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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.
[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.
[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.
[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 2005on 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).
[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).
[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.
[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.
[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.).
[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).
[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.
[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).
[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.
[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.
[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).
[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.
[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.
[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).
[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).
[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.
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.
[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).
[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).
[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.”).
[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 . .
.”).
[31] Nikolay Golova
& Lars Rönnbäck, Big Data
Normalization For Massively Parallel Processing Databases, 54 Computer Standards & Interfaces 86,
87 (2017).
[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).
[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”).
[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]Seeid.
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]Seeid.
at 552 (discussing how institutions with industrial secrets may rely on secrecy
to protect the big data they have accumulated).
[64]Seeid.
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”).
[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))).
[76]Id. at 415 (“[B]roader rights have
substantial downsides, including hindering potential downstream invention and
consumer deadweight losses . . .”).
[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”).
[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”).
[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).
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]
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.
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.
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 iTunesLitigation 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); seealso, 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.
[9] The OECD has recently devoted several roundtables to the subject. See
OECD Policy Roundtables, Algorithms and Collusion, DAF/COMP(2017)4; seealso 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).
[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.
[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); seealso 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.
[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).
[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”); seealso
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.
[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. ButseeU.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.”).
[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).
[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. SeeU.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.
[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.
[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.
[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.
[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).
[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; seealso
Alan Devlin & Michael Jacobs, The Empty Promise of Behavioral Antitrust, 37 Harv. J.L. & Pub. Pol’y 1009, 1057 (2014).
[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, inCompetition, 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, inThe 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).
[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.
[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”).
[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.
[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.
[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).
[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. SeeGavil & 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.”).
[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”).
[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).
[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).
[165]See generallyMicrosoft
Decision, supra note 8;see alsoKudrle, 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).
[174]Id. para. 470, at 129; see alsoNew 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 “proportionality” is absent from the European Commission’s decision.
[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 generallyMicrosoft Decision, supra note 8; see alsoUnited States v. Microsoft Corp., 253 F.3d.
[185]Microsoft Decision, supra note 8, paras. 792-799, at 209-211.
[186]Seegenerally 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.
[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[.]” SeeGavil & 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.
[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).
[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]SeegenerallyLegal 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).
[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/.
[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.
[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).
[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.”).
[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).
[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.
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”:
* 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).
[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.”
[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.
[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 athttps://fas.org/sgp/crs/misc/license.pdf (summarizing the three
factors from Summum,
555 U.S. 464-65).
[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).
[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).
[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)).
[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
[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.
[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.”).
[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.”).
[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)).
[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.
[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.
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
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.
[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).
[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.
[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).
[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”].
[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”).
[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).
[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)).
[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).
[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”).
[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.”).
[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).
[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).
[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).
[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).
[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[.]”).
[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.”).
[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).
[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).
[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.
[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).
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)(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
* 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.
[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.
[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 athttps://www.ft.com/content/3eda6296-b711-11e2-a249-00144feabdc0.
[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.
[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 AreaThe 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).
[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).
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 "promote
the Progress of . . . useful Arts, by securing for limited Times to . . .
Inventors the exclusive Right to their respective . . . Discoveries."[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.
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.
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:
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.
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.
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.
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.
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.
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.
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
*
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’sResponse to TS Tech
and Genentech, 25 Berkeley Tech. L.J.
61 (2010); Yan Leychkis, Of Fire Ants and ClaimConstruction:
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, inEigentum 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).
[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).
[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).
[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]SeeRichard
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).
[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 Coupé, 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.
[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.
[55]SeePosner,
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).
[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.
[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).
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]
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)
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)
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
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
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
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
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
*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).
[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).
[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)..
[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.
[28] TRIPS Agreement, supra note 25, art. 30-31; see alsoRagavan, 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.
[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.
[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 alsoRagavan, 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.
[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). Seesupra note 22.
[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.
[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).
[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.”).
[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,
[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).
[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.
[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.”).
[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).
[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.
[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).
[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.
[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.
[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.
[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.
[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.”).
[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.”).
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).
[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.”).
[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.
