself ideal, see below), requiring little incremental effort to file additional forms. Rather, given our experience with IPO during this study (see Methodology, above), we expect that the missing forms are due largely to the IPO’s failure to upload Forms 27 to its web site in a timely and reliable manner, and the dropping of Forms 27 once uploaded.

B. Working Status

As noted above, we reviewed 4,935 Forms 27 filed with respect to 3,126 patents in the mobile device sector. Figure 3 below illustrates the number of patents for which Forms 27 were filed and which the assignee designated that the patent was worked versus not worked (or, in a few cases, made no indication of working status).[148]

Figure 3

Working Status, by Assignee

X

These results suggest that different patentees have developed significantly different strategies regarding their Form 27 filings. For example, Qualcomm, the largest holder of patents in the mobile device sector (1,298 patents, 993 of which have associated Forms 27), represents that nearly all of its patents (986, 99.3%) are being worked. Samsung, on the other hand, holds the second-highest number of patents (551 patents, 430 of which have associated Forms 27). Yet Samsung claims that it is working only 12 of its patents (2.3%). Clearly, these two patentees are employing different strategies regarding the declaration of working. A glance at Figure 3 suggests that some patentees such as RIM (now renamed Blackberry) follow Qualcomm’s approach of declaring most patents to be worked, while others (Ericsson, LG, Motorola, Panasonic, Philips, Siemens) follow Samsung’s approach and declare most patents not to be worked.

Of course, one might reason that there may be some difference between the patents themselves, and that the patentees’ declarations may simply reflect the fact that some firms’ patents are used more pervasively in India. This conjecture, however, is unlikely. Most of the patentees studied are large multinationals whose patents cover the same products. Many of these patents are declared as essential to the same technical standards. Moreover, given the generally ambiguous evidence proffered by patentees supporting their designated working status (see Part III.C, below), we doubt there are substantial enough differences among the patentees’ portfolios to account for the significant divide in declarations of working status.

C. Descriptive Responses

As noted above,[149] Form 27 requires the patentee to disclose whether or not a patent is being worked in India. If so, the patentee must disclose the number and amount of revenue attributable to products covered by the patent that are manufactured in India and are imported from other countries. If the patent is not being worked, the patentee must explain why and describe what steps are being taken to work the invention. In both cases, the patentee must also identify licenses and sublicenses granted and state how it is meeting public demand for products at a reasonable price.

As first observed by Basheer, there is widespread non-compliance with these reporting and disclosure requirements.[150] We largely confirm this result. Below is a summary of our findings with respect to the descriptive responses for the 4,935 Forms 27 that we reviewed.

1. Working Status Not Disclosed

For a surprising number of Forms 27 (95 or 3%), the working status of the relevant patent was not designated (i.e., neither the box for “worked” nor “not worked” was checked by the patentee). Table 1 below shows the patentees that filed Forms 27 in this manner.

Table 1

Forms 27 Failing to Disclose Working Status

X

Clearly, these sophisticated multinational firms understood the filing requirements for Form 27 and, in most cases, filed additional Forms 27 that did indicate whether the relevant patent was or was not being worked. Thus, the principal reason for filing a Form 27 without designating its working status appears to be the patentee’s uncertainty regarding the patent’s working status in India.

Illustrating this point, Motorola declares in several of its Forms of this nature that “[i]t is not possible to determine accurately whether the patented invention has been worked in India or not, due to the nature of the invention.”[151] While Motorola fails to explain how “the nature of the invention” makes it impossible to determine whether or not the patent is being worked, it uses this litany in most of its Forms 27 that fail to disclose working status. Ericsson adopts a slightly different approach, stating that while it is actively seeking opportunities to work the patent, there may have been some uses of the patented technology.[152] Thus, again, it is uncertain whether the patent is being worked or not. Presumably, these patentees felt that it was preferable to file an incomplete, rather than incorrect, Form 27.

Interestingly, most patentees never revised their working non-designations over the years. Thus, if a patent was not designated as worked or not worked in the first year a Form 27 was filed, subsequent filings for that patent typically duplicated the language of prior years’ filings. One exception appears to be Google, which acquired Motorola’s patent portfolio in 2012. For Indian Patent No. 243210 issuing in 2010, Motorola filed Forms 27 in 2010 and 2011 without indicating whether or not the patent was worked. However, in 2013, Google/Motorola filed a Form 27 for the same patent indicating that it was not worked.

Google has elected to opt for non-working when it is uncertain of the working status of a patent. For example, the following qualified language is used in several Forms in which Google indicates that a patent is not being worked:

Based on a reasonable investigation, it is Google’s belief that the patent has not been worked in India. The uncertainty arises because Google’s products and services are covered by numerous patents belonging to Google’s very large worldwide patent portfolio, and Google does not routinely keep track of which individual patent is being employed in Google’s products and services. The present statement is being filed on the basis of Google’s current estimation, but Google requests opportunities to revise the statement, should it transpire at a later date that the patent is being worked contrary to their present belief.[153]
2. Patents Not Worked

We examined a total of 2,380 Forms 27 that indicated the relevant patents were not being worked. If a patent is specified as not being worked, the patentee must disclose the reasons for the failure to work the patent, and describe what steps are being taken to work the invention.

In a small number of cases, the patentee offered some plausible explanation for non-working of the patent. The most common of these, claimed by in Ericsson in thirty-six Forms 27, was that the underlying technology was still under development,[154] making working impossible, at least until that development was completed. In a handful of other Forms 27 (6), Ericsson and Nokia have claimed that a patent was not being worked because it covered a technology awaiting approval or endorsement by a standards body.[155] In the vast majority of cases, however, no explanation is offered as to why a particular patent is not being worked.

With respect to disclosure of the patentees’ plans for working a non-worked patent, most simply include stock language stating that they are “actively seeking” or “on the lookout for” commercial working opportunities in the future.[156] Alcatel-Lucent adopted an even more passive and non-specific stance toward its plans to work patents, stating in numerous Forms 27 (applicable to 29 patents) that “as and when there is a specific requirement, the patent will be worked.”[157]

3. Varied Interpretations of Working

We reviewed 2,425 Forms 27 that listed the subject patent as being worked. In such cases, the patentee must disclose the number and amount of revenue attributable to products covered by the patent, whether manufactured in India or imported from other countries. A tiny percentage of the Forms 27 that we reviewed provided this information in the form requested. As we discuss in our conclusions, below, it is likely that the format of the required response is simply unsuitable for complex products such as mobile devices. Below we summarize and classify the types of responses that patentees offered regarding the working of their patents.

a. Specific Information ñ Very few Forms 27 actually provide the specific product volume and value information required by the Form. The only patentee that provided the specific information required by Form 27 was Panasonic, which, with respect to the only two patents that it claimed to work (of a total of 66 Indian patents as to which a Form 27 was found), listed specific product volumes and values.[158]

Other patentees disclosed specifics regarding the technical details of their worked patents, but declined to provide product volume and value information. For example, Ericsson discloses: “the stated patent covers a specific detail of data transmission to a mobile in a GSM or WCDMA mobile network where said transmission of data is not performed if the mobile has not enough battery capacity left for the transfer.”[159] Ericsson goes on, however, to explain that because this patented technology is intended to be used in conjunction with other patented technologies, it is not possible to provide the financial value of the worked patent “in isolation.”[160] Oracle also adopts this approach of offering specific product information, while declining to estimate associated sales volume or revenue.[161]

b. Relevance to a Standard ñ In several cases, a patentee describes its patented invention by reference to an industry standard. For example, Nokia-Siemens utilize the following description for one patent that is allegedly worked: “Invention relevant for IEEE 802.16-2009 and IEEE 802.16-2011 standard.”[162] While the patentee offers no additional information regarding the working of the patent, the desired implication, presumably, is that the patent covers an aspect of the standard, and if the standard is implemented in products sold in India (as it likely is), then the patent is thereby worked.

Some patentees offer less specific information regarding the standards that their patents cover. For example, Ericsson states in one Form that “This patent is essential for a 3rd Generation Partnership Project (3GPP) standard and Ericsson is also, subject to reciprocity, committed to make its standard essential patents available through licensing on fair, reasonable and Non-discriminatory (FRAND) terms.”[163] In this formulation, the patentee appears both to be implying working of the patent by virtue of the implicit inclusion of the standard in Indian products, and also to be making known its willingness to enter into licenses in the future on FRAND terms. This future-looking perspective, however, is not responsive to the information called for by Form 27 for patents that are allegedly being worked, and implies that the patent is not, in fact, being worked yet in India.

c. Indian Licensees ñ Some licensees, Qualcomm in particular, disclose that they have licensed their patents to Indian firms. These licenses are disclosed in Qualcomm’s Forms 27 for various patents.[164] However, it is not clear what manufacturing or other activity is carried out by these Indian licensees. Ericsson, which has been engaged in litigation with numerous Indian and Chinese vendors of mobile devices in India, reports that it is receiving royalties from at least two of these entities under court order, though it stops short of stating that these entities are licensed under Ericsson’s patents.[165]

d. Worldwide Licensees ñ In addition to Indian licensees, Qualcomm discloses that, as of 2014, it had granted worldwide CDMA-related patent licenses to more than 225 licensees around the world, and that CDMA-based devices were imported into India from “countries such as Canada, China, Finland, Germany, Italy, Japan, Korea, Switzerland, Taiwan, and the United States.”[166] While Qualcomm is not specific regarding the linkage, if any, between its worldwide licensees and mobile devices sold in India, it reports that more than 37.7 million CDMA-based mobile devices were sold in India in 2014 at an average price of USD $161.94.[167] And though not express, the implication of these data is that all CDMA-based mobile devices sold in India somehow utilize Qualcomm’s patented technology.

The granting of worldwide licenses raises an interesting question regarding local working of patents. As Ericsson (which claims to have executed more than 100 patent licensing agreements) explains, its global licensees are, by definition, licensed in every country, including India. Because their global license agreements “are operational in India”, the licensees are theoretically authorized to work Ericsson’s patents in India. But it is not clear that this means that the patents are actually being worked in India. Simply granting a worldwide patent license does not mean that the licensed patent is being worked, just as the issuance of a patent in a country does not mean that the patent is being worked in that country.

e. Too Big to Know ñ Some patentees claim that they or their patent portfolios are simply too vast to determine how particular patents are being worked in India, or the number or value of patented products sold in India. Nokia, for example, uses the following language in 82 separate Form 27 filings: “Nokia’s products and services are typically covered by tens or hundreds of the nearly 10,000 patents in Nokia’s worldwide portfolio. Nokia does not keep records of which individual patents are being employed in each of Nokia’s products or services, and is therefore unable to report the quantum and value of its products or services which employ the patented invention.”[168]

In a similar vein, Ericsson notes that its patented technologies are intended to be used in combination with a large number of other technologies patented by Ericsson and others. Accordingly, “it is close to impossible to prove an indication of specific or even close to accurate financial value of the said patent in isolationÖ”[169] This said, Ericsson goes on to disclose its total product sales in India (3.09 billion SEK in 2013) and also notes that it earns revenue from licensing its patents (without disclosing financial data).[170]

f. On the Lookout ñ Curiously, some patentees that claim to be working their patents use the same language regarding their search for working opportunities as they and others use with respect to non-worked patents. For example, Ericsson makes this statement regarding some of the patents that it is allegedly working in India: “The patentee is in the lookout for appropriate working opportunities in a large scale although there may have been some use of the patented technology in conjunction with other patented technologies.”[171] This language is uncertain and does not seem to support a claim that, to the patentee’s knowledge, the patent is actually being worked. At best, it expresses optimism toward the possibility of finding an opportunity to work the patent in the future.

g. Information Provided Upon Request ñ Some patentees decline to provide any information about the working of their patents in Forms 27, but offer to provide this information if requested (presumably by a governmental authority).[172] Some patentees further explain their hesitation to provide this information in Form 27 on the basis that the information is confidential, but commit to provide it if requested.[173]

h. Corporate PR ñ Some patentees, in addition to, or in lieu of, providing information about their patents, offer general corporate information of a kind that would often be found in corporate press releases and annual reports. For example, Research in Motion offers this glowing corporate report in lieu of any information about its allegedly worked patents:

Patentee is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, the patentee provides platforms and solutions for seamless access to time-sensitive information including email, phone, SMS messaging, internet and intranet-based applications. Patentee’s technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity. Patentee’s portfolio of award-winning products, services and embedded technologies are used by thousands of organizations around the world (including in India) and include the Blackberry wireless platform, the RIM Wireless Handheld product line, software development tools, radio-modems and software/hardware licensing agreements.[174]

RIM then goes on to explain that it has so many patents that identifying how the instant patent is worked in India is impossible (see “Too Big to Know” above).

Ericsson likewise offers a bit of self-serving corporate history in twenty-eight different Forms 27 in which it states:

Ericsson’s history in India goes back 112 years during which period Ericsson has contributed immensely to the telecommunication field in India. Ericsson provides, maintains and services network for several major government and private operators in India. At present, Ericsson has more than 20,000 employees across 25 offices in India. Further, Ericsson has established manufacturing units, global service organization and R&D facilities in India…[175]

i. Just Don’t Know ñ Some patentees simply assert that they are unable to determine information regarding working of their patents, without any explanation why. Alcatel-Lucent, for example, offers the following unsatisfying disclosure with respect to the eight patents that it claims to be working in India: “The patentee is unable to particularly determine and provide with reasonable accuracy the quantum and value of the patented invention worked in India, including its manufacture and import from other countries during the year 2014.”[176]

j. No Description ñ Some patentees simply omit to provide any information whatsoever regarding the working of their patents, even when patents are allegedly worked.[177]

4. Changes in Status

While some of the “boilerplate” responses provided by patentees in their filed Forms 27 might suggest that patentees give little thought to the content of Form 27 filings, we identified a small but non-trivial number of patents (4.1%) as to which the patentee changed the working status, either from worked to not worked, or vice versa. Overall, we identified 128 instances in which the working status of a patent was changed from one year to the next. Of these, 51 went from worked to not worked, and 77 went from not worked to worked. Such changes suggest that patentees give at least some thought to the manner in which they work their patents, and seek to correct inaccurate disclosures, though these observed variances could also be attributed to changes in law firm, changes in interpretation of filing requirements or mere clerical errors and inconsistencies in filings from year to year.

In 17 cases, the status of the same patent changed twice over the course of three or more Forms 27. Almost all of these three-stage “flip-flops” moved from worked to not worked to worked, with the aberrant ‘not worked’ year occurring in 2013. In fact, 2013 seems to have been a popular year for changes in working status, whether because of heightened awareness, and therefore greater scrutiny of Form 27 filings due to the Controller General’s public notice of that year, or changes in interpretation of filing requirements occasioned by a widely-attended seminar or article. But whatever the cause, it seems highly unlikely that, over the course of three years, a single patent could go from being worked in India, to not being worked, to being worked again. As a result, we attribute these flip-flop changes primarily to filing errors and inconsistencies rather than genuine attempts to correct inaccurate disclosures.

Corresponding to changes in working status, patentees often changed the textual descriptions of working or non-working contained in their Forms 27. These changes usually involved adding stock language regarding working or non-working to a Form 27 that previously contained no descriptive information. However, in some cases the patentee’s descriptive text bears little relation to the purported working status of the patent. For example, as illustrated in Table 2 below, a single patentee’s disclosures with respect to two different patents across three filings employ the same textual descriptions but for different working status.

Table 2

Comparison of Working Status Descriptions

X

As illustrated by Table 2, the patentee’s working description (Text A) is identical in 2011 and 2014 for both patents, though in 2014 one patent is allegedly worked and the other is not. Likewise, in 2013, one patent is worked and the other is not, yet the textual description for both is identical (Text B). Putting aside, for a moment, the fact that neither Text A not Text B is particularly responsive to the information requirements of Form 27, it is puzzling why the patentee would use the same stock language to describe both working and non-working of its patents. The only consistency that emerges from this example is across filing years, suggesting, perhaps, that the textual descriptions used in these forms was more dependent on the person or firm making the filing in a particular year than the alleged working status of the patents in question.

IV. Discussion and Analysis

Professor Basheer charges that significant numbers of Forms 27 are “grossly incomplete, incomprehensible or inaccurate,” and has sued the Indian Patent Office to compel it to improve its monitoring and enforcement of Form 27 filings.[178] Our results confirm that there are overall weaknesses in the Indian Form 27 system, several of which reveal deeper problems with the implementation of India’s patent working requirement.

A. Process Weaknesses

Though filings in support of India’s patent working obligation have been required since 1972, and Form 27 has been on the books since 2003, meaningful filings of Form 27 did not begin until the Controller’s first public notice on this topic in 2009. In the following eight years, Form 27 filings have increased, but are still well below required levels (see Part III.A, above). Even at their peak in 2013, we located only 70.7% of required Forms 27 in the mobile device sector, a sector characterized by sophisticated firms that are advised by counsel. Filing ratios were significantly lower in every other year.

There are several possible reasons for these discrepancies. First are possible issues with the IPO’s electronic access to records. As noted in Part II, we experienced significant difficulties obtaining Forms 27 through the IPO’s web site. It was only after two RTI requests that significant numbers of Forms 27 were made accessible online. It is possible that the IPO has additional Forms 27 in its files that have not been made accessible electronically. For a system the purpose of which is to make information about non-worked patents available to the public, such lapses are inexcusable, particularly given that India’s current working requirement is nearing its 50th anniversary. Accordingly, we expect that improvements to the IPO’s electronic filing and access systems may improve the profile of Form 27 filing compliance.

B. Non-Enforcement and Non-Compliance

As noted above, we expect that some portion of the apparent non-compliance with India’s Form 27 requirement is attributable to the inaccessibility of properly filed Forms 27. However, it is also likely that some portion of the deficit in available Forms 27 is due to actual non-compliance by patentees. Though there are stiff penalties on the books for failing to comply with Form 27 filing requirements, including fines and imprisonment,[179] we are unaware of any enforcement action by the IPO or any other Indian governmental authority regarding such non-compliance.[180]

Given that records of all issued Indian patents are available online, and that all filed Forms 27 should also be available online, it would not seem particularly difficult for the IPO to implement an automatic monitoring and alert system warning patentees that they have not filed required Forms 27. Such a system would likely increase compliance substantially. However, we find no evidence that the IPO monitors or otherwise keeps track of Form 27 filings or seeks to contact patentees who fail to meet their filing requirements. As a result, it is not surprising that non-compliance is widespread.

C. Uncertainty Surrounding Working and Complex Products

When Forms 27 are filed, many of them lack any meaningful detail regarding the manner in which patents are worked or the reasons that they are not worked. While the descriptive requirements of Form 27 are quite clear, even the largest and most sophisticated patentees seemingly struggle with determining whether or not a patent is actually worked in India and, if so, how to quantify its working in the manner required by the Form. There are several reasons that this degree of uncertainty exists. First, India has no clear statutory, regulatory or judicial guidelines for interpreting its working requirement. As the court noted in Natco, the working determination must be made on a case by case basis, with attention to the specific details of the patent in question.[181] This open-ended standard offers little guidance to firms regarding the degree to which importation or licensing may qualify as working a patent, or even what degree of assembly, packaging or distribution within India will so qualify.

Additionally, some patentees have taken the position in their Forms 27 that merely licensing a patent to an Indian firm qualifies as working the patent in India.[182] Some have even gone so far as to take the position that granting a worldwide patent license qualifies as working the licensed patent in India, given that India is part of the world.[183] These conclusions seem stretched, but they have not, to our knowledge, ever been challenged by the IPO or any private party.

What’s more, several patentees take the position that it is impossible to determine the value attributable to a single patent that covers only one element of a complex standard or product (“too big to know”).[184] While these patentees may disclose the size of their large patent portfolios or total Indian product revenues, these figures do not provide the information required by Form 27 relative to the individual patent that is claimed to be worked.

Given the degree of uncertainty surrounding the Indian working requirement and how it is satisfied, it is not surprising that the disclosures contained in most Forms 27 are meaningless boilerplate that convey little or no useful information about the relevant patents or products. Moreover, it is questionable whether it is even possible for a willing patentee to provide the product and revenue information currently required by Form 27 for complex, multi-patent products such a mobile devices.[185] It may be time for the IPO to revisit the information requirements of Form 27, which were seemingly developed with products covered by one or a handful of patents in mind, to more suitable address complex electronic and communications products that may be covered by hundreds or thousands of patents each.

D. Strategic Behavior

In an environment of extreme uncertainty and low enforcement, it is not surprising that patentees have developed self-serving strategies to achieve their internal goals while arguably complying with the requirements of Form 27. Evidence of strategic behavior can be seen clearly in the divide between those patentees that claim that they are working most of their patents and those that claim that they are not.[186] We can assume that there are not significant differences in the portfolio make-up among these different patentees, so the large difference between their ratios of worked and non-worked patents must be attributable primarily to decisions made to further corporate interests.

For example, it is possible that those patentees claiming significant working of their patents do so in order to avoid requests for compulsory licenses against their patents. Such patentees may wish to exploit the Indian market themselves, or license others to do so on terms of their choosing, so may seek to avoid compulsory licensing on terms dictated by the government. Those patentees claiming significant non-working, on the other hand, may actively be seeking applications for compulsory licensing. Why? Perhaps because these patentees do not plan to sell products in India and see little prospect of entering into commercial license agreements with Indian producers. Thus, their greatest prospect of any financial return on their patents may be a compulsory license. As unlikely as it sounds, they may be using Form 27 as a legally-sanctioned “To Let” sign for otherwise unprofitable patents.[187]

Whatever the underlying reasons are for patentee strategic decisions in the filing of Forms 27, IPO owes the public greater clarity regarding the formal requirements for working patents in India. It is only when disclosures are made in a consistent and understandable format that the public will acquire the knowledge about patent working that the Act intends for them to receive.

E. Opportunities for Further Study

This is the first comprehensive and systematic study of reporting compliance with India’s patent working requirements. It covers only one industry sector: mobile devices. Expanding this study to additional industry sectors, particularly pharmaceuticals and biomedical products, would likely yield additional insights.

It would also be informative to revisit the instant set of patents in a few years time to determine whether increased IPO access to electronic records may alter the somewhat poor compliance landscape revealed by this study. That is, if a significant number of Forms 27 that have been filed are simply unavailable through the IPO’s web site, then hopefully continued information technology improvements at the IPO will improve availability in years to come.

Conclusion

India’s annual Form 27 filing requirement is intended to provide the public with information regarding the working of patents in India so as to enable informed requests to be made for compulsory licenses of non-worked patents. While such a goal is laudable, it is not clear that this system is currently achieving the desired results.

In the first systematic study of all Forms 27 filed with respect to a key industry sector ñ mobile devices ñ we found significant under-reporting of patent working, likely due to some combination of systemic deficiencies and non-compliance by patentees. Thus, from 2009 to 2016, we could identify and access only 20.1% of Forms 27 that should have been filed in this sector, corresponding to 72.5% of all mobile device patents for which Forms 27 should have been filed. Forms 27 were missing for almost all patentees, suggesting that defects in the Indian Patent Office’s online access system may play a role in the unavailability of some forms.

But even among Forms 27 that were accessible, almost none contained useful information regarding the working of the subject patents or fully complying with the informational requirements of the Form and the Indian Patent Rules. Patentees adopted drastically different positions regarding the definition of patent working, some arguing that importation of products into India or licensing of Indian suppliers constituted working, while others even went so far as to argue that the granting of a worldwide license to a non-Indian firm constituted working in India. Several significant patentees claimed that they or their patent portfolios were simply too large to enable the provision of information relating to individual patents, and instead provided gross revenue and product sale figures, together with historical anecdotes about their long histories in India. And many patentees simply omitted required descriptive information from their Forms without explanation.

The Indian government has made little or no effort to monitor or police compliance with Form 27 filings, likely encouraging non-compliance. Moreover, some of the complaints raised by patentees and industry observers regarding the structure of the Form 27 requirement itself have merit. Namely, patents covering complex, multi-component products that embody dozens of technical standards and thousands of patents are not necessarily amenable to the individual-level data requested by Form 27. We hope that this study will contribute to the ongoing conversation in India regarding the most appropriate means for collecting and disseminating information regarding the working of patents.

APPENDIX

TABLE A1

X

*Professor, University of Utah S.J. Quinney College of Law and Senior Fellow, Centre for International Governance Innovation. JD (Harvard Law School), BSEE, BA (Rice University). The authors are grateful for constructive discussion and feedback at the 2016 Works in Progress in Intellectual Property conference at University of Washington, the 2017 International Intellectual Property Roundtable at NYU Law School, the 2017 Intellectual Property Scholars Conference (IPSC) at Cardozo Law School, the Second International Conference on Standardization, Patents and Competition Issues at Jindal Global Law School, and a faculty workshop at the University of Utah S.J. Quinney College of Law. We also thank Anubha Sinha, Shamnad Basheer, Nehaa Chaudhari, Kirti Gupta, Kshitij Kumar Singh, Marketa Trimble and Sai Vinod for their helpful input regarding this article, and Anna Liz Thomas and Nayana Dasgupta for valuable research assistance. The research for this article was conducted as part of the Pervasive Technologies Project at the Centre for Internet and Society, India, and has been supported, in part, by the International Development Research Centre (Canada), the Albert and Elaine Borchard Fund for Faculty Excellence at the University of Utah and Google, Inc. The views expressed in this article are solely those of the authors.

**Program Officer, Centre for Internet and Society, India. Bachelor of Instrumentation Engineering (University of Mumbai).

***Law Clerk, Supreme Court of Utah. JD (University of Utah S.J. Quinney College of Law), BS, BA (Butler University).

[1] Natco Pharma Ltd. v. Bayer Corp., (2011) I.P.O. Order No. 1, at 6 (India).

[2] See id.

[3] The Natco case is one in a long line of cases in the ongoing “access to medicines” dispute, in which developing countries seek compulsory licenses for local use of lifesaving drugs that are patented by western pharmaceutical firms. See, e.g., Srividhya Ragavan, Patent and Trade Disparities in Developing Countries (2012); Charles R. McManis and Jorge L. Contreras, Compulsory Licensing of Intellectual Property: A Viable Policy Lever for Promoting Access to Critical Technologies?, in TRIPS and Developing Countries ñ Towards a New IP World Order? (Gustavo Ghidini, Rudolph J.R. Peritz & Marco Ricolfi, eds. 2014); Jerome H. Reichman, Comment: Compulsory Licensing of Patented Pharmaceutical Inventions: Evaluating the Options, 37 J. L. Med. & Ethics 247, 250 (2009).

[4] Natco Pharma Ltd. v. Bayer Corp., supra note 1 at 6.

[5] See Patents Act, No. 39 of 1970, India Code (1970), ch. XVI, § 84(1).

[6] See Rochelle Dreyfuss & Susy Frankel, From Incentive to Commodity to Asset: How International Law Is Reconceptualizing Intellectual Property, 36 Mich. J. Int’l L. 557, 576 (2015); See also Feroz Ali, Picket Patents: Non-Working as an IP Abuse, at *5, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2732521 (last visited Feb. 6, 2017); see also Bryan Mercurio & Mitali Tyagi, Treaty Interpretation in WTO Dispute Settlement: The Outstanding Question of the Legality of Local Working Requirements, 19 Minn. J. Int’l L. 275, 281 (2010).

[7] Marketa Trimble, Patent Working Requirements: Historical and Comparative Perspectives, 6 U.C. Iʀᴠɪɴᴇ L. Rᴇᴠ. 483, 500-501 (2016).

[8] Id. at 495.

[9] Jorge L. Contreras & Rohini Lakshané, Patents and Mobile Devices in India: An Empirical Survey, 50 Vand. Transnat’l L.J. 1 (2017). The data set used in the foregoing study can be found at https://cis-india.org/a2k/blogs/dataset-patent-landscape-of-mobile-device-technologies-in-india.

[10] Trimble, supra note 7, at 488. In England, royal patents were granted to foreigners who would teach their art to the local population. Id. at 488, 497. Venice provided monopoly rights and tax holidays for foreign inventors to immigrate and improve local industrialization. Ragavan, supra note 3, at 3.

[11] See Ragavan, supra note 3, at 3; see also G.B. Reddy & Harunrashid A. Kadri, Local Working of Patents ñ Law and Implementation in India, 18 J. Intell. Prop. Rights 15, 15 (2013).

[12] See Ragavan, supra note 3, at 3; see also Trimble, supra note 7, at 488.

[13] See Ragavan, supra note 3, at 3; see also Reddy & Kadri, supra note 11, at 16.

[14] See Reddy & Kadri, supra note 11, at 17; see also Ali, supra note 6, at *9.

[15] See generally Paul Champ & Amir Attaran, Patent Rights and Local Working Under the WTO TRIPS Agreement: An Analysis of the U.S.-Brazil Patent Dispute, 27 Yale J. Int’l L. 365, 371 (2002).

[16] Trimble, supra note 7, at 498 (“In the United Kingdom in the 18th century ‘the requirement of compulsory working dropped into desuetude and its place was taken for all practical purposes, in particular in the practice of the law courts, by [the full disclosure] requirement’”) (alterations in original) (internal citations omitted).

[17] Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. 5(A)(1), March 20, 1883.

[18] See Reddy & Kadri, supra note 11, at 17; see also Champ & Attaran, supra note 15, at 371; Trimble, supra note 7, at 493ñ94.

[19] Hague Revision to Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. (5)(A)(2), November 6, 1925.

[20] See Champ & Attaran, supra note 15, at 372; see also Trimble, supra note 7, at *490-94 (tracing history of remedies for failure to meet working requirements, including forfeiture).

[21] London Revision to Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. 5(A)(4), June 2, 1934; See Trimble, supra note 7, at 494.

[22] Stockholm Revision to Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. 5(A)(2), July 14, 1967.

[23] See Trimble, supra note 7, at 494-95; see also Janice M. Mueller, The Tiger Awakens: The Tumultuous Transformation of India’s Patent System and the Rise of Indian Pharmaceutical Innovation, 68 U. Pitt. L. Rev. 491, 517-18 (2007)..

[24] See Trimble, supra note 7, at 494.

[25] See Ragavan, supra note 3, at 65-66. See generally TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1c, 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994), reprinted in World Trade Organization, The Results of the Uruguay Round of Multilateral Trade Negotiations 365 (1995) [hereinafter “TRIPS Agreement”].

[26] Additionally, those countries that were not members of the Paris Union but are members of the WTO are therefore obligated to comply with the Paris Convention and its revisions under Article 2.2 of the TRIPS Agreement.

[27] TRIPS Agreement, supra note 25, art. 27.1.

[28] TRIPS Agreement, supra note 25, art. 30-31; see also Ragavan, supra note 3; McManis and Contreras, supra note 3.

[29] See generally Trimble, supra note 7, at 496; Shamnad Basheer, Making Patents Work: Of IP Duties and Deficient Disclosures, 7 Queen Mary J. Intell. Prop. 3, 16-17 (2017).

[30] Request for Consultations by the United States, Brazil ñ Measures Affecting Patent Protection, WTO Doc. WT/DS199/1 (June 8, 2000); see also Reddy & Kadri, supra note 11, at 17; Trimble, supra note 7, at 496-497.

[31] Champ & Attaran, supra note 15, at 380.

[32] Article 28(1) of the TRIPS Agreement defines the rights that may be conferred on patent owners.

[33] Champ & Attaran, supra note 15, at 381-82.

[34] Id. at 381. The two patented drugs that the Brazilian Ministry of Health threatened to grant compulsory licenses on were efavirenz and nelfinavir. These drugs are antiretroviral drugs used to treat AIDS. Geoff Dyer, Brazil Defiant Over Cheap AIDS Drugs, Fin. Times, Feb. 9, 2001, at 10.

[35] Barbara Crossette, U.S. Drops Case Over AIDS Drugs in Brazil, N.Y. Times (June 26, 2001), http://www.nytimes.com/2001/06/26/world/us-drops-case-over-aids-drugs-in-brazil.html.

[36] Kalyan C. Kankanala, Arun K. Narasani & Vinita Radhakrishnan, Indian Patent Law & Practice 1 (2010).

[37] See Mueller, supra note 23, at 509-511; see also Ragavan, supra note 3, at 31.

[38] Shri Justice N. Rajagopala Ayyangar, Report on the Revision of the Patents Law (September 1959) [hereinafter “Ayyangar Report”]; Ragavan, supra note 3, at 31-33.

[39] P. Narayanan, Patent Law 5 (4th ed. 2006).

[40] Ayyangar Report, supra note 38.

[41] Ragavan, supra note 3, at 35.

[42] Id. at 39-40.

[43] See generally The Patents Act, No. 39 of 1970, India Code (1970).

[44] See Ragavan, supra note 3, at 42-45 (summarizing changes effected by the 1970 law).

[45] The Patents Act, 1970 § 83 (emphasis added).

[46] The Indian Controller General of Patents, Designs & Trade Marks, who will be referred to herein as the Controller for simplicity.

[47] The Patents Act, 1970, § 84(1) (emphasis added). The three-year time period reflected in the Act is derived from Section 5(A)(4) of the Paris Convention (current numbering). See supra note 22.

[48] The Patents Act, 1970 § 84(1).

[49] Id. § 90(c).

[50] Id.

[51] Id. § 89(3). While the language of Section 89 is couched in terms of the “reasonable requirements of the public,” it is interesting to note that the caption of the section reads “Revocation of patents by the Controller for non-working,” thus focusing more explicitly on the working requirement.

[52] The Patents Act, 1970 § 89(1). The two-year time period reflected in the Act is derived from Section 5(A)(3) of the Paris Convention (current numbering). See supra note 21 and accompanying text.

[53] See India and the WTO, Wᴏʀʟᴅ Tʀᴀᴅᴇ Oʀɢ., http://www.wto.org/english/thewto_e/countries_e/india_e.htm. See generally TRIPS Agreement.

[54] India amended its 1970 Act in three amendments, corresponding to the transition periods permitted by the TRIPS Agreement. India played a significant role in establishing the TRIPS multi-year transition periods. See Mueller, supra note 23, at 518. For a discussion of India’s political and economic considerations underlying its support of compulsory licensing under TRIPS, see Omar Serrano & Mira Burri, Making Use of TRIPS Flexibilities: Implementation and Diffusion of Compulsory Licensing Regimes in Brazil and India (World Trade Inst. Working Paper No. 1 2016).

[55] The Patents (Amendment) Act, No. 38 of 2002, India Code (2002).

[56] Id. § 85.

[57] Id. § 83(c).

[58] Id. § 83(d)-(f).

[59] Id. § 89.

[60] Id. § 84(1) (emphasis added).

[61] Id.

[62] Id. § 84(6).

[63] See Thomas Cottier, Shaheeza Lalani & Michelangelo Temmerman, Use It or Lose It: Assessing the Compatibility of the Paris Convention and TRIPS Agreement with Respect to Local Working Requirements, 17 J. Int’l Econ. L. 437, 441 (2014).

[64] See The Patents Act, No. 39 of 1970, India Code (1970), § 90(2) (“No license granted by the Controller shall authorise the licensee to import the patented article or an article or substance made by a patented process from abroad where such importation would, but for such authorisation, constitute an infringement of the rights of the patentee.”).

[65] See Basheer, supra note 29, at 9.

[66] Natco Pharma Ltd. v. Bayer Corp., (2011) I.P.O. Order No. 1, 5 (India).

[67] Id. at 22.

[68] Id. at 25 (noting that an average Indian government employee would have to work for 3.5 years to afford a single month’s dosage).

[69] Id. at 6.

[70] Id. at 5.

[71] Id.

[72] Id. at 6.

[73] Id.

[74] Id. at 37.

[75] Id.

[76] Id. at 38.

[77] Id. at 40-41.

[78] Id. at 43.

[79] Id. at 45 (“I am therefore convinced that ‘worked in the territory of India’ means ‘manufactured to a reasonable extent in India.’”).

[80] Id. at 60.

[81] Natco Pharma Ltd. v. Bayer Corp., (2013) I.P.A.B. Order No. 45 (India).

[82] Id.

[83] Id.

[84] Id. at 43.

[85] Bayer Corp. v. Union of India, Bombay High Ct. at 29 (Jul. 15, 2014).

[86] Id.

[87] Id.

[88] Id. at 24.

[89] Id. Bayer subsequently appealed to the Indian Supreme Court, which declined to hear the case. See Samanwaya Rautray, Nexavar License Case: SC Dismisses Bayer’s Appeal Against HC Decision, Economic Times, Dec. 13, 2014,

http://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/nexavar-licence-case-sc-dismisses-bayers-appeal-against-hc-decision/articleshow/45500051.cms

[90] Harsha Rohatgi, Indian Patent Office Rejects Compulsory Licensing Application: BDR Pharmaceuticals Pvt. Ltd. vs. Bristol Myers Squibb, Khurana & Khurana (last visited Oct. 20, 2017), http://www.khuranaandkhurana.com/2013/11/13/indian-patent-office-rejects-compulsory-licensing-application-bdr-pharmaceuticals-pvt-ltd-vs-bristol-myers-squibb/.

[91] Patralekha Chatterjee, 2013: India Battles for Right to Use Compulsory Licenses to Make Medicines Affordable, Intellectual Property Watch (last visited Oct. 20, 2017), https://www.ip-watch.org/2013/01/22/2013-india-battles-for-right-to-use-compulsory-licences-to-make-medicines-affordable/.

[92] See Pankhuri Agarwal, DIPP Drags the Dasatinib Compulsory License Drama: A Situation of ‘Extreme Urgency’?, SpicyIP blog (Sep. 24, 2016), https://spicyip.com/2016/09/dipp-drags-the-dasatinib-compulsory-license-drama-a-situation-of-extreme-urgency.html. See, e.g., IPO Order No. C.L.A. No.1 of 2015, In the matter of Lee Pharma Ltd v. AstraZeneca AB, dated January 19, 2016 (rejecting application due to lack of evidence presented under all three prongs of Section 84 analysis).

[93] For example, Article 68 of Brazil’s 1996 Industrial Property Law subjects a patentee to compulsory licensing if the patentee does not exploit “the object of the patent within the Brazilian territory for failure to manufacture the product or failure to use a patented process.” 68 C.P.I., Law No. 9,279 (Brazil, May 14, 1996). For additional examples, See Cottier et al., supra note 63, at 461-71.

[94] While form submissions to show the working of a patent are unique to India’s patent law, a submission requirement to maintain intellectual property rights is similarly used in the United States for trademarks. In the United States, registered trademark owners must submit a declaration of use to avoid cancellation of the registration. See 15 U.S.C. § 1058.

[95] The Patents Act, No. 39 of 1970, India Code (1970), § 146(2).

[96] Id.

[97] The Patent Rules, Rule 131, India (2003).

[98] The Patent Rules, Rule 131, India (2003). There is an apparent discrepancy between section 146(2) of the India Patents Act, 1970 and Rule 131 of the Patent Rules, 2003. While section 146 suggests that patentees should file Forms 27 every six months, Rule 131 of the Patent Rules, 2003 requires the statements to be furnished in respect of every calendar year.

[99] The Patents Act, No. 39 of 1970, India Code (1970), § 146(2).

[100] The public requirement refers to “the reasonable requirements of the public with respect to the patented invention.” The Patents (Amendment) Act, No. 38 of 2002, India Code (2002), § 84(1)(a). In other words, if the patentee must explain how he has or has not met his duties under section 83 and 84 of the Patents Amendment Act of 2002.

[101] Patents Rules, Form 27, 2003.

[102] The Patents (Amendment) Act, No. 38 of 2002, India Code (2002), § 122 provides:

“1) If any person refuses or fails to furnish-Ö b) to the controller any information or statement which he is required to furnish by or under section 146,

he shall be punishable with [a] fine which may extend to twenty thousand rupees.

2) If any person, being required to furnish any such information as is referred to in sub-section (1), furnishes information or statement which is false, and which he either knows or has reason to believe to be false or does not believe to be true, he shall be punishable with imprisonment which may extend to six months, or with fine, or with both.”

[103] Annual Report 2007-08, Office of the Controller General of Patents, Designs, and Trade Marks including GIR and PIS/NIIPM (IPTI), at 12; see also Reddy & Kadri, supra note 11, at 21.

[104] Annual Report 2008-09, Office of the Controller General of Patents, Designs, Trade Marks and Geographical Indications, at 21; Annual Report 2007-08, Office of the Controller General of Patents, Designs, and TradeMarks including GIR and PIS/NIIPM (IPTI), at 12; see also Reddy & Kadri, supra note 11, at 21-22.

[105] Controller Gen. of Patents, Designs and Trade Marks, Public Notice No. CG/PG/2009/179, Dec. 24, 2009; Controller Gen. of Patents, Designs and Trade Marks, Public Notice No. CG/Public Notice/2013/77, Feb. 12, 2013; Controller Gen. of Patents, Designs and Trade Marks, Public Notice No. CG/Public Notice/2015/95, 2015.

[106] The Patents Act, No. 39 of 1970, India Code (1970), § 122. (A patentee may be imprisoned for submitting false information).

[107] Reddy & Kadri, supra note 11, at 22; see also Shamnad Basheer v. Union of India, Writ Petition, at F (Del. 2015) [hereinafter Basheer Writ Petition (2015)] (“[T]he Respondents authorities have never initiated action against any of the errant patentees.”).

[108] Prashant Reddy, Patent Office Publishes All ‘Statements of Working’ ñ Finally!, Spicy IP, (June 25, 2013) https://spicyip.com/2013/06/patent-office-publishes-all-statements.html.

[109] See, e.g., Basheer Writ Petition (2015), supra note 107 (raising numerous deficiencies with Form 27); Shamnad Basheer & N. Sai Vinod RTI Applications and ‘Working’ of Foreign Drugs in India, Spicy IP, at 5 (Apr., 2011) (“However, Form 27 in its present format leaves much to be desired and we will be drafting a more optimal Form 27 and forwarding this to the government for consideration, so that the form can be a lot more clearer and can call for a greater range of information.”).

[110] Letter from Philip S. Johnson, President, Intellectual Prop. Owners Assn., to Hon. Michael Froman, U.S. Trade Representative (Feb. 7, 2014).

[111] Id.

[112] Id.

[113] Prathiba Singh & Ashutosh Kumar, When in Rome, do as the Romans do, IP Pro Life Sciences at 16, (Mar. 10, 2013) http://ipprolifesciences.com/ipprolifesciences/IPPro%20Life%20Sciences_issue_04.pdf.

[114] Among other things, Prof. Basheer is the founder of the SpicyIP blog, a leading source of intellectual property news and commentary in India. See Part III.A, infra, for a discussion of the results of his studies of Form 27 compliance.

[115] Basheer & Vinod, supra note 109, at 6-8.

[116] Basheer Writ Petition (2015), supra note 107.

[117] Id. at 1, 8.

[118] Shamnad Basheer v. Union of India, Writ Petition No. 5590 (Del. 2015), Application Seeking Permission to Intervene in the Above Public Interest Litigation (2016). Some of the issues raised by Mr. Thappeta are discussed in Part IV below.

[119] Bayer Corp. v. Union of India, Writ Petition No. 1323 of 2013, Judgment at 8ñ10 (Jul. 15, 2014).

[120] Basheer, supra note 29, at 17.

[121] Indian Patent Office reporting year (Apr. 1 – Mar. 31).

[122] See supra note 105.

[123] Basheer & Vinod, supra note 109.

[124] This study pre-dates the electronic availability of Forms 27.

[125] Basheer & Vinod, supra note 109, at 7-8.

[126] Basheer Writ Petition (2015), supra note 107, at Annexure P-11, tbl. I. It is not clear how the studied patents were selected. They do not represent the totality of patents in the designated industry sectors. Likewise, it is not clear how “publicly-funded research” is defined nor the amount of such funding behind the selected patents.

[127] It appears that this study covered three “reporting years” at the IPO: 2009-10, 2010-11 and 2011-12. Reporting years run from April 1 to March 31.

[128] This figure is calculated as 1 – 263/421. Prof. Basheer has reported this ratio as approximately 35%. Basheer, supra note 29, at 18.

[129] Basheer Writ Petition (2015), supra note 107, at Annexure P-11, tbl. I.

[130] Id. at 10.

[131] Id. at 10-16; Basheer, supra note 29, at 19.

[132] Basheer, supra note 29, at 12-13.

[133] See Contreras & Lakshané, supra note 9, at 27-28 (describing electronic search and case harvesting methodology).

[134] Searches were conducted and results were compiled by a contracted Indian service provider selected through a competitive bid process.

[135] While InPASS and IPAIRS retrieve Form 27 submissions from the same URL, we observed that sometimes a submission that was displayed on data base was not displayed on the other. Thus, IPAIRS was used when Form 27 was not found for a queried patent on InPASS. InPASS has two features: Application Status and E-Register. At times, some forms were not available at E-Register that could be found through the Application Status table, and vice versa. Thus, both features were used. A detailed, step-by-step description of the search methodology used can be found at http://cis-india.org/a2k/blogs/methodology-statements-of-working-form-27-of-indian-mobile-device-patents.

[136] Ajoy Kumar, “Request for Information under Section 6 of the Right to Information Act, 2005; regarding Form 27 Submissions for Patents,” The Centre for Internet and Society, (June 10, 2015), https://cis-india.org/a2k/blogs/rti-app-2015.pdf/at_download/file.

[137] Boudhik Bhawan, “Supply of information sought under RTI ñ reg,” The Centre for Internet and Society, (June 17, 2015), https://cis-india.org/a2k/blogs/rti-reply-2015.pdf/at_download/file.

[138] Ajoy Kumar, “Request for Information under Section 6 of the Right to Information Act, 2005; regarding Form 27 Submissions for Patents,” The Centre for Internet and Society, (Mar. 11, 2016), https://cis-india.org/a2k/blogs/rti-app-2016.pdf/at_download/file.

[139] Id.

[140] Ujjwala Haldankar, “Supply of information sought under RTI, 2005 ñ reg,” The Centre for Internet and Society, (Apr. 4, 2016), https://cis-india.org/a2k/blogs/rti-reply-2016.pdf/at_download/file.

[141] Rohini Lakshané, Dataset for “Patent Working Requirements and Complex Products: An Empirical Assessment of India’s Form 27 Practice and Compliance,” The Centre for Internet and Society (Aug. 17, 2017), https://cis-india.org/a2k/blogs/dataset-for-patent-working-requirements-and-complex-products-an-empirical-assessment-of-indias-form-27-practice-and-compliance.

[142] Similar deficiencies with the IPO’s online filing facility have been noted by Basheer. See Basheer Writ Petition (2015), supra note 107, at 17.

[143] Prior to the 2002 Amendments to the Patents Act, 1970 (effective May 20, 2003), the term of product patents in India was 14 years from the date of issuance. Patents Act (2002 Amendments), Sec. 53. Accordingly, any patent issued in 1995 or earlier would be expired by 2009. Based on the data provided by the Controller and Basheer, it appears that few, if any, Forms 27 were filed prior to 2009. Thus, it is unlikely that any patent that expired prior to 2009 would have a corresponding Form 27. As a result, for purposes of counting Forms 27 that were, and should have been filed, we disregarded 107 patents in our dataset that were issued in 1995 or earlier (the vast majority of which were owned by Siemens).

[144] A total of 4,935 Forms 27 were identified by our search. In 2013, Motorola filed 19 Forms 27 that were backdated to 2004 and 2005. These Forms corresponded to patents issued between 2008 and 2010, and apparently reflected the patentee’s incorrect belief that Form 27 must be filed as of the date of the filing of a patent application rather than the issuance of the patent. Because the patentee also filed Forms 27 dated as of 2013 for these patents, we have disregarded these spurious filings.

[145] Based on the data provided by the Controller and Basheer, it appears that few, if any, Forms 27 were filed prior to 2009. Thus, we assumed that Forms 27, if filed, would only have begun to be filed in 2009. As discussed in note 143, supra, the first patents that could be expected to have a filed Form 27 were issued in 1996 (i.e., one Form filed in 2009, the year of the patent’s expiration). Thus, beginning with patents issued in 1996, we calculated the total number of Forms 27 that could have been filed with respect to such patents beginning in 2009 and ending in 2016 (noting that we ended our study in August 2016). Thus, for patents issued in 1996 and expiring in 2009, one Form 27 could have been filed. For patents issued in 2002 to 2008, and expiring well after 2016, a total of eight Forms 27 could have been filed, in each case beginning in 2009 and ending in 2016. Patents issued in 2015 could have at most one Form 27 filed. Though Form 27 is not required to be filed until the year after a patent has been granted, some patentees have made filings in the year of grant. We counted these filings, but did not count year-of-grant filings in determining the maximum number of filings that could be made for a particular patent.

[146] See supra text accompanying note 105.

[147] It is not surprising that no forms were available for patents issued prior to 2007, the first year that the Indian Controller of Patents drew attention to the Form 27 requirement. See supra Part I.D.

[148] For patents that had different working designations in Forms 27 filed in different years, we counted a patent to be declared as worked if at least one Form 27 so designated the patent.

[149] See supra text accompanying note 101.

[150] See Basheer Writ Petition, supra note 107, at 10.

[151] Motorola, Form 27 for 243220, IɴPASS (Mar. 31, 2014), http://ipindiaonline.gov.in/frm27/2013/243220_2013/243220_2013.pdf.

[152] Ericsson, Form 27 for 241488, IɴPASS (Feb. 3, 2012), http://ipindiaonline.gov.in/frm27/2011/241488_2011/241488_2011.pdf (“The patentee is in the look out for appropriate working opportunities in a large scale although there may have been some use of the patented technology in conjunction with other patented technologies.”).


[153] Google, Form 27 for 243210, IɴPASS (Mar. 27, 2015), http://ipindiaonline.gov.in/frm27/2014/243210_2014/243210_2014.pdf. See infra Part III.D for a discussion of patents as to which the patentee has changed the working status over the years.

[154] See, e.g., Ericsson, Form 27 for 209941, IɴPASS (Mar. 30, 2015), http://ipindiaonline.gov.in/frm27/2014/209941_2014/209941_2014.pdf.

[155] See, e.g., Ericsson, Form 27 for 259809, IɴPASS (Mar. 19, 2015), http://ipindiaonline.gov.in/frm27/2014/259809_2014/259809_2014.pdf.

[156] Ericsson, Form 27 for 227819, IɴPASS (Mar. 13, 2015), http://ipindiaonline.gov.in/frm27/2014/227819_2014/227819_2014.pdf (“The patentee is in the look out for appropriate working opportunities in a large scale”); Motorola, Form 27 for 236128, IɴPASS (Mar. 8, 2013), http://ipindiaonline.gov.in/frm27/2012/236128_2012/236128_2012.pdf (“The Patentee is actively looking for licensees and customers to commercialise the invention in the Indian environment.”).

[157] Alcatel-Lucent, Form 27 for 258507, IɴPASS (Mar. 18, 2015), http://ipindiaonline.gov.in/frm27/2014/258507_2014/258507_2014.pdf.

[158] Panasonic, Form 27 for 239668, IɴPASS (Mar. 21, 2014), http://ipindiaonline.gov.in/frm27/2013/239668_2013/239668_2013.pdf; Panasonic, Form 27 for 208405, IɴPASS (Mar. 21, 2014), http://ipindiaonline.gov.in/frm27/2013/208405_2013/208405_2013.pdf.

[159] Ericsson, Form 27 for 233994, IɴPASS (Mar. 6, 2013), http://ipindiaonline.gov.in/frm27/2012/233994_2012/233994_2012.pdf.

[160] Id.

[161] See Oracle, Form 27 for 230190, IɴPASS (Mar. 24, 2014), http://ipindiaonline.gov.in/frm27/2013/230190_2013/230190_2013.pdf (“The methods/structures of the patent are generally related to "Asynchronous servers". This product has been sold to several businesses in India in the past few years and is believed to be used by them. Additional information will be enquired and provided to the Patent Office upon request.”).

[162] Nokia Siemens, Form 27 for 254894, IɴPASS (Mar. 28, 2014), http://ipindiaonline.gov.in/frm27/2013/254894_2013/254894_2013.pdf.

[163] Ericsson, Form 27 for 249058, IɴPASS (Mar. 03, 2014), http://ipindiaonline.gov.in/frm27/2013/249058_2013/249058_2013.pdf; In other Forms 27, however, Ericsson

provides significant detail regarding the standards/specifications covered by its patents.

See, e.g., Ericsson, Form 27 for 213723, IɴPASS (Mar. 16, 2016), http://ipindiaonline.gov.in/frm27/2015/213723_2015/213723_2015.pdf (citing ETSI TS 126 092 V4.0.0 (2001-03), ETSI TS 126 073 V4.1.0 (2001-12) and ETSI TS 126 093 V4.0.0 (2000-12), all of which are pertinent to the UMTS 3G standard).

[164] See, e.g., Qualcomm, Form 27 for 251876, IɴPASS (Mar. 28, 2015), http://ipindiaonline.gov.in/frm27/2014/251876_2014/251876_2014.pdf (disclosing Indian licensee Innominds Software Pvt. Ltd.).

[165] See Ericsson, Form 27 for 213723, IɴPASS (Mar. 16, 2016), http://ipindiaonline.gov.in/frm27/2015/213723_2015/213723_2015.pdf (referencing royalty payments from Micromax and Gionee).

[166] Qualcomm, Form 27 for 251876, IɴPASS (Mar. 28, 2015), http://ipindiaonline.gov.in/frm27/2014/251876_2014/251876_2014.pdf.

[167] Id.

[168]Nokia, Form 27 for 220072, IɴPASS (Mar. 20, 2014), http://ipindiaonline.gov.in/frm27/2013/220072_2013/220072_2013.pdf.

[169] Ericsson, Form 27 for 251757, IɴPASS (Mar 11, 2014), http://ipindiaonline.gov.in/frm27/2013/251757_2013/251757_2013.pdf.

[170] Id.

[172] See, e.g., Huawei, Form 27 for 251769, IɴPASS (Mar. 4, 2014), http://ipindiaonline.gov.in/frm27/2013/251769_2013/251769_2013.pdf (“Information not readily available; efforts will be made to collect and submit further Information, if asked for.”).

[173] See, e.g., Hitachi, Form 27 for 226462, IɴPASS (Mar. 28, 2013), http://ipindiaonline.gov.in/frm27/2013/226462_2013/226462_2013.pdf (“Confidential Information will be provided if asked for.”).

[174] Research in Motion, Form 27 for 261068, IɴPASS (Feb. 10, 2015), http://ipindiaonline.gov.in/frm27/2014/261068_2014/261068_2014.pdf.

[175] Ericsson, Form 27 for 254652, IɴPASS (Mar. 21, 2016), http://ipindiaonline.gov.in/frm27/2015/254652_2015/254652_2015.pdf.

[176] See, e.g., Alcatel-Lucent, Form 27 for 202208, IɴPASS (Mar. 27, 2014), http://ipindiaonline.gov.in/frm27/2013/202208_2013/202208_2013.pdf.

[178] Basheer Writ Petition (2015), supra note 107, at 10.

[179] A patentee may be imprisoned for submitting false information. The Patents Act, No. 39 of 1970, India Code, § 122 (1970).

[180] See Reddy & Kadri, supra note 11, at 22; Basheer Writ Petition (2015), supra note 107, at 10 (“authorities have never initiated action against any of the errant patentees.”).

[181]See supra text accompanying notes 81-84.

[182]See supra Part III.C.3.c.

[183]See supra Part III.C.3.d.

[184] See supra Part III.C.3.e.

[185] For example, as of 2015, more than 61,000 patent disclosures had been made against ETSI’s 4G LTE standard, and more than 43,000 against ETSI’s 3G UMTS standard, both of which are only one of many standards embodied in a typical mobile device. Justus Baron & Tim Pohlmann, Mapping Standards to Patents Using Databases of Declared Standard-Essential Patents and Systems of Technological Classification at 20, Table 5 (Regulation & Econ. Growth, Working Paper, 2015), http://www.law.northwestern.edu/research-faculty/searlecenter/innovationeconomics/documents/Baron_Pohlmann_Mapping_Standards.pdf.

[186]See supra Part III.B.

[187] We thank Chris Cotropia for this insight.

[188] 421 Forms 27 were found for Motorola. This total has been reduced by the 19 Forms filed in 2013 and incorrectly backdated to 2004 and 2005.

[189] 101 Siemens patents expired prior to 1996.