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

Think Big! The Need for Patent Rights in the Era of Big Data and Machine Learning
By: Hyunjong Ryan Jin*   Download a PDF version of this article here  


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. 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.


While highly restrictive, the guidelines from the Federal Circuit still allow the grant of patent rights for the computational aspects of machine learning algorithms. The guidelines also would prevent highly preemptive mathematical innovations, including data-generating patents such as machine learning models. The narrow range of patentability makes a patent regime appealing for computational methods. The recent emphasis on preemption concerns acts in favor of preventing data network effects based on data-generating patents. While not discussed in this paper, other patentability requirements such as obviousness or definiteness would further constraint the grant of overly broad data-generating patents. Such an approach strikes the appropriate balance between promoting innovation and encouraging data reuse for societal benefits. Compared to other approaches of providing protection over innovations in machine learning, the narrowly tailored approach for patent rights for computational inventions fits best with the policy goal of promoting innovation through data reuse. The industry trends in collaboration and recruiting also matches the proposed focus on patent law protection.
* J.D. Candidate, New York University School of Law, 2018; Ph.D. in Electrical and Computer Engineering, University of Illinois at Urbana-Champaign, 2012. The author would like to thank Professor Katherine Jo Strandburg for her guidance; fellow JIPEL Notes Program participants Julian Pymento, Gia Wakil, Neil Yap, and Vincent Honrubia for their comments and feedback; and Dr. Sung Jin Park for her support throughout the process.
[1] Sang-Hun Choe & John Markoff, Master of Go Board Game Is Walloped by Google Computer Program, N.Y. Times (March 9, 2016), (reporting the shocking defeat of Go Master Lee Se-dol to Google DeepMind’s AlphaGo).
[2] Laurence Zuckerman, Chess Triumph Gives IBM a Shot in the Arm, N.Y. Times (May 12, 1997), (detailing IBM’s highly publicized win through Deep Blue’s victory over world chess champion Garry Kasparov).
[3] See Choe & Markoff, supra note 1.
[4] David Silver et al., Mastering the game of Go with deep neural networks and tree search, 529 Nature 484, 484 (2016).
[5] Id.
[6] Id.
[7] Id. at 485.
[8] Id.
[9] See Andre Esteva et al., Dermatologist-level classification of skin cancer with deep neural networks, 542 Nature 115 (2017).
[10] See Sue Ellen Haupt & Branko Kosovic, Big Data and Machine Learning for Applied Weather Forecasts, (2015).
[11] See Wei-Yang Lin et al., Machine Learning in Financial Crisis Prediction: A Survey, 42 IEEE Transactions on Systems, Man, and Cybernetics 421 (2012).
[12] See Farzindar Atefeh & Wael Khreich, A Survey of Techniques for Event Detection in Twitter, 31 Computational Intelligence 132 (February 2015).
[13] See Corey Blumenthal, ECE Illinois Students Accurately Predicted Trump’s Victory, ECE Illinois (Nov. 18, 2016),
[14] For the purpose of this Note, secrecy refers to the use of trade secret and contract based non-disclosure agreements.
[15] Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets As IP Rights, 61 Stan. L. Rev. 311, 332 (2008) (“Patent and copyright law do not exist solely to encourage invention, however. A second purpose — some argue the main one — is to ensure that the public receives the benefit of those inventions.”).
[16] Andrew Ng et al., How Artificial Intelligence Will Change Everything, Wall Street Journal (March 7, 2017),
[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) (“The idea that the data will be used by unspecified people, in unspecified ways, at unspecified times . . . is thought to have broad benefits”).
[18] See Saeed Ahmadiani & Shekoufeh Nikfar, Challenges of Access to Medicine and The Responsibility of Pharmaceutical Companies: A Legal Perspective, 24 DARU Journal of Pharmaceutical Sciences 13 (2016) (discussing how “pharmaceutical companies find no incentive to invest on research and development of new medicine specified for a limited population . . .”).
[19] 17 U.S.C. §101 (2012).
[20] Id.
[21] 17 U.S.C. §102(a) (Copyright exists “in original works of authorship fixed in any tangible medium of expression . . .”).
[22] Apple Comput., Inc. v. Franklin Comput. Corp., 714 F.2d 1240 (3d Cir. 1983).
[23] Comput. Assocs. Int’l v. Altai, 982 F.2d 693 (2d Cir. 1992).
[24] Id.
[25] See id. at 707-09.
[26] 837 F.3d 1299, 1314 (Fed. Cir. 2016).
[27] Altai, 982 F.2d at 698.
[28] See Dionne v. Se. Foam Converting & Packaging, Inc., 240 Va. 297 (1990).
[29] Kewanee Oil v. Bicron Corp., 416 U.S. 470 (1974).
[30] Id. at 490.
[31] Nikolay Golova & Lars Rönnbäck, Big Data Normalization For Massively Parallel Processing Databases, 54 Computer Standards & Interfaces 86, 87 (2017).
[32] Jon Russell, Alibaba Teams Up with Samsung, Louis Vuitton and Other Brands to Fight Counterfeit Goods, TechCrunch (Jan. 16, 2017)
[33] Lemley, supra note 15, at 33
[34] See Lior Rokach, Introduction to Machine Learning, Slideshare 3 (July 30, 2012),
[35] Id. at 4.
[36] Id. at 10.
[37] See Lars Marius Garshol, Introduction to Machine Learning, Slideshare 26 (May 15, 2012)
[38] Id.
[39] Id.
[40] See Lei Yu et al., Dimensionality Reduction for Data Mining – Techniques, Applications and Trends, Binghamton University Computer Science 11, (last visited Feb. 23, 2018).
[41] Id.
[42] See Rokach, supra note 34, at 10.
[43] Yu et al., supra note 40.
[44] Laurens van der Maaten et al., Dimensionality Reduction: A Comparative Review, Tilburg Centre for Creative Computing, TiCC TR 2009-005, Oct. 26, 2009, at 1 (“In order to handle such real-world data adequately, its dimensionality needs to be reduced. Dimensionality reduction is the transformation of high-dimensional data into a meaningful representation of reduced dimensionality. Ideally, the reduced representation should have a dimensionality that corresponds to the intrinsic dimensionality of the data. The intrinsic dimensionality of data is the minimum number of parameters needed to account for the observed properties of the data”).
[45] Andrew Ng, Nuts and Bolts of Applying Deep Learning (Andrew Ng), YouTube (Sept. 27, 2016),
[46] Andrew Ng, Model Selection and Train/Validation/Test Sets, Machine Learning, (last visited Feb. 23, 2018).
[47] Id.
[48] See Rokach, supra note 34, at 10.
[49] Alex Rampell & Vijay Pande, a16z Podcast: Data Network Effects, Andreesen Horowitz (Mar. 8, 2016),
[50] James Manyika et. al., Big Data: The Next Frontier for Innovation, Competition, and Productivity, McKinsey Global Inst., May 2011, at 11, available at
[51] Id.
[52] Leonid Bershidsky, Why Are Google Employees So Disloyal?, Bloomberg (July 13, 2013, 11:41 AM),
[53] Id.
[54] Rob Valletta, On the Move: California Employment Law and High-Tech Development, Federal Reserve Bank of S.F. (Aug. 16, 2002),
[55] Id.
[56] See Quentin Hardy, IBM, G.E. and Others Create Big Data Alliance, N.Y. Times (Feb. 15, 2015),
[57] See, e.g., Finicity and Wells Fargo Ink Data Exchange Deal, Wells Fargo (Apr. 4, 2017),
[58] Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014).
[59] Karen E.C. Levy, Relational Big Data, 66 Stan. L. Rev. Online 73, 73 n.3 (2013), (explaining that the big data phenomenon is due to the need of practices to analyze data resources).
[60] Christine L. Borgman, The Conundrum of Sharing Research Data, 63 J. Am. Soc’y for Info. Sci. & Tech. 1059, 1059-60 (2012) (discussing the lack of data sharing across various industries).
[61] See Michael Mattioli, Disclosing Big Data, 99 Minn. L. Rev. 535 (2014).
[62] See id. at 545-46 (discussing the technical challenges in merging data from different sources, and issue of subjective judgments that may be infused in the data sets).
[63] See id. at 552 (discussing how institutions with industrial secrets may rely on secrecy to protect the big data they have accumulated).
[64] See id. at 570 (“[T]he fact that these practices are not self-disclosing (i.e., they cannot be easily reverse-engineered) lends them well to trade secret status, or to mere nondisclosure”).
[65] Id.
[66] Id. at 552.
[67] Patrick Clark, The World’s Top Economists Want to Work for Amazon and Facebook, Bloomberg (June 13, 2016, 10:47 AM), (“If you want to be aware of what interesting questions are out there, you almost have to go and work for one of these companies”).
[68] Bill Franks, Taming the Big Data Tidal Wave 20 (2012) (discussing that the biggest challenge in big data may not be developing tools for data analysis, but rather the processes involved with preparing the data for the analysis).
[69] See Borgman, supra note 60, at 1070 (“Indeed, the greatest advantages of data sharing may be in the combination of data from multiple sources, compared or “mashed up’ in innovative ways.” (citing Declan Butler, Mashups Mix Data Into Global Service, 439 Nature 6 (2006))).
[70] Jack Clark, Apple’s Deep Learning Curve, Bʟᴏᴏᴍʙᴇʀɢ Bᴜsɪɴᴇssᴡᴇᴇᴋ, (Oct 29, 2015)
[71] Kewanee Oil v. Bicron Corp., 416 U.S. 470, 490 (1974).
[72] See infra Section III-B.
[73] Brenda Simon & Ted Sichelman, Data-Generating Patents, 111 Nw. U.L. Rev. 377 (2017).
[74] Id. at 379.
[75] Id. at 414.
[76] Id. at 415 (“[B]roader rights have substantial downsides, including hindering potential downstream invention and consumer deadweight losses . . .”).
[77] Id. at 417.
[78] Rampell & Pande, supra note 49.
[79] Lina Kahn, Amazon’s Antitrust Paradox, 126 Yale L.J. 710, 785 (2017) (“Amazon’s user reviews, for example, serve as a form of network effect: the more users that have purchased and reviewed items on the platform, the more useful information other users can glean from the site”).
[80] Simon & Sichelman, supra note 73, at 410.
[81] See infra Section III-A.
[82] Id.
[83] See infra Section III-B.
[84] Jack Clark, Apple’s Deep Learning Curve, Bʟᴏᴏᴍʙᴇʀɢ Bᴜsɪɴᴇssᴡᴇᴇᴋ (Oct 29, 2015),
[85] Peer, supra note 17 (“The idea that the data will be used by unspecified people, in unspecified ways, at unspecified times . . . is thought to have broad benefits”).
[86] See Harshavardhan Achrekar et al., Predicting Flu Trends using Twitter data, IEEE Conference on Comput. Commc’ns. Workshops 713 (2011),
[87] Jordan Crook, Uber Taps Foursquare’s Places Data So You Never Have to Type an Address Again, TechCrunch, (May 25, 2016)
[88] See Rampell & Pande, supra note 49.
[89] See Mattioli, supra note 61, at 554 (“A final limitation on patentability possibly relevant to big data is patent law’s requirement of definiteness”).
[90] See Nautilus, Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014).
[91] See Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014).
[92] Robert R. Sachs, Two Years After Alice: A Survey of the Impact of a “Minor Case” (Part 1), Bilski Blog (June 16, 2016),
[93] Id.
[94] Stephanie E. Toyos, Alice in Wonderland: Are Patent Trolls Mortally Wounded by Section 101 Uncertainty, 17 Loy. J. Pub. Int. L. 97,100 (2015).
[95] Id.
[96] Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2349 (2014).
[97] Id.
[98] Id.
[99] Id. at 2350 (emphasis added) (citation omitted).
[100] Id. at 2357 (emphasis added) (alteration in original) (citation omitted).
[101] Id. at 2350.
[102] Id. at 2351.
[103] Enfish, LLC v. Microsoft Corp., 822 F.3d 1327, 1330 (Fed. Cir. 2016).
[104] Bascom Glob. Internet Servs. v. AT&T Mobility LLC, 827 F.3d 1341, 1349 (Fed. Cir. 2016).
[105] McRO, Inc. v. Bandai Namco Games Am. Inc., 837 F.3d 1299, 1308 (Fed. Cir. 2016).
[106] Id.
[107] Bascom, 827 F.3d at 1349.
[108] Enfish, 822 F.3d at 1330.
[109] McRO, Inc., 837 F.3d at 1314.
[110] Id.
[111] Bascom, 827 F.3d at 1349.
[112] Id.
[113] Id.
[114] See Toyos, supra note 94, at 121; DDR Holdings, LLC v., 773 F.3d 1245, 1257 (Fed. Cir. 2014).
[115] See supra Section II-A.

What Young Innovative Companies Want: Formulating Bottom-Up Patent Policy for the Internet of Things

What Young Innovative Companies Want: Formulating Bottom-Up  Patent Policy for the Internet of Things
By Roya Ghafele* Download a PDF version of this article here  

I. The New Paradigms of the Internet of Things

The next wave of internet usage will disrupt a host of different industries, while at the same time opening up so far unknown opportunities to those ready to seize them. Devices and components with an internet address will be joined to each other allowing for large-scale communication embedded in gigantic sensing systems.[1] In this sense, the Internet of Things (IoT) can be understood as a means to connect objects, machines and humans in large-scale communication networks.[2] The IoT merges physical and virtual worlds by interconnecting people and objects through communication networks, sending status updates, and reporting on the surrounding environment. Applications will become more sophisticated, allowing for the emergence of services and product offerings that are beyond our imagination: IoT based toys will accompany children from early age until adulthood, IoT driven medical devices will save the lives of those suffering from a sudden stroke, and clothing with IoT technology built in will allow everything from our shirts to our shoes to customize according to daily fashion trends. Smart homes, smart cities, and even smart countries will become the norm; reducing energy wastage to a minimum. The commercial opportunities associated with the IoT will be substantial. Markets will expand into areas we have not even conceived of, thereby creating new jobs and fostering further competition between the various regions of the world. Against this background, the European Union has recognized the need to identify a governance framework that will enable it to take advantage of the promising opportunities associated with the IoT, while mitigating risks and adverse effects to the best extent possible. An important aspect of a European IoT strategy consists of adequately addressing the interplay between competition and intellectual property law. Consequently, the European Commission itself considers it necessary to formulate policy guidelines on fair, reasonable, and non-discriminatory (FRAND) licensing. In order to accomplish this, the European Commission (E.C.) launched a series of stakeholder consultations, workshops and published two in-depth reports addressing the potentially anticompetitive effects that standard essential patents could have for the Internet of Things.[3] With the goal of offering further clarity on the licensing conditions for patents that read on standards, the E.C. issued guidelines on FRAND licensing[4] on the 29th of November 2017.[5] While these guidelines are non-binding, the E.C. will nonetheless take advantage of soft law mechanisms so to offer a transparent framework for FRAND licensing. This appears justified given the major patent wars[6] that the licensing of standard essential patents triggered in the telecommunications sector. For a quantitative analysis of the imminent rise in patent litigation in the area of speech recognition, an area closely related to IoT, see for example the below analysis by iRunway; showing a sharp increase in patent litigation since 2011.[7] Figure 1: Patent Litigation Trend in Speech Recognition Domain (Source: iRunway analysis based on patent data from USPTO and litigation data from RPX)
(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.)


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.
[1] See, e.g., Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property and Growth, at 14-15 (2011) (U.K.),
[2] See The Internet of Things, Eur. Comm’n (last visited Sept. 4, 2017)
[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),; 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); Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, Public Consultation on Patents and Standards – A Modern Framework forStandardisation Involving Intellectual Property Rights (2015),; European Competitiveness and Sustainable Industrial Policy Consortium, Patents and Standards: A Modern Framework for IPR-Based Standardization (2014),
[4] Setting Out the EU Approach to Standard Essential Patents, European Comm’n,
[5] Directorate-General for Internal Mkt., Indus., Entrepreneurship and SMEs, Communication from the Commission on Standard Essential Patents for a European Digitalised Economy, Ares(2017)1906931 (2017),
[6] See, e.g., Lea Shaver, Illuminating Innovation: From Patent Racing to Patent War, 69 Wash. &n Lee Rev. 1891, 1933 (2012); Thomas H. Chia, Fighting the Smartphone Patent War with RAND-Encumbered Patents, 27 Berkeley Tech. L. J. 209, 210, 239-238 (2012); Jeff Hecht, Winning the laser-patent war, 12 Laser Focus World 49, 49 (1994); Sonia Karakashian, A Software Patent War: The Effects of Patent Trolls on Startup Companies, Innovation, and Entrepreneurship, 11 Hastings Bus. L.J. 119, 122 (2015); Tim Bradshaw, Smartphone patent wars set to continue, Financial Times, May 28, 2013, available at
[7] Aditi Das, Ashish Gupta, & Bhargav Ram, Speech Recognition Technology & Patent Landscape, iRunway, (2015), at 26, available at
[8] Setting Out the EU Approach to Standard Essential Patents, supra note4
[9] LexInnova, The Internet of Things: Patent Landscape Analysis, (Nov. 2014), available at
[10] William H. Dutton, The Internet of Things, (June 20, 2013), (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),
[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),
[13] See Raph Crouan, Why are SMEs the single most important element in our Alliance for IoT today?, Eur. Comm’n (Nov. 20, 2015),; ‘Internet of Things’ has huge potential for SMEs, Knowledge Transfer Ireland,‘Internet-of-Things’-has-huge-potential-for-SMEs.html; The Business Drivers and Challenges of IOT for SMEs, IOTUK,; The business drivers and challenges of IoT for SMEs.
[14] S.J. Liebowitz & Stephen E. Margolis, Network Externalities (Effects),
[15] See Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8.2 J. Persp. 93 (1994).
[16] See Joseph Farrell & Paul Klemperer, Coordination and Lock In: Competition with Switching Costs and Network Effects, in 3 Handbook of Indus. Org. 1967 (Mark Armstrong & Robert H. Porter eds., 2007).
[17] Pierson Paul, Increasing Returns, Path Dependence, and the Study of Politics, 94(2) Am. Pol. Sci. Rev. 251, 251-67 (2000); see also Kenneth J. Arrow, Increasing Returns: Historiographic Issues and Path Dependence, 7(2) Eur. J. of the Econ. Thought 171, 171-80 (2000).
[18] See Vernon W. Ruttan, Induced Innovation, Evolutionary Theory and Path Dependence: Source of Technical Change, 107(444) The Econ. J. 1520, 1520-29 (1997); Robert W. Rycroft & Don E. Kash, Path Dependence in the Innovation of Complex Technologies, 14(1) Tech. Analysis & Strategic Mgmt. 21, 21-35 (2002); Arthur W. Brian, Increasing Returns and Path Dependence in the Economy, 46 (1994).
[19] See Venkatesh Shankar & Barry L. Bayus, Network Effects and Competition: An Empirical Analysis of the Home Video Game Industry, 24(4) Strategic Mgmt. J. 375, 375-84 (2003).
[20] William B. Arthur, Increasing Returns and the Two Worlds of Business, 74(4) Harv. Bus. Rev. 100, 100-09 (1996) (emphasis added).
[21] Joseph S. Miller, Standard Setting, Patents, and Access Lock-In: Rand Licensing and the Theory of the Firm, 40 Ind. L. Rev. 351, 378 (2007).
[22] See Dan Hunter, Cyberspace as Place and the Tragedy of the Digital Anticommons, 91 Calif. L. Rev. 439, 439-519 (2003); Sven Vanneste et al., From “Tragedy” to “Disaster”: Welfare Effects of Commons and Anticommons Dilemmas, 26 Int’l Rev. of L. and Econ. 104, 104-22 (2006); Clarisa Long, Patents and Cumulative Innovation, 2 Pol’y 229, 229-46 (2000).
[23] See, e.g., U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007) (addressing ‘hold up’ in the context of standard setting).
[24] Philippe Chappatte, FRAND Commitments – The Case for Antitrust Intervention, 5 Eur. Competition J. 319, 326 (2009).
[25] Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, Standard Setting Patents and Hold-Up, 74 Antitrust L. J. 603, 608 (2007).
[26] See, e.g., U.S. Dep’t of Justice & U.S. Fed. Trade Comm’n, supra note21 (addressing hold up in the context of standard setting); Mark A. Lemley & Carl Shapiro, Patent Hold-up and Royalty Stacking, 85 Texas L. Rev. 1991 (2007); Carl Shapiro, Injunctions, Hold-Up, and Patent Royalties, 12 Am. L. & Econ. Rev. 280 (2010). For a critique of Lemley & Shapiro, see Einer Elhauge, Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?, 4 J. Competition L. & Econ 535 (2008); John M. Golden, “Patent Trolls” and Patent Remedies, 85 Texas L. Rev 2111 (2007); Vicenzo Denicolò, Damien Geradin, Anne Layne-Farrar, & A. Jorge Padilla, Revisiting Injunctive Relief: Interpreting Bay In High-Tech Industries With Non-Practicing Patent Holders, 4 J. Competition L. & Econ 571 (2008); Peter Camesasca, Gregor Langus, Damien Neven, & Pat Treacy, Injunctions for Standard-Essential Patents: Justice Is Not Blind, 9 J. Competition L. & Econ 285 (2013); James Ratliff & Daniel L. Rubinfeld, The Use and Threat of Injunctions in the RAND Context, 9 J. Competition L. & Econ 1 (2013).
[27] Gregor Langus, Vilen Lipatov & Damien Neven, Standard-Essential Patents: Who Is Really Holding Up (and When)?, 9 J. Competition L. & Econ., 253 (2013); Damien Geradin, Reverse Hold-Ups: The (Often Ignored) Risks Faced by Innovators in Standardized Area The Pros and Cons of Standard Setting, (Nov. 12, 2010) (paper prepared for the Swedish Competition Authority on the Pros and Cons of Standard-Setting).
[28] Michael J. Meurer, Controlling Opportunistic and Anti-Competitive Intellectual Property Litigation, 44 B.C. L. Rev. 509 (2003).
[29] Dirk Czarnitzki & Julie Delanote, Young Innovative Companies: The New High-Growth Firms?, 1 (Ctr. for Eur. Econ. Research, Discussion Paper No. 12-030) (2012).
[30] Robert H. Pitkethly, Intellectual Property Awareness, 59 Int’l J. Tech. Mgmt. 163 (2012).
[31] Robert Pitkethly, UK Intellectual Property Awareness Survey 2006, Chronicles of Intellectual Prop.,; Preliminary Report, Intellectual Property Awareness Survey 2015 (Feb. 11, 2016),
[32] See IPeuropeAware, Promoting the Benefits of greater knowledge and effective management of European SMEs & Intermediaries,; European IPR Helpdesk, (last visited Dec. 1, 2017).
[33] See World Intellectual Property Organization, (last visited Dec. 1, 2017).
[34] Intellectual Property Office, From Ideas to Growth: Helping SMEs get value from their intellectual property (Apr. 3, 2012),; Competitiveness and Innovation Framework Programme, IP Awareness and Enforcement Modular Based Actions for SMEs,
[35] Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property and Growth (May 18, 2011),
[36] Patents for software? European law and practice, Eur. Pat. Off., (“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,, (last visited Nov. 9, 2017).
[42] Fair Standards Alliance, Our Vision, Fair Standards Alliance (last visited Nov. 9, 2017).
[43] Robert Pitkethly, Intellectual Property Awareness, 59 Int’l J. of Tech. Mgmt. 163 (2010); Juhani Talvela, How to Improve the Awareness and Capabilities of Finnish Technology Oriented SMEs in Patent Related Matters, ResearchGate, June 2016, available at; Rashid Nikzad, Small and medium-sized enterprises, intellectual property, and public policy, 42 Sci. & Pub. Pol’y 176, 178-179, 183 (2014); Robert Pitkethly, UK Intellectual Property Awareness Survey 2010, Intell. Prop. Office (2010), available at
[44] Setting Out the EU Approach to Standard Essential Patents, supra note4
[45] Chia, supra note5

An Empirical Study of University Patent Activity

An Empirical Study of University Patent Activity
By Christopher J. Ryan, Jr. & Brian L. Frye*

Download a PDF version of this article here


Since in the last quarter of the 20th Century, the United States patent system has been in a state of flux, influencing not only patent law but the incentives underlying invention and patent ownership. A series of legislative acts and judicial decisions, beginning in 1980, have affected the ownership, scope, and duration of patents. In 1980, the Bayh-Dole Act enabled academic institutions to patent inventions created from federally-sponsored research.[1] In 1994, Congress extended the maximum duration of a United States patent from 17 to 20 years for certain patents, increasing the monopolistic value of patent protection.[2] And in 2011, the America Invents Act shifted the patent system from a first-to-invent standard to a first-to-file system.[3] These changes have impacted all inventors but especially those at academic institutions, where research is a multi-billion dollar industry; perhaps relatedly, these changes have coincided with historic increases in patent activity among academic institutions.

This patent activity is not necessarily unexpected, inefficient, or objectionable. After all, academic institutions are charitable organizations and intended to promote the public good of innovation, among other things. Many academic institutions, especially research universities, rely on significant federal investment to support research that promotes the dissemination of knowledge, disclosure of new knowledge, and importantly, innovation. In theory, the patent system could do even more to encourage academic institutions to invest far greater resources in innovation.

However, university patent activity has important economic and normative implications. The patent system uses private economic incentives to promote innovation. Accordingly, it creates an incentive for universities to overinvest in patentable innovation and limit access to innovation, in order to internalize private economic value. This is especially troubling because universities may use publicly-funded research to generate patentable innovations for private gain. Thus, concerns about transparency and efficiency arise when considering the extent from which universities may ultimately derive private monetary benefit from public investment, especially given that universities lack the capacity to bring an invention to market.[4] That is, as a non-practicing entity, in order to internalize the economic value of their research, universities must acquire patent protection over their inventions. However, because they do not have the capacity to bring their inventions to market, universities can and do use public funds to produce research yielding patents that are worthless or, worse yet, transfer their patents rights to patent assertion entities rather than practicing entities, producing externalities and inefficiency in the patent system.[5]

While the purposes of the patent system are manifold, these sorts of behaviors undercut the argument that patents contribute to innovation. Thus, there is a founded concern that academic institutions have responded to patent incentives in ways that may actually limit access to innovation. Yet, this concern is not the only cause for unease about inefficient responses to patent incentives.[6] For example, most of the patent infringement actions heard in a handful of district courts that have been described as engaging in forum selling—being a friendly forum for cases filed by patent assertion entities that choose the forum based on its pro-plaintiff bias.[7] Many observers are concerned that the concentration of patent assertion activity in certain district courts has increased the cost of innovation.[8]

Similarly, there is legitimate concern that universities contribute to cost and inefficiency by: (1) using public funds to support research that results in often useless patents; or (2) providing the instrumentality for non-practicing entities to increase the cost of innovation. That is, universities may participate in driving up the cost of innovation by aggregating patent protection for inventions that are likely to have little market value or that they cannot bring to market and must transfer, even to other non-practicing entities. This article is the first in a series of papers to investigate the relationship between universities and the patent system. In particular, this article addresses whether universities can be said to aggregate patent protection for their inventions systematically or monopolistically, which may indicate their role in increasing the cost of innovation. The discussion and results, below, suggests that academic institutions have responded to patent policy changes not in a manner consistent with firm behavior, by accruing property rights when incentivized by patent policy changes to do so, but also by strategically holding out in order to reap greater monopolistic benefit under anticipated patent regime changes, which may have exacerbated the problem of increasing the cost of innovation.

I. The Patent System

The purposes of the patent system are several, but the primary purpose is to promote technological innovation, or rather, to &#34promote the Progress of . . . useful Arts, by securing for limited Times to . . . Inventors the exclusive Right to their respective . . . Discoveries.&#34[9] While some scholars have questioned the efficiency of the patent system, and other scholars have suggested that it may only provide efficient incentives in some industries, conventional wisdom assumes that it is generally efficient, providing a net public benefit by encouraging investment in innovation.[10] In any case, while the patent system has always provided essentially identical incentives to inventors in all industries, the demographics of patent applicants and owners have changed over time. Originally, many patent applicants and owners were individual inventors, but for quite some time, the overwhelming majority of patent applicants and owners have been both for-profit and non-profit corporations. An increasing number of those corporate patent applicants and owners are academic institutions.[11]

A. Academic Patents

Academics have always pursued patents on their inventions with varying degrees of success. But academic institutions did not meaningfully enter the patent business until the early 20th century, and even then, they did so only tentatively.[12] In 1925, the University of Wisconsin at Madison created the first university patent office, the Wisconsin Alumni Research Foundation, an independent charitable organization created in order to commercialize inventions created by University of Wisconsin professors. Similarly, in 1937, MIT formed an agreement with Research Corporation, an independent charitable organization, to manage its patents.[13] Many other schools followed MIT’s lead, and Research Corporation soon managed the patent portfolios of most academic institutions.[14]

Before the Second World War, academic institutions engaged in very limited patent activity, collectively receiving less than 100 patents. But during the war, many academic institutions adopted formal patent policies, typically stating that faculty members must assign any patent rights to the institution.[15] Gradually, some academic institutions began creating their own patent or “technology transfer” offices. But by 1980, only 25 academic institutions had created a technology transfer office, and the Patent Office issued only about 300 patents to academic institutions each year.[16]

Since then, patent law has increasingly encouraged patent activity at academic institutions. Until 1968, each federal agency that provided research funding to academic institutions had its own patent policy. Some provided that inventions created in connection with federally funded research belonged to the federal government, others placed them in the public domain, and a few negotiated institutional patent agreements with academic institutions, allowing them to own patents in those inventions. In 1968, the Department of Health, Education, and Welfare’s introduced an Institutional Patent Agreement, allowing for non-profit institutions to acquire assignment of patentable inventions resulting from federal research support for which the institution sought a patent. However, this policy was not uniformly applied. As such, in 1980, under pressure to respond to the economic malaise of the 1970s, Congress passed the Bayh-Dole Act, which enabled academic institutions to patent inventions created in connection with federally-funded research.[17] Specifically, the Act provided that, with certain exceptions and limitations, “a small business firm or nonprofit organization&rdquo could patent such inventions, if the organization timely notified the government of its intention to patent the invention and gave the government the right to use the invention.[18] The Act placed certain additional requirements on nonprofit organizations, providing that they could only assign their patents to an organization whose primary function is to manage inventions. Additionally, the nonprofit organizations must share any royalties with the inventor and use the earned royalties only for research or education. The limitation on assignment was intended to encourage academic institutions to assign their patents to charitable organizations, like Research Corporation, but in practice, it led many of them to compete over federal funds only to produce patentable inventions with little value or to assign their patents to patent aggregators or &ldquopatent assertion entities.&rdquo[19]

At about the same time, the scope and duration of patent protection began to expand. First, the Supreme Court explicitly expanded the scope of patentable subject matter to include certain genetically modified organisms and computer software.[20] Then, in 1982, Congress created the United States Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over patent cases and has adopted consistently pro-patent positions.[21] In 1984, Congress expanded the patentability of pharmaceuticals.[22] In 1994, Congress ratified the Uruguay Round of negotiations which created the World Trade Organization and extended the maximum duration of a United States patent from 17 years from the date of issue to 20 years from the filing date, marginally increasing the value of a patent.[23] And in 2011, Congress passed the Leahy-Smith American Invents Act, which amended the Patent Act by, inter alia, moving from a first-to-invent to a first-to-file patent system.[24]

All of these changes in patent protection caused an increase in overall patent activity, across all types of inventors.


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.


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.

* * *





* Christopher J. Ryan, Jr., American Bar Foundation & AccessLex Institute Doctoral Fellow, American Bar Foundation. Ph.D. Candidate, Vanderbilt University; J.D., University of Kentucky; M.Ed., University of Notre Dame; A.B. Dartmouth College. Brian L. Frye, Spears-Gilbert Associate Professor of Law, University of Kentucky School of Law. J.D., New York University School of Law; M.F.A., San Francisco Art Institute; B.A, University of California, Berkeley. This article was presented at the Searle Center Roundtable on Patents and Technology Standards in Chicago, IL on May 4, 2017. The authors would like to thank the organizers of the conference and the attendees whose comments were essential to the article’s refinement, including Alan Marco, as well as our colleagues at the American Bar Foundation, Vanderbilt University, and the University of Kentucky whose comments helped us improve the article in its formative stages, especially Steph Didwania, Ben Skinner, Walker Swain, Richard Blissett, and Luis Rodriguez.

[1] Patent and Trademark Law Amendments (Bayh-Dole) Act, Pub. L. No. 96-517, 94 Stat. 3015, 3019 (1980).

[2] See Uruguay Round Agreements Act, Pub. L. No. 103–465, 108 Stat. 4809, 4984 (1994) (codified at 35 U.S.C. § 154(a)(2) (1994)).

[3] See Leahy–Smith America Invents Act, Pub. L. No. 112–29, 125 Stat. 284, 285 (2011).

[4] See generally Stuart W. Leslie, The Cold War and American Science: The Military-Industrial Academic Complex at MIT and Stanford (1993); Christopher P. Loss, Between Citizens and the State: The Politics of American Higher Education in the 20th Century 224-25 (2012).

[5] See generally David Mowery, et Al., Ivory Tower and Industrial Innovation: University-industry Technology Transfer before and after the Bayh-Dole Act (2015) (noting the trend of universities to transfer patent rights to patent assertion entities in recent years); Donald S. Siegel, David Waldman & Albert Link, Assessing the Impact of Organizational Practices on the Relative Productivity of University Technology Transfer Offices: An Exploratory Study, 32 Research Pol’y 27 (2003) (analyzing productivity in university technology transfer offices and finding that many are only successful at litigating infringement, not bringing the technology to market); Matkin, Technology Transfer and the University (1990) (exploring university patent transfer after the Bayh-Dole Act).

[6] For instance, the Supreme Court recently limited the scope of patent venue in its unanimous decision in TC Heartland v. Kraft Foods, which was motivated by flagrant “forum selling” in the district courts. TC Heartland vs. Kraft Foods Group Brands, 137 S. Ct. 1514 (2017). For the Federal Circuit’s decision, which was reversed by the Supreme Court, see TC Heartland vs. Kraft Foods Group Brands, 821 F.3d 1338 (Fed. Cir. 2016). Forum selling is an issue many scholars have identified as increasing the costs to innovation. See, e.g., Brian L. Frye & Christopher J. Ryan Jr., Fixing Forum Selling, 25 U. Miami Bus. L. Rev. 1 (2017); Gregory Reilly & D. Klerman, Forum Selling, 89 S. Cal L. Rev. 241 (2016); Chester S. Chuang, Offensive Venue: The Curious Use of Declaratory Judgment to Forum Shop in Patent Litigation, 80 Geo. Wash. L. Rev. 1065 (2011); Elizabeth P. Offen-Brown, Forum Shopping and Venue Transfer in Patent Cases: Marshall’s Response to TS Tech and Genentech, 25 Berkeley Tech. L.J. 61 (2010); Yan Leychkis, Of Fire Ants and Claim Construction: An Empirical Study of the Meteoric Rise of the Eastern District of Texas as a Preeminent Forum for Patent Litigation, 9 Yale J.L. & Tech. 194 (2007).

[7] See, e.g., Mark Lemley, Where to File Your Patent Case 4-27 (Stanford Public Law, Working Paper No. 1597919, 2010),; 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, (May 7, 2014). In this article, the term “patent” is used to refer exclusively to utility patents. While the United States Patent and Trademark Office also issues design patents and plant patents, and the United States Code provides for protection of vessel hull designs and mask works, both of which resemble design patents, all of these forms of intellectual property are outside the scope of this article.

[10] See, e.g., James Bessen & Michael J. Meurer, Patent Failure (2008) (questioning the efficiency of the patent system); William W. Fisher, The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States, in Eigentum im internationalen Vergleich 255-91 (1999) (decrying the antitrust implications of intellectual property protection at the exclusion of innovation); Dan L. Burk & Mark A. Lemley, Is Patent Law Technology-Specific?, 17 Berkeley Tech. L.J. 1155 (2002) (observing that the patent system seems to provide efficient incentives in some industries, but not others); but see, e.g., Robert P. Merges, Justifying Intellectual Property (2011) (concluding that the patent system is broadly justified).

[11] See generally Jacob Rooksby, The Branding of the American Mind (2016).

[12] See generally Leslie, supra note 4; Loss, supra note 4.

[13] Research Corporation was formed in 1912 by Professor Frederick Cottrell of the University of California to manage his own inventions, as well as those others submitted by faculty members of other educational institutions. See Frederick Cottrell, The Research Corporation, an Experiment in Public Administration of Patent Rights, 4 JIndust. & Engineering Chemistry 846 (1912).

[14] See Rooksby, supra note 11, at 130-35.

[15] By 1952, 73 universities had adopted a formal patent policy. By 1962, 147 of 359 universities that conducted scientific or technological research had adopted a formal patent policy, but 596 universities reported that they conducted “little or no scientific or technological research” and had no formal patent policy. American Association of University Professors, American University Patent Policies: A Brief History, files/ShortHistory.pdf (last visited Oct. 23, 2017).

[16] This increase in patent activity at universities between 1968 and 1980 is almost certainly a response to the Institutional Patent Agreement. See Rooksby, supra note 11, at 130-35; American Association of University Professors, supra note 15.

[17] Patent and Trademark Law Amendments (Bayh-Dole) Act, Pub. L. 96-517, 94 Stat. 3015, 3019 (1980).

[18] 35 U.S.C. § 202(c)(7) (2011).

[19] See Mark A. Lemley, Are Universities Patent Trolls?, 18 Fordham Intell. Prop. Media & Ent. L.J. 611 (2008). But see Jonathan Barnett, Has the Academy Led Patent Law Astray? Berkeley Tech. L.J. (forthcoming 2017),

[20] See Diamond v. Chakrabarty, 447 U.S. 303 (1980) (holding that patentable subject matter included genetically modified organisms); Diamond v. Diehr, 450 U.S. 175 (1981) (holding that patentable subject matter included certain kinds of computer software); Patent and Trademark Law Amendments Act, Pub. L. No. 96-517, 94 Stat. 3015 (1980) (amending 35 U.S.C. § 301 and allowing universities to take title in the patentable results of funded research).

[21] See Federal Courts Improvement Act, Pub. L. No. 97-164, 96 Stat. 25 (1982) (creating an appellate-level court, the U.S. Court of Appeals for the Federal Circuit, with the jurisdiction to hear patent cases).

[22] See Drug Price Competition and Patent Term Restoration Act, Pub. L. No. 98-417, 98 Stat. 1585 (1984) (enabling generic pharmaceutical companies to develop bioequivalents to patented innovator drugs).

[23] See Uruguay Round Agreements Act, Pub. L. No. 103–465, 108 Stat. 4809, 4984 (1994) (codified at 35 U.S.C. § 154(a)(2)).

[24] See Leahy–Smith America Invents Act, Pub. L. No. 112–29, 125 Stat. 284, 285 (2011).

[25] See United States Patent and Trademark Office Patent Technology Monitoring Team, U.S. Patent Statistics Chart, Calendar Years 1963 – 2015 (2016),

[26] Id.

[27] Id.

[29] Id.

[30] See Rooksby, supra note 11, at 130-35.

[31] Association of University Technology Managers (AUTM) STATT Database,

[32] See Rooksby, supra note 11, at 139-50. See also Joseph Friedman & Jonathan Silberman, University Technology Transfer: Do Incentives, Management, and Location Matter?, 28 J. Tech. Transfer 17 (2003); Mowery, et. Al., supra note 5, at 24-40.

[33] See AUTM STATT Database, supra note 31; see also Rooksby, supra note 11, at 139.

[34] See Francis M. Bator, The Anatomy of Market Failure, 72 Q. J. Econ. 351, 377 (1958).

[35] See, e.g., Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in Readings in Industrial Economics, 219-36 (1972); Francis M. Bator, The Anatomy of Market Failure, 72 Q. J. Econ. 351 (1958); Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. Political Econ. 416 (1956).

[36] See Richard Posner, Economic Analysis of Law § 3.3, at 48-50 (8th ed. 2011).

[37] Because the benefits of patent protection disincentivize the inventor form further innovating the patented invention, patent law can be said to discourage innovation. This is because—from the time the invention is granted a patent—the inventor’s costs are sunk, meaning that the inventor must incur new development costs and secure a new patent in order to innovate under the patent law regime. See id. at 38-39.

[38] See generally Colleen V. Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 Hastings L. J. 297 (2010).

[39] Id. See also Thomas L. Ewing, Indirect Exploitation of Intellectual Property Rights by Corporations and Investors, 4 Hastings Sci. & Tech. L. J. 1 (2011); but see David L. Schwartz & Jay P. Kesan, Analyzing the Role of Non-Practicing Entities in the Patent System, 99 Cornell L. Rev. 425 (2014) (arguing that the debate over non-practicing entities should be reframed to focus on the merits of the lawsuits they generate, including patent system changes focusing on reducing transaction costs in patent litigation, instead of focusing solely on whether the patent holder is a non-practicing entity); Holly Forsberg, Diminishing the Attractiveness of Trolling: The Impacts of Recent Judicial Activity on Non-Practicing Entities, 12 Pitt. J. Tech. L. & Pol’y 1 (2011) (centering on the difficulties faced by legislators in attempting to solve the patent troll problem and turns to the recent judicial activity related to patent law allowing for individually-focused, closely tailored analysis is examined with an evaluation of four recent court decisions and resulting changes to the patent system).

[40] See Daniel A. Crane, Intellectual Liability, 88 Tex. L. Rev. 253 (2009). See also James Boyle, Open Source Innovation, Patent Injunctions and the Public Interest, 11 Duke L. & Tech. Rev. 30 (2012) (noting that open source innovation is unusually vulnerable to patent injunctions); John R. Allison, Mark A. Lemley & Joshua Walker, Extreme Value or Trolls on Top? The Characteristics of the Most-Litigated Patents, 158 U. Penn. L. Rev. 1 (2009); John R. Allison, Mark A. Lemley & Joshua Walker, Patent Quality Settlement Among Repeat Patent Litigants, 99 Georgetown L. J. 677 (2011); Colleen V. Chien & Mark A. Lemley, Patent Holdup, the ITC, and the Public Interest, 98 Cornell L. Rev. 1 (2012).

[41] See Chien & Lemley, supra note 40 (noting the unintended consequence of the Supreme Court’s ruling in eBay v. MercExchange, 547 U.S. 388 (2006), namely, the driving patent forces entities to a different forum, the International Trade Commission (ITC), to secure injunctive relief not available in the federal courts); Thomas F. Cotter, Patent Holdup, Patent Remedies, and Antitrust Responses, 98 J. Corp. L. 1151 (2009).

[42] See Ronald Coase, The Problem of Social Cost, 3 J. L. & Econ. 1 (1960).

[43] See Brownwyn H. Hall, Exploring the Patent Explosion, 30 J. Tech. Transfer 35 (2005); U.S. Patent and Technology Office, U.S. College and University Utility Patent Grants – Calendar Years 1969 – 2012, ido/oeip/taf/univ/univ_toc.htm (last visited Oct. 23, 2017) (examining the sources of patent growth in the United States since 1985, and confirming that growth has taken place in all technologies); Rosa Grimaldi, Martin Kenney, Donald S. Siegel & Mike Wright, 30 Years after Bayh-Dole Act: Reassessing Academic Entrepreneurship, 40 Res. Pol’y 1045 (2011) (discussing and appraising the effects of the legislative reform relating to academic entrepreneurship); Elizabeth Popp Berman, Why Did Universities Start Patenting? Institution-Building and the Road to the Bayh-Dole Act, 38 Soc. Studies of Sci. 835 (2008); Leslie, supra note 4; Loss, supra note 4, at 224-25. But see Elizabeth Popp Berman, , 38 Soc. Studies of Sci. 835 (2008) (noting that while observers have traditionally attributed university patenting to the to the Bayh-Dole Act of 1980, university patenting was increasing throughout the 1970s, and explaining the rise of university patenting as a process of institution-building, beginning in the 1960s).

[44] David C. Mowery, Richard R. Nelson, Bhaven N. Sampat & Arvids A. Ziedonis, The Growth of Patenting and Licensing by US Universities: An Assessment of the Effects of the Bayh-Dole Act of 1980, 30 Pol’y 99 (2001) (examining the effect of the Bayh-Dole Act on patenting and licensing at three universities—Columbia, Stanford, and California-Berkeley—and suggesting that the Bayh-Dole Act was only one of several important factors behind the rise of university patenting and licensing activity); see also Harold W. Bremer, The First Two Decades of the Bayh-Dole Act, Presentation to the National Association of State Universities and Land Grant Colleges (Nov. 11, 2001) (attributing the proliferation of technology transfer to the Bayh-Dole Act).

[45] See, e.g., Jennifer Carter-Johnson, Unveiling the Distinction between the University and Its Academic Researchers: Lessons for Patent Infringement and University Technology Transfer, 12 Vanderbilt J. Entertainment & Tech. L. 473 (2010) (exploring the idea that a faculty member acting in the role of an academic researcher in the scientific disciplines should be viewed in the context of patent law as an autonomous entity within the university rather than as an agent of the university, and arguing that acknowledging a distinction between the university and its academic researchers would revive the application of the experimental use exception as a defense to patent infringement for the scientists who drive the innovation economy and encourage academic researchers to participate in transferring new inventions to the private sector); Martin Kenney & Donald Patton, Reconsidering the Bayh-Dole Act and the Current University Invention Ownership Model, 38 Res. Pol’y 1407 (2009) (citing the problems with the Bayh-Dole Act’s assignment of intellectual property interests, and suggesting two alternative invention commercialization models: (1) vesting ownership with the inventor, who could choose the commercialization path for the invention, and provide the university an ownership stake in any returns to the invention; and (2) making all inventions immediately publicly available through a public domain strategy or, through a requirement that all inventions be licensed non-exclusively); Liza Vertinsky, Universities as Guardians of Their Inventions, 4 Utah L. Rev. 1949 (2012) (submitting that universities need more “discretion, responsibility, and accountability over the post-discovery development paths for their inventions,” in order to allow the public benefit of the invention to reach society, and arguing that, because universities guard their inventions, the law should be designed to encourage their responsible involvement in shaping the post-discovery future of their inventions).

[46] 35 U.S.C. §154 (1994); 125 Stat. §§ 284-341 (2011).

[47] See Kira R. Fabrizio, Opening the Dam or Building Channels: University Patenting and the Use of Public Science in Industrial Innovation (Jan. 30 2006) (working paper) (on file with the Goizueta School of Business at Emory University) (investigating the relationship between the change in university patenting and changes in firm citation of public science, as well as changes in the pace of knowledge exploitation by firms, measured using changes in the distribution of backward citation lags in industrial patents); Hall, supra note 43 (confirming that growth since 1984 has taken place in all technologies, but not in all industries, being concentrated in the electrical, electronics, computing, and scientific instruments industries); Michael D. Frakes & Melissa F. Wasserman, Does Agency Funding Affect Decisionmaking?: An Empirical Assessment of the PTO’s Granting Patterns, 66 Vanderbilt L. Rev. 67 (2013) (finding that the PTO is preferentially granting patents on technologies with high renewal rates and patents filed by large entities, as the PTO stands to earn the most revenue by granting additional patents of these types); Tom Coupe&#769, Science Is Golden: Academic R&D and University Patents, 28 J. Tech. Trans. 31 (2003) (finds that more money spent on academic research leads to more university patents, with elasticities that are similar to those found for commercial firms).

[48] See Clovia Hamilton, University Technology Transfer and Economic Development: Proposed Cooperative Economic Development Agreements Under the Bayh-Dole Act, 36 J. Marshall L. Rev. 397 (2003) (proposing that Congress amend the Bayh-Dole Act to provide guidance on how universities can enter into Cooperative Economic Development Agreements patterned after the Stevenson-Wydler Act’s Cooperative Research and Development Agreements); Lita Nelsen, The Rise of Intellectual Property Protection in the American University, 279 Science 1460, 1460-1461 (1998) (describing the inputs and outcomes of university assertion of intellectual property rights); Nicola Baldini, Negative Effects of University Patenting: Myths and Grounded Evidence, 75 Scientometrics 289 (2008) (discussing how the university patenting threatens scientific progress due to increasing disclosure restrictions, changes in the nature of the research (declining patents’ and publications’ quality, skewing research agendas toward commercial priorities, and crowding-out between patents and publications), and diversion of energies from teaching activity and reducing its quality); Lemley, supra note 7 (illustrating that universities are non-practicing entities, sharing some characteristics with trolls but somewhat distinct from trolls, and making the normative argument that the focus should be on the bad acts of all non-practicing entities and the laws that make these acts possible); Jacob H. Rooksby, University Initiation of Patent Infringement Litigation, 10 John Marshall Rev. Intell. Prop. L. 623 (2011) (revealing similarities between the litigation behavior of universities and for-profit actors, as well as complex and varied relationships between universities, their licensees, and research foundations closely affiliated with universities).

[49] See Rooksby, supra note 11, at 150-67. See also Mowery et al., supra note 5, at 24-40.

[50] See Rooksby, supra note 11, at 150-67.

[51] See generally Mowery, et al., supra note 5; Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Unpacking Patent Assertion Entities (PAEs), 99 Minn. L. Rev. 649 (2014); Sara Jeruss, Robin Feldman & Joshua Walker, The America Invents Act 500: Effects of Patent Monetization Entities on US Litigation, 11 Duke L. & Tech. Rev. 357 (2013).

[52] See, e.g., Baldini, supra note 48; Berman, supra note 43.

[53] See Hall, supra note 43.

[54] See Lemley, supra note 19.

[55] See Posner, supranote36, atee also Peter Lee, Patents and the University, 63 Duke L. J. 1 (2013).

[56] See Ronald Coase, The Nature of the Firm, 4 Economica 386 (1937).

[57] See Cyert & James G. March, A Behavioral Theory of the Firm (Herbert A. Simon ed., Prentice-Hall Inc. 1963).

[58] See Lattuca & Joan S. Stark, Shaping the College Curriculum: Academic Plans in Context 24 (2d ed. 2009) (modeling visually the interaction between universities and external influences such as governments).

[59] See Berman, supra note 43.

[60] See Bremer, supra note 44 .

[61] (2002), doi= (noting that such a duty transforms the academia-industry relationship from the traditional view of disparate entities into a Congressionally-mandated partnership, intended to advance technology and benefit the public).

[62] See Lemley, supra note 19.

[63] Rooksby, supra note 11, at 16.

[64] See Valerie L. McDevitt et al., More than Money: The Exponential Impact of Academic Technology Transfer, 16 Technology & Innovation 75 (2014).

[65] See U.S. Patent and Technology Office, supra note 43.

[66] Id.

[67] This study employs data from the Carnegie Classification of Institutions of Higher Education, U.S. College and University Utility Patent Grants – Calendar Years 1973, 1987, 1994, 2000, 2005, 2010, with years 1994, 2000, 2005, and 2010, (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), how-can-i-run-a-piecewise-regression-in-stata/. Effectively, calculating the slope and intercept shifts by hand using spline regression rescales the variable “year” by centering it on the location of the spline knot. For example, the first spline knot (k1) is centered on 1981, with all years before it counting up to zero and all years after—but before the next spline knot—counting up from zero. Including the centered “year” variable in the regression equation also requires adding an indicator variable of the intercept before and after the spline knot. Because the model has an implied constant—the intercepts before and after the spline knot should add up to 1—the overall test of the model will be appropriately calculated by hand. To finish estimating the slope and intercept differences by hand, this regression approach requires the use of the “hascons” option, because of the implied intercept constant. Alternatively, the “mkspline” package in Stata 13 can be used to conduct this estimation. Both approaches were used and yielded substantially similar results. The estimates from using the “mkspline” command are reported below for ease of interpretation.

[71] James H. Steiger, An Introduction to Splines, StatPower (2013),

[72] 35 U.S.C. § 301 (2006) (permitting universities to take title in inventions and discoveries produced through federally-funded research); 35 U.S.C. § 154(a)(2) (2006) (extending the duration of patent protection from seventeen to twenty years); 35 U.S.C. § 100(i) (2006) (changing the right to the grant of patent from first-to-invent to first-inventor-to-file).

[73] Cragg & Patrick J. Schloss, Organization and Administration in Higher Education 3-25 (2017).

Patent Working Requirements and Complex Products

Patent Working Requirements and Complex Products
By Jorge L. Contreras*, Rohini Lakshané**, Paxton M. Lewis***

Download a PDF version of this article here



In 2012, Natco Pharma Ltd. (“Natco”) petitioned the Indian Patent Office (“IPO”) for a compulsory license to manufacture Bayer’s patented cancer drug, Nexavar.[1] Natco cited numerous grounds in support of its petition, including Nexavar’s high cost and limited availability in India.[2] But along with these relatively common complaints in the global access to medicines debate,[3] Natco raised a less typical theory; Bayer failed to “work” the patent sufficiently in India.[4] In doing so, Natco invoked a seldom-used provision of Indian patent law that allows any person to seek a compulsory license under an Indian patent that is not actively being commercialized by its owner within three years from the issuance of the patent.[5]

Patent working requirements exist in different forms throughout the world. Broadly speaking, to “work” a patent is to practice, in some manner, the patented invention within the country that issued the patent. While patents are seen as a means to create incentives for inventors to share their ideas, working requirements are intended to mitigate the exclusivity of patent monopolies by requiring the patent holder to disseminate its invention into the local market.[6] The patent holder thereby imparts knowledge and skills to the local community, enhances economic growth, supports local manufacturing, and promotes the introduction of innovative new products into the local market.[7]

While patent working requirements have existed in various jurisdictions for more than a century, working requirements have seldom been the subject of vigorous enforcement.[8] The U.S.-Brazil dispute and the Natco case represent a revival of interest in patent working requirements. In particular, the Natco case has reintroduced questions of whether working requirements are, or should be, allowed under the TRIPS Agreement.

In prior work, Contreras and Lakshané have analyzed the domestic Indian patent landscape pertaining to mobile device technology.[9] The authors now extend that work to examine the working of those patents. This Article presents a detailed case study of the Indian patent working statutes and their procedures, particularly the requirement that all patent holders file an annual form (Form 27) to demonstrate that their patents are being worked in the country. We collected and reviewed all publicly available Forms 27 in the mobile device sector to assess the completeness and accuracy of the information disclosed. We then analyzed the results to assess the robustness of India’s patent working requirement and its utility for complex information and communication-based products and technologies.

The remainder of this Article proceeds in four principal parts. Part I.A provides a brief history of patent working requirements. Part I.B describes the development of India’s current working requirements and its novel Form 27 filing requirement. Part II describes our empirical study of India’s Form 27 filings in the mobile device sector. Part III discusses our findings and analysis. We conclude with recommendations for further study and policy.

I. Patent Working Requirements

A. History of Patent Working Requirements

The origins of patent working requirements have been traced to the 1300s, when early patent privileges were granted in jurisdictions such as feudal England and the Republic of Venice, with an expectation that foreign innovators would teach the invented art to local industry.[10] The underlying incentive for providing monopoly rights was thus tied to local industrialization.[11] This incentive to share technology was directed not only to local citizens but, even more so, to foreign inventors.[12] Countries issued patent privileges to encourage foreigners to migrate and develop or protect local industry by teaching their art to the local population.[13] Local industrialization was thus considered a central means to economic development and technological advancement.[14]

Despite these early developments, by the late 19th and early 20th centuries, developed countries’ conceptual understanding of a patentee’s obligation and its relevance to national development began to shift away from local manufacturing.[15] As a result, in many developed countries disclosure through importation became sufficient to meet the “informational goal” of patents, particularly patents that represented improvements to existing technologies.[16]

The 1883 Paris Convention for the Protection of Industrial Property prohibited the automatic forfeiture of a patent for a failure to work it locally.[17] While both developed and developing countries disputed the proper remedy for the failure to work a patent, there remained a consensus that failure to work a patent was inconsistent with the patent privilege.[18]

A half-century later, the 1925 Hague Conference, which amended the Paris Convention, recognized the failure to work a patent as an abuse that member states could “take necessary legislative measures to prevent.”[19] As a remedy for non-working, drafters viewed compulsory licensing of non-worked patents as more palatable than outright forfeiture.[20] Nevertheless, forfeiture of patent rights was still permitted under the Convention, though an action for forfeiture could not be brought until two years following the issuance of the first compulsory license covering the non-worked patent.[21] In the 1967 Stockholm amendments to the Convention, further limitations on compulsory licensing for non-working patents were introduced, notably prohibiting member states from permitting the grant of a compulsory license for failure to work until three years after the issuance of the allegedly non-worked patent.[22]

Within the flexibilities allowed by the Convention, developing countries continued to adopt strict working requirements and to resist international requirements that favored developed countries.[23] For example, in the late 1970s and early 1980s, developing countries proposed revisions to the Paris Convention that would have provided that mere importation did not satisfy local working requirements and to permit the expansion of sanctions for non-working beyond compulsory licensing.[24]

The desire of developed countries for stronger international rules relating to intellectual property led to the formation of the World Trade Organization (“WTO”) in 1994, under which the Trade Related Aspects of Intellectual Property Rights (“TRIPS”) Agreement was negotiated.[25] While the TRIPS Agreement does not explicitly address patent working requirements, Article 2.1 incorporates Article 5A of the Paris Convention (i.e. the article related to compulsory licensing and the limitations on granting compulsory licenses discussed above), and Article 2.2 reinforces the existing obligations of members of the Paris Union.[26] Additionally, Article 27.1 of the TRIPS Agreement, which establishes requirements for patentable subject matter, prohibits “discrimination as to the place of invention, the field of technology and whether products are imported or locally produced” raising a question as to whether countries with local working requirements must recognize importation as an acceptable manner of satisfying those requirements.[27] However, Article 30 of the TRIPS Agreement permits a member state to allow exceptions to the exclusive rights of a patent holder, and Article 31 allows a state to issue a “compulsory” license under one or more patents without the authorization of the patent holder “in the case of national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.”[28] Given these mixed signals, commentators are divided on whether, and how, the TRIPS Agreement may affect local working requirements.[29]

To date, the only WTO dispute challenging the validity of national working requirements has been between the United States and Brazil.[30] In 2000, the Clinton administration, responding to concerns raised by the American pharmaceutical industry, initiated a WTO dispute proceeding to challenge Brazil’s local working requirement.[31] The United States argued that Article 68 of Brazil’s 1996 Industrial Property Law violated Articles 27(1) and 28(1)[32] of the TRIPS Agreement for discriminating against U.S. owners of Brazilian patents whose products were imported, but not locally produced, in Brazil.[33]

Despite the pending WTO litigation, the Brazilian Ministry of Health adopted an aggressive stance toward reducing the price of antiretroviral medications and threatened to issue compulsory licenses for the local manufacture of two such drugs, both patented by U.S. companies, if they were not discounted by 50%.[34] In response to political and public pressures, the United States and Brazil settled the dispute before any definitive opinion was issued by the WTO.[35]

B. The Evolution of India’s Patent Working Requirement

1. Background

As a British colony, India’s pre-independence patent laws were modeled largely on then-prevailing English law.[36] India gained its independence from Great Britain in 1947 and almost immediately began to consider the adoption of patent laws reflecting emerging national goals of industrialization and economic development.[37] Thus, in early 1948, a committee known as the Tek Chand Committee was appointed to review and reconcile India’s patent laws with its national interests.[38] The committee’s efforts resulted in the Chand Report, which recommended the use of compulsory patent licenses to stimulate India’s industrial economy.[39]

A second major report commissioned by the Indian government and prepared primarily by Shri Justice N. Rajagopala Ayyangar, was issued in 1959.[40] The Ayyangar Report suggested that India should deviate from the “unsuitable patent policies of industrialized nations” because patent regimes operate differently in developing versus developed nations.[41] Recognizing that a significant weakness in developing nations “is that foreign patent owners do not work the invention locally,” the Ayyangar Report recommended compulsory licensing as “the remedy to redress the handicap of foreigners not working the invention locally.”[42]

2. The Patents Act, 1970

The India Patents Act, 1970, was enacted in 1972.[43] Among other things, it sought to address the economic repercussions resulting from foreign dominance of the patent landscape in India, as recommended by the Chand Report and the Ayyangar Report.[44] Accordingly, Section 83 of the 1970 Act provides certain policy-driven justifications for India’s working requirements, explaining:

“that patents are granted to encourage inventions and to secure that the inventions are worked in India on a commercial scale and to the fullest extent that is reasonably practicable without undue delay; [and]
that they are not granted merely to enable patentees to enjoy a monopoly for the importation of the patented article[.]”[45]

These provisions make clear that working a patent in India is both an important policy goal and consists of something more than importation of the patented article into India. Some additional knowledge transfer must occur so that manufacturing of other steps necessary for commercialization are carried out in India.

Following the Ayyangar Report’s recommendations, Section 84(1) of the 1970 Act provided for compulsory licensing of patents as follows:

“At any time after the expiration of three years from the date of the sealing of a patent, any person interested may make an application to the Controller[46] alleging that the reasonable requirements of the public with respect to the patented invention have not been satisfied or that the patented invention is not available to the public at a reasonable price and praying for the grant of a compulsory licence to work the patented invention.”[47]

These requirements, particularly the availability of the patented article to the public at a “reasonable price,” seek to address issues raised in the debate over access to medicines, and particularly the high pricing maintained by many Western pharmaceutical firms in developing countries.[48]

However, working of patents more generally is incorporated into the compulsory licensing regime through Section 90, which clarifies when the “reasonable requirements of the public” will be deemed not to have been satisfied.[49] In particular, Section 90(c) specifies that, for purposes of compulsory licensing under Section 84, “the reasonable requirements of the public shall be deemed not to have been satisfied Ö if the patented invention is not being worked in the territory of India on a commercial scale to an adequate extent or is not being so worked to the fullest extent that is reasonably practicable[.]”[50] Thus, local working of patents is tied to the public interest and has become express grounds for requesting a compulsory license in India.

In addition to giving applicants the right to seek a compulsory license under non-worked patents, the 1970 Act also gave the Controller the power to revoke a patent on the grounds that the reasonable requirements of the public were not being satisfied or the patented invention was not available to the public at a reasonable price.[51] Under Section 89(1), any interested person could apply to the Controller for such an order of revocation no earlier than two years following the grant of the first compulsory license under the relevant patent.[52]

3. India’s Current Working Requirement

India became a member of the World Trade Organization on January 1, 1995, also making India a party to the TRIPS Agreement.[53] In order to reconcile the 1970 Act with the TRIPS Agreement, India amended its Patents Act in 1999, 2002, and 2005.[54] Most relevant to this Article, the 2002 amendments modified India’s compulsory licensing and working requirements.[55]

India’s amended Patents Act retains strong working requirements, which permit the Controller to revoke unworked patents.[56] Section 83 of the Act, as amended in 2002, provides several additional justifications for India’s patent working requirement not contemplated in earlier versions of the Act. For example, the 2002 amendments recognize that patents are intended to support the “transfer and dissemination of technology . . . in a manner conducive [sic] to social and economic welfare.”[57] Several of the new justifications emphasize that patents should support, and not impair, the public interest, particularly “in sectors of vital importance for socio-economic and technological development of India.”[58]

Against this backdrop, the amended Act explicitly makes compulsory licenses available for non-worked patents. Section 89 explains that one of the “general purposes” of compulsory licenses is to ensure that “patented inventions are worked on a commercial scale in the territory of India without undue delay and to the fullest extent that is reasonably practicable.”[59] The amended Act expanded Section 84(1), which authorizes third parties to seek compulsory licenses, to include as an express basis for seeking a compulsory license “that the patented invention is not worked in the territory of India.”[60]

Thus, new section 84(1)(c) establishes working of a patent as an independent ground for seeking a compulsory license, in addition to the grounds under sections 84(a) and (b) that the patented technology fails to reasonably meet public needs. This approach contrasts with the original 1970 formulation, discussed above, in which non-working of a patent formed a basis for seeking a compulsory license, but only as an element of the “reasonable requirements of the public,” rather than an independent ground in itself.[61]

Section 84(6) specifies factors that the Controller must take into account when considering an application for a compulsory license, including:

(i) the nature of the invention, the time which has elapsed since the sealing of the patent and the measures already taken by the patentee or any licensee to make full use of the invention;
(ii) the ability of the applicant to work the invention to the public advantage;
(iii) the capacity of the applicant to undertake the risk in providing capital and working the invention, if the application were granted;
(iv) as to whether the applicant has made efforts to obtain a licence from the patentee on reasonable terms and conditions and such efforts have not been successful within a reasonable period as the Controller may deem fit [i.e., not ordinarily exceeding a period of six months] . . . . [62]

Section 84(6) appears to represent a concession to patent holders, making clear that compulsory licenses will only be granted to applicants that are able to exploit the licensed patent rights in a manner that is likely to remedy the failure of the patent holder to work the patent.

While a formal definition of working is not provided under the statute, the language of section 83 suggests that the patented invention must be manufactured locally to the extent possible and that importation would be acceptable only if local manufacturing is unreasonable.[63] Additionally, the statutory language suggests that if importation is necessary, only the patent holder or its chosen licensees may import the patented invention.[64] The statute also fails to establish any circumstances that may be excused from India’s patent working requirement. This omission may have been intentional, perhaps suggesting that any technology that is worth patenting in India should also be capable of being worked in India.

In short, India’s patent working requirement is intended to be taken seriously. The penalties for failing to work a patent include the issuance of a compulsory license beginning three years after patent issuance, and if that does not fulfill public requirements for the patented article, possible revocation of the patent. Moreover, there is evidence that Indian courts may be reluctant to grant injunctive relief to patent holders that do not work their patents.[65]

C. The Indian Working Requirement and Natco Pharma Limited v. Bayer Corporation

India’s patent working requirement was featured prominently in Natco’s recent compulsory license request with respect to Bayer’s Indian patent covering sorefanib tosylate, a kidney and liver cancer drug marketed by Bayer as NexavarTM. Bayer obtained an Indian patent covering Nexavar in 2008.[66] Despite Bayer’s estimate that more than 8,800 patients in India were eligible to take the drug, its imports were sufficient to supply only 200 patients.[67] Moreover, Bayer priced a monthly dose of the drug at more than 280,000 Rupees (approximately US$5,608), a price unaffordable to the vast majority of Indians.[68] In response, Natco, an Indian generic drug manufacturer, attempted to negotiate a license with Bayer to manufacture and sell Nexavar in India.[69] However, when negotiations were unsuccessful, Natco applied to the Drug Controller General of India for regulatory approval to manufacture a generic version of Nexavar in India.[70] The approval was granted.[71]

Natco then petitioned the Controller of Patents under section 84 of the Patents Act for a compulsory license to manufacture a generic version of Nexavar.[72] Natco offered several justifications in support of its application for a compulsory license, including Nexavar’s high cost and limited availability in India.[73] In addition, Natco argued that Bayer had failed to work its patent in India within three years of its issuance, as required under section 84(1)(c) of the Patents Act. Specifically, Natco argued that “[t]he patented product is being imported into India and hence the product is not worked in the territory of India to the fullest extent that is reasonably practicable.”[74] Additionally, Natco argued that Bayer faced “no hurdle[s] preventing [it] from working the Patent in India” because Bayer already had “manufacturing facilities in India for several products.”[75]

Bayer responded that it actively imported Nexavar into India, which demonstrated sufficient working, and argued that India’s working requirement did not require manufacture of the patented product in India.[76] In evaluating Natco’s petition, the Controller considered the legislature’s intent, the Paris Convention, the TRIPS Agreement, and India’s Patents Act.[77] In view of these authorities, the Controller interpreted the term “worked” to mean that the patented invention must be manufactured or licensed within India, reasoning that “[u]nless such an opportunity for technological capacity building domestically is provided to the Indian public, they will be at a loss as they will not be empowered to utilise [sic] the patented invention, after the patent right expires.”[78] Under this interpretation, the Controller concluded that Bayer had not worked its patent in India since importation is not sufficient to constitute “working” a patent.[79] Accordingly, in 2012 the Controller issued a compulsory license to Natco under Bayer’s patent covering Nexavar.[80]

Bayer unsuccessfully appealed the Controller’s decision to the Indian Intellectual Property Appellate Board (IPAB).[81] The IPAB affirmed the Controller’s decision, but disagreed with the Controller’s interpretation of the term “worked.”[82] Instead of ruling that working categorically excludes importation of the patented product into India, the IPAB concluded that determining whether a patented invention is worked must be considered on a case-by-case basis.[83] Thus, the term “worked” does not necessarily exclude importation, but it also does not strictly require manufacturing in India.[84]

In affirming the decision of the IPAB, the Bombay High Court opined that “[m]anufacture in all cases may not be necessary to establish working in India[.]”[85] However, the court implied that working a patent without local manufacture could be a high hurdle to clear, reasoning that the patent holder must then “establish those reasons which makes it impossible/prohibitive for it to manufacture the patented drug in India.”[86] It is only when the patent holder satisfies the authorities that “the patented invention could not be manufactured in India” that it can be considered worked by import.[87]

Apart from the working requirement, the Bombay court focused on whether Bayer had reasonably satisfied the requirements of the public, recognizing that those requirements might differ depending on the type of product covered by the patent.[88] Thus, when assessing whether demand for the patented article was met to an “adequate extent,” the considerations pertaining, for example, to a luxury article would vary significantly from those pertaining to a lifesaving medicine. In the case of medicines, the court reasoned, meeting public demand to an adequate extent should be deemed to mean it is available to 100% of the market: “Medicine has to be made available to every patient and this cannot be deprived/sacrificed at the altar of rights of [the] patent holder.”[89]

Following Natco’s successful application for, and defense of, its compulsory license, other generic drug manufacturers sought compulsory licenses to manufacture patented pharmaceutical products in India. For example, in 2013, BDR Pharmaceuticals, Ltd., an Indian manufacturer, filed an application for a compulsory license to manufacture Bristol Myers Squibb’s anti-cancer drug dasatinib (marketed as SprycelTM),[90] and the Indian Ministry of Health recommended that the Department of Industrial Policy and Promotion (DIPP) grant local manufacturers compulsory licenses for trastuzumab, a breast cancer drug marketed by Roche (HerclonTM) and Genentech (HerceptinTM) and ixabepilone (Roche’s IxempraTM).[91] To date, each of these petitions has failed for various reasons other than that pertaining to dasatinib, which remains under consideration by DIPP.[92]

D. Form 27 and India’s Reporting Requirement

The Indian patent working requirement under Section 84 of the Patents Act, as well as the availability of compulsory licenses for non-worked patents, is not unique to India, and other developing countries have adopted similar legal requirements.[93] India has, however, enacted what appears to be a unique reporting structure associated with its patent working requirement.[94] India adopted a form submission requirement as a means to regulate the patent working requirement under the India Patents Act in 1970.[95] Specifically, section 146(2) of the Patents Act provides that:

every patentee and every licensee (whether exclusive or otherwise) shall furnish in such manner and form and at such intervals (not being less than six months) as may be prescribed statements as to the extent to which the patented invention has been worked on a commercial scale in India.[96]

In support of this statutory requirement, the patent rules adopted by the Indian Ministry of Commerce and Industry provide that the required statements of working must be submitted in a prescribed format (Form 27).[97] The rules also provide that such statements must be furnished to the Controller of Patents in respect of every calendar year within three months following the end of such year.[98]

Form 27, a template of which is appended to the 2003 version of the Indian patent rules, requires the patent holder to disclose “the extent to which the patented invention has been worked on a commercial scale in India.”[99] To that end, Form 27 requires that the patent holder complete the following information:

The patented invention:

(i) { } Worked { } Not worked [Tick (✓) mark the relevant box]
a. if not worked: reasons for not working and steps being taken for the working of the invention.
b. if worked: quantum and value (in Rupees), of the patented product:
manufactured in India
imported from other countries (give country wise details)
(ii) the licenses and sub-licenses granted during the year;
(iii) state whether the public requirement[100] has been met partly/adequately/to the fullest extent at reasonable price.[101]

Under Section 122, failing to submit a Form 27 or providing false information on the form may lead to a significant fine, imprisonment, or both.[102]

Though India’s working requirement first appeared in the Patents Act in 1970, it appears to have been ignored until around 2007. In 2007, the Controller first mentioned the local working of patented inventions in his annual report.[103] The reports provided by the Controller between 2007 and 2009 indicate that, on average, less than 15 percent of Indian patents were being worked commercially.[104] In 2009, 2013 and 2015, the Controller issued public notices calling on patent owners to comply with their obligations to file statements of working on Form 27.[105]

While the penalties for failing to furnish information via Form 27 are steep, potentially resulting in fines or imprisonment,[106] local critics claim that many patent holders fail to make the required filings and that the Indian government has never taken meaningful action to penalize this non-compliance.[107]

On February 12 2013, the Indian Patent Office announced plans to make Form 27 submissions for the year 2012 available to the public via the IPO website.[108] As discussed in Part II.A below, that effort has been met with limited success.

E. Theory and Criticism of Form 27

There is little legislative or administrative history explaining the genesis of India’s unique Form 27 requirement. On one hand, a requirement that the details of patent working be disclosed by patent holders supports the goal of making unworked patents available for compulsory licensing in India, both to promote economic development and public access to patented products. A public registry of Forms 27 could also shift enforcement of India’s working requirement from the IPO and Controller to private sector entities with the greatest incentive to monitor the working of patents in their respective industries. This shift could relieve India’s resource-strapped administrative agencies of a potentially significant policing function, one that it does not appear they were actively enforcing in any event.

However, it is not clear that these goals are well served by the current Form 27 framework, which has been criticized by a number of local commentators.[109] For example, the IPAB ruled in Natco that the term worked must be decided on a case-by-case basis. How, then, should patent holders answer the first question posed in Form 27 and its sub-questions? How is a patent holder to know whether importation or licensing in a certain case will qualify as working a patent in India? If the Form is intended to increase transparency and certainty regarding the working of patents in India, it is hindered in so doing by the lack of a formal definition of working. This lack of clarity affects both patent holders, who are less able to order their affairs so as to comply with statutory working requirements, as well as potential compulsory licensees, who lack a clear assurance of when a compulsory license petition will be successful.

Commentators have raised a variety of additional critiques of the Form 27 framework. The U.S.-based Intellectual Property Owners Association, in a formal 2014 submission to the U.S. Trade Representative, has referred to the Form 27 process as “highly burdensome” and warns that the information disclosed in publicly-accessible forms could “result in even greater pressure on Indian authorities to compulsory license [patented] products.”[110] Moreover, the association argues that Form 27 does not adequately recognize that some patents may be practiced by multiple products, or that multiple patents may be practiced by a single product.[111] Thus, it may be unrealistic for patent holders to attribute a “specific commercial value” to specific patented features of complex technologies.[112]

Additionally, a number of Indian practitioners have raised concerns that the public disclosure of confidential plans for working patents through Form 27 may jeopardize or destroy valuable trade secrets and proprietary information.[113] This threat could cause patent holders to disclose as little specific or valuable information as possible in their Form 27 filings, a result that is suggested by the findings discussed in Part III below.

Based on studies of filed Forms 27, Professor Shamnad Basheer,[114] has concluded that India’s local working Form 27 submission requirements are not being taken seriously, particularly by international pharmaceutical companies.[115] As a result, in 2015 Professor Basheer initiated public interest litigation in the High Court of Delhi against the Indian government for failure to comply with India’s patent laws.[116] The suit seeks a judicial order compelling the Indian government “to enforce norms relating to the disclosure of ‘commercial working’ of patents by patentees and licensees” and to take action “against errant patentees and licensees for failure to comply with the mandate.”[117] In 2016 an Indian patent attorney, Narendra Reddy Thappeta, filed an application to intervene in Basheer’s public interest suit, among other things, in order to raise issues regarding the difficulty of complying with Form 27 requirement for information and communication technology providers.[118]

Despite its perceived problems, Form 27 has proven useful in Indian proceedings. Notably, the information disclosed in Bayer’s Form 27 filings played an important role in the Natco case by helping to establish the low number of patients having access to the drug.[119] Basheer refers to the working requirement as “a central pillar of the Indian patent regime” and views the disclosure requirements of Form 27 as essential tools to ensure that needed information is made public.[120]

II. Empirical Study of Indian Form 27 Disclosures in the Mobile Device Industry

In order to gain a better understanding of India’s patent working requirement, particularly patent holders’ compliance with the statutory requirement to declare information about the working of their patents through Form 27, we conducted an empirical study of all available Form 27 submissions for Indian patents in the mobile device sector. In this Part, we describe the objectives, background and methodology of this study.

A. Background: Existing Data and Studies

Every year, the Controller publishes an Annual Report containing statistics relating to patent filings in India. Since 2010, this report has contained data relating to Form 27 filings. This data indicates that a significant number of patent holders fail to file Form 27 as required. Below is a summary of this data as derived from the Controller’s Annual Reports from 2010 to 2016:

Table 1

Indian Controller of Patents Form 27 Filing Data (2010-2016)


Under the Patents Act, a Form 27 must be filed every year with respect to every issued patent in India. Accordingly, the discrepancy between the number of patents in force for a given year and the number of Forms 27 filed likely indicates non-compliance with the filing requirement. Interestingly, it appears that instances of non-compliance dropped noticeably in years immediately after the Controller issued its public reminders to file Form 27 in December 2013, February 2013 and early 2015.[122] Even so, compliance has not been complete even in these years.

As noted above, Professor Shamnad Basheer has conducted two studies of Form 27 compliance in India. The first study, released in April 2011, focused on the pharmaceutical sector.[123] The researchers selected seven pharmaceutical products directed at either cancer or hepatitis, all of which were subject either to Indian litigation or patent office oppositions and were patented in India between 2006 and 2008. They then collected Form 27 filings relating to each of these patents through a series of Right to Information (RTI) petitions to the Indian Patent Office (IPO).[124] Based on the Forms produced by the IPO in response to these requests, the researchers found significant non-compliance with Form 27 filing requirements: some firms failed to file forms in some years, while some forms that were filed were incomplete.[125]

Professor Basheer’s second study had a broader scope, covering a total of 141 patents: 52 patents held by 13 firms in the pharmaceutical sector, 52 patents held by 7 firms in the telecommunications sector, and 37 patents held by 4 institutions which are claimed to have arisen from publicly-financed research.[126] The researchers used series of RTI petitions to collect a total of 263 Forms 27 corresponding to these patents filed between 2009 and 2012.[127]

Based on a total of 141 patents, full compliance with Form 27 filing requirements would have yielded 423 Forms 27 over the three-year period studied. The total of 263 Forms identified indicates a non-compliance ratio of approximately 38%,[128] assuming that all filed forms were produced by the IPO. A review of the reported data[129] indicates that some firms, particularly in the pharmaceutical sector, were assiduous in filing Forms 27. For example, Genentech and Janssen Pharmaceuticals, with two patents each, each filed six Forms 27, suggesting full compliance. Other firms, however, fell far short of this measure. Apple, for example, with four patents, filed only one Form.

In addition to raw filing statistics, Prof. Basheer investigates the quality of the disclosures made in individual Forms 27. He finds that significant numbers of filed Forms “were grossly incomplete, incomprehensible or inaccurate.”[130] For instance, numerous forms failed to indicate how patents were being worked or the quantity, value or place of manufacture of patented products as required by the Form.[131] In addition, of forty-two Forms that disclosed non-working of a patent, twenty-eight (65%) failed to offer any reason for non-working.[132] Though the raw data underlying these conclusions does not appear to be publicly available, choice excerpts from a few Forms are offered.

While the prior studies cited above suggest that there are substantial non-compliance issues with Form 27 practice in India, additional data is required to develop a more complete understanding of this issue. The Controller’s annual report data is provided only at a gross level and lacks any detail regarding compliance. Prof. Basheer’s pioneering studies, while first alerting the public to the problems of non-compliance, cover only small, non-random samples of patents and end prior to the general online availability of Forms 27.

B. Methodology

In this study, we sought to assess annual Form 27 submissions across a comprehensive set of patents and a substantial time frame. To do so, we utilized a set of 4,052 Indian patents identified by Contreras and Lakshané as of February 2015 in a prior study of the Indian mobile device patent landscape (Landscape Study).[133] Another 367 patents pertaining to mobile device technology, which were not included in the original Landscape Study, were also identified by an independent contracted search firm. In the aggregate, we analyzed 4,419 Indian patents issued as of February 2015 in the mobile device sector, which we believe to represent the large majority of issued Indian patents in this sector as of the date selected.

We identified Form 27 filings with respect to each such patent through searches[134] of two public online databases maintained by the Indian Patent Office: Indian Patent Advanced Search System (“InPASS”) and Indian Patent Information Retrieval System (“IPAIRS”).[135] We manually eliminated duplicate results obtained from these two databases.

Our initial searches in 2015 yielded Form 27 submissions for only 1,999 out of 4,419 patents. These searches yielded no Forms 27 for some firms known to be significant patent holders in the mobile devices industry. To attempt to locate the missing forms, Lakshané, through the Centre for Internet and Society (CIS), submitted two formal requests to the IPO located in Mumbai under the Indian Right to Information (“RTI”) Act of 2005. The first RTI application was submitted on June 10, 2015, requesting Form 27 information for over 800 patents.[136] On June 17, the IPO replied with generic instructions on how to find Form 27 submissions online.[137] A second RTI application was filed on March 11, 2016.[138] The second request sought Form 27 filings pertaining to 61 of the remaining patents.[139] These 61 patents were selected to represent a sample of patents held by the full cross-section of patent holders identified in the Landscape Study. In April 2016, the IPO replied that, due to internal resource constraints, it could only provide CIS with Forms 27 for eleven (11) of the requested patents.[140]

Nevertheless, a few days after IPO’s reply, Form 27 submissions pertaining to patents in the Landscape Study started appearing on InPASS and IPAIRS. We repeated the search for Forms 27 corresponding to all 4,419 patents in our dataset in August 2016 and obtained a total of 4,935 Forms 27 corresponding to a total of 3,126 patents (an increase of 1,127 patents over the initial search).

All Forms 27 that we accessed were downloaded as PDF files or original image files and manually entered into a text-searchable spreadsheet maintained at CIS.[141] All information from the Forms 27 was transcribed into the spreadsheet, including all textual descriptions of patent working and licensing. The results were then analyzed as described in Part III.A below.

C. Limitations

The present study was limited by the technical capabilities of the IPO’s online Form 27 repository.[142] As described above, we found significant gaps in posted Forms 27 in our initial search, and it took a formal RTI application to spur the IPO to upload additional forms. Yet, we still identified 1,400 fewer Forms 27 than issued patents in the mobile devices category. The degree to which these missing forms arise from abandoned or expired patents, or additional failures of the IPO to upload filed forms, is unclear. Other than the IPO web site, there is no practical way to identify or access Forms 27 filed with the IPO. Technical issues with the InPASS and IPAIRS databases were constant challenges during this study. The databases were frequently unavailable, produced conflicting results, and were subject to numerous runtime errors and failures.

Despite these technical challenges, we believe that we have identified a large segment of filed Forms 27 covering Indian patents held by all major patent holders in the mobile device sector. We hope that this study will further encourage the IPO to improve the regularity and reliability of its Form 27 database.

III. Findings

In this Section, we describe the findings of our empirical collection analysis of Forms 27 pertaining to Indian patents in the mobile device sector.

A. Aggregated Data ñ Forms Found and Missing

As noted above, we used a dataset comprising 4,419 Indian patents in the mobile device sector issued as of February 2015. Of these, at least 107 patents were likely expired prior to the date on which a Form 27 would have been filed,[143] leaving 4,312 patents for which at least one Form 27 could have been filed.

We were able to identify and obtain a total of 4,916 valid Forms 27[144] which corresponded to 3,126 of these patents, leaving 1,186 Indian patents for which a Form 27 could have been filed, but was not found. This total represents 27.5% of the patents for which at least one Form 27 could have been filed: a significant portion of the total number of patents in the field, and within the general range of missing Forms identified by both the Controller and Basheer (2015).

Based on the year of grant of each of the 4,312 patents identified in the mobile device sector as to which a Form 27 could have been filed, we determined that a total of 24,528 Forms 27 should have been filed with respect to these patents.[145] This figure represents the sum of total Forms 27 that could have been filed for each such patent, which ranges from a low of one to a high of eight Forms 27 per patent. In our sample, no single patent was associated with more than five Forms 27. As noted above, we obtained a total of 4,935 Forms 27 filed with respect to 3,126 patents, representing only 20.1% of the total Forms 27 that should have been filed and made available with respect to the 4,312 patents studied. Figure 1 below compares the number of Forms 27 filed in each year since 2009 with the number of Forms 27 that should have been filed each year based on the number of mobile device patents in force from year to year.

Figure 1

Actual vs. Required Form 27 Filings, by year

(based on number of mobile device patents in force)

Graph of Forms Filed in 2009-2016

As shown in Figure 1, Form 27 filings have fallen well below the required number every year. In 2009, the first year in which Forms 27 were filed in any numbers, only 36 Forms were filed, representing only 2.8% of the 1,302 Forms that should have been filed based on the number of mobile device patents in force that year. By 2013, the number of Forms filed rose to 2,389, representing 70.7% of the 3,379 Forms that should have been filed. This ratio declined again in 2014 to 1,392 Forms out of a total of 3,639 (38.3%). Data for 2015 and 2016 are likely incomplete given the February 2015 cutoff for patents in our study. We also expect that many of the 1,186 “missing” Forms 27 were filed more recently and have not yet been uploaded by the IPO in a searchable format.

One possible explanation for the beginning of filings in 2009 and the significant jump in filings in 2013 may be the Controller’s public notifications of the need to file Forms 27 in 2009 and 2013.[146]

Figure 2 below illustrates the number of issued patents in the mobile device sector for which Forms 27 were found and missing, categorized by patent holder (assignee). Complete data is contained in the Appendix, Table A1.

Figure 2

Forms 27 (Identified and Missing) Per Assignee


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.


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.




*Professor, University of Utah S.J. Quinney College of Law and Senior Fellow, Centre for International Governance Innovation. JD (Harvard Law School), BSEE, BA (Rice University). The authors are grateful for constructive discussion and feedback at the 2016 Works in Progress in Intellectual Property conference at University of Washington, the 2017 International Intellectual Property Roundtable at NYU Law School, the 2017 Intellectual Property Scholars Conference (IPSC) at Cardozo Law School, the Second International Conference on Standardization, Patents and Competition Issues at Jindal Global Law School, and a faculty workshop at the University of Utah S.J. Quinney College of Law. We also thank Anubha Sinha, Shamnad Basheer, Nehaa Chaudhari, Kirti Gupta, Kshitij Kumar Singh, Marketa Trimble and Sai Vinod for their helpful input regarding this article, and Anna Liz Thomas and Nayana Dasgupta for valuable research assistance. The research for this article was conducted as part of the Pervasive Technologies Project at the Centre for Internet and Society, India, and has been supported, in part, by the International Development Research Centre (Canada), the Albert and Elaine Borchard Fund for Faculty Excellence at the University of Utah and Google, Inc. The views expressed in this article are solely those of the authors.

**Program Officer, Centre for Internet and Society, India. Bachelor of Instrumentation Engineering (University of Mumbai).

***Law Clerk, Supreme Court of Utah. JD (University of Utah S.J. Quinney College of Law), BS, BA (Butler University).

[1] Natco Pharma Ltd. v. Bayer Corp., (2011) I.P.O. Order No. 1, at 6 (India).

[2] See id.

[3] The Natco case is one in a long line of cases in the ongoing “access to medicines” dispute, in which developing countries seek compulsory licenses for local use of lifesaving drugs that are patented by western pharmaceutical firms. See, e.g., Srividhya Ragavan, Patent and Trade Disparities in Developing Countries (2012); Charles R. McManis and Jorge L. Contreras, Compulsory Licensing of Intellectual Property: A Viable Policy Lever for Promoting Access to Critical Technologies?, in TRIPS and Developing Countries ñ Towards a New IP World Order? (Gustavo Ghidini, Rudolph J.R. Peritz & Marco Ricolfi, eds. 2014); Jerome H. Reichman, Comment: Compulsory Licensing of Patented Pharmaceutical Inventions: Evaluating the Options, 37 J. L. Med. & Ethics 247, 250 (2009).

[4] Natco Pharma Ltd. v. Bayer Corp., supra note 1 at 6.

[5] See Patents Act, No. 39 of 1970, India Code (1970), ch. XVI, § 84(1).

[6] See Rochelle Dreyfuss & Susy Frankel, From Incentive to Commodity to Asset: How International Law Is Reconceptualizing Intellectual Property, 36 Mich. J. Int’l L. 557, 576 (2015); See also Feroz Ali, Picket Patents: Non-Working as an IP Abuse, at *5, (last visited Feb. 6, 2017); see also Bryan Mercurio & Mitali Tyagi, Treaty Interpretation in WTO Dispute Settlement: The Outstanding Question of the Legality of Local Working Requirements, 19 Minn. J. Int’l L. 275, 281 (2010).

[7] Marketa Trimble, Patent Working Requirements: Historical and Comparative Perspectives, 6 U.C. Iʀᴠɪɴᴇ L. Rᴇᴠ. 483, 500-501 (2016).

[8] Id. at 495.

[9] Jorge L. Contreras & Rohini Lakshané, Patents and Mobile Devices in India: An Empirical Survey, 50 Vand. Transnat’l L.J. 1 (2017). The data set used in the foregoing study can be found at

[10] Trimble, supra note 7, at 488. In England, royal patents were granted to foreigners who would teach their art to the local population. Id. at 488, 497. Venice provided monopoly rights and tax holidays for foreign inventors to immigrate and improve local industrialization. Ragavan, supra note 3, at 3.

[11] See Ragavan, supra note 3, at 3; see also G.B. Reddy & Harunrashid A. Kadri, Local Working of Patents ñ Law and Implementation in India, 18 J. Intell. Prop. Rights 15, 15 (2013).

[12] See Ragavan, supra note 3, at 3; see also Trimble, supra note 7, at 488.

[13] See Ragavan, supra note 3, at 3; see also Reddy & Kadri, supra note 11, at 16.

[14] See Reddy & Kadri, supra note 11, at 17; see also Ali, supra note 6, at *9.

[15] See generally Paul Champ & Amir Attaran, Patent Rights and Local Working Under the WTO TRIPS Agreement: An Analysis of the U.S.-Brazil Patent Dispute, 27 Yale J. Int’l L. 365, 371 (2002).

[16] Trimble, supra note 7, at 498 (“In the United Kingdom in the 18th century ‘the requirement of compulsory working dropped into desuetude and its place was taken for all practical purposes, in particular in the practice of the law courts, by [the full disclosure] requirement’”) (alterations in original) (internal citations omitted).

[17] Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. 5(A)(1), March 20, 1883.

[18] See Reddy & Kadri, supra note 11, at 17; see also Champ & Attaran, supra note 15, at 371; Trimble, supra note 7, at 493ñ94.

[19] Hague Revision to Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. (5)(A)(2), November 6, 1925.

[20] See Champ & Attaran, supra note 15, at 372; see also Trimble, supra note 7, at *490-94 (tracing history of remedies for failure to meet working requirements, including forfeiture).

[21] London Revision to Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. 5(A)(4), June 2, 1934; See Trimble, supra note 7, at 494.

[22] Stockholm Revision to Paris Convention for the Protection of Industrial Property, World Intellectual Property Organization, art. 5(A)(2), July 14, 1967.

[23] See Trimble, supra note 7, at 494-95; see also Janice M. Mueller, The Tiger Awakens: The Tumultuous Transformation of India’s Patent System and the Rise of Indian Pharmaceutical Innovation, 68 U. Pitt. L. Rev. 491, 517-18 (2007)..

[24] See Trimble, supra note 7, at 494.

[25] See Ragavan, supra note 3, at 65-66. See generally TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1c, 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994), reprinted in World Trade Organization, The Results of the Uruguay Round of Multilateral Trade Negotiations 365 (1995) [hereinafter “TRIPS Agreement”].

[26] Additionally, those countries that were not members of the Paris Union but are members of the WTO are therefore obligated to comply with the Paris Convention and its revisions under Article 2.2 of the TRIPS Agreement.

[27] TRIPS Agreement, supra note 25, art. 27.1.

[28] TRIPS Agreement, supra note 25, art. 30-31; see also Ragavan, supra note 3; McManis and Contreras, supra note 3.

[29] See generally Trimble, supra note 7, at 496; Shamnad Basheer, Making Patents Work: Of IP Duties and Deficient Disclosures, 7 Queen Mary J. Intell. Prop. 3, 16-17 (2017).

[30] Request for Consultations by the United States, Brazil ñ Measures Affecting Patent Protection, WTO Doc. WT/DS199/1 (June 8, 2000); see also Reddy & Kadri, supra note 11, at 17; Trimble, supra note 7, at 496-497.

[31] Champ & Attaran, supra note 15, at 380.

[32] Article 28(1) of the TRIPS Agreement defines the rights that may be conferred on patent owners.

[33] Champ & Attaran, supra note 15, at 381-82.

[34] Id. at 381. The two patented drugs that the Brazilian Ministry of Health threatened to grant compulsory licenses on were efavirenz and nelfinavir. These drugs are antiretroviral drugs used to treat AIDS. Geoff Dyer, Brazil Defiant Over Cheap AIDS Drugs, Fin. Times, Feb. 9, 2001, at 10.

[35] Barbara Crossette, U.S. Drops Case Over AIDS Drugs in Brazil, N.Y. Times (June 26, 2001),

[36] Kalyan C. Kankanala, Arun K. Narasani & Vinita Radhakrishnan, Indian Patent Law & Practice 1 (2010).

[37] See Mueller, supra note 23, at 509-511; see also Ragavan, supra note 3, at 31.

[38] Shri Justice N. Rajagopala Ayyangar, Report on the Revision of the Patents Law (September 1959) [hereinafter “Ayyangar Report”]; Ragavan, supra note 3, at 31-33.

[39] P. Narayanan, Patent Law 5 (4th ed. 2006).

[40] Ayyangar Report, supra note 38.

[41] Ragavan, supra note 3, at 35.

[42] Id. at 39-40.

[43] See generally The Patents Act, No. 39 of 1970, India Code (1970).

[44] See Ragavan, supra note 3, at 42-45 (summarizing changes effected by the 1970 law).

[45] The Patents Act, 1970 § 83 (emphasis added).

[46] The Indian Controller General of Patents, Designs & Trade Marks, who will be referred to herein as the Controller for simplicity.

[47] The Patents Act, 1970, § 84(1) (emphasis added). The three-year time period reflected in the Act is derived from Section 5(A)(4) of the Paris Convention (current numbering). See supra note 22.

[48] The Patents Act, 1970 § 84(1).

[49] Id. § 90(c).

[50] Id.

[51] Id. § 89(3). While the language of Section 89 is couched in terms of the “reasonable requirements of the public,” it is interesting to note that the caption of the section reads “Revocation of patents by the Controller for non-working,” thus focusing more explicitly on the working requirement.

[52] The Patents Act, 1970 § 89(1). The two-year time period reflected in the Act is derived from Section 5(A)(3) of the Paris Convention (current numbering). See supra note 21 and accompanying text.

[53] See India and the WTO, Wᴏʀʟᴅ Tʀᴀᴅᴇ Oʀɢ., See generally TRIPS Agreement.

[54] India amended its 1970 Act in three amendments, corresponding to the transition periods permitted by the TRIPS Agreement. India played a significant role in establishing the TRIPS multi-year transition periods. See Mueller, supra note 23, at 518. For a discussion of India’s political and economic considerations underlying its support of compulsory licensing under TRIPS, see Omar Serrano & Mira Burri, Making Use of TRIPS Flexibilities: Implementation and Diffusion of Compulsory Licensing Regimes in Brazil and India (World Trade Inst. Working Paper No. 1 2016).

[55] The Patents (Amendment) Act, No. 38 of 2002, India Code (2002).

[56] Id. § 85.

[57] Id. § 83(c).

[58] Id. § 83(d)-(f).

[59] Id. § 89.

[60] Id. § 84(1) (emphasis added).

[61] Id.

[62] Id. § 84(6).

[63] See Thomas Cottier, Shaheeza Lalani & Michelangelo Temmerman, Use It or Lose It: Assessing the Compatibility of the Paris Convention and TRIPS Agreement with Respect to Local Working Requirements, 17 J. Int’l Econ. L. 437, 441 (2014).

[64] See The Patents Act, No. 39 of 1970, India Code (1970), § 90(2) (“No license granted by the Controller shall authorise the licensee to import the patented article or an article or substance made by a patented process from abroad where such importation would, but for such authorisation, constitute an infringement of the rights of the patentee.”).

[65] See Basheer, supra note 29, at 9.

[66] Natco Pharma Ltd. v. Bayer Corp., (2011) I.P.O. Order No. 1, 5 (India).

[67] Id. at 22.

[68] Id. at 25 (noting that an average Indian government employee would have to work for 3.5 years to afford a single month’s dosage).

[69] Id. at 6.

[70] Id. at 5.

[71] Id.

[72] Id. at 6.

[73] Id.

[74] Id. at 37.

[75] Id.

[76] Id. at 38.

[77] Id. at 40-41.

[78] Id. at 43.

[79] Id. at 45 (“I am therefore convinced that ‘worked in the territory of India’ means ‘manufactured to a reasonable extent in India.’”).

[80] Id. at 60.

[81] Natco Pharma Ltd. v. Bayer Corp., (2013) I.P.A.B. Order No. 45 (India).

[82] Id.

[83] Id.

[84] Id. at 43.

[85] Bayer Corp. v. Union of India, Bombay High Ct. at 29 (Jul. 15, 2014).

[86] Id.

[87] Id.

[88] Id. at 24.

[89] Id. Bayer subsequently appealed to the Indian Supreme Court, which declined to hear the case. See Samanwaya Rautray, Nexavar License Case: SC Dismisses Bayer’s Appeal Against HC Decision, Economic Times, Dec. 13, 2014,

[90] Harsha Rohatgi, Indian Patent Office Rejects Compulsory Licensing Application: BDR Pharmaceuticals Pvt. Ltd. vs. Bristol Myers Squibb, Khurana & Khurana (last visited Oct. 20, 2017),

[91] Patralekha Chatterjee, 2013: India Battles for Right to Use Compulsory Licenses to Make Medicines Affordable, Intellectual Property Watch (last visited Oct. 20, 2017),

[92] See Pankhuri Agarwal, DIPP Drags the Dasatinib Compulsory License Drama: A Situation of ‘Extreme Urgency’?, SpicyIP blog (Sep. 24, 2016), See, e.g., IPO Order No. C.L.A. No.1 of 2015, In the matter of Lee Pharma Ltd v. AstraZeneca AB, dated January 19, 2016 (rejecting application due to lack of evidence presented under all three prongs of Section 84 analysis).

[93] For example, Article 68 of Brazil’s 1996 Industrial Property Law subjects a patentee to compulsory licensing if the patentee does not exploit “the object of the patent within the Brazilian territory for failure to manufacture the product or failure to use a patented process.” 68 C.P.I., Law No. 9,279 (Brazil, May 14, 1996). For additional examples, See Cottier et al., supra note 63, at 461-71.

[94] While form submissions to show the working of a patent are unique to India’s patent law, a submission requirement to maintain intellectual property rights is similarly used in the United States for trademarks. In the United States, registered trademark owners must submit a declaration of use to avoid cancellation of the registration. See 15 U.S.C. § 1058.

[95] The Patents Act, No. 39 of 1970, India Code (1970), § 146(2).

[96] Id.

[97] The Patent Rules, Rule 131, India (2003).

[98] The Patent Rules, Rule 131, India (2003). There is an apparent discrepancy between section 146(2) of the India Patents Act, 1970 and Rule 131 of the Patent Rules, 2003. While section 146 suggests that patentees should file Forms 27 every six months, Rule 131 of the Patent Rules, 2003 requires the statements to be furnished in respect of every calendar year.

[99] The Patents Act, No. 39 of 1970, India Code (1970), § 146(2).

[100] The public requirement refers to “the reasonable requirements of the public with respect to the patented invention.” The Patents (Amendment) Act, No. 38 of 2002, India Code (2002), § 84(1)(a). In other words, if the patentee must explain how he has or has not met his duties under section 83 and 84 of the Patents Amendment Act of 2002.

[101] Patents Rules, Form 27, 2003.

[102] The Patents (Amendment) Act, No. 38 of 2002, India Code (2002), § 122 provides:

“1) If any person refuses or fails to furnish-Ö b) to the controller any information or statement which he is required to furnish by or under section 146,

he shall be punishable with [a] fine which may extend to twenty thousand rupees.

2) If any person, being required to furnish any such information as is referred to in sub-section (1), furnishes information or statement which is false, and which he either knows or has reason to believe to be false or does not believe to be true, he shall be punishable with imprisonment which may extend to six months, or with fine, or with both.”

[103] Annual Report 2007-08, Office of the Controller General of Patents, Designs, and Trade Marks including GIR and PIS/NIIPM (IPTI), at 12; see also Reddy & Kadri, supra note 11, at 21.

[104] Annual Report 2008-09, Office of the Controller General of Patents, Designs, Trade Marks and Geographical Indications, at 21; Annual Report 2007-08, Office of the Controller General of Patents, Designs, and TradeMarks including GIR and PIS/NIIPM (IPTI), at 12; see also Reddy & Kadri, supra note 11, at 21-22.

[105] Controller Gen. of Patents, Designs and Trade Marks, Public Notice No. CG/PG/2009/179, Dec. 24, 2009; Controller Gen. of Patents, Designs and Trade Marks, Public Notice No. CG/Public Notice/2013/77, Feb. 12, 2013; Controller Gen. of Patents, Designs and Trade Marks, Public Notice No. CG/Public Notice/2015/95, 2015.

[106] The Patents Act, No. 39 of 1970, India Code (1970), § 122. (A patentee may be imprisoned for submitting false information).

[107] Reddy & Kadri, supra note 11, at 22; see also Shamnad Basheer v. Union of India, Writ Petition, at F (Del. 2015) [hereinafter Basheer Writ Petition (2015)] (“[T]he Respondents authorities have never initiated action against any of the errant patentees.”).

[108] Prashant Reddy, Patent Office Publishes All ‘Statements of Working’ ñ Finally!, Spicy IP, (June 25, 2013)

[109] See, e.g., Basheer Writ Petition (2015), supra note 107 (raising numerous deficiencies with Form 27); Shamnad Basheer & N. Sai Vinod RTI Applications and ‘Working’ of Foreign Drugs in India, Spicy IP, at 5 (Apr., 2011) (“However, Form 27 in its present format leaves much to be desired and we will be drafting a more optimal Form 27 and forwarding this to the government for consideration, so that the form can be a lot more clearer and can call for a greater range of information.”).

[110] Letter from Philip S. Johnson, President, Intellectual Prop. Owners Assn., to Hon. Michael Froman, U.S. Trade Representative (Feb. 7, 2014).

[111] Id.

[112] Id.

[113] Prathiba Singh & Ashutosh Kumar, When in Rome, do as the Romans do, IP Pro Life Sciences at 16, (Mar. 10, 2013)

[114] Among other things, Prof. Basheer is the founder of the SpicyIP blog, a leading source of intellectual property news and commentary in India. See Part III.A, infra, for a discussion of the results of his studies of Form 27 compliance.

[115] Basheer & Vinod, supra note 109, at 6-8.

[116] Basheer Writ Petition (2015), supra note 107.

[117] Id. at 1, 8.

[118] Shamnad Basheer v. Union of India, Writ Petition No. 5590 (Del. 2015), Application Seeking Permission to Intervene in the Above Public Interest Litigation (2016). Some of the issues raised by Mr. Thappeta are discussed in Part IV below.

[119] Bayer Corp. v. Union of India, Writ Petition No. 1323 of 2013, Judgment at 8ñ10 (Jul. 15, 2014).

[120] Basheer, supra note 29, at 17.

[121] Indian Patent Office reporting year (Apr. 1 – Mar. 31).

[122] See supra note 105.

[123] Basheer & Vinod, supra note 109.

[124] This study pre-dates the electronic availability of Forms 27.

[125] Basheer & Vinod, supra note 109, at 7-8.

[126] Basheer Writ Petition (2015), supra note 107, at Annexure P-11, tbl. I. It is not clear how the studied patents were selected. They do not represent the totality of patents in the designated industry sectors. Likewise, it is not clear how “publicly-funded research” is defined nor the amount of such funding behind the selected patents.

[127] It appears that this study covered three “reporting years” at the IPO: 2009-10, 2010-11 and 2011-12. Reporting years run from April 1 to March 31.

[128] This figure is calculated as 1 – 263/421. Prof. Basheer has reported this ratio as approximately 35%. Basheer, supra note 29, at 18.

[129] Basheer Writ Petition (2015), supra note 107, at Annexure P-11, tbl. I.

[130] Id. at 10.

[131] Id. at 10-16; Basheer, supra note 29, at 19.

[132] Basheer, supra note 29, at 12-13.

[133] See Contreras & Lakshané, supra note 9, at 27-28 (describing electronic search and case harvesting methodology).

[134] Searches were conducted and results were compiled by a contracted Indian service provider selected through a competitive bid process.

[135] While InPASS and IPAIRS retrieve Form 27 submissions from the same URL, we observed that sometimes a submission that was displayed on data base was not displayed on the other. Thus, IPAIRS was used when Form 27 was not found for a queried patent on InPASS. InPASS has two features: Application Status and E-Register. At times, some forms were not available at E-Register that could be found through the Application Status table, and vice versa. Thus, both features were used. A detailed, step-by-step description of the search methodology used can be found at

[136] Ajoy Kumar, “Request for Information under Section 6 of the Right to Information Act, 2005; regarding Form 27 Submissions for Patents,” The Centre for Internet and Society, (June 10, 2015),

[137] Boudhik Bhawan, “Supply of information sought under RTI ñ reg,” The Centre for Internet and Society, (June 17, 2015),

[138] Ajoy Kumar, “Request for Information under Section 6 of the Right to Information Act, 2005; regarding Form 27 Submissions for Patents,” The Centre for Internet and Society, (Mar. 11, 2016),

[139] Id.

[140] Ujjwala Haldankar, “Supply of information sought under RTI, 2005 ñ reg,” The Centre for Internet and Society, (Apr. 4, 2016),

[141] Rohini Lakshané, Dataset for “Patent Working Requirements and Complex Products: An Empirical Assessment of India’s Form 27 Practice and Compliance,” The Centre for Internet and Society (Aug. 17, 2017),

[142] Similar deficiencies with the IPO’s online filing facility have been noted by Basheer. See Basheer Writ Petition (2015), supra note 107, at 17.

[143] Prior to the 2002 Amendments to the Patents Act, 1970 (effective May 20, 2003), the term of product patents in India was 14 years from the date of issuance. Patents Act (2002 Amendments), Sec. 53. Accordingly, any patent issued in 1995 or earlier would be expired by 2009. Based on the data provided by the Controller and Basheer, it appears that few, if any, Forms 27 were filed prior to 2009. Thus, it is unlikely that any patent that expired prior to 2009 would have a corresponding Form 27. As a result, for purposes of counting Forms 27 that were, and should have been filed, we disregarded 107 patents in our dataset that were issued in 1995 or earlier (the vast majority of which were owned by Siemens).

[144] A total of 4,935 Forms 27 were identified by our search. In 2013, Motorola filed 19 Forms 27 that were backdated to 2004 and 2005. These Forms corresponded to patents issued between 2008 and 2010, and apparently reflected the patentee’s incorrect belief that Form 27 must be filed as of the date of the filing of a patent application rather than the issuance of the patent. Because the patentee also filed Forms 27 dated as of 2013 for these patents, we have disregarded these spurious filings.

[145] Based on the data provided by the Controller and Basheer, it appears that few, if any, Forms 27 were filed prior to 2009. Thus, we assumed that Forms 27, if filed, would only have begun to be filed in 2009. As discussed in note 143, supra, the first patents that could be expected to have a filed Form 27 were issued in 1996 (i.e., one Form filed in 2009, the year of the patent’s expiration). Thus, beginning with patents issued in 1996, we calculated the total number of Forms 27 that could have been filed with respect to such patents beginning in 2009 and ending in 2016 (noting that we ended our study in August 2016). Thus, for patents issued in 1996 and expiring in 2009, one Form 27 could have been filed. For patents issued in 2002 to 2008, and expiring well after 2016, a total of eight Forms 27 could have been filed, in each case beginning in 2009 and ending in 2016. Patents issued in 2015 could have at most one Form 27 filed. Though Form 27 is not required to be filed until the year after a patent has been granted, some patentees have made filings in the year of grant. We counted these filings, but did not count year-of-grant filings in determining the maximum number of filings that could be made for a particular patent.

[146] See supra text accompanying note 105.

[147] It is not surprising that no forms were available for patents issued prior to 2007, the first year that the Indian Controller of Patents drew attention to the Form 27 requirement. See supra Part I.D.

[148] For patents that had different working designations in Forms 27 filed in different years, we counted a patent to be declared as worked if at least one Form 27 so designated the patent.

[149] See supra text accompanying note 101.

[150] See Basheer Writ Petition, supra note 107, at 10.

[151] Motorola, Form 27 for 243220, IɴPASS (Mar. 31, 2014),

[152] Ericsson, Form 27 for 241488, IɴPASS (Feb. 3, 2012), (“The patentee is in the look out for appropriate working opportunities in a large scale although there may have been some use of the patented technology in conjunction with other patented technologies.”).

[153] Google, Form 27 for 243210, IɴPASS (Mar. 27, 2015), See infra Part III.D for a discussion of patents as to which the patentee has changed the working status over the years.

[154] See, e.g., Ericsson, Form 27 for 209941, IɴPASS (Mar. 30, 2015),

[155] See, e.g., Ericsson, Form 27 for 259809, IɴPASS (Mar. 19, 2015),

[156] Ericsson, Form 27 for 227819, IɴPASS (Mar. 13, 2015), (“The patentee is in the look out for appropriate working opportunities in a large scale”); Motorola, Form 27 for 236128, IɴPASS (Mar. 8, 2013), (“The Patentee is actively looking for licensees and customers to commercialise the invention in the Indian environment.”).

[157] Alcatel-Lucent, Form 27 for 258507, IɴPASS (Mar. 18, 2015),

[158] Panasonic, Form 27 for 239668, IɴPASS (Mar. 21, 2014),; Panasonic, Form 27 for 208405, IɴPASS (Mar. 21, 2014),

[159] Ericsson, Form 27 for 233994, IɴPASS (Mar. 6, 2013),

[160] Id.

[161] See Oracle, Form 27 for 230190, IɴPASS (Mar. 24, 2014), (“The methods/structures of the patent are generally related to "Asynchronous servers". This product has been sold to several businesses in India in the past few years and is believed to be used by them. Additional information will be enquired and provided to the Patent Office upon request.”).

[162] Nokia Siemens, Form 27 for 254894, IɴPASS (Mar. 28, 2014),

[163] Ericsson, Form 27 for 249058, IɴPASS (Mar. 03, 2014),; In other Forms 27, however, Ericsson

provides significant detail regarding the standards/specifications covered by its patents.

See, e.g., Ericsson, Form 27 for 213723, IɴPASS (Mar. 16, 2016), (citing ETSI TS 126 092 V4.0.0 (2001-03), ETSI TS 126 073 V4.1.0 (2001-12) and ETSI TS 126 093 V4.0.0 (2000-12), all of which are pertinent to the UMTS 3G standard).

[164] See, e.g., Qualcomm, Form 27 for 251876, IɴPASS (Mar. 28, 2015), (disclosing Indian licensee Innominds Software Pvt. Ltd.).

[165] See Ericsson, Form 27 for 213723, IɴPASS (Mar. 16, 2016), (referencing royalty payments from Micromax and Gionee).

[166] Qualcomm, Form 27 for 251876, IɴPASS (Mar. 28, 2015),

[167] Id.

[168]Nokia, Form 27 for 220072, IɴPASS (Mar. 20, 2014),

[169] Ericsson, Form 27 for 251757, IɴPASS (Mar 11, 2014),

[170] Id.

[172] See, e.g., Huawei, Form 27 for 251769, IɴPASS (Mar. 4, 2014), (“Information not readily available; efforts will be made to collect and submit further Information, if asked for.”).

[173] See, e.g., Hitachi, Form 27 for 226462, IɴPASS (Mar. 28, 2013), (“Confidential Information will be provided if asked for.”).

[174] Research in Motion, Form 27 for 261068, IɴPASS (Feb. 10, 2015),

[175] Ericsson, Form 27 for 254652, IɴPASS (Mar. 21, 2016),

[176] See, e.g., Alcatel-Lucent, Form 27 for 202208, IɴPASS (Mar. 27, 2014),

[178] Basheer Writ Petition (2015), supra note 107, at 10.

[179] A patentee may be imprisoned for submitting false information. The Patents Act, No. 39 of 1970, India Code, § 122 (1970).

[180] See Reddy & Kadri, supra note 11, at 22; Basheer Writ Petition (2015), supra note 107, at 10 (“authorities have never initiated action against any of the errant patentees.”).

[181]See supra text accompanying notes 81-84.

[182]See supra Part III.C.3.c.

[183]See supra Part III.C.3.d.

[184] See supra Part III.C.3.e.

[185] For example, as of 2015, more than 61,000 patent disclosures had been made against ETSI’s 4G LTE standard, and more than 43,000 against ETSI’s 3G UMTS standard, both of which are only one of many standards embodied in a typical mobile device. Justus Baron & Tim Pohlmann, Mapping Standards to Patents Using Databases of Declared Standard-Essential Patents and Systems of Technological Classification at 20, Table 5 (Regulation & Econ. Growth, Working Paper, 2015),

[186]See supra Part III.B.

[187] We thank Chris Cotropia for this insight.

[188] 421 Forms 27 were found for Motorola. This total has been reduced by the 19 Forms filed in 2013 and incorrectly backdated to 2004 and 2005.

[189] 101 Siemens patents expired prior to 1996.

The Challenging Economics of the Companion Diagnostics Industry: A Compelling Case for Invigorated Patent Protection

The Challenging Economics of the Companion Diagnostics Industry: A Compelling Case for Invigorated Patent Protection
Download a PDF version of this article here.

By Doran Satanove*



Diagnostic tests are a core component of modern health care practice: they determine a patient’s susceptibility to developing cancer and other disorders; they diagnose biological conditions; they monitor the progress of disease; and they can assess the risk of disease recurrence.[1] Ensuring their innovative growth is therefore an important issue in innovation policy. While legal scholarship addresses much about the relevance of patents and other forms of intellectual property protection for diagnostic methods as a general matter,[2] far less attention has been paid to a distinct class of diagnostic tests that deserves its own innovation policy debate: companion diagnostic tests.

This note seeks to draw more attention to the unique economic challenges facing the companion diagnostics industry.[3] Part I provides the necessary background to understand what a companion diagnostic test is, and why it is vital to the future of modern health care. It presents the fundamental problem this note addresses, which is the sub-optimal growth that the companion diagnostics industry is currently experiencing. Part II focuses on why the industry faces challenging economics, relying on discussion and empirical case studies from pharmacology and biotechnology business literature. Part II.A introduces the key stakeholders in companion diagnostic test development. Part II.B argues that the empirical results of case studies suggest that one specific development pathway for companion diagnostics, referred to as the “co-development pathway,” is most conducive to economic growth for the industry as a whole. Part II.C explains how the incentives of the stakeholders in the companion diagnostics industry are misaligned in ways that impede pursuit of the preferable co-development pathway. Part II.D addresses how recently-proposed FDA guidance on diagnostics testsmight affect the economics of the companion diagnostics industry. Finally, Part III argues that the microeconomics of the companion diagnostics industry present a compelling case for invigorated patent protection of companion diagnostic tests.


A. Personalized Medicine Is the Future of Health Care

Imagine you have been diagnosed with early onset of a disease. Your doctor prescribes an expensive drug therapy that your insurance only partly covers, but you decide to pursue the treatment anyway because to you, health comes first. Weeks pass, but the disease shows no decline in progress. You wonder whether the drug is even working, and whether it ever will. The sad truth is that it probably isn’t working, and it probably ever won’t.

This predicament is common because a given drug, on average, is only effective in 30% to 40% of the prescribed patient population.[4] One esteemed academic geneticist has suggested that over 90% of drugs work for less than half of those prescribed them.[5] This problem is largely attributable to immense genetic variation across individuals.[6] Genetic variation affects how drugs are absorbed and distributed; how they act on their targets; how they are metabolized; and how they are eventually excreted, all of which influence the efficacy and toxicity of drugs administered to patients.[7] This forms the basis of the study of pharmacogenetics and pharmacogenomics, both of which, at the risk of oversimplification, assess genetic characteristics of individuals and sub-populations to determine whether a drug will trigger a great response, bad response, or no response in a particular person.[8] This is accomplished not only by analyzing an individual’s genes, but also by analyzing the downstream biochemical and molecular processes that are influenced by genetic variation and that play important roles in managing the body’s response to drugs.[9] These distinct genetic, biochemical, and molecular characteristics of individuals are broadly referred to as “biomarkers,” and studying them informs how clinical care management can be maximized and tailored to subpopulations of patients.[10]

The efforts of scientists to understand and develop innovative applications from the presence, absence, or level of expression of specific biomarkers, to improve health outcomes for patients, is the foundation of “personalized medicine.” Personalized medicine represents the modern aspiration of a health care system that is predictive, preventive, personalized and participatory,[11] where every patient receives the right drug, at the right dose, at the right time.[12]

B. Companion Diagnostics Are An Essential Component of Personalized Medicine

The tools that scientists use to ascertain differences in biomarkers across patient populations are known as in vitro diagnostic devices. These are medical devices used to test human samples outside the living body, in test tubes (hence the name in vitro).[13] For example, many women undergo testing of the BRCA1 and BRCA2 genes to inform them of their risk of developing breast and ovarian cancers; these tests are completed by in vitro diagnostic devices.[14] In vitro diagnostic devices can also be used to diagnose disease, to inform the selection of treatment plans, to monitor the progress of disease, and to assess the risk of disease recurrence.[15]

This note is about one category of in vitro diagnostic devices in particular: companion diagnostics. Companion diagnostics are the class of in vitro diagnostic devices that assess the likely safety and efficacy of a particular drug in a particular patient.[16] They accomplish this by assessing pharmacodynamic biomarkers – genetic, biochemical, and molecular characteristics that help predict the outcome of a drug’s interaction with its target.[17] This enables scientists and physicians to identify segments of a patient population in which a drug will be most effective, ineffective, or even harmful. Companion diagnostic tests, through their analysis of biomarkers, can also inform the optimal dosages of drugs for different sub-segments of the relevant population.[18] Companion diagnostics (“CDx’s”) are thus an essential component of personalized medicine because they are the vehicle for ascertaining the selection of the right drug, at the right dose, at the right time, for the right person.[19]

The benefits of more sophisticated methods of drug treatment selection attributable to CDx testing are plenty. Companion diagnostic testing can enhance the lifespan of patients, preventing them from undergoing therapies that are ineffective or cause harmful side effects. [20] “HercepTest,” the first broadly-marketed companion diagnostic whose companion is the breast cancer drug trastuzumab (sold as “Herceptin”), identifies the 25-30% subpopulation with overexpression of the HER-2 gene for which Herceptin is uniquely effective.[21] The CDx “HLA-B*5701,” used alongside HIV treatment with the drug Abacavir, singles out the 10% of patients that will experience adverse reactions, saving the health care system costs from hospitalizations caused by these adverse side effects.[22]

The more recently developed “Cobas 4800 BRAF V600E mutation test” illustrates how CDx’s ensure that drugs that are effective in smaller segments of the population still make their way to market. The actual benefit of this test’s companion drug, Zelboraf, in an unselected clinical population would have been around 50%, and therefore insufficient to obtain FDA approval.[23] Armed with the knowledge from the Cobas 4800 CDx that Zelboraf appeared to be more effective in patients with a certain mutation, only those patients with the mutation were selected for the Phase III trial. The results demonstrated a tremendous clinical benefit over chemotherapy.[24] In 2015, Zelboraf was the 391st-biggest drug in the world, with sales of $219 million, an unobtainable achievement were it not for the CDx.[25] Evidently, the economic gains that can be realized from CDx’s are substantial.[26]

C. Scientific Progress of Companion Diagnostic Development Outpaces Economic Progress

The science and business literature expresses disappointment and dissatisfaction with CDx economic growth,[27] even though the science underlying CDx’s has transformed dramatically since the launch of the HercepTest in 1998, and especially after the completion of the human genome product in 2003.[28] Acknowledgment of the potential of CDx’s and personalized medicine is juxtaposed with statements that the use of CDx’s “is currently constrained;”[29] that their progress has been “slower than expected;”[30] that their potential has “yet to be fully realized;”[31] that “significant opportunity remains untapped;”[32] and that there exist “several operational challenges.”[33] In fact, as of 2014, CDx’s made up only 3% of the worldwide market for in vitro diagnostics.[34] They account for a small percentage of today’s health insurance expenditures.[35] Many have yet to gain widespread adoption,[36] and few CDx-drug pairs have been approved since Herceptin’s breakthrough.[37] Forecasts show this trend will continue.[38] In the meantime, society is left with a plethora of commonly used and costly therapeutic agents that are ineffective in a high percentage of patients prescribed them, even though the science says the health care industry could know better.[39] Scientific challenges do undoubtedly remain,[40] but the consensus is loud and clear that the growth rate of CDx’s is sub-optimal and disappointing in light of how far the science has progressed. The obstacles responsible for this less-than-optimistic view of CDx-driven personalized medicine are not scientific; they are economic.

II. Companion Diagnostic Development Faces Challenging Economics

This Part explores the economic challenges of the CDx industry, drawing from the results of several case studies from the pharmacologic literature that examine the most successful CDx’s on the market. Part A introduces the key stakeholders in CDx development, and begins to reveal how the stakeholders’ incentives are misaligned. Part B examines the important distinction between co-developed CDx’s (CDx’s that are developed in tandem with their companion drug), and post-approval CDx’s (CDx’s that are developed after their companion drug has been put on the market). It argues that co-developed CDx’s are economically and socially preferable to post-approval ones, and that stimulating CDx-drug co-development is a necessary step to move the CDx industry forward as a whole. Part C presents the challenges in incentivizing diagnostic companies and drug companies to engage in the requisite collaboration for CDx-drug co-development.

A. The Interests of the Stakeholders Are Diverse

The key stakeholders in the CDx industry are the payers, diagnostic developers, drug companies, the regulators, and healthcare providers.

1. The Payers

The payers possess power in the CDx industry because, ultimately, their reimbursement policies allow or restrict access to the market.[41] Payers include governmental and private organizations that manage reimbursement of healthcare costs. They vary in their size, scope, and management of patient care.[42]

Companion diagnostics may pose large potential cost savings to payers by eliminating payments for ineffective drugs and reducing the costs associated with adverse events.[43] But this is no guarantee.[44] Consider the overall cost savings to payers as a function of: (1) the cost of the treatment decision in the absence of the CDx; (2) the cost of the treatment decision made in light of the CDx; (3) the probability that the CDx will change the treatment decision; and (4) the cost of administering the CDx.[45] Permutations of these variables reflect some interesting results. Most obviously, if the CDx has a low probability of changing a patient’s treatment decision (for example, the CDx reveals that only 10% of a patient subpopulation should avoid an expensive drug therapy), the cost savings to the payer will be less than if the CDx revealed that 50% of the patient population should avoid the drug therapy. Whether either of these scenarios presents a net savings to the payer, however, will depend on the cost of the new treatment decision. If a CDx reveals that either 10% or 50% of a patient subpopulation should avoid a particular drug therapy because it will be ineffective or cause adverse side effects, the cost of the alternative treatment could still be significantly higher. And while the cost of the tests themselves are not prohibitive (some are priced as low as $40 per test; many cost under $300 per test, and few cost over $1000 per test),[46] the consequences of reimbursing every eligible member of the patient population, compared to the savings when only a few patients benefit, are uncertain.[47] The savings to payers presented by CDx’s are therefore variable.

The quality of clinical utility evidence available is also a key factor in payer decision-making.[48] Clinical utility evidence is the body of evidence that showcases the added value of a CDx to treatment management, as compared with treatment management without a CDx. The more the CDx has been clinically tested, the more evidence is available to assure a payer that the variations in biomarkers revealed by the CDx actually lead to overall health care savings in the patient population.[49]

Analyzing cost savings to payers is also complicated by the high rate of customer turnover for commercial payers in the United States.[50] This factor is most relevant to patients diagnosed with a long-term disease: a payer might cover the cost of an initial screening and CDx that reveals which drug therapy will be most optimal if and when the disease begins to progress. If that patient leaves the payer before the disease begins to progress, the payer will not see the benefit in the reduction of cost of the patient’s future treatments.[51]

All of these factors lead payers to behave variably and unpredictably. [52] Payers will differ in terms of which CDx’s and drugs they choose to cover and when, with some enforcing strict coverage rules, and others extending more room for medical providers to determine what they deem to be the appropriate care for their patients.[53]

2. The Diagnostic Developers

Diagnostic test developers range from modest research labs to large companies. Across the entire range, significant obstacles exist in the way of profitability.[54]

Generally, the potential revenues to be generated from a CDx are not substantial. Diagnostics are valued and paid for at far lower levels compared to their companion drugs. While common drug treatments cost between $15,000 and $149,000 per patient in the United States, the CDx’s range from $40 to $2,000 per test.[55] One economic simulation of a co-developed CDx using favorable assumptions for the diagnostic developer[56] found the expected net present value (eNPV) of CDx tests to be 2-4% of the eNPV of their corresponding drugs.[57] The difficulty in reaping large revenues from CDx’s is augmented by the fact that few diagnostic developers have a large enough sales force to educate healthcare providers about ordering the appropriate CDx.[58]

Beyond the difficulties in obtaining a revenue stream, the development costs of a CDx are substantial, varying widely based on which of two possible classes of CDx’s the developer chooses to pursue. The first class of CDx a developer may pursue includes commercial CDx testing kits (“commercial CDx’s”). As the name implies, these CDx’s are developed with the intention of being commercialized and broadly marketed to other labs, to physicians, and to the public through direct-to-consumer marketing.[59] Companion diagnostics can be co-developed alongside a particular drug and used in the drug’s clinical trials, or they can be developed “post-approval;” that is, after their corresponding drug has been FDA approved for market. The CDx’s in the second class are “laboratory developed CDx’s” (“LDT-CDx’s”). These are CDx’s that are manufactured and offered within a single laboratory and are not sold as commercial products in the marketplace. Instead, they are sold as services, with the diagnostic developing lab being the sole performer of the CDx (unlike commercial CDx’s, which can be performed by all entities to which the CDx is marketed).[60] LDT-CDx’s are most often not co-developed with drugs, since co-developed CDx’s are typically commercially marketed with their companion drug.

The development costs for a commercial CDx are far greater than for an LDT-CDx, primarily because the FDA imposes costlier regulatory hurdles for commercial CDx’s.[61] The FDA has actually exercised its enforcement discretion with regard to LDT-CDx’s, which are only subject to minimal regulation by the Center for Medicaid and Medicare Services (CMS).[62] Developers pursuing commercial CDx’s thus face greater upfront expenses. It is perhaps not surprising that the value of commercial CDx’s in the market is far less than that of LDT-CDx’s: in 2012, the value of commercial CDx’s was $405 million and the value of LDT-CDx’s was $1.17 billion.[63]

Difficulties in obtaining payer reimbursement further complicate the business model of a diagnostic developer. Payer reimbursement is essential to assist in covering the extensive upfront costs just described, but the amount of time to payer coverage is unpredictable as previously alluded to in Part II.A.1 and further discussed in Part II.B. The same is true for the time until physicians adopt the tests. The diagnostic developer must consider ex ante what minimum economic data and evidence of clinical utility will be necessary to obtain payer reimbursement, and how to get past potential barriers in the adoption of the tests by medical providers.[64]

In summary, CDx development is more capital-intensive compared to other diagnostic tests, and the diagnostic developer faces a high degree of uncertainty in securing returns which depend heavily on the regulatory requirements at play and payer reimbursement practices.

3. The Pharmaceutical Companies

Pharmaceutical companies are wholly distinct from diagnostic developers. The latter employ completely different technology in their development platforms compared to the former. The business models and economics of the pharmaceutical industry are equally distinct from diagnostics, as each industry develops products with different life cycles and timelines, customers, and regulatory requirements.[65] The top priorities for a pharmaceutical company are to obtain as much value as possible after market launch of their drugs, and, to a lesser extent, reduce development costs.[66]

Decisions to pursue CDx development versus conventional “treat-all” approaches are complex, and depend on many factors including the size of the patient population, the class of disease the drug targets, the degree of payer management of the target indication, and the potential for value differentiation. [67]

Each of the above factors is further influenced by whether the CDx is co-developed with its companion drug, or developed post-approval. Co-development of a CDx with its companion drug has several benefits for a pharmaceutical company.[68] The CDx can significantly reduce the costs of clinical trials because if the drug company knows in advance which patient subpopulation is most likely to benefit from it, it can tailor the trial to that specific subpopulation. This increases the chance of demonstrating drug efficacy and of obtaining approval, and can decrease the amount of time it takes to get the drug to market.[69] At the same time, however, there is a risk that a suitable diagnostic will not be approved for use in clinical trials with the drug or be discovered at all.[70] Other studies have explored additional factors suggesting that savings in CDx co-development for drug companies may be offset by other costs associated with using a CDx in clinical trials.[71]

Post-approval CDx’s have the potential to take a well-known drug therapy on the market that is a second-line or third-line treatment option for the general population, and turn it into a first-line treatment for a select group of patients.[72] The drug Tarceva is a good example. Since its CDx was approved in 2013, Tarceva’s forecast changed to projections of increased growth over the next five years.[73] Post-approval CDx’s, on the other hand, have the potential to divide the treatable population of patients into sub-segments, thereby decreasing the number of patient customers.[74] A post-approval CDx also has the potential to direct segments of the patient population to a competitor’s product, a drug company’s worst nightmare. Ultimately, the potential costs and benefits of post-approval CDx’s for drug companies are also difficult to ascertain.

The incentives of drug companies to engage in CDx co-development with diagnostic developers, and the advantages and disadvantages posed by the development of post-approval CDx’s, are discussed in greater detail in Part III. For now, it is simply worth noting that the incentive structures are complicated and that there is clear potential for the incentives of drug companies and diagnostic developers to point in opposite directions.

4. The Regulators

As noted earlier, the FDA regulates commercial CDx’s, and has exercised its enforcement discretion for LTD-CDx’s, leaving their regulation in the hands of the CMS.[75] The CMS and the FDA have different regulatory goals. The FDA addresses “the safety and effectiveness of the diagnostic tests themselves and the quality of the design and manufacture of the diagnostic tests.”[76] The CLIA regulates “the quality of the clinical testing process itself, mostly by assessing the quality of the clinical laboratory.”[77]

The FDA’s regulatory oversight of commercial CDx’s is more substantial than the CMS’s regulatory oversight of LDT-CDx’s. The CMS only evaluates LDT-CDx’s for their analytical validity, which is the ability of a CDx to measure the biomarker it is intended to measure.[78] The FDA evaluates the analytical validity of commercial CDx’s, but it also evaluates the tests’ clinical validity – the ability of the test to predict the likelihood of a clinical outcome from its measurement of a biomarker.[79] In addition, commercial CDx’s are subject to pre-market review, systematic adverse event reporting, and a process for corrections or recalls.[80] This discrepancy in the level of regulatory overseeing between LDT-CDx’s and commercial CDx’s, and between all laboratory-developed tests (LDTs) and commercial diagnostic tests for that matter, has attracted significant attention in light of the increasing complexity of LDTs and their expansion from academic institutions to commercial ones.[81] The FDA has developed “serious concerns” regarding the lack of independent review of the evidence of clinical validity of LDTs generally, including LDT-CDx’s.[82] Consequently, it issued a draft guidance in the Federal Register in October 2014 to begin regulating LDTs on a risk-based approach.[83] If the guidance were to become final, LDT-CDx’s would be classified under the highest-risk category and in effect would be subject to the same regulatory standards as commercial CDx’s.[84] The economic implications of the current regulatory overseeing regime as well as the FDA’s recent proposal are discussed in Part III.

5. The Medical Providers

Economically, CDx’s can have a positive or negative impact on medical providers depending on what the results of the test suggest for further treatment. Under the current procedure-based reimbursement for providers, physicians are incentivized to use CDx’s that will increase, rather than decrease, the number of subsequent procedures a patient requires.[85] Where diagnostic tests make existing procedures unnecessary, doctors might be disinclined to perform them. Providers are likely to wait some time to ascertain the effects of a CDx on treatment procedures before deciding whether it is in their economic interest to use the test. Providers might not pay much attention to companion diagnostics at all if they aren’t committed to molecularly-guided therapeutic decisions.[86] Educating providers on newly-developed CDx’s is therefore critical to clinical adoption of CDx’s and their commercial success.

The subsequent sections take on the more complicated task of analyzing how the stakeholders’ incentives interact in the context of developing CDx’s along the various pathways, and the economic consequences for the CDx industry that flow therefrom.

B. Co-Developed Companion Diagnostics Are More Conducive to CDx Microeconomic Growth

This Part argues that CDx’s that are co-developed with their companion drugs provide greater economic and social benefit over post-approval CDx’s, drawing on the empirical findings of case studies of CDx-drug pairs on the market for support.

1. CDx Co-Development Leads to Better Evidence of Clinical Utility & Greater Patient Access

Clinical utility refers to the body of evidence that showcases the added value of a CDx to treatment management.[87] A CDx may accurately measure a biomarker (i.e., be analytically valid), and from that measurement, a CDx may accurately predict how a particular subpopulation will respond to a drug (i.e., be clinically valid). But that doesn’t necessarily mean that the benefit of this knowledge outweighs the costs of developing the CDx; that is, that the CDx has strong clinical utility. To ascertain the latter, controlled studies must be conducted.

Case studies find that the quality of clinical utility and cost-effectiveness evidence for CDx’s is highly variable, and often very weak.[88] For instance, the 2013 Cohen et al. study analyzed data from the Cost Effective Analyses (“CEA”) Registry, a publically-available database of over 2,000 different cost-utility analyses published in peer-reviewed journals, for eight CDx-drug pairs.[89] It found that the quality and quantity of both the clinical and cost-effectiveness studies in the registry varied significantly, with “surprisingly few CEAs show[ing] conclusive evidence as to whether [the companion diagnostic] represents ‘good value’ to society.”[90] Likewise, in 2014, Cohen et. al. and Towse et al. found a dearth of evidence concerning the comparative clinical effectiveness of CDx-drug combinations.[91]

Nevertheless, the CDx’s from the case studies demonstrate that the greatest clinical utility evidence base is typically found for CDx’s that were co-developed rather than developed post-approval.[92] Because the FDA doesn’t actually assess a CDx’s clinical utility (the FDA only assesses analytical and clinical validity),[93] the fact that co-developed CDx’s have a better clinical utility evidence base is not due to the fact that they are FDA regulated and commercially marketed.[94] In fact, seven of the eight post-approval CDx’s in the Cohen, 2014 study, for example, were indeed FDA approved and sold as commercial CDx’s.[95]

Co-developed CDx’s are supported by greater evidence of clinical utility because they are a core component of their companion drugs’ clinical trials. For drugs to be FDA-approved, clinical utility must be established in Phase III,[96] and when a CDx is co-developed with its companion drug, the CDx-drug pair are tested together in Phase III.[97] Therefore, co-developed CDx tests generate evidence of their clinical utility automatically from their use in clinical trials (that is, the clinical utility of the CDx is self-evident when it is used to select the patients in the study and the drug is proven effective in those patients).[98]

Since post-approval CDx’s stand alone in their development, they do not partake in the clinical trial process that drugs do. So demonstrating clinical utility for a post-approval test requires generating evidence distinct from the drug itself. The case studies illustrate that randomized control trials are the best route to demonstrate clinical utility for the sake of obtaining payer reimbursement.[99] Diagnostic companies are often not in in the financial position to be able to accommodate these studies,[100] which would explain why the evidence base of post-approval tests is weak. But when a diagnostic developer collaborates with a drug company, the drug company will typically sponsor the costs of the clinical trials, since the clinical utility of the test might be necessary for the drug to obtain approval and achieve its full value.[101] Therefore, co-development in effect subsidizes the costs of generating clinical utility evidence of a CDx for a diagnostic developer, and enhances the value of the clinical trial process.

Ultimately, the impact of a stronger clinical utility evidence base on the payers and medical providers opens the door for greater market access to CDx’s. Case studies that examine payer reimbursement practices, and that survey payers to ascertain the influence of different kinds of evidence on reimbursement decisions, find that evidence of clinical utility and cost-effectiveness are the top priorities in deciding whether to reimburse a CDx.[102]

The lack of evidence on clinical utility would understandably make payers insecure and hesitant to immediately cover CDx’s. This is supported by the survey data from payers across multiple studies which has found that a large majority question the clinical utility of CDx tests, often viewing the conclusiveness of test evidence to be inadequate. [103] Reimbursement, while variable, is generally limited and slow, with payers sometimes refusing to reimburse diagnostics that the FDA explicitly requires.[104] Even for co-developed CDx’s that include better evidence of clinical utility, however, the variability in payer response suggests that methods for incorporating this evidence into economic evaluations are inconsistent. Consequently, critics have called for health technology assessment agencies and payers to implement more explicit decision criteria, guidelines, and policies over the economic evaluation of CDx’s.[105] Despite the overwhelming consensus that the evidence base establishing linkage between diagnostic testing and positive health outcomes must be strengthened,[106] it is clear that pursuing co-development will lead to better evidence of clinical utility and payer reimbursement, thereby increasing patient and provider access to CDx’s.

2. Co-Development Uses Resources More Efficiently

CDx-drug co-development provides significant opportunity to use the resources of both companies more effectively by reducing the development costs of the CDx and corresponding drug, and increasing the likelihood of therapeutic success and improved cost-effectiveness.[107] Co-development allows both companies to streamline their research[108]: as the pharmaceutical company narrows in on the selection of a lead compound, and the diagnostic company narrows in on corresponding biomarkers, each side will learn from each other’s research developments.[109] Both will then make better-informed decisions that they would not have otherwise made in isolation. The compound and diagnostic method ultimately selected will jointly run through Phase III (and potentially earlier phases as well),[110] increasing the chances that the drug will have a significant enough benefit in the clinical trial population to be approved, and generating evidence of clinical utility for the diagnostic developer. This illustrates the “regulatory efficiency” of tying the drug and CDx together at the outset.[111] If the CDx and drug both pass FDA approval, patients for whom the drug is effective will have received a cure they might not have were it not for the presence of the CDx, and at a faster speed, with a faster turnaround of payer coverage.[112]

Comparatively, post-approval CDx’s can inform patients that a drug they might have been prescribed will be ineffective, cause adverse side effects, or should be taken at a different dose. Co-developed CDx’s do the same for their corresponding drug, in addition to helping ensure that the most effective drugs for certain populations that would not necessarily have ever made it to market, do. Further, as more drugs are co-developed with a CDx, the number of drugs in need of a post-approval CDx only goes down. Therefore, co-developed CDx’s ultimately capture more value than post-approval ones, and are the key to driving personalized medicine forward.

C. A Misalignment of Stakeholder Incentives Impedes Necessary CDx Co-Development

Despite the economic benefits of co-development just described, the number of post-approval CDx’s is larger than the number of co-developed CDx’s.[113] Ultimately, this reflects a lack of willingness on the part of drug and diagnostic companies to collaborate. This Part presents the obstacles and deterrents of co-development for each stakeholder, which reveals how their underlying incentives are misaligned.[114] It argues that based on the empirical evidence from the case studies, the drug companies have a greater incentive to engage in CDx co-development, while diagnostic companies have a greater incentive to focus on post-approval CDx’s, primarily LDT-CDx copies of co-developed CDx’s already on the market.

1. Disparate Business Models Hinder Co-Development

A popular assertion in the pharmacologic and biotech business literature is that economic collaboration between drug and diagnostic developers is undermined by their different business models.[115] As noted above, each stakeholder employs completely different technology in its development platforms, produces a different class of products, and has different development timelines, costs, rates of return, customers, and regulations.[116] Few have endeavored to empirically test how these differences in drug and diagnostic business models impact their collaboration, but at least two studies shed light on the question.[117]

Luo et al. selected nine successful CDx-drug pairs, and quantitatively assessed the impact of factors pertinent to drug and diagnostic companies that influence their calculus in deciding whether to collaborate.[118] The priority factors selected for drug companies were drug prices, drug efficacy, patient responses, and patient subpopulation; CDx price and CDx sensitivity were the priority factors selected for the diagnostics.[119] The study found no significant relationship between the economic factors for the two industries.[120] For example, the CDx price did not significantly correlate with any of the factors that impact drug development; high-risk, high-benefit drugs that are priced high to reflect their greater development costs may only require cheap and simple CDx’s to accurately stratify the patient population. And moderate-risk or low-risk drugs might require CDx’s that are more complex and expensive to develop to accurately segment the patient population. These findings thus support the view that the disparate business models of the CDx and pharmaceutical industries are a legitimate obstacle to CDx-drug co-development.[121]

2. For Drug Companies, Co-Development Is Economically Preferable Over Post-Approval CDx Development

Despite the potential ability of CDx co-development to reduce development costs for drug companies discussed in Part II.B, research has suggested that CDx’s may sometimes do little to improve drug development productivity and might actually increase overall costs.[122] Some of these scenarios are now considered.

As a general matter, additional complexities associated with running clinical trials with a CDx include “recruiting special patients at additional sites, executing the clinical protocols, demonstrating effects in biomarker-negative patients, and analyzing biomarker data.”[123] These can reduce the savings associated with smaller clinical trials.[124] There is also the risk that a suitable CDx will not be adequately developed.[125] If so, the associated costs will not be offset by any savings in clinical trials. Similarly, if a CDx is used in clinical trials but the drug still fails to be approved, the CDx will not have conferred a benefit to the drug company. It is also possible that a drug will be co-developed with a CDx in its early phases, but that later trials reveal that the drug performs well enough in the broader population to obtain FDA approval without the CDx.[126] The CDx, then, will have been unnecessary to achieve FDA approval, and the development costs of the CDx will not be offset. This is what happened with the drug ponatinib,[127] though it is not a common occurrence given the reduced odds of a drug being effective enough in the broader patient population. Nevertheless, these factors conceivably influence a drug company’s calculus in deciding whether to collaborate with a diagnostic company for CDx co-development.

The economic risks associated with co-development for a drug company pale in comparison with the risks of the development of post-approval CDx’s. In co-development, the risks previously described are offset by the potential gains achieved by obtaining FDA approval for a drug for segments of the patient population, when the drug would be incapable of obtaining FDA approval for the broader population.[128] But novel post-approval CDx’s are developed by diagnostic companies for drugs that have already obtained FDA approval.[129] What a new post-approval CDx ultimately accomplishes, then, is the stratification of the patient population that reveals those who are not ideal responders, patients that would have been prescribed the drug prior to the arrival of the post-approval CDx. This undeniably benefits the public. For the drug company, however, the post-approval CDx in effect divides the treatable population into smaller segments, reducing the drug’s sales and the market share of the relevant patient population.[130] Economic theory would predict that the drug company would increase its price in response, to make up for this decrease in revenues, and that payers would correspondingly pay the higher price, reflecting the greater drug’s greater efficacy with the CDx and the resulting savings from fewer patients taking the drug.

This does not appear to occur in practice, however. A study from the Massachusetts Institute of Technology that quantitatively analyzed economic value to drug and diagnostic companies in case studies of co-developed and post-approval CDx’s illustrates the point.[131] In 2006, the drug panitumumab was FDA approved with a co-developed CDx for patients with metastatic colorectal cancer and EGFR overexpression (the biomarker measured by the CDx).[132] A year later, an additional CDx developed by an independent diagnostic company, showed that the drug was actually ineffective in a subset of this EGFR over-expressing subpopulation, and thus the patient population to which the drug could subsequently be marketed decreased.[133] Reimbursement levels did not rise to reflect the higher efficacy in the smaller selected subpopulation, causing the drug developer to suffer a loss in revenues[134] – perhaps a disappointing outcome to those who despise market inefficiencies, and a pleasing outcome for those hostile towards corporate America. Either way, this pricing inflexibility on the part of payers might reflect the externality of renegotiating drug prices, or might also reflect payer skepticism regarding the cost savings attributable to CDx’s, as discussed in Part II.[135]

The increased risk in revenue reduction attributable to the development of post-approval CDx’s by third parties would seem to provide an incentive for drug companies to engage in CDx co-development. By doing so, they increase the accuracy of their business projections, and increase the likelihood of capturing potential losses in revenues from CDx stratification in the drug price, by negotiating ex ante with payers as opposed to ex post.[136]

3. For Diagnostic Developers, Post-Approval CDx Development Is Economically Preferable to Co-Development

Diagnostic developers face many disincentives in collaborating with drug companies for CDx-drug co-development. Despite CDx companies conducting business on vastly smaller scales than drug companies, CDx deals are still very capital-intensive for the diagnostic partner.[137] The co-development process will require the diagnostic developer to submit a pre-market approval application to the FDA, increasing upfront costs dramatically, and adding risk associated with obtaining approval. While the diagnostic partner always has to account for the risk associated with being unable to develop a suitable CDx,[138] in the co-development world it must also account for the risk associated with the drug not being approved. The latter risk is magnitudes greater than the former.[139] For instance, Trusheim’s statistical model found that delaying a drug launch by one year, for the purposes of developing a CDx, nearly doubles the diagnostic eNPV due to the decreased risk of cancellation of the drug development program.[140]

The diagnostic companies also face limited ability to gain a return on the more expensive R&D spent in co-development.[141] They often desire royalties from the pharmaceutical company on the sales of the drug or sales-based milestones to compensate for the risk that the drug won’t be approved or will have lackluster sales.[142] But generally drug development partners have structured payments to test developers as a “fee for service.”[143] This typically doesn’t cover the full investment cost of the diagnostic developer,[144] so some degree of payer reimbursement to the diagnostic developer is necessary for them to recoup their full investment.[145]

The costlier and higher-risk nature of co-development for a diagnostic company incentivizes those companies to gravitate towards CDx development for drugs already on the market.[146] These post-approval CDx’s can be novel and commercial, like their co-developed counterparts. More often, however, they are LDT-CDx copies of previously co-developed commercial CDx’s. This is largely achievable because of the weak intellectual property protection afforded to CDx test methods.[147] By generating LDT-CDx’s, a diagnostic firm avoids the increased costs of applying for FDA pre-market approval. It can then amass more revenue in the short term to satisfy the investment community, at the expense of encouraging collaboration with drug companies, which only might lead to returns in the future for the diagnostic company. The large upfront investment and decreased certainty involved in developing a novel CDx through co-development consequently discourages competition between CDx developers until the first CDx reaches the market. The result is a dominance of late-stage over early-stage competition, facilitated by free-riding on first movers.[148] For example, after the FDA approved Roche’s CDx, “Cobas 4800 BRAF Mutation Test” for the drug vemurafenib, at least nine laboratories began to offer their own LDT version of the test.[149] It has been estimated that as of 2013, at least 45% of BRAF testing is performed via LDT-CDx’s.[150]

The success of other diagnostic developers in developing LDT-CDx’s is attributable to the fact that many payer billing practices still don’t allow the payer to discriminate between a commercial CDx and an LDT-CDx.[151] This allows labs who have spent less money on creating an LDT-CDx to be reimbursed the same amount as the more costly commercial, co-developed CDx. Fortunately, in November of last year, Medicare and Medicaid payers adopted a new reimbursement program known as “MolDx,” which requires labs to use separate codes for commercial CDx’s and LDT-CDx’s.[152] The program will need to gain more momentum against payers before this issue is resolved.[153]

In theory, one might suspect that diagnostic companies are still better off pursuing co-development because co-development will lead to better evidence of clinical utility and a faster rate of payer reimbursement. But the reality is that the disparity in regulatory oversight between LDT-CDx’s and commercial CDx’s, coupled with remarkably weak IP protection for CDx biomarkers and methods, pulls diagnostic developers away from the world of co-development and pushes them towards late-stage, post-approval competition. [154] This is illustrated in the disparity in the number of co-developed versus post-approval CDx’s, and the greater value of LDT-CDx’s versus commercial CDx’s in the market.[155]

Despite the misaligned incentives to engage in co-development detailed in this section, the number of deals between pharma and diagnostic companies has increased over recent years.[156] The deals are typically concentrated in a small number of companies with the appropriate financial stability, regulatory knowledge, technical expertise, and global reach for commercialization.[157] Deals are structured in four ways. The drug developer will develop companion diagnostics internally (“in house”), partner with a diagnostic company to develop the test, acquire the diagnostic company, or engage in a hybrid of those three methods.[158] What these deals ultimately reflect are examples of successful risk-sharing between drug and diagnostic companies, underscoring the need for innovative risk-sharing models between the two types of companies, to drive co-development.[159]

Expediting CDx growth by incentivizing diagnostic companies to engage in co-development requires far more than innovative risk-sharing models, however. Before addressing the unique capabilities of stronger patent protection to solve many of the problems in this field, this part considers the possible ramifications of the FDA’s recently proposed guidelines for increased regulatory oversight over all LDT-CDx’s.

D. The FDA’s Proposed Guidelines For Diagnostic Tests Could Exacerbate the Economic Challenges

In October 2014, the FDA formally issued draft guidance in the Federal Register to start regulating all LDTs in the future under a risk-based approach, rather than continuing to exercise its enforcement discretion.[160] The comment period ended in February of last year, but a final guidance document has yet to issue.[161] The guidelines describe the FDA’s plan to take a “risk based approach” to oversight, by dividing all LDTs into three risk categories and subjecting each to different levels of increased regulation.[162] The FDA has made clear that CDx’s will fall into the highest risk category and must therefore meet new registration, listing, adverse event reporting, and pre-market review requirements.[163]

From a public health and safety perspective, the proposal appears to be beneficial. A study conducted by the FDA of 20 LDTs, which included two LDT-CDx’s, found that often manufacturer claims were unsupported, as evidenced by an overly large number of false positive and false negative results for some tests, risking harm to patients. This was attributed to the fact that LDTs are not subject to adverse event reporting, and that their safety and efficacy is undermined by a lack of agency review of performance data. LDT performance data is “informally” reviewed via the peer-review publication process, but the FDA maintains that this is insufficient to protect against patients and healthcare providers being misled.[164]

The chief concern for diagnostic developers is the prospect of bearing the burden of the costs of obtaining approval or clearance. The burden will fall most heavily on more modest diagnostic developers: academic research centers, labs based in hospitals, and other CLIA-certified labs that are typically not accustomed to complying with the regulatory requirements associated with conducting clinical studies, and that lack the expertise to do so.[165] In light of these increased hurdles, it is reasonable to suspect that these smaller diagnostic developers will be unable to continue to provide LDTs in general, absent federal funding agencies relieving this financial burden.[166]

But perhaps that would be a good thing. Consistent regulatory requirements across LDT-CDx’s and commercial CDx’s would level the playing field between commercial kit manufacturers and laboratories.[167] This could potentially mitigate the issue of LDT-CDx’s proliferating after a commercial co-developed one reaches the market; the costs of obtaining FDA approval for LDT-CDx’s would reduce the benefit associated with free-riding.[168] This could incentivize diagnostic companies to engage in earlier CDx co-development instead. Diagnostic developers with the resources to handle an additional pre-market approval, however, might still develop LDT-CDx versions of co-developed CDx’s because they would still save on the upfront R&D expenses. The potential impact of the regulations is therefore questionable.

III. Re-Invigorating Patent Protection For Companion Diagnostics Is the Most Efficient Way to Stimulate Companion Diagnostic Microeconomic Growth

This Part addresses how patent protection for CDx tests can help resolve the misaligned incentive structure amongst the key stakeholders that continues to hamper CDx microeconomic growth.

A. Strengthening a Weak Business Case

Part II explained the difficulties diagnostic companies face in securing solid returns on R&D investment (what some have called the “weak business case” supporting CDx development).[169] On the one hand, partnering with drug companies helps diagnostic developers establish better evidence of clinical utility which can increase rates of payer reimbursement. On the other hand, however, the diagnostic company is burdened by the heightened risk associated with approval of the drug, and can spend less on upfront R&D expenses by developing an LDT-CDx version of a co-developed CDx already on the market. So even though avoiding the co-development process in favor of developing post-approval CDx’s can increase the time it takes for payers to approve the test, the market is clear that diagnostic companies still prefer to develop LDT-CDx’s. Stronger patent protection for CDx’s can transform this “weak business case” supporting CDx development into a stronger one.

The function of patents as “signals” to investors that an invention possesses commercial potential is well-documented by scholars.[170] Particularly in the life sciences, patents increase prospects of obtaining earlier venture capital funding which facilitates commercialization.[171] This financial boost goes far for CDx developers. It can allow for greater expenditures on demonstrating clinical utility, thereby increasing rates of payer adoption and promoting greater patient access. It can help cover the cost of obtaining FDA approval. If the FDA’s guidance becomes final, this will be particularly beneficial to smaller companies and research labs at universities and hospitals. These latter actors may not normally be as incentivized by the prospect of a patent as larger commercial ventures, but faced with the costs associated with obtaining FDA approval, the necessity of a patent is more compelling. Further, an increase in funding attracted by the patent can help in educating medical providers about the availability of the tests to encourage their adoption.

Then comes the most fundamental benefit of a patent: the right to exclude free-riders, or for our purposes, diagnostic developers who wait to develop LDT-CDx copies of commercial CDx’s on the market, reducing the ability of the innovative CDx developers to recoup their investment.[172] Patents can therefore shift the abundance of late-stage competition between CDx developers into earlier-stage competition since the threat of liability for infringement will deter CDx developers from competing in LDT-CDx’s that mimic the earlier, commercial one. This will force CDx developers to focus on the creation of novel CDx’s. The FDA’s proposed guidance might help to shift competition towards co-development, by increasing the costs of copying a commercial CDx with an LDT-CDx. But without the patent to attract investment upfront, and to spur collaboration with drug companies, as the next section argues, the costs to develop innovative, commercial CDx’s will be prohibitive for all but the best-funded developers.

B. Patents Can Facilitate Co-Development

Greater patent protection eliminates many of the obstacles that stand in the way of CDx-drug development, and adds to the already existing benefits of co-development for diagnostic companies. For diagnostic companies, it reduces the risk that the increased costs associated with co-development will cause them to see a loss by increasing the diagnostic company’s bargaining power against the drug company; the patent puts the diagnostic company on a less uneven playing field.[173] With patents in hand, diagnostic companies are in a stronger position to negotiate more favorable risk-sharing agreements: no longer can drug companies argue that the lack of IP protection on the CDx reduces its value such that royalty payments on sales of the drug are not feasible. And if the drug company doesn’t budge, the diagnostic developer is now in a position to shop around for better co-development deals, without concern over potential appropriation of its data. This illustrates how when two parties bargaining at arm’s length each have patents, Arrow’s paradox disappears[174] – the security of the patent enables a sharing of information that might not otherwise occur when one party is concerned about keeping its proprietary information secret. Greater CDx patent protection for the diagnostic company would also provide a stronger incentive for drug companies to engage in CDx co-development: the exclusivity of a commercial CDx would reduce the amount pharmaceutical companies have to pay diagnostic developers to cover the costs associated with the reduction in the value of the CDx due to LDT-CDx competition.

Both drug and diagnostic companies could also stand to gain from considering joint or integrated patent strategies throughout the co-development process.[175] Coordinating patent filings and tailoring them to the specific CDx-drug pair could increase the commercial value of both products, and provide greater security of patent validity.[176] Patenting combinations of methods that apply both the drug and the CDx and vary the subject matter would increase the chances that at least some claims would withstand invalidity attacks.[177] If the relationship between the CDx and drug companies is a partnership, filing patents that overlap both company’s products could create control problems. The drug company may want exclusive control so that competitors don’t have access to the CDx, while the CDx may want exclusive control so it can do business with other drug companies. On balance, however, it is apparent that more secure patent protection for CDx developers would catalyze collaboration between stakeholders and drive CDx growth forward.

C. The Case Against Patents Does Not Apply to the CDx Niche

This Part briefly addresses some of the common counterarguments to extending patent protection in genetics-related research, and asserts that they don’t apply in the unique context of the CDx industry. Critics of patent protection in the life sciences frequently point to the 2010 report written by the Secretary of Health and Human Services’ Advisory Committee on Genetics, Health, and Society (the “SACGHS report”).[178] The report found that patent rights were neither necessary nor sufficient conditions for the development of commercial diagnostic testing kits and LDTs.[179] This was because it determined that private funding was “supplemental to the significant federal government funding in this arena,” and that most genetic research is conducted by academic researchers.[180]

These conclusions fail to differentiate between basic genetic research and the research involved in developing a CDx. Genetic research simply refers to the identification of genes associated with different conditions, and the case studies cited in the SACGHS report are circumscribed in this arena.[181] Developing a CDx, however, requires a more complicated understanding of how different variations in given genes correlate with the actions of a given drug.[182] CDx targets extend beyond genes themselves to other proteins, metabolites, and tracers that are all influenced by genetic variation and its downstream molecular processes.[183] Developing this research from scratch requires expensive, large-scale validation and replication studies, and is therefore more often funded by the private sector.[184]

Another concern is that greater patent protection in genetics-related research will interfere with research by academics and impede upstream experimental research.[185] Again, this may well be a valid concern for standard genetic research, but in the context of CDx development, it is not. The CDx industry is made up of many private firms because of the substantial costs associated with development and commercialization.[186] Empirical studies have also found that basic researchers follow a practice of ignoring patent infringement, while patent owners ignore enforcement against basic researchers so long as no one is engaged in commercial endeavors associated with the patent.[187]

Fear that increased patent protection will promote monopoly pricing over CDx tests is another valid concern, especially where payer reimbursement is not increased to match the savings of the CDx, and costs are shifted onto the consumer. Given that the costs of CDx development pale in comparison to therapeutics, however, the concern is arguably less warranted. And while no one wants to have to pay more for diagnostic testing, the CDx tests, as explained in Part I, can save consumers far greater costs in the long-run by preventing them from using up their insurance policies on treatments that prove to be ineffective.

Of course, it would be myopic to assert that re-invigorating patent rights for CDx’s is the only way to achieve an increase in CDx growth. There are other policy tools that could also be effective in different ways: non-patent exclusivities, government subsidies, prizes, and tax credits to name a few.[188] Evaluating the comparative merits of those proposals is beyond the scope of this note. But from a broad perspective, it is clear that the unique challenges facing the CDx industry embody all the most fundamental justifications for patent protection: significant upfront R&D expenses; significant risks associated with regulatory hurdles; uncertainty in the ability to recoup investments; cutting-edge, important science and technology; flagrant free-riding; and a need to share proprietary information with parties at arm’s length.

D. Patent Law’s Subject Matter Eligibility Doctrine Has Undermined the Prospects of Patenting Companion Diagnostic Tests

Patentability of diagnostic methods faced its first attack in the Supreme Court’s decision in Mayo Collaborative v. Prometheus Labs.[189] There, the Court articulated a new two-part test for assessing the subject matter eligibility of inventions,[190] which was reiterated in the software case Alice v. CLS Bank.[191] It is now commonly referred to by the U.S. Patent & Trademark Office and the Federal Circuit as the Mayo or Alice “two-step.”[192] Step one requires a court to determine whether the claims at issue are directed to a patent-ineligible concept (i.e., an abstract idea, natural phenomenon or product of nature).[193] Step two asks the court to consider the elements of each claim individually, and as an ordered combination, to determine whether any additional elements transform the nature of the claim into a patent-eligible application (also known as the search for the “inventive concept”).[194]

On its face, Mayo appears to be a flexible test: individual elements of all claims can be routine, conventional, and ordinary, but so long as the claims when considered as an ordered combination “transform” the naturally occurring phenomenon into a patent-eligible application, they are patent-eligible.[195] One might suspect that the debatable meaning of “as an ordered combination” and “patent-eligible application” would leave good room to distinguish the most innovative and meritorious applications of diagnostic methods from those that contain little more than the underlying unpatentable principles on which they rely. In practice, however, the Federal Circuit seems to have applied Mayo as a rule that diagnostic method patents are categorically unpatentable.[196] Only three cases involving diagnostic method claims have been decided since Alice so the sample size to evaluate how Mayo has affected the patentability of diagnostic methods is admittedly small.[197] But the fact that several diagnostic method claims have been invalidated across these cases, especially those in Ariosa[198] – included diagnostic method claims arising out of what scientists have lauded as one of the most remarkable discoveries of the century – suggests a bleak future for their survival.

Consequently, practitioners are undoubtedly reconsidering how to write diagnostic method claims to survive under the recent doctrine.[199] But while the patentability of diagnostic methods as a general matter has become dubious, the patentability of co-developed CDx’s could be more promising if strategically tailored to the companion drug as well.[200] Even so, the heightened difficulties in obtaining patent protection for CDx’s as a result of the doctrinal developments in subject-matter eligibility suggests that legislative or regulatory changes are necessary to enable economic growth in CDx development to catch up with its scientific growth – two unpredictable alternatives to a centuries-old system that was built to solve the very problems that plague this industry.


Furthering innovation in the development of all kinds of diagnostic tests is important to modern healthcare. But not all diagnostic tests should be viewed in the same light when debating innovation policy. As this note has illustrated, companion diagnostic tests possess unique economic challenges that stem from a complicated and misaligned incentive structure amongst the key industry stakeholders. Accordingly, CDx tests deserve their own innovation policy debate. Yet while literature in economics and pharmacology has addressed the unique circumstances surrounding the CDx industry and conducted insightful case studies, legal scholarship addressing innovation policy has yet to engage with these critical diagnostic tests as vigorously. In an effort to begin doing so, this note has imported many valuable insights from empirical case studies in other fields to argue that co-developing CDx tests with their companion drugs is the optimal pursuit for furthering economic growth in the CDx industry. It has further argued that increased patent protection in the narrow niche of CDx tests is the optimal policy choice for catalyzing the economic growth of CDx tests to enable them to one day match their rate of scientific growth. Unfortunately, strengthening patent protection in this niche seems a doubtful possibility in practice in light of the constraints that current subject-matter eligibility doctrine has created. Coupled with the potential for increased FDA regulation of companion diagnostic tests, the incentives to innovate in the CDx sector might become further eroded. In the meantime, the healthcare system that is predictive, preventive, personalized and participatory, where every patient receives the right drug, at the right dose, at the right time, will remain a fantasy. The science will have to remain patient.

*J.D. Candidate, New York University School of Law, 2017; B.Sc. Pharmacology, First Class Honors, McGill University. I thank Professors Rochelle Dreyfuss, Scott Hemphill, and Christopher Sprigman for their helpful comments on this note. I also thank the 2016-2017 Editorial Board of the NYU Journal of Intellectual Property & Entertainment Law for their assistance in the editing process. Any errors are my own.

[1] See infra Part I.B. (defining diagnostic tests more specifically and elaborating on their importance to clinical health care practice).

[2] See, e.g., Christopher M. Holman, The Critical Role of Patents in the Development, Commercialization and Utilization of Innovative Genetic Diagnostic Tests and Personalized Medicine, 21 B.U. J. Sci. & Tech. L. 297 (2015); Eldora L. Ellison & David W. Roadcap, Diagnostic Method Patents – Not All Hope Is Lost, 22 No. 15 Westlaw J. Intell. Prop. 1 (2015); Rebecca Eisenberg, Diagnostics Need Not Apply, 21 B.U. J. Sci. & Tech. L. 256 (2015); Note, Diagnostic Method Patents and Harms to Follow-On Innovation, 126 Harv. L. Rev. 1370 (2013); Daniel K. Yarbrough, After Myriad: Reconsidering the Incentives for Innovation in the Biotech Industry, 21 Mich. Telecomm. & Tech. L. Rev. 141 (2014).

[3] The authors who have addressed companion diagnostics specifically in the legal literature have yet to analyze the complicated underlying economic structure of industry. See, e.g., Alison Hill, Comment, Ambiguous Regulation and Question Patentability: A Toxic Future for In vitro Companion Diagnostic Devices and Personalized Medicine?, 2013 Wis. L. Rev. 1463 (2013) (addressing the application of FDA regulations and patentability standards to companion diagnostic tests).

[4] Jakka Sairamesh & Michael Rossbach, An Economic Perspective on Personalized Medicine, 7 The Hugo Journal 1, 2 (2013) (defining an “ineffective drug” as one where the costs from adverse events outweigh the benefits); see also Culbertson et al., Personalized Medicine: Technological Innovation and Patient Empowerment or Exuberant Hyperbole?, 8(3) Drug Discovery World 18 (2007) (finding that the efficacy of a drug can vary from 30% to 75% depending on the drug class and therapeutic use).

[5] Steve Connor, Glaxo Chief – “Our Drugs Do Not Work On Most Patients”, The Independent (London), Dec. 13, 2011, available at (interviewing Allen Roses, an academic geneticist from Duke University and worldwide vice-president of genetics at GlaxoSmithKline).

[6] See generally Ashraf G. Madian et al., Relating Human Genetic Variation to Variation in Drug Responses, 28(10) Trends Genetics 487 (2012) (summarizing the evidence accumulated over the last three decades of how genetic variation plays a major role in drug response variability).

[7] Id.

[8] More specifically, pharmacogenetics is a field that explains how different people respond to a given drug in different ways. Pharmacogenomics explains the role of differences in the level of expression of given genes (i.e., how ‘active’ genes are), which also influences drug responses. Devarajan Thangadurai & Jeyabalan Sangeetha, Biotechnology and Bioinformatics 37 (2015).

[9] Madian, supra note 6, at 487.

[10] Elizabeth Drucker & Kurt Krapfenbauer, Pitfalls and Limitations in Translation from Biomarker Discovery to Clinical Utility and Personalised Medicine, 4 The EPMA Journal 1, 2 (2013).

[11] Sairamesh & Rossbach, supra note 4, at 1.

[12] U.S. Food and Drug Administration, Paving the Way for Personalized Medicine: FDA’s Role in New Era of Medical Product Development, A more rigorous definition of personalized medicine would be “the use of genetic or other biomarker information to improve the safety, effectiveness, and health outcomes of patients via more efficiently targeted risk stratification, prevention, and tailored medication and treatment-management approaches.” Thangadurai & Sangeetha, supra note 8, at 37.

[13] In vitro is Latin for “in glass” and is a term of art for conducting tests on components of an organism isolated from or outside of their biological surroundings, such as in a test tube. Oxford Dictionaries, In contrast, “in vivo” testing is carried out in a living organism such as electrocardiography or diagnostic imaging (for example, X-rays). For a denser definition of in vitro diagnostic devices, see 21 C.F.R. § 803.3.

[14] National Institute of Health, BRCA1 & BRCA2: Cancer Risk and Genetic Testing, National Cancer Institute, (last visited Apr. 22, 2016).

[15] In Vitro Diagnostics, U.S. Food and Drug Administration, (last updated Oct. 24, 2016).

[16] Companion Diagnostics, U.S. Food and Drug Administration, (last updated Oct. 5, 2016).

[17] Drucker & Krapfenbauer, supra note 10at 2. Pharmacodynamic biomarkers aren’t limited to genetic information. The other “biochemical and molecular characteristics” referred to include proteins, metabolites, essential elements, and tracers since all these molecules can affect drug action. Amit Agarwal et al., The Current and Future State of Companion Diagnostics, 8 Pharmacogenomics and Personalized Med. 99 (2015).

[18] Zivana Tezak et al., FDA and Personalized Medicine: In Vitro Diagnostic Regulatory Perspective, 7 Personalized Med. 517, 522 (2010). For example, the drug Warfarin, which is used to treat blood pressure, is metabolized at different rates depending on what version of the CYP2C9 gene a patient possesses. A CDx for Warfarin enables physicians to identify the 30% of European and Caucasian populations that metabolize Warfarin at a slower rate, and therefore require a lower dose, to avoid internal bleeding. Simon Sanderson et al., CYP2C9 Gene Variants, Drug Dose, and Bleeding Risk in Warfarin-Treated Patients: A HuGEnetTM Systematic Review and Meta-Analysis, 7 Genetics in Medicine 97 (2005).

[19] Stephen Naylor & Toby Cole, Overview of Companion Diagnostics in the Pharmaceutical Industry, Drug Discovery World, (last visited Feb. 22, 2016) (acknowledging widespread agreement that a companion diagnostic provides biological and/or clinical information that enables better decision making about the use of a potential drug therapy).

[20] E.g., Christopher P. Leamon & Mike A. Sherman, The Rise of Companion Diagnostics: A Step Towards Truly Personalized Medicine, Oncology Business Review (obr) Green, (last visited Mar. 1, 2016).

[21] Remarkably, the HerceptTest is now also used to identify those in the 22% subpopulation of patients with stomach cancer that are eligible for treatment with Herceptin. Dako: FDA approval of Diagnostic Tests Provides Hope for Patients with Stomach Cancer, Thomson-Reuters, (last visited Apr. 22, 2016).

[22] A.R. Hughes, Pharmacogenetics of Hypersensitivity to Abacavir, 8 The Pharmacogenomics Journal 365 (2008). See also Leamon & Sherman, supra note 20; Sairamesh & Rossbach, supra note 4 (same).

[23] Edward Blair et al., Aligning the Economic Value of Companion Diagnostics and Stratified Medicines, 2 J. Pers. Med. 257, 261 (2012).

[24] Id.

[25] Drug Analyst, Equity Research, Zelboraf, DrugAnalyst Concensus Database, (last visited Apr. 22, 2016).

[26] But see Gregory Zaric, Cost Implications of Value-Based Pricing for Companion Diagnostic Tests in Precision Medicine, PharmacoEconomics, (2016) (finding in some scenarios analyzed that companion diagnostic tests will lead to an increase in healthcare costs).

[27] E.g. Lisa M. Meckley & Peter J. Neumann, Personalized Medicine: Factors Influencing Reimbursement, 94 Health Pol. 91, 97 (2010) (concluding from six case studies that “the hype of personalized medicine technologies has outpaced its evidentiary support to date”); Mark D. Hughes, Molecular Diagnostics Market Trends and Outlook, Enterprise Analysis Corporation, (last visited Mar. 3, 2016) (describing pharmacogenetics as a “disappointment” from the perspective of molecular diagnostic vendors despite initial enthusiasm about sales).

[28] See e.g., Drucker & Krapfenbauer, supra note 10 (noting that thousands of putative biomarkers have been identified and published, dramatically increasing the opportunities for developing more effective therapeutics); James Buchanan et al., Issues Surrounding the Health Economic Evaluation of Genomic Technologies, 14 Pharmacogenomcis 1833 (2013) (acknowledging the promise of new genetic diagnostic technologies).

[29] Dee Luo et al., A Quantitative Assessment of Factors Affecting the Technological Development and Adoption of Companion Diagnostics, 6 Frontiers in Genetics 1 (2016).

[30] Adrian Towse et al., Understanding the Economic Value of Molecular Diagnostic Tests: Case Studies and Lessons Learned, 3 J. Personalized Medicine 288 (2013).

[31] Mark R. Trusheim et al., Quantifying Factors for the Success of Stratified Medicine, 10 Nature Reviews: Drug Discovery 817 (2011).

[32] Robert McCormack et al., Co-development of Genome-Based Therapeutics and Companion Diagnostics, 311 J. Amer. Medical Assoc. 1395 (2014).

[33] Sairamesh & Rossbach, supra note 4, at 2; Jerel Davis et al., The Microeconomics of Personalized Medicine, McKinsey & Company, (last visited Feb. 22, 2016).

[34] Agarwal et al., supra note 17, at 106 (2015).

[35] E.g., Joshua Cohen et al., Clinical and Economic Challenges Facing Pharmacogenomics, 13 Pharmacogenomics J. 367 (2013) (purporting to explain why there is a lack of comprehensive reimbursement of CDx’s).

[36] Hughes, supra note 22; Naylor & Cole, supra note 19 (companion diagnostics have been “cautiously adopted”); Sairamesh & Rossbach, supra note 4, at 2 (“[O]nly a few personalized medicine based diagnostic tests have achieved high levels of clinical adoption.”).

[37] Drucker & Krapfenbauer, supra note 10, at 44; Luo et al., supra note 29, at 2-3.

[38] Cohen et al., supra note 35.

[39] E.g. McCormack et al., supra note 32 (calling attention to the fact that many commonly-used and costly agents don’t have validated CDx tests and are ineffective in large number of patients).

[40] E.g. Drucker & Krapfenbauer, supra note 10, at 3 (identifying challenges in developing biomarkers for CDx tests that are of high sensitivity and specificity).

[41] See generally P.M. Danzon, Pricing and Reimbursement of Biopharmaceuticals and Medical Devices in the USA, 3 Encyclopedia of Health Economics 127 (2014) (providing an overview of payer reimbursement for drugs and medical devices in the USA); see also P. Deverka, Pharmacogenomics, Evidence, and the Role of Payers, 12 Pub. Health Gen. 49 (2009).

[42] Eric Faulkner et al., Challenges and Development and Reimbursement of Personalized Medicine-Payer and Manufacturer Perspectives and Implications for Health Economics and Outcomes Research, 15 Value Health 1162, 1163 (2012).

[43] E.g., Davis et al., supra note 33 (estimating that CDx’s save $600 to $28,000 per patient).

[44] See Faulkner et al., supra note 42 (qualifying the fact that payers recognize the potential advantages of personalized medicine with the notion that they are cautious regarding the potential downsides of the CDx approach).

[45] See Davis et al., supra note 33.

[46] Cohen et al., supra note 35, at 387.

[47] Id.

[48] See infra Part II.B.1 for further discussion on the importance of the quality of clinical utility evidence to payer decision-making, and the consequences arising from the difficulties in assessing clinical utility.

[49] Paul Engstrom et al., NCCN Molecular Testing White Paper: Effectiveness, Efficiency and Reimbursement, 9 J. Nat’l Comprehensive Cancer Network (Supl. 6) S1 (2011)

[50] Sairamesh & Rossbach, supra note 4, at 3.

[51] Id. (turnover also makes it less attractive to reimburse prophylactic tests that minimize likelihood of disease occurring later in life).

[52] See infra Part II.D for further discussion of the variability of payer decision making.

[53] For example, the payer company Aetna, does not cover CYP2C9 testing for Warfarin, citing the lack of clinical and cost-effectiveness evidence in their “Policy on Pharmacogenomic Testing” as a reason for not covering the test, while the payer Cigna does cover the test. Meckley & Neumann, supra note 27, at 94.

[54] E.g. Davis et al., supra note 43; McCormack et al., supra note 32 (describing the financial position of diagnostic companies as “fragile”).

[55] Joshua P. Cohen & Abigail E. Felix, Personalized Medicine’s Bottleneck: Diagnostic Test Evidence and Reimbursement, 4(2) J. Personalized Med. 163 (2014); Agarwal et al., supra note 17 (emphasizing that the potential revenue from a “blockbuster” CDx is rarely over $100 million while annual sales of the companion drug can reach up to ten times that amount).

[56] These were that the drug company would absorb most of the diagnostic development costs and that the diagnostic company would receive net $200 payer reimbursement per test. Trusheim et al., supra note 31, at 829.

[57] Id.

[58] Agarwal et al., supra note 17; see also McCormack et al., supra note 32 (noting that the financial position of diagnostic companies for developing a CDx is often fragile); Leeland Ekstrom et al., Well Begun Is Half Done: Success Factors for Companion Diagnostic Launch, in Personalized Medicine, The Path Forward, 28 (McKinsey & Company, eds. 2013).

[59] For example, a diagnostic company that owns several clinical laboratories may develop a CDx in one of its labs and then transfer the CDx to several clinical labs within its network. This would be a considered a commercial CDx. U.S. Food & Drug Admin., Draft Guidance for Industry, Clinical Laboratories, and FDA Staff: Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs) (Oct. 3, 2014), [hereinafter, FDA Guidance for LDTs].

[60] For example, a laboratory will use peer-reviewed articles and its own instruments to develop a testing protocol that will be verified and validated within the lab. Once validated, the CDx can be used by the lab to provide clinical diagnostic results for health care providers. Id. LDT-CDx’s are sometimes developed as novel CDx’s for post-approval drugs on the market, but more often, they are developed as copies of co-developed CDx’s.

[61] The additional cost of obtaining FDA approval for a CDx as compared to an LDT-CDx can range from $24–$75 million. Frost & Sullivan, Opportunities and Growth Strategies for the APAC IVD Industry, SlideShare, (last visited Feb. 29, 2016).

[62] Agarwal et al., supra note 17.

[63] Id.

[64] Faulkner et al., supra note 42, at 1166.

[65] Maham Ansari, The Regulation of Companion Diagnostics: A Global Perspective, 47 Therapeutic Innovation & Regulatory Science 405, 406 (2013).

[66] See Davis et al., supra note 33 (claiming that the potential to generate greater value after marketing is more important for the economics of pharmaceutical companies than making development more productive).

[67] Faulkner et al., supra note 42, at 1165.

[68] See infra Part II.B.1 for further dissection of the incentives of drug companies to engage in CDx co-development.

[69] Davis et al., supra note 33; Drucker & Krapfenbauer, supra note 10, at 3; Sairamesh & Rossbach, supra note 4, at 3; Leamon & Sherman, supra note 20. For example, Pfizer’s drug Zalkori was able to obtain FDA approval in a lightning-fast 1.8 years with the assistance of its co-developed CDx, the ALK Break Apart FISH Probe Kit. Agarwal et al., supra note 17. The drugs Tarceva and Iressa, which were not initially approved with a CDx, took 5.3 and 7.0 years respectively. Id.

[70] E.g. Davis et al., supra note 33. For further discussion on the risks associated with CDx co-development to a diagnostic developer see infra Part II.B.2.

[71] Sairamesh & Rossbach, supra note 4, at 4 (noting that co-development might increase costs and delay drug developments since clinical trials must frequently be larger when CDx’s are employed and that this is more likely to occur when the drug’s mechanism of action is less well-understood); Mark R. Trusheim, Economic Challenges and Possible Policy Actions to Advance Stratified Medicine, 9 Personalized Medicine 413, 414 (2013) (listing other factors that offset the potential gains of co-development).

[72] Agarwal et al., supra note 17.

[73] Id. The increase in sales growth is modest, but it is so rare for a drug to experience faster growth eight years after its initial launch, that the example is worth nothing.

[74] Davis et al., supra note 33; Sairamesh & Rossbach, supra note 4, at 4 (noting that CDx’s divide the market of treatable patients into groups and clusters thereby reducing market share of the patient population).

[75] Amanda Sarata & Judith Johnson, Regulation of Clinical Tests: In Vitro Diagnostic (IVD) Devices, Laboratory Developed Tests (LDTs), and Genetic Tests, Congressional Research Service Report 11 (2014). The Clinical Laboratory Improvement Amendments Act (CLIA) of 1988 provides the CMS with authority to regulate clinical labs that carry out diagnostic testing. 42 U.S.C. § 263(a).

[76] Sarata & Johnson, supra note 75, at ii.

[77] Id. at 11.

[78] Id.

[79] Id.

[80] Id.

[81] See, e.g., Report of the Secretary’s Advisory Committee on Genetics, Health and Society, U.S. System of Oversight of Genetic Testing: A Response to the Charge of the Secretary of Health and Human Services, (April 2008).

[82] See, e.g., Office of Public Health Strategy and Analysis, FDA, The Public Health Evidence for FDA Oversight of Laboratory Developed Tests: 20 Case Studies (Nov. 16, 2015) (examining events involving 20 LDTs with inaccurate results that placed patients at risk).

[83] U.S. Dep’t of Health and Human Services, FDA, Center for Devices and Radiological Health, Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs), Draft Guidance, Oct. 2014 [hereinafter FDA Draft Guidance].

[84] Id. at 23-27.

[85] Sairamesh & Rossbach, supra note 4, at 6; Davis et al., supra note 33.

[86] Ildar Akhmetov et al., Market Access Advancements and Challenges in “Drug-Companion Diagnostic Test” Co-Development in Europe, 5 J. Personalized Med. 213, 224 (2015).

[87] Engstrom et al., supra note 49, at S-3.

[88] Cohen & Felix, supra note 55; Cohen et al., supra note 35; Meckley et al., supra note 27; Towse et al., supra note 30.

[89] Cohen et al., supra note 35.

[90] Cohen & Felix, supra note 55, at 386.

[91] Id.; Towse et al., supra note 30, at 169 (finding only four studies in the CEA registry that included a CDx in analyzing the cost-effectiveness of the corresponding drug).

[92] Cohen & Felix, supra note 55, at 171; Cohen et al., supra note 35, at 380; Towse et al., supra note 30, at 297-99.

[93] Sarata & Johnson, supra note 75.

[94] Meckley & Neumann, supra note 27, at 96.

[95] Cohen & Felix, supra note 55, at 167.

[96] McCormack et al., supra note 32, at 1396.

[97] Id.

[98] Meckley & Neumann, supra note 27, at 94.

[99] Id. at 97.

[100] Towse et al., supra note 30; Davis et al., supra note 33.

[101] Blair et alsupra note 23, at 258–59; Meckley & Neumann, supra note 27, at 97.

[102] Meckley & Neumann, supra note 27, at 91-92 (conducting six case studies of CDx tests and examining the practices of five different payers and finding the strength of the evidence of the test to be the strongest predictor of reimbursement); Cohen et al., supra note 35, at 383 (surveying payers and finding that among the 12 that responded, clinical utility was unanimously ranked as the most strongly considered criteria in making coverage decisions).

[103] For example, the commercial payer Aetna does not cover CYP2C9 testing for Warfarin, citing the lack of clinical and cost-effectiveness evidence in their “Policy on Pharmacogenomic Testing” as a reason for not covering the test, while the payer Cigna does. Meckley & Neumann, supra note 27, at 94. See also Cohen & Felix, supra note 55, at 169 (surveying payers and finding that among the eleven that responded, the largest majority questioned the clinical utility of the CDx tests in the study over any other criteria); Faulkner et al., supra note 42, at 1164-66 (noting skepticism of the efficacy of CDx’s to predict responses to therapy and uncertainty of the necessity of a CDx slows reimbursement).

[104] E.g., Cohen et al., supra note 35, at 382-84 (finding that three out of the twelve payers who completed the survey do not provide reimbursement for the KRAS CDx explicitly required by the FDA for use with the colon cancer drug cetuximab).

[105] Faulkner et al., supra note 42.

[106] E.g. Meckley & Neumann, supra note 27 (arguing that evidence on the impact of CDx testing on actual patient outcomes is lacking).

[107] E.g. Cohen & Felix, supra note 55, at 171; Luo et al., supra note 29, at 2. The FDA’s 2014 guidance document regarding CDx’s also recommends that the CDx be co-developed especially where it is essential for the safe and effective use of the product. U.S. Food and Drug Administration, In Vitro Companion Diagnostic Devices: Guidance for Industry and Food and Drug Administration Staff, (Aug. 6, 2014).

[108] Leamon & Sherman, supra note 20.

[109] Id.

[110] See Cohen et al., supra note 35, at 379 (claiming that a CDx intended to inform uses of a drug in development should be studied in parallel in Phases I or II).

[111] Dorothea K. Thompson, From Research to Clinical Application: Challenges in Regulating Companion Biomarker Tests for “Personalized” Drugs, 1 J. Pharmaceutical Analytics & Insights 1 (2016).

[112] This embodies the example of the Cobas 4800 Mutation CDx, used with the drug Zelboraf, discussed in Part I.

[113] Joshua Cohen, Overcoming Regulatory and Economic Challenges Facing Pharmacogenomics, 29 New Biotechnology 751-56 (2012); Drucker & Krapfenbauer, supra note 10; Thompson, supra note 111.

[114] That the incentives of drug companies and diagnostic companies are misaligned when it comes to CDx development is a frequently-held position in the pharmacologic and biotech business literature. See generally Thompson, supra note 111.

[115] This difference in business models has led many authors in the pharmacologic and biotech business literature to claim that the incentives of the stakeholders in the CDx industry are misaligned. See e.g., Agarwal et al., supra note 17; Davis et al., supra note 33; Sairamesh & Rossbach, supra note 4, at 2-4; Faulkner et al., supra note 42, at 1163-67. Scientific factors can and do still slow co-development as well, mostly in situations where the drug’s mechanism of action is poorly understood. Leamon & Sherman, supra note 20. However, that does not change the fact that economic growth still lags behind the science.

[116] Peter Collins, Personalized Medicine: From Biomarkers to Companion Diagnostics, GEN: Genetic Engineering & Biotechnology News (March 27, 2013),

[117] See Luo et al., supra note 29. The second case study was completed at MIT by Trusheim et al., supra note 31, and is discussed infra Part II.C.1.

[118] Luo et al., supra note 29.

[119] Id. at 3.

[120] Id. at 6.

[121] See supra note 109 and accompanying text.

[122] Davis et al., supra note 33.

[123] Trusheim, supra note 71; see also Trusheim et al., supra note 31, at 827 (explaining that the need to screen more patients with a CDx increases the complexity of clinical trials and may lengthen the duration of the study).

[124] Trusheim, supra note 71.

[125] Trusheim et al., supra note 31, at 827.

[126] Heather Thompson, Companion Diagnostics from a Business Perspective, MDDI: Med. Device & Diagnostic Industry (March 8, 2013),

[127] See id. Phase I results of the ponatinib trial suggested the drug may be more effective in patients with a particular mutation. Phase II showed better results in the subpopulation with the mutation, but on the whole, stratifying would not be required for the clinical trial results to meet the primary end point for all patients. The FDA submission for pre-market approval of the CDx was therefore withdrawn by the drug company. Id.

[128] Thompson, supra note 126.

[129] See supra Part II.A.2.

[130] See supra note 70 and accompanying text.

[131] Trusheim et al., supra note 31.

[132] Id. at 822.

[133] Id.

[134] Id. at 823.

[135] See supra Part II.A.1.

[136] The quantitative study by Trusheim suggested that price negotiations with drug companies prior to when a drug is FDA-approved have greater flexibility for the drug company. See Trusheim et al., supra note 31.

[137] Agarwal et al., supra note 17; Towse et al., supra note 30; Blair et al., supra note 23, at 259-60.

[138] Trusheim et al., supra note 31, at 827.

[139] Nicholas A. Meadows et al., An Evaluation of Regulatory and Commercial Barriers to Stratified Medicine Development and Adoption, 15 Pharmacogenomics J. 6, 10 (2015).

[140] Trusheim et al., supra note 31, at 829.

[141] McCormack et al., supra note 32.

[142] Agarwal et al., supra note 17, at 105.

[143] Id.

[144] McCormack et alsupra note 32 (noting that some diagnostic companies sell tests at costs that reflect running the test and not overall investment of co-development or value CDx delivers to patient).

[145] Payer reimbursement for diagnostics has its own complications, however. Up until 2013, all payers billed in-vtiro diagnostic devices using the method of “non-specific coding/code stacking”. Meckley & Neumann, supra note 27, at 97. This method describes the process associated with testing and therefore reimburses the cost of carrying out the individual components of a CDx test, not the value provided by the CDx. Id. Fortunately, some payers such as Medicare payers, have begun to move towards “value-based pricing” for diagnostics (the method always applied for drugs), which should help diagnostic companies to capture more value from their CDx’s. See Meadows et al., supra note 139, at 9. But many authors still emphasize that there remains a lack of uniform standards for applying criteria across payers that makes coverage decisions unpredictable, and continues to make it difficult for diagnostic developers to obtain full reimbursement. E.g., Real World Health Care, Personalized Medicine & Companion Diagnostics: What You Need to Know, Health Well Found. (Oct. 28, 2015),; Faulkner et al., supra note 42, at 1169.

[146] Luo et al., supra note 29, at 9; Agarwal et al., supra note 17, at 106-08.

[147] McCormack et al., supra note 32; Leeland Ekstrom et al., Capturing Value for Dx in Personalized Medicines—Is There a Path?, in Personalized Medicine, The Path Forward, 28 (McKinsey & Company, eds. 2013) (noting that lab services companies can provide substitutes for commercial CDx’s without fear of patent challenges).

[148] See infra Part II.A.2.

[149] U.S. Food and Drug Administration U.S. Food and Drug Administration,The Public Health Evidence for FDA Oversight of Laboratory Developed Tests: 20 Case Studies, 29-30 (2015),

[150] Ekstrom et al., supra note 147, at 36 (stressing that first mover advantage is limited because of significant competition from LDTs).

[151] McCormack et al., supra note 32, at 1396.

[152] MolDx, Clinical Test Evaluation Process (CTEP) M00096, VMolDx, Clinical Test Evaluation Process (CTEP) M00096, Version 5.0 (2015),$File/MolDX_Clinical_Test_Evaluation_Process_(CTEP)_M00096.pdf.

[153] MolDx also adopts a set of standards and best practices for assessing clinical utility and cost-effectiveness but many have disavowed the clinical utility assessment criteria. Cohen & Felix, supra note 55, at 172.

[154] McCormack et al., supra note 32; Faulkner et al., supra note 42, at 1169.

[155] See Frost & Sullivan, supra note 61; see also supra note 113 and accompanying text.

[156] Agarwal et al., supra note 17, at 104-05.

[157] Id.

[158] Id. See also Leamon & Sherman, supra note 20 (illustrating the four deal types in a table and providing examples of companies that engage in each of the deal methods).

[159] Cohen et al., supra note 35, at 387 (noting a specific example of successful risk-sharing, the agreement between United Healthcare and Genomic Health for the Oncotype Dx test used in breast cancer treatment).

[160] See FDA Guidance for LDTs, supra note 59; Kenneth D. Levy et al., FDA’s Draft Guidance on Laboratory-Developed Tests Increases Clinical and Economic Risk of Adoption of Pharmacogenetic Testing, 55 J. Clinical Pharmacology 725, 725–26 (2015).

[161] See Levy et al., supra note 160, at 726.

[162] FDA Guidance for LDTs, supra note 59, at 8, 11-15.

[163] The FDA will focus its enforcement efforts on the highest risk category, giving diagnostic labs twelve months from the date of final issuance to comply with the new regulations. Id. at 13–14. Pre-market review can be accomplished in one of two ways. The first route is for the diagnostic developer to conduct clinical studies and subsequently submit a pre-market approval application. If there is evidence providing a reasonable assurance that the test is safe and effective, the FDA will grant pre-market approval. The second and less expensive route is for the diagnostic developer to submit a 510(k) application proving that the test is substantially equivalent to one already FDA approved and on the market. If so the FDA will “clear” the test. Id. at 20, 23-24.

[164] See U.S. Food & Drug Administration, supra note 149, at 2, 4, 27.

[165] Laboratory Developed Tests, Am. Clinical Laboratory Ass’n, (last visited Feb. 28, 2016).

[166] Id.

[167] The FDA has emphasized leveling this “uneven playing field” in supporting its recommendation. See e.g., FDA, supra note 82, at 4.

[168] FDA pre-market approval for a commercial CDx can cost up to $75 million more to develop than a corresponding LDT-CDx. Doug Dolginow et al., Mystery Solved! What is the Cost to Develop and Launch a Diagnostic?, Dɪᴀᴄᴇᴜᴛɪᴄs, Iɴᴄ., (last visited Mar. 3, 2016).

[169] McCormack et al., supra note 32, at 1395-96.

[170] See, e.g., Robert P. Merges, A Transactional View of Property Rights, 20 Bᴇʀᴋᴇʟᴇʏ Tᴇᴄʜ. L.J. 1477, 1489–90 (2005); Clarisa Long, Patent Signals, 69 U. Cʜɪ. L. Rᴇᴠ. 625, 653 (2002) (arguing that patents can be used to signal the quality of a startup to investors); Stuart J.H. Graham et al., High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey, 24 Bᴇʀᴋᴇʟᴇʏ Tᴇᴄʜ. L.J. 1255, 1280–83 (2009); Ted Sichelman & Stuart J.H. Graham, Patenting by Entrepreneurs: An Empirical Study, 17 Mɪᴄʜ. Tᴇʟᴇᴄᴏᴍᴍ. & Tᴇᴄʜ. L. Rᴇᴠ. 111, 159 (2010).

[171] Dᴀɴ L. Bᴜʀᴋ & Mᴀʀᴋ Lᴇᴍʟᴇʏ, The Patent Crisis and How the Courts Can Solve It 4 (2009).

[172] See infra Part II.C.3.

[173] See supra note 166 and accompanying text.

[174] See, e.g., Shyamkrishna Balganesh, Hot News”: The Enduring Myth of Property in News, 111 Cᴏʟᴜᴍ. L. Rᴇᴠ. 419, 433 (2011) (describing “Arrow’s information paradox” wherein “[a] potential licensee has no way of evaluating the information/intangible until it is disclosed to him; yet, upon such disclosure he has little reason to want to pay for it”).

[175] See Ekstrom et al., supra note 58, at 22.

[176] Cynthia H. Zhang & Y. Philip Zhang, Maximizing the Commercial Value of Personalized Therapeutics and Companion Diagnostics, 31 Nᴀᴛᴜʀᴇ Bɪᴏᴛᴇᴄʜɴᴏʟᴏɢʏ 803, 803–04 (2013).

[177] Id.

[178] Sec’y’s Advisory Comm. on Genetics, Health, & Soc’y, Dep’t of Health & Human Servs., Gene Patents and Licensing Practices and Their Impact on Patient Access to Genetic Tests (2010), available at _patents_report_2010.pdf.

[179] Id. at 20-36.

[180] Id. at 1, 9.

[181] Id.

[182] Drucker & Krapfenbauer, supra note 10, at 2-4.

[183] See supra note 18 and accompanying text.

[184] Frost & Sullivan, supra note 61.

[185] See, e.g., Brief for American Medical Association et al. as Amici Curiae Supporting Petitioners at 13–16, Ass’n for Molecular Pathology v. Myriad Genetics, Inc. 133 S. Ct. 2107 (2013) (No.12-398).

[186] See Cohen et al., supra note 35, at 387 (providing price ranges for various CDx’s).

[187] See Holman, supra note 2, at 305.

[188] See Trusheim, supra note 71, at 418 (discussing some of these policy proposals).

[189] Mayo Collaborative Servs. v. Prometheus Labs, 132 S. Ct. 1289, 1294 (2011).

[190] Id. at 1294, 1302.

[191] Alice Corp. Pty. Ltd. v. CLS Bank Int’l et al., 134 S. Ct. 2347, 2355 (2014).

[192] See, e.g., 2014 Interim Guidance on Patent Subject Matter Eligibility, 79 Fed. Reg. 74618, 74619, 74622 (Dec. 16, 2014) (to be codified at 37 C.F.R. pt. 1); Content Extraction & Transmission LLC v. Wells Fargo Bank, N.A., 776 F.3d 1343, 1346 (Fed. Cir. 2014) (noting that “the two-step framework described in Mayo and Alice guides [the subject matter eligibility] analysis”).

[193] Alice, 134 S. Ct. at 2355.

[194] Id.

[195] Mayo, 132 S. Ct. at 1298.

[196] Eisenberg, supra note 2, at 257.

[197] See Ariosa Diagnostics, Inc. v. Sequenom, Inc., 788 F.3d 1371, 1373 (Fed. Cir. 2015) (reh’g en banc denied); In re BRCA1- & BRCA2-Based Hereditary Cancer Test Patent Litig., 999 F.Supp. 2d 1377 (J.P.M.L. 2014); Genetic Techs. Ltd. v. Lab. Corp. of Am. Holdings, No. CV 12-1736-LPS-CJB, 2014 WL 4379587, at *13-14 (D. Del. Sept. 3, 2014).

[198] Ariosa Diagnostics, 778 F.3d at 1373 (laying out the key patent claims at issue).

[199] Rachel E. Sachs, Innovation Law and Policy: Preserving the Future of Personalized Medicine, 49 U.C. Davis L. Rev. 1881, 1912 (2016).

[200] Zhang & Zhang, supra note 176, at 804.

Correlative Obligation in Patent Law: The Role of Public Good in Defining the Limits of Patent Exclusivity

Correlative Obligation in Patent Law: The Role of Public Good in Defining the Limits of Patent Exclusivity
Download a PDF version of this article here.

By Srividhya Ragavan*



Of all the thieves, robbers, murderers and rapists, one man emerged the “most hated man in America” in the year 2015. That man was Martin Shkreli, the Chief Executive of Turing Pharmaceuticals, and his infamy was a direct reaction to raising the price of Daraprim, a generic drug originally developed in the 1950s, by 5000%.[1] Although the patent on the Turing drug had expired, the price of pharmaceuticals in patent monopoly contexts continues to represent a significant international debate. The price of pharmaceuticals is an important election issue in the United States. In January 2016, fifty Democratic members of the House, led by Representative Lloyd Doggett of Texas, urged government agencies to consider diluting or diminishing the exclusive rights over patents on pharmaceuticals.[2] While the pharmaceutical industry denounced reductions in patent exclusivity as arbitrary on the grounds that they would stifle innovation, non-governmental organizations and the public seemed broadly in favor.[3] At the center of this debate is the role of the exclusivity conferred by the grant of a patent. Contemporary issues involving patent law have struggled to define the limits of patent exclusivity in the context of addressing the ability of patents to deliver the purported objective of public benefit. The effect of patent trolls on innovation, access to essential medicines, and exclusive rights on basic research tools are a mere sample of issues that have raised doubts regarding the patent system’s ability to serve its preordained promise of public benefit.[4] In all, the quest for a patent system that serves to encourage desirable innovation without imposing undue social cost is ongoing, and its end remains elusive.

Traditionally, scholarly discussions on the limits of patent exclusivity posit patents in functional terms. That is, patents are defined as property rights granted to encourage desirable innovation. The system was designed to capture the objective of enhancing public benefit by incentivizing creativity without imposing undue social cost. However, positing patent law within the property framework has been used to support a notion that the patent system is functioning to ultimately achieve its objectives.[5] Scholars and even courts rely on a property rhetoric to sustain the patent system.[6] Generally, the property based conception of patents has had the laudatory impact of working towards a system that results in more patents, which is decoded as more innovation, which, in turn, is discerned as an increase in public benefit.[7] Such a perception of patents has beneficially encapsulated patent law with the appealing sheen of producing public benefit.[8]

This paper asserts that patent law is a misfit within the traditional property regime. That is, the prevailing notions of patents as an extension of property rights lead one to construe patents in terms of rights rather than obligations. Property law posits rights in correlative terms and thus, defines rights from the perspective of the duty of third parties. Thus, acquisition of patent rights signals a societal duty to forbear from the patented invention. However, the property-based construct of patents does a poor job of defining the limits of the rights. As such, patent law lacks a clear outline or measure of the patent owner’s duties corresponding to the rights.

For instance, property regimes, rarely, if ever, provide for absolute ownership. While Blackstone may have touted an Englishman’s “sole and despotic dominion” over his land, ownership over real property is regularly subject to public interests.[9] Eminent domain and government regulations over private property serve as examples of how public interests limit private property. Thus, in real property law, the components of ownership and the ensuing exclusivity have clear limits and are tied to the larger goals of establishing societal orderliness. In contrast, contemporary patent law struggles with defining the outer limits of patent exclusivity.[10] Importantly, over time, it has resulted in a lack of correlation or proportionality between exclusive rights and the public benefit goals it seeks to achieve.[11] For example, a patent owner has limited duties in return for acquiring the exclusionary rights. The patent owner has no direct duty towards securing the end of public benefit, save for the disclosure. The patent mechanism does not clearly define whether, and if so, when, public interest considerations supersede the private rights of the patent owner. For example, a pharmaceutical patent owner does not have a duty to institute access-enabling mechanisms.[12] Even during a public health crisis, a patent owner is not legally obligated to price differentially or license the patent, voluntarily or compulsorily.[13] While patent owners have a duty to honor a state’s power of eminent domain, the practice of compulsory licensing has been controversial.[14] Thus, under the current structure, the obligation of patent owners in the context of the larger goals of the system is unclear. A lack of clear limits, this paper highlights, has caused an imbalance in the rights versus duties construct within patent law. It has also blurred the lines that define the public benefit goals of the system.

This shift in rhetoric towards a rights-centric approach has resulted in a more Blackstonian view of patent protection, causing patent law to move away from the public benefit goals of the system. Consequently, instrumental elements of the patent system have coalesced to predominantly protect the inventor. In turn, public benefit aspects of the system have been relegated to the status of a by-product. Patent law has long suffered from a lack of a realistic scale to measure its output, which has led to technical measures such as the number of patents to become predicates of its outcome. Slowly, patent disclosures increasingly became perceived as the sole exchange for gaining exclusivity. Disclosure has come to be treated as the singular constituent element that delivers the objectives of the system.[15] The resulting tendency is to treat quantitative measures – the number of patents issued – as a proxy for desirable innovation that is presumed to benefit the public. Consequently, more private property has come to denote more public benefit. That is perhaps why more patents are generally considered desirable. We are at a point where scholars, and even courts, express their discontent over the quality of innovation and disclosures.[16]

This paper’s main assertion is that the extent of exclusivity that patent monopoly currently bestows seems unsupported by the doctrinal construct of the philosophy behind exclusivity.[17] Thus, at the outset, the discourse in this paper outlines the historical as well as the philosophical perspectives of patent exclusivity. A nuanced observation of the history of patent exclusivity reveals that the basic doctrinal and normative structure of patent law provides limited exclusivity focused on achieving the one goal of public benefit. Consequently, the goal of securing public benefit defines the limits of exclusivity, and by default, the patent system. That is, public benefit serves as the scale to measure the merits of the patent system.[18] Such a measure directly addresses the obligation of the patent system and provides an outcome not only addressing the rights in patents, but more importantly, their limits.

Next, the paper traces the prevailing rights over patents. The discussion outlines how scholars and courts historically associated patent rights as a means to achieve two functional ends,[19] namely: (i) encouraging or incentivizing innovation to achieve larger public benefit goals; and (ii) disseminating information through disclosure.[20] Over time, each of these outcomes has come to represent interrelated functions, regardless of whether they do or not in fact. Disclosure has come to be interrelated with inventive presence to the extent that more disclosure has come to mean more inventive activities. Slowly, under the contemporary view, securing patent rights is implicitly considered as satisfying the twin objectives of encouraging innovation and disseminating information. Such a construct, this paper asserts, dampens the presence of a duty of the patent owner to society. Instead, it has posited patent grants largely within a rights paradigm, diluting the duty requirement of the patent holder. Slowly, the grant of a patent is presumed to fulfill the corresponding duty to discharge the innovation and dissemination objectives of the patent system. The realigned rights and duties relationship in its prevailing form has led to a distorted understanding of patent law divorced from its social responsibilities. Thus, the absoluteness of the currently prevailing form of rights over patents, generally attributed as a by-product of association with property law, is perhaps misguided.[21]

Last, the paper asserts that the patent owner has a corresponding duty which arises from the overlay of the law of contracts on underlying patent law theories. The characteristic feature of contract law, on which intellectual property is heavily based, imposes corresponding obligations or responsibilities over the rights holder. The paper draws support from historic and philosophical sources of intellectual property law to assert that the overlay of the law of contracts on patents cannot be ignored. Instead, the overlay of the law of contracts is desirable because it can better tailor patent law to encourage innovation without undue social costs. The grant of monopoly rights is a contract with the government in exchange for the patent holder providing a benefit to society. The intrinsic nature of contract law imposes corresponding obligations on the rights holder. The contract necessarily balances granted rights with imposed corresponding obligations of the patent owner. That is, the patent owner would be subject to an obligation in proportion to the rights granted.[22]Such a design would result in public benefit goals inherently limiting the ambit of patent exclusivity.

The historic role of the exclusivity doctrine, from which Part I of this paper proceeds, is the obvious starting point to appreciate the role and architecture of the exclusivity doctrine in the context of the public benefit expectations. Part II highlights how instrumental elements of the contemporary patent regime have suffered from an acute disconnect with the targeted objectives of the system, resulting in a rights-centric patent system. Next, Part III defines the ambit of the correlative duty to delineate the rights and obligations in the background of the current system. In doing so, Part III examines the kernel of the rights in patents as well as the source of the duty not to infringe and concludes that patent law needs to be reoriented from the perspective of the grant in order to achieve the public benefit objectives.

I. Of Exclusivity & Public Benefit

This part explores the doctrinal core of patent exclusivity and presents a historical understanding of the doctrine in terms of its objectives. The historical orientation of patents is examined in the context of its nexus with the public benefit obligation. In doing so, the narrative postulates that patent exclusivity can be most effective when viewed from its ordained public function. Hence, patent exclusivity is meant to be limited by larger public benefit considerations. Disclosures, while serving an important role, cannot represent the sole exchange for gaining exclusive rights.

A. A Historical Overview of the Doctrine of Exclusivity

The core of patent law’s doctrinal and normative structure can best be elucidated from the writings of Thomas Jefferson.[23] In denying a connection between patent law’s proprietary underpinnings and natural rights, Jefferson asserts that the exclusive right to the invention is a direct return for the benefit that the society will derive.[24] Jefferson describes the concept of stable ownership as a mere gift of social law as opposed to a natural right.[25] Jefferson indicates that the exclusive right of the patent owner is not a natural right, but instead is an encouragement “to pursue ideas which may produce utility but this may or may not be done, according to the will and convenience of the society, without claim or complaint from anybody.”[26] Thus, benefit to society is the central theme in Jefferson’s thinking. Jefferson emphasizes the line that segregates items for which society can suffer “the embarrassment of an exclusive right” from those for which it cannot.[27] For Jefferson, products that can benefit from exclusive rights ought to be clearly distinguished from those that do not deserve or require such protection, although he acknowledges the difficulties of the exercise.[28] Patent Commissioner Conway Coe would later rephrase the trade-off as one where “giving the inventor a limited amount of protection, [it] assures society of the benefits of his genius.”[29] Thus the internal core of patent law connects societal benefit to the vested exclusive rights.[30]

The inherent dilemmas confronting the rights versus obligation question were captured by Thomas Jefferson in his letter to Isaac McPherson.[31] Jefferson, himself an inventor and a draftsman of the 1793 Patent Act,[32] outlined to McPherson in 1813 the social and economic rationale of the patent system.[33] He wrote, “[s]ociety may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from anybody.”[34] The societal discretion outlined in Jefferson’s conception of patents creates the impression of a contract, which posits society’s benefit as the consideration for patent exclusivity.

In his classical treatise on patent law, and like many other scholars after him, George Curtis defines patents from a contractual standpoint as a “grant by the government, to the author of a new and useful invention, of the exclusive right, for the term of invention, of practicing that invention.”[35] The consideration for the grant, Curtis reflects, “is the benefit to the society resulting from the invention.”[36] When viewed through a contract law lens, a patent subjects an inventor to an obligation to provide benefits to the public in exchange for the public’s refrainment from the patented invention.

The primacy of the social benefit component of patents has survived to date and forms an integral part of U.S. patent law. For instance, at a speech delivered during the Centennial Celebration of the American Patent System in 1891, W.C. Dodge reiterated that our patent system is based on the idea of primarily benefitting the public and not the inventor.[37] The U.S. Supreme Court endorses the view that exclusivity is a sufferance self-imposed by society (designed as an award by the government to the inventor) to generate a larger public good. In Graham, the Supreme Court echoed Jefferson’s words in holding that “the patent monopoly was not designed to secure to the inventor his natural right in his discoveries. Rather, it was a reward, an inducement, to bring forth new knowledge.”[38] Similarly, Margaret Chon argued in 1993 that James Madison, whose thinking had significant impact on U.S. patent law, subscribed to the view that “the public good fully coincides with the claims of individuals.”[39] Chon discusses how Madison repeatedly claimed that there is no contradiction between simultaneously maximizing self-interest and the public good.[40] Thus, the social benefit component of patents seems to have survived contemporary times. In sum, the societal tolerance of the monopoly is to encourage creation of more innovations that benefit society, whereas disclosures merely help make the knowledge public. Society will, for its own benefit, bear the correlative duty of tolerating the exclusive right for the term of the patent.[41]

B. A Philosophical Perspective of the Exclusivity Doctrine

Against this historical background of the doctrinal core of patent exclusivity, the philosophy of patent exclusivity, outlined below, further asserts the strong public benefit underpinnings in this area of the law. The predominant focus was seemingly on the end objective of the system. This part highlights that whether from a natural rights, private, or public law perspective, patents were viewed as fulfilling a social benefit objective. Thus, the narrative postulates that the role of exclusivity was limited and confined by the larger needs of the society. In doing so, this section asserts that exclusivity can be most effective when viewed from such an ordained public function.

The role of public benefit in the context of the awarded exclusive rights has traditionally resonated as part of the discussions on patents. Captured originally by Jefferson, the importance of the public benefit end has been reiterated by other distinguished experts.[42] For instance, the Honorable William E. Simonds, Commissioner of Patents, reasoned that the extent of natural right exclusivity in intellectual property creations should be subject to limitations such as the principle of necessity.[43] “Each original inventor of an improvement in the useful arts,” he outlined, “has . . . the same kind of a title to the exclusive enjoyment thereof . . . .”[44] Commissioner Simonds further added, “[w]hile the exclusive natural right to an invention is a correct thing in theory, its exercise is suppressed through necessity.”[45] Although Simonds considered patents as natural rights (unlike Jefferson, who posited patent rights as social rights), he nonetheless found that necessity could circumscribe the extent of the rights. Thus, interference into patent exclusivity to ensure societal benefit is viewed as a legitimate exercise serving the objective of the system. Elsewhere Simonds outlined that “[i]n all forms of society all kinds of property are held under such conditions and limitations as society deems reasonable. Under the right of eminent domain governments take private property for public use on suitable remuneration when public necessity and convenience demanded,”[46] and that “[i]t is therefore entirely reasonable that society should set a limit to the enjoyment of the natural right of property in intellectual productions.”[47]

Three important points stand out from Simonds’ work that are exemplary of early thinking regarding the limits of rights of the inventor.[48] First, early thinking on patent law was pervaded by concerns of its outcome – that is, the system’s ability to achieve its preordained objectives – rather than the rights that it created. Even a natural rights theorist such as Simonds considered circumscribing patent exclusivity to achieve the system’s objectives. Second, early developments of patent law seemed to repeatedly warrant interference into patent exclusivity if the patent system was not primarily functioning to ensure flow of benefits to society. Thus, it leaves a perception that early thinking revolved around the concept of society tolerating the grant of some rights on the inventor, as opposed to an inventor earning these rights. Third, the obvious view from the societal lens dictates adequate limitations if the end – the public benefit objective of the system – is not well served.

These three points taken together demonstrate that the correlative duty is not a per se reward for the inventor’s genius, but a toleration by society, driven and dictated by the larger public benefit. An inventor can gain recognition and rights as a consequence of the invention, but the exclusivity aspect of the right is simply an intended by-product of the correlative duty that the society willingly tolerates. From the perspective of the law of contracts, correlative duty can be viewed as a consideration for the larger public benefit. Simonds’ background as the Commissioner of Patents perhaps defined his conception of patents as a natural right. Yet both Simonds and Jefferson seem to suggest that the operation of patent law and the exercise of exclusivity is circumscribed by the needs of society.

Interestingly, Professor Balganesh makes a similar assertion in the background of H.L.A. Hart’s philosophy with respect to copyright law.[49] Professor Balganesh suggests that “while the [rights and duties] always go together, the systematic neglect of copyright’s ‘duties’ in copyright jurisprudence and scholarship has over time skewed our understanding of copyright’s basic structure as an area of law endowed with an obligatory dimension. . . .”[50] Patent law suffers from the same malaise. The rights package of patents necessarily embodies obligations imposed on patent holders, a corresponding obligation to bring forth public benefit. The framework of the obligations are perhaps reminiscent of the bipolar feature of private law highlighted by Professor Balganesh, who noted that the rights package vested on the inventor necessarily imposes a correlative duty on the society to not infringe, and a corresponding obligation on the inventor to generate public benefit.[51] When exclusive rights are considered from the perspective of the self-imposed correlative duty of society to refrain from the property in exchange for public benefit, patent law can be accommodated into the edifice of private law. In turn, the inventor’s corresponding duty to society arises from the overlay of the law of contracts over theories of intellectual property law.[52]

While patent law is not a perfect fit within the property regime, broad encapsulation of the limits of patent rights treads closely with the Lockean theory of property. Locke elaborates, “Nothing was made by God for Man to spoil or destroy.”[53] Locke conceives of property rights as entitlements to a person for exercising labor:

The same law of Nature that does by this means give us property, does also bound that property too. . . . As much as anyone can make use of to any advantage of life before it spoils, so much he may by his labor fix his property in. Whatever is beyond this is more than his share, and belongs to others. . . .[54]

Thus, under the Lockean conception of property, the appropriation of property rights is only through the creator’s own sweat of the brow, and the right is subject to the sufficiency and spoliation obligations. The sufficiency restriction requires that one must leave “enough and as good” for others, which Locke asserts is an integral part of a just property regime. The spoliation principle states that the creator may only appropriate as much as the creator is able to use, and may not claim ownership of so many natural resources that some of them spoil before he is able to use them.[55]

Locke’s theory of sufficiency and spoliation goes further than Simonds’ necessity theory and provides a clearer limitation to the natural rights over property. In the patent context, while Locke’s theory fully recognizes the rights of the inventor, it also subjects the rights to the sufficiency and spoilage limitations. Locke’s implication is that the space for disputes over property exists because resources can become limited even though they may presently exist in abundance. That is, an inventor’s appropriation should be limited by need and not greed. Also, property holders must leave “enough and as good” for others. Locke repeatedly suggests that there is something morally wrong with distributions in which some people’s property leaves others with very little.[56] Ironically, largess of possession has come to present a problem in the contemporary patent system. That is, the grant of patent rights cannot work to the detriment of social benefit. If it does, the sufficiency proviso will empower society to use the property for public benefit. Commenting on this, John Simmons would later say, “[t]he clear implication is that in later ages, when scarcity is a problem, there is room for doubt about . . . largeness of possession.”[57]

Writing about the Lockean provisos in the context of copyright law, Wendy Gordon asserts, “[i]f a new creation renders the public domain less valuable, the proviso gives people a privilege to use the new creation to the extent necessary to make themselves as well off as they previously were.”[58] Among other things, Gordon asserts that this means that major cultural developments must be open for all to use in order to preserve the integrity of the public domain.[59] In the patent context, life-saving drugs created using biodiversity products or drugs created using public funds are examples of classes of things that society should have access to use to the extent necessary. Gordon also concludes that the spoliation proviso in the copyright context prevents ownership over abstract ideas because it “preserves . . . public domain.”[60] A similar limitation is needed in the patent context. Public health is a great example to serve as a bar for limiting exclusivity following the grant of the patent. Such limitations will also define the contours of the corresponding obligation of the patent owner in return for the rights gained. Lack of an adequate public interest exception and flexibility to enable access in the patent context can lead to disastrous outcomes. This is particularly the case, for example, in the event of a public health crisis, which can potentially be more disastrous in economic value than a copyright regime without a free speech exception. Such a reading underscores the importance of the public interest limitations of patent rights.[61]

In the context of Lockean exceptions, it is worth pointing out that Curtis believes that public benefits from patents flowed through two channels: first, the practice of the invention during the patent term; second, the opportunity to practice the patent after its expiration.[62] The Curtis treatise is perhaps the first to contextualize the importance of practicing the invention during the term. In doing so, Curtis seemingly connects exclusivity with the spoliation proviso in that it imposes a burden on the patentee to practice the invention during the patent term to prevent spoliation. Curtis’ work is significant in highlighting a nexus between exclusivity vested on the inventor and the requirement that the inventor practice the invention during the term. The question of whether practice of the invention by the inventor during the term is relevant to securing the broader public benefit goals of the system has become an important issue.[63] Curtis’ conception of exclusivity as creating at least an opportunity for the public to practice the invention is much broader than a mere disclosure to the public. At the very minimum, it prevents the patentee from hoarding the patent by not putting it into use during the patent term. This conception of exclusivity prevents inventors from circumventing the patent system by deliberately not practicing the invention and, in effect, hiding the invention from the public during the term of the patent.

The above discussion on exclusivity is important to understand the foundations of the exclusivity doctrine. The repeated resonance of the public benefit objective is a common theme that informs both the historical and philosophical foundations of the exclusivity doctrine. It is imperative for the contemporary patent regimes to be engaged with the foundational objectives for the system. With that background, the discussion below outlines the role of patent disclosure to determine its role vis-à-vis patent exclusivity as well as the objectives of the system.

II. The Emergence of a Rights-Centered Patent Regime

This part traces how, over time, the U.S. patent regime has become more rights-centric by focusing on the assumption that more disclosures entail more innovation. Such an encapsulation of the patent regime relegated the public benefit objective to a secondary position as a by-product instead of a mandatory obligation. The discussion below begins with how disclosures came to occupy a central position. It then highlights the various roles that courts have embraced for patent disclosures, which in turn has taken the focus away from the question of whether the system is serving its historical objective of benefitting society.

A. Early Signs of Disconnect

This section examines the engagement of the exclusivity doctrine with the disclosure aspect of patent registration. In doing so, it traces the effect of such engagement as resulting in a disconnect of the exclusivity doctrine from its intended goals and public benefit expectations.

Historically, it would be incorrect to categorize the U.S. patent system as tending towards the rights side of the balance. In Kendell v. Windsor,[64] the Supreme Court noted that “[t]he limited and temporary monopoly granted to inventors was never designed for their exclusive profit or advantage . . . the benefit to the public or community at large was another and doubtless the primary object in granting and securing that monopoly.”[65] Rather, “the true policy and ends of the patent laws enacted under this Government are disclosed in that article of the Constitution . . . ‘to promote the progress of science and the useful arts,’ contemplating and necessarily implying their extension, and increasing adaptation to the uses of society.”[66] Courts were cautious not to create unwarranted private property. The skepticism against granting a patent was so high that there was a time when Justice Jackson himself lamented that “the only patent that is valid is one which this court has not been able to get its hands on.”[67]

Yet the seeds of a rights-centric regime were laid much earlier. The constitutional powers of Congress notwithstanding, courts – especially the U.S. Supreme Court – have played an important role in shaping the doctrine.[68] Two cases in the early 1800s arguably set the tone for correlating public acquisition at the end of the patent term as fulfilling the components of the exclusivity obligation. In Evans v. Eaton,[69] the Supreme Court held that “patent law confers a benefit on the discoverer of any artful invention, which consists in a monopoly of his invention for a limited time.”[70]Further, “[t]he consideration which it requires him to pay for this benefit, is to put the public in possession of his invention; so as to enable all to use it, after his monopoly shall expire.”[71] The Court’s use of the term “consideration” alluded to the patent holder putting the public in possession of the invention in exchange for securing the rights. But the Court defined the consideration in exchange for exclusivity as the public benefitting and progressing from the invention after the monopoly expires, focusing on disclosure and ignoring other important aspects such as the public benefit from practicing the invention during the patent term. Similarly, in the 1829 case Pennock v. Dialogue,[72] Justice Story opined that the crux of the patent system is to enable the public to ultimately acquire the innovation while recording “due regard” to the inventor in the form of exclusivity.[73] While it is clear that the Court conceptualized the objective of a patent in terms of public acquisition of the invention, these cases implied that the public benefit aspect of exclusivity can flow after the patent term.

Further, these cases also laid the foundation for a steady instrumental development of patents by positing a patent holder’s exclusive rights on a broad platform of the progress of science and arts.[74] That is, they led to an organic appreciation wherein the relationship between patents and the progress requirement was measured by the quantity of patents, which in turn, fed into the public benefit. The result was a slow process that steadily divorced or distanced the inventor from any direct obligation to achieve the ultimate goal of public benefit. To date, the constituent elements of the “progress” requirements remain unresolved. Whether it is the disclosure, number of patents, technological advancement, public benefit, or a combination of one or more of these factors, remains unsettled.[75] Over time, however, courts have come to view patent protection as a necessity for encouraging innovation despite economic studies to the contrary, which, in turn, has resulted in a view that the extent of private property rolled out is a standard measure of progress.[76] But even assuming that the number of patents issued can serve as a loose measure of technological advancement, the public benefit aspect of progress, or in other words, the application of the technology towards societal progress, remains unclear.[77] That is, the patent system has been clearly posited as being ordained by the Constitution to promote progress, but much is needed to decipher the elements of progress. It cannot be mechanically equated with either technological advancement or number of patents issued without a clear delineation of public benefit goals.

Under basic contract theories, on which patent law is partly premised, vesting rights sans appropriate obligations (which happens if the term “progress” is not viewed as a limitation) would skew the contract. Thus, the constituents of progress should be defined so that the mere act of invention is not associated as a contribution to progress, whether or not it does in fact. The currently prevailing and seemingly narrow view of progress is not universally accepted, and in fact fits uneasily with constitutional goals of countries that define economic and social advancement as an element of progress.[78] International trade agreements also recognize a broader definition of progress. For example, Article 7 of the Agreement on Trade-Related Aspects of Intellectual Property Rights notes that protecting and enforcing intellectual property rights “should contribute . . . to a balance of rights and obligations” of members in a manner conducive to social and economic welfare.[79] Thus, benefits to the society from access, sustainability of the ensuing development, public health, and food security – defined more generally as public benefit – are all factors that form important measurements of progress.[80] Such a construction of progress serves as a limitation to the exclusive rights conferred in expectation of progress.[81] Unfortunately, the Supreme Court has provided little guidance on the progress limitation of the intellectual property clause of the Constitution.[82]

Notably, in 1908, the Supreme Court was presented with an opportunity to define a limit to patent rights vis-à-vis the public benefit objectives.[83] The Supreme Court, in Continental Paper Bag, considered whether it could restrain the infringement of a patent “which has long and always and unreasonably been held in nonuse . . . instead of being made beneficial to the art to which it belongs.”[84] The question presented was whether an inventor could choose not to exploit the patent during its term, or in other words, whether the owner of an unused patent is limited in law from alleging infringement.[85] In dealing with this question, the Court emphasized that exclusivity characterized the absoluteness of the inventor’s property rights: “[E]xclusion vests a legal privilege on the inventor to withhold knowledge from the public while insisting on deriving the advantages and benefits the statute promises.”[86] Unused patents deprive the public of the patent’s benefits during the term and thus prejudicially impact the public interest.[87] The Court refused to acknowledge the effects of nonuse on competition or on public rights.[88] Instead, the Court noted, “[i]t is the privilege of any owner of property to use or not use it, without question of motive.”[89] As a result, the Court filtered out “working the invention during the term” from the public benefit aspect, thereby leaving “disclosure” as the sole residue that constitutes the public benefit output. In doing so, Continental Paper Bag marked a watershed moment, showcasing a shift towards treatment of patents as absolute property instead of a governmental grant which entails responsibilities towards the public.

After Continental Paper Bag, judicial opinions supporting limitations on exclusivity have remained as minority opinions.[90] Indeed, the Supreme Court expressly reconsidered Continental Paper Bag in eBay v. MercExchange,[91] but unfortunately refused to reject or adopt a different approach, such as requiring the use or practice of the patented material during the term.[92] The decision found that infringement remedies should be subject to the traditional four-factor test based on equitable considerations to determine whether an injunction should issue in favor of a patent owner against an alleged infringer.[93] However, the Supreme Court did not go further to treat nonuse of the patent by the owner as a ground to deny injunctive relief or be a central part of the four-factor test.[94] Of particular interest is Justice Kennedy’s concurrence, which specifically identifies that “[a]n industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”[95] While Justice Kennedy strongly advocates against automatically affirming a patentee’s absolute right to exclude through injunctions in cases of non-practicing patentees, the concurrence urges courts to grant damages of reasonable royalties.[96] The guidance from the Supreme Court has resulted in courts increasingly approving reasonable royalties and vacating permanent injunctions.[97] Yet Continental Paper Bag stands in contrast to the wisdom of the Curtis treatise.[98] The case serves as an early exemplar of how courts have failed to construe practice of inventions during the patent term as part of the inventor’s obligation to contribute to the public benefit paradigm in return for exclusivity.[99] Unfortunately, courts have not ventured to determine whether a patentee’s rights entail an obligation, in public interest, to practice the patent during the term. Emphasis on practicing the patent during its term could have prevented some of the woes from Continental Paper Bag, as outlined below.

B. Woes of Continental Paper Bag

Continental Paper Bag set the tone for the manifestation of several woes from not obligating the practice of patents during the term. First, Continental Paper Bag has served as an important background to establish the absoluteness of the exclusive rights during the patent term and thus ignore public interest-based responsibilities of patentees to practice during the term of the patent.[100] Over time, patent owners have capitalized on patents by not practicing the invention during the term and reaping the benefits by asserting the patent strategically against (often unassuming) practicing entities.[101] Patent owners keep the patent from the public until it can be successfully asserted against a practicing entity. The perversity of the problem is best understood through the reality that a new business model has developed where patent owners benefit from hoarding instead of using the patent.[102] This behavior has led to ‘trolling,’ which is defined as the act of using the patent merely as an assertion tool (to assert against infringers) and not as a tool for furthering innovation.[103] That a considerable number of patent holders choose to find hoarding more rewarding than commercializing the patent during the monopoly term is telling of the woes that have affected the system from not associating practice of the invention during the term with the larger goals of the system.

Second, failing to associate the use of the patent with the resulting public interest goals has strengthened the association of disclosure with the ultimate goals of the system.[104] Slowly, the status of disclosure has been elevated as the main quid pro quo of the inventor’s monopoly.[105] Although the constitutional goal of “promoting the progress of useful arts” was never formally relegated to a secondary position,[106] the return for securing the bundle of rights was gradually narrowed to the element of public disclosure.[107] Even the Supreme Court effectively treated public disclosure as the only consideration in exchange for granting patent rights. Indeed, in 1933, the Supreme Court elaborated, “in consideration of [an invention’s] disclosure and the consequent benefit to the community, the patent [wa]s granted.”[108] This proposition later found its way into Bonito Boats,[109] the 1989 decision which laid the groundwork for the Court of Appeals for the Federal Circuit (Federal Circuit) to embrace the exact proposition.[110] Thus, disclosure came to be the only element needed to fulfill the progress requirement.[111] As the disclosure doctrine slowly became identified with the consequential public benefit and the progress of useful arts requirement, it was a natural shift to justify patentees’ rights as a return for the disclosure made.

C. The Rights-Centric Regime

The above narrative highlighted how the disclosure requirement gained a central position in defining the objectives of the patent system. The narrative below describes how the disclosure requirement has been used to further expand the scope of patent rights. The disclosure requirement has resulted in more patents without necessarily resulting in a corresponding increase in innovation.

First, materials not disclosed in a specific manner were treated as being unknown to the public, and thus susceptible to creating private rights. The teaching, suggestion, and motivation (TSM) test serves as an example of this proposition. The TSM test was first applied in the 1960s by the Court of Customs and Patent Appeals (the Federal Circuit’s predecessor) to determine the burden of proof for nonobviousness during patent prosecution.[112] In ACS Hospital Systems,[113] the Federal Circuit first enunciated that teachings of prior art references could be combined to prove obviousness only if there was a specific teaching, suggestion, or motivation in the prior art to do so.[114] By 1985, the Federal Circuit elevated this rule into a standardized prescription from which examiners could not derogate.[115] Consequently, examiners were prohibited from rejecting patent applications for obviousness unless they had “elucidate[d] . . . factual teachings, suggestions or incentives from th[e] prior art that show[] . . . the propriety of [the patented] . . . combination.”[116] In other words, under the TSM test, the examiner bears the initial prima facie burden to show clear teaching, suggestion, or motivation from the prior art such that it would have led a person of ordinary skill in the art to combine the references to arrive at the claimed invention. Thus, a claimed application will be considered prima facie nonobvious unless there is a showing of specific teaching, suggestion or motivation from the prior art to make the combination.[117]

The TSM test in effect lowered the threshold of prima facie obviousness during prosecution by creating a standardized prescription to determine an objective element. The TSM test was touted as a means to minimize examiners’ subjectivity and reduce rejections of patent applications based on hindsight bias.[118] But it eliminated a critical element – the application of common sense of an examiner – from the obviousness determination.[119] Thus, the TSM standard created a unique form of legal obviousness by disengaging the examiner’s use of common sense.[120] The end result was application materials otherwise obvious to a person of ordinary skill in the art which were able to clear the legal nonobvious threshold.[121] This greatly facilitated stacking more private rights to the detriment of the public domain. In Re Dembiczak stands as an outstanding demonstration of the above point.[122] There, the Federal Circuit held that a Halloween-themed trash bag was a patentable invention because there was no prior art showing a “clear and particular” teaching to use all of the claim limitations, namely, the use of a plastic bag in pre-manufactured orange color and with specific Halloween facial indicia.[123] In re Dembiczak was by no means an aberration, but instead formed part of a steady stream of cases where the line between obvious and nonobvious was determined by what was typecast in the prior art, as opposed to what existed in the public domain.[124] While the TSM test may have taken credit for reducing rejections based on hindsight bias, it clearly led to an over-allowance of patent applications.

As for disclosures, in excluding specifically undisclosed materials from the definition of prior art, even if the material was otherwise obvious, the TSM test resulted in further elevating the role and importance of disclosures. The test stood on the assumption that submitted prior arts should be embodiments of every possible teaching and combination applicable to an invention. Consequently, materials not explicitly taught, suggested, or motivated by the prior art were susceptible to a prima facie clearance as being nonobvious.[125] The result was more patents, some of which embodied minor innovations, leading to more private rights to the detriment of the public domain and the progress requirement.[126]

The rigid application of the TSM test resulted in a marked difficulty “to invalidate bad patents, and thereby stifling innovation.”[127] The costs to society from the monopolies awarded by patents embodying a lower obviousness threshold became unjustified.[128] The result was a perverse trend in the United States, where about fifty-five percent of patents were not renewed at the eight-year period after their issuance.[129] The TSM test was largely diluted after the Supreme Court intervened in KSR v. Teleflex and reestablished a common sense based approach similar to the statutory test in 35 U.S.C. § 103 to determine nonobviousness.[130] However, the historical development of the TSM test exemplifies how disclosures were elevated to a point where common sense had a limited role.

Biotechnology patents represent an area where the disclosure requirement has been extensively used to define the rights and limits of patenting.[131] For instance, a gradual lowering of standards in biotechnology inventions in the 1990s,[132] such as in In Re Deuel,[133] largely lowered the threshold for biotechnology patent applications, resulting in an increase in biotechnology patent activity.[134] This resulted in a proliferation of intellectual property rights in biomedical research.[135] As one court noted,

[B]etween 1990 and 1998, the total number of biotechnology patents granted to U.S. corporations has quadrupled. In contrast, between 1990 and 1998, the total number of patents issued increased by about sixty percent. This large disparity is cause for concern. It suggests that the biotechnology industry is using the relaxed nonobviousness standard to obtain genomic patents simply for corporate gain.[136]

The increase in patent activity was attributed to a regime that adequately lowered thresholds, resulting in patenting of basic biotechnology research materials. It placed the biotechnology industry in a “spiral of overlapping patent claims in the hands of different owners.”[137] The result was that some basic research materials became inaccessible owing to the private property status which also increased the access cost effectively slowing down the pace of innovation in this area.[138] While these realities mandated that the free-for-all in biotechnology patent applications be capped, they also highlighted that the system greatly facilitated accumulating patent rights.[139] The Federal Circuit attempted to fix such a rights-centric patent regime by expanding the doctrine of written description, a traditional disclosure doctrine, to include enabling functions, thereby further contributing to the elevation of disclosure.[140] In Eli Lilly, the Federal Circuit held that a functional definition of a gene would be insufficient to meet the written description requirement because it merely indicates what the gene does, rather than what it is.[141] The Federal Circuit further held that a “meaningful disclosure” was the exchange for patent exclusivity and where the disclosure was inadequate, the material was susceptible to being denied protection.[142] From Eli Lilly in 1997 through the Ariad decision in 2010,[143] the Federal Circuit largely relied on enabling disclosures in the written description of biotechnology specifications as a correctional mechanism.[144]

The above narrative highlights how disclosures have steadily grown to occupy a central role in defining the rights and limits of patenting, obviating the need for broader discussions on public benefit and the constituents of the progress requirement.

III. Recognizing Responsibilities: Correlative Obligation of Patents

This part examines whether the normative framework imposes any obligation on the inventor by examining the relationship between patent rights and the theoretical bases of the societal duty not to infringe. In doing so, the narrative focuses on fundamental values and returns that characterize the notions of patenting. First, this part traces the philosophical underpinnings of the patent rights framework. Second, it examines the philosophical justifications for these rights to understand the framework for establishing the obligations of the right holder. Lastly, this part focuses on how the duty practically operates and directs the law to create fundamental values and returns (privilege duty) that characterize the notions of patenting.[145]

A. Rights Framework

Western discourse on intellectual property law conceptualizes patents as incentivizing the inventor and gathering the benefits of the exercise through public disclosure.[146] Exploring patents from the perspective of the relationship between the rights and obligations is essential to appreciate the existing structure of the rights-obligations balance. The desire to innovate, fuel creative genius, and promote the progress of useful arts are all explanations that support the rights paradigm of the patent system.[147] These explanations, however, do not fully define the societal obligation imposed on third parties to refrain from infringing patents. The narrative below examines the philosophical underpinnings that can perhaps justify the correlative obligation construct and its relationship with the vested rights of the patent holder.

Bentham categorizes rights into two distinct typologies based on their relationships with legal obligation.[148] Bentham’s first category encompasses rights resulting from the absence of legal obligations.[149] Here, the law may actively permit or passively not prohibit certain actions, leaving the right holder with the liberty to decide whether or not to exercise the right.[150] Bentham’s second category addresses rights existing as a by-product of obligations imposed by law on others.[151] Patent exclusivity falls into this second category because it exists as a by-product of a statutorily imposed societal obligation not to infringe the patent. The legal obligation under the second category embodies a principal law “requiring the act which is obligatory” and a subsidiary law “requiring or permitting punishment for breach” of that obligation.[152] The failure to conduct oneself in a specified manner as required under a principal law should result in pain (or its equivalent, loss of pleasure), which is legally imposed by a subsidiary law as a punitive measure for non-compliance with the principal law.[153] H.L.A Hart refers to this as inherently embodying both imperative and probabilistic elements.[154] It is imperative in that sanctions are mandated by the subsidiary law and probabilistic in that there is a probability of incurring sanctions if obligations are not fulfilled. Bentham terms this second category of rights as “services,” typified by a “correlative obligation,” which are requirements of action or forbearance imposed on third parties.[155] That is, a right is an “enforced service” that results when the law creates a correlative obligation that imposes a duty of forbearance on society in favor of the right holder.[156] A patent right is an “enforced service” wherein infringement of patents (even if by independent creation) represents an imposed legal obligation.[157] The correlative obligation of the society is a service right that provides the inventor the ability to benefit from a duty of forbearance imposed on the rest of the society.[158] In other words, having a right correlative conferred by law onto the right holder relative to an obligation denotes that it leads to a benefit.[159]

The benefits to the right holder under these circumstances tend to be indirect.[160] The right holder may, but does not have to, benefit directly from the performance of the legal obligation by others. Compliance by third parties with the legal obligation to refrain from infringing patented materials makes it conducive for the patent owner to benefit indirectly. Forbearance from the patented material by third parties prevents a potential loss.[161] Hence, the benefits that patent exclusivity confers on the patent holder are indirect, negative in nature, and dependent upon the compliance of third parties with their legal obligations. Bentham defines them as contingently beneficial laws and notes that the duties under such laws are relative to the right holder, who wields complete control over the area covered by the duty. A right holder may, for instance, decide to prosecute one individual with a duty of forbearance while deciding to waive his rights with regard to a similar transgression by another individual. The concept of the relative duty of the right holder contrasts with the more absolute nature of such duties under criminal law, where certain actions are prohibited against all individuals by enforcement of law.[162] Thus, under a contingently beneficial law, the correlative duties of third parties are akin to “species of normative property belonging to the right holder.”[163] They are property that derives from norms that belong to identified individuals, under which the right holder is empowered by the legal provisions to enjoy a special control.[164] Termed as the power of “contrectation,” the right holder’s power is a legal permission to an act which, if done by any other, would result in the contravention of the law.[165]

The benefits flowing to the right holder from contingently beneficial laws invariably remain dependent on a plethora of causes and effects. For example, the patent application process has carefully tailored disclosure requirements to facilitate future replication.[166] Statutory requirements such as written description and enablement serve to ensure that even if the inventor perishes, the invention remains available to the public.[167] Thus, an inventor whose patent application falls short of statutory requirements like disclosure may see the flow of benefits discontinued under certain conditions. Similarly, a refusal to disclose the invention will lead to a refusal of the bundle of rights that forms the patent package. Thus, arguably disclosure is just one example of the expectation the general public receives in return for the correlative obligation not to infringe.[168] In return for the sufferance of the imposed correlative obligation, Bentham notes that the public as “unassignable individuals” acquire broad returns such as that from the disclosure.[169]

B. Justifications for the Rights

Having discussed the nature of rights, this section examines the reason for conferring such rights and possible reasons for the societal tolerance of the correlative obligation. Thus, this section examines each of the justifications for the correlative obligation, including the law of contracts.

The first of these reasons is perhaps a sense of generosity which provides a simple enough explanation. Unfortunately, it is unlikely to be the reason for the legal obligations tailored to benefit the right holder. If mankind uniformly had such a strong sense of generosity, or any other public interest based reason to promote innovation without any expectation to itself, arguably there would be no need for rules.[170] David Hume, in The Book of Morals, asserts, “Men being naturally selfish, or endow[e]d only with a confin[e]d generosity, they are not easily induc[e]d to perform any action for the interest of strangers, except with a view to some reciprocal advantage, which they had no hope of obtaining but by such a performance.”[171] Hume adds that “[it is] only from the selfishness and confin[e]d generosity of men, along with the scanty provision nature has made for his wants, that justice derives its origin.”[172] Thus, the question of the benefit to society from treating patented property as privileged, thereby forbearing from the property during the term.

A different construct examining the basis of correlative duty is a sense of individual morality.[173] That is, does a sense of moral obligation to not take away from the inventor what he created provide adequate justification for the society’s tolerance of the correlative obligation? The interaction between law and morality is a romanticized aspect of our legal system. Like justice, morality remains elusive, and hence, provides easy explanations to appreciate normative structures. Thus, one can justify that moral obligation formed the basis of the legal obligation that imposes the correlative duty on the society. Yet, a positivist like Hart would assert that there is no necessary connection between law and morality.[174] Even assuming there is a connection between law and morality, morals that vest the correlative obligation on the inventor should also obligate the patent holder to certain duties in return for legal rights.

A further expansion of the concept of morality – religious morality – also fails to fully account for the self-imposed correlative duty of the society.[175] Religious morality asserts that God ordained labor as a fundamental right of men.[176] This reasoning posits that the creation of monopoly is consistent with the right to labor except that the king or lawmaker with powers to effectuate a monopoly also has a duty to ensure that it is duly limited.[177] This position is reflected in the Statute of Monopolies, which notes that monopolies were tolerated only when they resulted in public good.[178]

Yet another justification for the patent system is that it meant to vest a privilege so as to promote the growth of “human capital” – that is, to encourage the transfer of valuable trade and technologies.[179] It is well documented that in thirteenth-century England, the Crown’s prerogative in granting a monopoly was to generate more trade or technology and diffuse them into the society.[180] Professor Drahos, in tracing the historical and philosophical underpinnings of intellectual property rights including patents, supports the view that patent rights were considered a strong form of interference with negative liberties, or the right of others to pursue certain trade.[181] This view supports the proposition that the inventor had an obligation to the society and is well supported by the law of contracts.

The law of contracts, by imposing a reciprocal corresponding obligation on the patent holder, can provide a better justification for the correlative obligation in the context of patent rights. As such, in a bilateral contract, one party’s obligation is correlative and reciprocal to the obligation of the other. A patent, as a government grant, repositions society as third-party beneficiaries. Imposing a duty (corresponding obligation) in exchange for the society’s correlative obligation would be a functional aspect of the grant. That is, the society has a correlative duty not to infringe the patent in return for which the patent owner has a corresponding duty to the society which includes, but is not limited to, the disclosure. Hence, the inventor, in exchange for the grant, may be charged with obligations benefitting the society. Under these circumstances, the third party, presumably the public in the context of a patent, while being the direct beneficiary lacks the legal right to enforce the contract should a breach detrimentally affect him. The right correlative to the obligation, under these circumstances, is held by the party having the control over the correlative obligation. In effect, the society will have the correlative obligation not to infringe the patent, the government will have control over the obligation, and in exchange, the patent holder will be subject to the corresponding obligation to secure public benefit objectives. This view justifies governmental interferences in the form of, say, a compulsory license, when there is a problem affecting the flow of benefit to the society.

The contract-oriented view finds support in writings of H.L.A Hart, who, in alluding to Bentham’s conception of the law of contracts, differentiates the imposition of duty under the law of contract as being “‘incomplete’ in a more radical way than the law underlying the institution of property.”[182] Part of the reason for the incomplete status is that under the law of contracts, acts that fall within the determination of the duty paradigm are left undefined. Hart suggests that “this open area may be restricted in a greater or lesser degree by the law’s insertion of compulsory clauses into contracts, or by its refusal to recognize the validity of certain types of agreement.”[183] Thus, general law can provide for certain compulsory restrictions on rights under certain circumstances, or government as the grantor and the control holder can insert regulations of varying degrees, which is not new to modern intellectual property systems. Using contracts as a mechanism would bind the inventor to a corresponding obligation in return for the rights. Thus, the inventor would be subject to the exercise of the power of imperation – that is, the power to ensure that individuals act in conformity with a command.[184] Imperative theory has its basis on the power of legislative and administrative bodies to create rules and regulations that result in increased effectiveness or efficiencies. Extending the analogy to patents, imperative theory would conceive of patents as providing exclusive rights granted under a contract wherein the rights may be limited to achieve the public benefit goals of the system.

Under the patent regime, access to the invention for the public typically begins when the patent term is over. But the correlative duty of forbearance from the property, termed as “enforced service,” begins immediately after the rights are acquired.[185] Considering this, treating disclosures as the unique goal in exchange for patent rights does not account for the imposed correlative obligation during the patent term. Further, if societal access to the invention through disclosures were the only goal, they can be effectively generated using other mechanisms, such as a one-time prize, which can also ensure faster societal access to the innovation.

C. Patent Law from the Rights & Duties Framework

This section provides a framework for rights and duties in the context of patent exclusivity to appreciate the public benefit objectives of the patent system. The bundle of rights awarded with the grant of a patent can be condensed into offshoots of the negative exclusionary rights. That is, the patent holder’s right is limited to excluding others from commercially exploiting the invention without a license. These negative rights contrast with the affirmative rights for a property owner to use and enjoy her property. The affirmative right to use one’s property gives rise to the property owner’s right to exclude others,[186] as exclusion is important to the owner’s use and enjoyment of the property.[187] The patent regime’s focus on negative rights is different from the real property regime, but is closer to the contractual grant. Unlike real property, patents are nonrivalrous, and thus one does not need an exclusive right as a functional necessity to practice the invention in the same way that a property owner needs an exclusive right to enjoy her property. That is, the inventor can continue to use and practice the invention even without the exclusive rights. Exclusivity does not vest any additional rights to use the patented invention. Hence, it becomes important to appreciate the role and characteristics of exclusivity in patents in order to appreciate the objectives for granting it.

Unlike in property law, where property rights are granted for facilitating possession of property, the rights of the patent owner are not awarded to facilitate possession of the invention. Patent rights are subject to traversing certain minimum thresholds of inventiveness, and are acquired after careful examination by the patent office. Possession can be inconsequential to patent law. Further, not all innovations and new ideas are granted patents. A novel invention can still fail to acquire the associated bundle of rights by being subject to a statutory bar,[188] lack of inventive genius, or other grounds for invalidity. Unlike in real property, where interference with ownership alone is sufficient to establish trespass, in patent law, the determination of infringement requires proof of both ownership and validity. This sets patents apart from other forms of property.

Theoretically, every form of property (which includes the physical and the technological) would have a value (base worth) assuming there is free competition and no protection. Such base worth is the value of the property or the product covering the physical property and the technology, but without the privilege of exclusivity. The factum of exclusivity (or, relatedly, fencing of the property) can operate to impose an artificially higher market value on account of the artificial scarcity, but the minimum value or base worth should remain the same notwithstanding the presence of exclusivity. There is truly no reason to suspect that falling into the public domain would alter the property value, at least until there are substitutes in the market. In reality, unfenced land per se can be equally valuable as fenced land in the market, as is true with inventive ideas. And an inventor who lets the invention into the public domain should be able to generate a minimum value equivalent to the base worth, at least until the invention is replicated or recreated.[189] Given this, the rights associated with patents operate to create a zone of protection for the property with a view to prevent encroachment from third parties.

The above narrative posits exclusivity as a non-functional aspect of the grant. In doing so, it raises a fundamental question with respect to the correlative duty that such exclusivity imposes on the rest of the world. The term ‘correlative duty’ is used along the same lines as in property law where the grant of a right correlates to a duty of forbearance on others. But neither disclosure nor incentive to innovate fully explain the reason for society taking on the correlative obligation of forbearance from the property during the term. If disclosure from the specification was the only ultimate goal, such disclosure could be better achieved in many cases by simply letting the invention fall in the public domain without vesting the exclusive rights that are now associated with it. If incentive to innovate instead were the only goal, this objective could be served by mechanisms such as a prize, which is usually a more risk free one-time reward or recognition in celebration of the invention.[190] Exclusivity entails more than a prize or a reward, although mechanisms like awards and prizes can also be effective to further the objective of encouraging creativity.[191]

Specifically, a system styled to monetize the technological benefits of an invention could capture most of the functional value of exclusivity and may even eliminate some of the associated dangers. Even without patents, an invention that is successful in the market can incentivize competition. Inventions protected by trade secrets increase competition by reverse engineering or substitution. Such competition, in turn, incentivizes the original creator to continue capturing the benefits of lead-time advantages. Thus, patent incentives may be redundant in some circumstances because innovators may be motivated by market profits even without patent incentives. Considering this, the societal preference for the patent system at the cost of the forbearance duties leads to a conclusion that, save for the clear public benefit paradigm, there is limited justification for the society’s self-imposition of a duty.

In considering the framework for rights and duties in patent law, a balance between rights and duties is important for the patent system to benefit the public. On the one hand, a patent regime that bears a low threshold for patentability may result in a large number of patents, likely to the detriment of the public domain. While such a system is likely to generate many patents, some with limited inventiveness, the value of each individual patent is likely to be limited by the lower levels of inventiveness barring exceptional circumstances. Also, the low inventiveness threshold makes it easier to find competing substitutes in the marketplace. Soon, as each of the patent holders embodying a low threshold of inventiveness compete, they will alter the norms relative to the others resulting in a rivalrous effect. Alternatively, each patent may be dependent on other patents or would have to be bundled together in order to generate adequate market value. Each such patent holder’s exclusivity will be circumscribed by other patents. The best example of the above problem of low-value patents can be found in the software industry.[192] As the number of patents on comparable and substitutable technology increases, there is an increasing tendency of corporations to accumulate software patents to create a portfolio.[193] That is, patent holders consolidate their property to maximize the benefits. This results in several patents with lower levels of inventiveness representing a potent business tool rather than pockets of innovation.

Under conditions detailed above, the value from each patent (or set thereof) is best generated when they are pooled together. Such consolidation can also have the benefit of minimizing litigations between holders of patents on comparable technologies. Thus, the trend today is to acquire a patent family, which is comprised of multiple patents that ultimately protect the same invention.[194] Within patent families each single patent may have limited value, but together as a patent family, they increase the bargaining parity of the patent holder.[195] In the telecommunication and mobile phone technology business, for example, Samsung is understood to hold about 31,524 patent families, Microsoft holds about 8,887, and Apple holds about 1,941.[196] Under these conditions, the market value of any one single invention is limited, and each patent holder’s exclusivity is circumscribed by other patents. Each individual patent embodies limited inventiveness because of the low thresholds for protection that prevails in the first place. These conditions incentivize a larger number of arguably weaker patents.

However, the system produces patent portfolios that affect the public detrimentally in many important ways.[197] For example, recent studies have concluded that patent consolidation – grouping patents in “thickets” – increases transaction costs, reduces profits that derive from the commercialization of innovation and ultimately reduces incentives to innovate.[198] The resources required to create a portfolio and the consequential increase in bargaining parity of the portfolio owner increase the entry barrier, reduce competition in the market, and can affect small investors disproportionately.[199] The resulting inefficiencies affect the public detrimentally because patent protection is bestowed for materials with limited innovation.[200] In turn, the system results in allocating more power, sometimes unfairly, to holders of large patent portfolios.

A system that rewards innovations with a lower threshold of inventiveness can result in accumulating more but can also erode the incentive for inventors to reach their maximum creative potential, or worse, can create costs that result in blocking follow-on innovations. The protection for minor innovations increases the overall need for licensing fees, further impeding innovation. Such a system is a detriment to the public domain. Under such circumstances, the incentive of exclusive rights in reality becomes a burden on the public, preventing access to what might have been otherwise available and accessible to the public. Thus, overall, a system that facilitates low threshold of patentability may frustrate the purpose of incentivizing invention. Along the same lines, largess in the rights package can prevent the system from achieving the targeted objective of incentivizing invention. Under these circumstances, the enormity of the rights package can lead to societal discontent with the system.[201]

Conversely, a legal system that confers limited power on the patent holder may be able to promote access to knowledge and innovation, even though it may not be able to capture all innovations under the private domain. The patent systems of several developing countries before the enactment of the TRIPS Agreement provide good examples.[202] Indian patent law allowed only process patents for pharmaceutical innovations with a view to improve competition. The process patent regime encouraged innovation in different methods of manufacturing known pharmaceutical products. This regime resulted in creating competing but similar products, increasing competition and thus making the product more accessible.[203] Process innovations became the critical first step for the genesis and growth of the Indian pharmaceutical industry. Similarly, a rule prohibiting product patents for chemicals was first introduced in the German Patent Law of 1877 to stimulate research in alternative methods of producing a product.[204] Within thirty years of enacting this rule, the German chemical industry became a European leader.[205] German scientists and research workers attributed the success to the various process innovations that promoted competition. Interestingly, research in Germany attributed the failure of the French chemical industry to the product patent system.[206] Importantly, providing exclusive rights to the process of production was considered a valuable inducement to the discovery of alternative processes.[207] The resulting increase in diversity of the products benefited consumers. Although regimes with only process protection for pharmaceutical drugs have typically been faulted for having lesser rights, they should not be confused as lacking in innovation.[208]

For the patent system to be most efficient, the system should create a balance between rights and obligation.[209] As Waldron asserts, “[t]o say that rights are a means to an end is one thing; but the correlative proposition that some should be forced to bear sacrifices for the greater social good smacks dangerously of throwing Christians to the lions for the delectation of Roman society.”[210] Justice Breyer captured this sentiment in Mayo v. Prometheus, opining,

[p]atent protection is, after all, a two-edged sword. On the one hand, the promise of exclusive rights provides monetary incentives that lead to creation, invention, and discovery. On the other hand, that very exclusivity can impede the flow of information that might permit, indeed spur, invention, by, for example, raising the price of using the patented ideas once created, requiring potential users to conduct costly and time-consuming searches of existing patents and pending patent applications, and requiring the negotiation of complex licensing arrangements.[211]

Reverberating similar sentiments, Justice Thomas in Myriad emphasized the importance of striking a “delicate balance between creating incentives that lead to creation, invention, and discovery and impeding the flow of information that might permit, indeed spur, invention.”[212] Ghosh perhaps couches this concept with more precision when he asserts,

While current intellectual property law assumes the primacy of the rights of owners (emphasizing the attachment to legal ownership), nuanced consequentialism would recognize the place of the intellectual property owner in a network of relationships which create duties and obligations. Sensitivity to the consequences of intellectual property rights is, to quote Professor Sen, sensitive ‘to agencies and relations in evaluating what is happening in the world.’[213]


This paper attempts to capture the intrinsic core of patent law’s structure as delineated in historical sources in an unorthodox manner. It asserts that patent law is a misfit within the traditional property regime. While patent law seems to struggle to define the outer limits of patent exclusivity, the paper shows how the current levels of exclusivity seem to lack support from the doctrinal construct of the philosophy behind exclusivity. In doing so, the paper highlights the source of exclusive rights to examine how a disconnect between the instrumental elements of patents and its targeted objectives has developed over time, leading to a rights-centric patent system. Understanding the objectives of the system is important for patent law to achieve its constitutional destiny. The paper does not propose a comprehensive theory of patent law. Instead, it presents the law of contracts as embodying a framework within which patent law can fit better. The paper concludes that patent law needs a more balanced approach to ensure that the rights and obligations inherent to the system work to achieve the targeted objectives.

* Srividhya Ragavan serves as a Professor of Law at the Texas A&M University School of Law. She is the author of the monograph Patents and Trade Disparities in Developing Countries, Oxford University Press, 2012. She has also co-published (with Irene Calboli) Diversity in Intellectual Property: Identities, Interests and Intersections, with Cambridge University Press, 2015. The author acknowledges that the paper has benefitted from thoughtful comments of several colleagues and wishes to thank Professors Peter Yu, Jay Kesan, Peter Lee, Saurabh Vishnubakth, Sarah Burstein, Timothy Holbrook and Stephen Henderson for their thoughtful comments. A special thanks to Mr. Erwin Cartwright for his work inputs on the paper.

[1] Zakir Thomas, Martin Shkreli: The Man of the (Pharma) Year 2015, SpicyIP (Jan. 15, 2016),

[2] Kimberly Leonard, Can the Government Already Control Drug Prices?, U.S. News (Jan. 11, 2016),

[3] Id.

[4] See Electronic Frontier Foundation: Defending Your Rights in the Digital World,Elec. Frontier Found., (last visited Sept. 2, 2016); see also James Bessen, The Evidence Is In: Patent Trolls Do Hurt Innovation, Harv. Bus. Rev. (Nov. 2014), See generally Robert L. Stoll, Patent Trolls: Friend or Foe, WIPO Magazine (Apr. 2014),; U.S. Const. art. 1, § 8, cl. 8.

[5] See William Fisher, Theories of Intellectual Property, in New Essays in the Legal and Political Theory of Property, 168, 169 (Stephen R. Munzer ed., 2001); Horne v. Dept. of Agric., 135 S. Ct. 2419, 2441-43 (2015) (holding that the Takings Clause imposes a “categorical duty” on the government to pay just compensation whether it takes personal or real property, thereby overruling the Ninth Circuit, which had previously held that personal property receives less protection under the Takings Clause than real property); see also Adam Mossoff, Patents as Constitutional Private Property: The Historical Protection of Patents Under the Takings Clause, 87 B.U. L. Rev. 689, 689 (2007).

[6] Id.

[7] See, e.g., Harold Wegner, China Leads Top Five Patent Filing Countries, LAIPLA (Mar. 13, 2016),; see also Jason Rantanen, US Patent Application Filings for FY 2015, PatentlyO (Oct. 15, 2016),

[8] See John C. Stedman, Invention and Public Policy, 12 Law and Contemp. Probs. 649, 649-79 (1947); see also David Kestenbaum, Evaluating The Benefits And Costs Of Patents,National Public Radio (July 17, 2014), (discussing the costs and benefits of patents).

[9] 2William Blackstone, Commentaries *2 (“[T]he right of property; or that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe.”).

[10] See, e.g.,James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk 30-70 (2008) (asserting and outlining the ways in which patent laws do not work well with property rights).

[11] See Robert P. Merges, Justifying Intellectual Property 150 (2011) [hereinafter, Justifying IP] (discussing the role of proportionality).

[12] See 35 U.S.C. § 271; Thomas F. Maffei, The Patent Misuse Doctrine: A Balance of Patent Rights and the Public Interest, 1J. Pat. & Trademark Off. Soc’y 178 (1970); see also Stedman, supra note 8, at 649-79; Jeanne C. Fromer, Should The Law Care Why Intellectual Property Rights Have Been Asserted?, 32 Hous. L. Rev. 549 (2015).

[13] See generally U.S.Const. amend. V (“[N]or shall private property be taken for public use, without just compensation.”). Eminent domain has always been an exception to the acquisition of private property, though the extension of the same principles in patent law has been much more controversial.

[14] Mark W. Lauroesch, General Compulsory Patent Licensing in the United States: Good in Theory, But Not Necessarily in Practice, 6 Santa Clara High Tech. L.J. 41 (1990); see Cole M. Fauver, Compulsory Patent Licensing in the United States: An Idea Whose Time Has Come, 8 Nw. J. Int’l L. & Bus. 666 (1988).

[15] See Peter Drahos, A Philosophy of Intellectual Property 213 (1996) (explaining that the term instrumentalism is connected with the doctrine of pragmatism which in law, refers to the idea of law serving as a tool, although Drahos would define the non-duty based instrumentalism as outlined in this paper as a form of proprietarianism).

[16] See In re Bilski, 545 F.3d 943, 1004 (Fed. Cir. 2008) (Mayer, J. dissenting) (referring to the low-threshold for patent eligibility to note that it has resulted in patents ranging from the somewhat ridiculous to the truly absurd); Sean B. Seymore, The Teaching Function of Patents, 85 Notre Dame L. Rev. 621, 641, 667-69 (2011) (asserting that unlike how it is in its current form, the patent document should be readable to fully perform its teaching function); see also Charles Duhigg & Steve Lohr, The Patent Used as a Sword, N.Y. Times, Oct. 8, 2012, at A14; Benjamin N. Roin, Note, The Disclosure Function of the Patent System (or Lack Thereof), 118 Harv. L. Rev. 2007 (2005). See generally Adam B. Jaffe & Josh Lerner, Innovation and its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do About It (2002).

[17] See David B. Schorr, How Blackstone Became a Blackstonian, 10 Theoretical Inquiries in Law 103, 104-06 (arguing that Blackstone himself “did not believe that this absolutist and individualist conception” of property squared with the prevailing British notions of property).

[18] See generally George C. Christie & Patrick H. Martin, Jurisprudence, Text and Readings on the Philosophy of Law (3d ed. 2007).

[19] See Roin, supra note 16; see also Timothy R. Holbrook, Possession in Patent Law, 59 SMU L. Rev. 123 (2006); Eldred v. Ashcroft, 537 U.S. 186, 227 (2003) (Stevens, J., dissenting); Pfaff v. Wells Elecs., Inc., 525 U.S. 55, 63 (1998) (stating that the patent system should be thought of as “a carefully crafted bargain that encourages both the creation and the public disclosure of new and useful advances in technology, in return for an exclusive monopoly for a limited period of time”); Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984).

[20] See Roberto Mazzoleni & Richard R. Nelson, The Benefits and Costs of Strong Patent Protection: A Contribution to the Current Debate, 27 Res. Pol’y 273, 274-300 (1998). See generally U.S. Patent & Trademarks Office,The Story of the American Patent System: 1790-1952 (1953).

[21] See also Shubha Ghosh, Duty, Consequences, & Intellectual Property, 10 U. St. Thomas L.J. 801 (2013) (noting that the heavy reliance on utilitarianism has resulted in an approach that measures success based on an aggregated rather than an individualist outcome). Ghosh points out that a measure of success under the utilitarian theory would consider technical success first, and consequences second. Id. at 8.

[22] See generally Merges, supra note 11, at 150-51.

[23] But see Adam Mossoff, Who Cares What Thomas Jefferson Thought about Patents? Reevaluating the Patent Privilege in Historical Context, 72 Cornell L. Rev. 953 (2007).

[24] Letter from Thomas Jefferson to Isaac McPherson, No Patents on Ideas (Aug. 13, 1813),; Letter from Thomas Jefferson to James Madison (July 31, 1788), in 1 The Founders’ Constitution 476 (Philip B. Kurland & Ralph Lerner eds., 1987).

[25] See Adam D. Moore, A Lockean Theory of Intellectual Property, 21 Hamline L. Rev. 65, 65 n.5 (1997) (noting that Thomas Jefferson explicitly disavowed any natural-law underpinning of intellectual property rights).

[26] Letter from Thomas Jefferson to Isaac McPherson (Aug. 13, 1813), [hereinafter Letter to McPherson].

[27] Id.

[28] Id. (“Considering the exclusive right to invention as given not of natural right, but for the benefit of society, I know well the difficulty of drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not.”).

[29] See The Story of the American Patent System: 1790-1952, supra note 20.

[30] Id.

[31] Letter to McPherson, supra note 26.

[32] See P.J. Federico, Operation of the Patent Act of 1790, 18 J. Pat. Off. Soc. 237, 238 (1936); see also Graham v. John Deere Co. of Kansas City, 383 U.S. 1, 7 (1996).

[33] See Graham, 383 U.S. at 7-9.

[34] Id. at 37 n.2; see also Writings of Thomas Jefferson, 180-81 (Washington ed. 2013).

[35]George Ticknor Curtis, A Treatise on the Law of Patents for Useful Inventions in the United States of America 1 (2d ed. 1854).

[36] Id.

[37] James L. Ewin, The Minor Innovations of the Century, in United States Bicentennial Commemorative Edition of Proceedings and Addresses 478 (1892).

[38] Graham, 383 U.S. at 9 (“The grant of an exclusive right to an invention was the creation of society – at odds with the inherent free nature of disclosed ideas – and was not to be freely given. Only inventions and discoveries which furthered human knowledge, and were new and useful, justified the special inducement of a limited private monopoly.”).

[39] See Margaret Chon, Postmodern “Progress”: Reconsidering the Copyright and Patent Power, 43 DePaul L. Rev. 97, 137-38 (1993); see also The Federalist No. 43 (James Madison).

[40] Id. at 138.

[41] See Dotan Oliar, Making Sense of the Intellectual Property Clause: Promotion of Progress as a Limitation on Congress’s Intellectual Property Clause, 94 Geo. L.J. 1771, 1816 (2006) (“[The] three considerations — the fact that the Framers would not adopt the intellectual property proposals in the plenary form in which they were made, the political makeup of the Convention, and the origin of the words in the Progress Clause as qualifiers of other powers — all contribute to one consistent story according to which the Progress Clause was intended to limit Congress’s intellectual property power.”).

[42]Jefferson, supra note 34.

[43] See William E. Simonds, Natural Right of Property in Intellectual Production, 1 Yale L.J. 16, 24 (1891).

[44] Id. at 24.

[45] Id. at 25.

[46] Id. at 23.

[47] Id. at 24.

[48] See Merges, supra note 11, at 148 (expounding fully Locke’s theory of property and applying it to intellectual property rights).

[49] Shyamkrishna Balganesh, The Obligatory Structure of Copyright Law: Unbundling the Wrong of Copying, 125 Harv. L. Rev 1664, 1665-66 (2012).

[50] Id. at 1666.

[51] See id. at 1667-68.

[52] See id.; Raymond T. Nimmer, Breaking Barriers: The Relation Between Contract and Intellectual Property Law, 13 Berkeley Tech. L.J. 827, 844 (1998) (writing with reference to copyright law although the same principles can be applied to patent law).

[53]John Locke, Two Treatises of Government 136 (Thomas I. ed., 1947) (1690).

[54] Id.

[55] George H. Smith, John Locke: Some Qualifications in Locke’s Theory of Property, (Nov. 2015), available at

[56] Daniel M. Layman, Sufficiency and Freedom in Locke’s Theory of Property, Eur. J. Pol. Theory (2015), available at

[57]John A. Simmons, The Lockean Theory of Rights 291 (1992).

[58] Wendy J. Gordon, A Property Right in Self-Expression: Equality and Individualism in the Natural Law of Intellectual Property, 102 Yale L.J. 1533, 1572 (1993).

[59] Id.; but see Jeremy Waldron, God, Locke and Equality: Christian Foundations in Locke’s Political Thought 158-63 (2002) (asserting that sufficiency is not a limitation especially where resources are scarce).

[60] Id.

[61] But see Jeremy Waldron, From Authors to Copiers: Individual Rights and Social Values in Intellectual Property, 68 Chi.-Kent L. Rev. 841, 847 (1993) (“Being constrained by rules of intellectual property is a different matter from being constrained by material property rules. The homeless person may freeze or starve because he finds himself excluded from every sheltered place and prohibited from taking literally any piece of food.”). Waldron’s assertions completely ignore the impact of being constrained by intellectual property from accessing essential medication.

[62] Curtis, supra note 35.

[63] Id.

[64] Kendall v. Winsor, 62 U.S. 322, 328 (1858).

[65] Id. The House Committee reporting on the 1909 Copyright Act echoed the same sentiment: “[T]he enactment of copyright legislation by Congress under the terms of the Constitution is not based upon any natural right that the author has in his writings, . . . but upon the ground that the welfare of the public will be served . . . .” H.R. Rep. No. 60-2222, at 7 (1909).

[66] Kendall, 62 U.S. at 328.

[67] Jungersen v. Ostby & Barton Co., 335 U.S. 560, 572 (1949).

[68] U.S.Const. art. I, § 8, cl. 8. The concept of exclusivity is ingrained in the Constitution “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.” Id.

[69] Evans v. Eaton, 20 U.S. 356 (1818).

[70] Id. at 413; see also Merrill D. Peterson, Thomas Jefferson and the New Nation: A Biography 937-38 (1975).

[71] Evans, 20 U.S. at 413-14; see also U.S.Const. art. I, § 8, cl. 9.

[72] Pennock v. Dialogue, 27 U.S. 1 (1829).

[73] Id. at 12 (“The constitution of the United States has declared, that congress shall have power ‘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.’ It contemplates, therefore, that this exclusive right shall exist but for a limited period, and that the period shall be subject to the discretion of congress.”).

[74] Id.; see also Diamond v. Chakrabarty, 447 U.S. 303, 315-16 (1980); Oliar, supra note 41, at 1816.

[75] Simone A. Rose, The Supreme Court and Patents: Moving Toward a Postmodern Vision of “Progress”?, 23 Fordham Intell. Prop. Media & Ent. L.J. 1197, 1203 (2013).

[76] See Ass’n for Molecular Pathology v. USPTO, 653 F.3d 1329, 1371 (Fed. Cir. 2011) (arguing that patent protection for genomic material, including isolated genes is crucial for continued innovation and economic growth of biotechnology industry). Judge Newman wrote:

The decisions in Allappat and State Street Bank confirmed the patent eligibility of many evolving areas of commerce, as inventors and investors explored new technological capabilities. The public and the economy have experienced extraordinary advances in information-based and computer-managed processes, supported by an enlarging patent base. The PTO reports that in Class 705, the examination classification associated with “business methods” and most likely to receive inventions that may not use machinery or transform physical matter, there were almost 10,000 patent applications filed in FY 2006 alone, and over 40,000 applications filed since FY 98 when State Street Bank was decided. An amicus in the present case reports that over 15,000 patents classified in Class 705 have issued. The industries identified with information- based and data-handling processes, as several amici curiae explain and illustrate, include fields as diverse as banking and finance, insurance, data processing, industrial engineering, and medicine.

In re Bilski, 545 F.3d at 992 (Newman, J., dissenting), aff’d but criticized sub nom. Bilski v. Kappos, 130 S. Ct. 3218 (2010).

[77] Rose, supra note 75, at 1201.

[78] The Indian Constitution emphasizes balancing social and economic rights. See India Const. pmbl. Article 21 of the Indian Constitution guarantees the right to life, which includes the right to good health. See id. art. 21.

[79] Agreement on Trade-Related Aspects of Intellectual Property Rights art. 7, Apr. 15, 1994 [hereinafter TRIPS].

[80] See Rose, supra note 41, at 1198 (“A radicalized modern view of patent law allows us to challenge the incentive-centered narrative of promoting progress and consider this narrative’s impact on future discoveries, humanism, morality and the environment.”).

[81] See Oliar, supra note 8, at 1804-05 (cogently constructing how from a historical, interpretative and policy perspective, the term “progress” is meant to serve as a limitation of the Constitutional powers of the Congress in the IP clause); Jeanne C. Fromer, The Intellectual Property Clause’s External Limitations, 61 Duke L.J. 1329, 1339 (2012); Rose, supra note 75, at 1201 n.11 (“Both Oliar and Fromer evaluate the structural composition of the IP Clause and persuasively argue that the nonbinding precedent view is incorrect since it fails to give meaning to the first ‘empowerment’ portion of the clause and goes against the natural textual reading or an ends-means relationship between providing exclusive rights (the means) to promote the end result of promoting progress.”). But see 1 Melville B. Nimmer & David Nimmer, Nimmer, Nimmer on Copyright § 1.03 (2004) (treating the “progress” portion of the IP clause as a preamble term introducing Congress’s broad powers in implementing Patent and Copyright protection).

[82] See Malla Pollock, What Is Congress Supposed to Promote? Defining “Progress” in Article I, Section 8, Clause 8 of the United States Constitution, or Introducing the Progress Clause, 80 Neb. L. Rev. 754, 767 (2001); Rose, supra note 75, at 1203 (clarifying that progress in the paper references a general sense and not progress in the copyright sense).

[83] See United States v. Am. Bell Tel. Co., 167 U.S. 224, 250 (1897) (“The inventor is one who has discovered something of value. It is his absolute property. He may withhold the knowledge of it from the public, and he may insist upon all the advantages and benefits which the statute promises to him who discloses to the public his invention.”).

[84] Cont’l Paper Bag Co. v. E. Paper Bag Co. (Continental Paper Bag), 210 U.S. 405, 422 (1908).

[85] Id.

[86] Id. at 424; see also Am. Bell Tel. Co., 167 U.S. at 249.

[87] See id.

[88] Continental Paper Bag, 210 U.S. at 425 (internal quotation marks omitted) (responding to the petitioner’s assertion regarding the effect on competitors, the Court added that “whenever this court has had occasion to speak, it has decided that an inventor receives from a patent the right to exclude others from its use for the time prescribed in the statute. And, for his exclusive enjoyment of it during that time, the public faith is pledged”).

[89] Id. at 429.

[90] Restricting exclusivity has remained the minority position in the United States. For example, the dissent of District Judge Aldrich in the First Circuit, from where Continental Paper Bag was appealed, favored restricting patent rights on the grounds that nonuse of patents for private benefits discouraged inventive activity. See Cont’l Paper Bag Co. v. E. Paper Bag Co., 150 F. 741 (1st Cir. 1906). Judge Aldrich stated that patents were meant to encourage invention by protecting the right to make, use and vend the product in public interest. Hence, he opined that the court should discourage activities hindering that objective by preventing the patent owner from alleging infringement. Judge Aldrich felt that the patent owner’s nonuse was for unconscionable private pecuniary gain. In not restricting the patent owner’s right, Judge Aldrich felt that the court of equity helped the owner to accomplish nonuse for private gains and thus contravened the spirit of equity and public policy. Id. at 745, 757. Justice Douglas recaptured the substance of Judge Aldrich’s opinion, albeit in his dissent, in Special Equip. Co. v. Coe, 324 U.S. 370 (1945). Justice Douglas argued that courts should interfere where patent owners misuse patents since patents are conditioned on public purposes per U.S. Const. art. I § 8, cl. 8. See Special Equip., 324 U.S. at 384; see also Cont’l Paper Bag Co., 150 F. at 744-45, 757.

[91] eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).

[92] See id. at 393.

[93] Id.

[94] Id.

[95] See eBay, 547 U.S. at 395-97 (Kennedy, J., concurring).

[96] Id.

[97] See, e.g., Innogenetics, N.V. v. Abbott Labs., 512 F.3d 1363, 1380-81 (Fed. Cir. 2008) (approving a reasonable royalty award and vacating an injunction); See Neil Tyler, Patent nonuse and technology suppression: The use of compulsory licensing to promote progress, 162 U. Pa. L. Rev. 451, 467 ( 2013); See also Jaideep Venkatesan, Compulsory Licensing of Nonpracticing Patentees After eBay v. MercExchange, 14 VA. J.L. & Tech. 26, 31 (2009) (“These courts have decided, though not always expressly, that a nonpracticing patentee is entitled only to the royalty it would have earned had the parties executed a license . . . .”).

[98] Curtis, supra note 35.

[99] See, for example, SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981) where Xerox was sued for refusing to use or license its patents involving its paper copier technology. The court asserted that this was a lawful exercise of its patent rights. See also Peter Meinhardt, Inventions, Patents and Monopoly 189 (1946) (“Probably 80 to 90 percent of all patented inventions are not worked in practice.”). See also Kurt M. Saunders, Patent Nonuse and the Role of Public Interest as a Deterrent to Technology Suppression, 15 Harv. J.L. & Tech. 389, 394 (2002) (discussing the anticompetitive effects of patent nonuse); see also Srividhya Ragavan, Patent and Trade Disparities in Developing Countries, Oxford University Press (2012) (highlighting how internationally, jurisdictions like India did emphasize the practice through working requirements and how the TRIPS Agreement has forced such requirements to be amended on the grounds that it affects international trade).

[100] Continental Paper Bag, 210 U.S. at 424.

[101] See, e.g., F.T.C., To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy 38-39 (2003),

[102] See, e.g., MercExchange, 547 U.S. at 396-97 (2006) (Kennedy, J., concurring) (“An industry has developed in which firms use patents not as a basis for production and selling goods but, instead, primarily for obtaining licensing fees.”).

[103] See Saunders, supra note 99 (discussing the anticompetitive effects of patent nonuse).

[104] Rebecca S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 U.Chi. L. Rev. 1017, 1028 (1989) (“The incentive to disclose argument, which has been more popular with the courts than with commentators, rests on the premise that in the absence of patent protection inventors would keep their inventions secret in order to prevent competitors from exploiting them.”); see also Fritz Machlup, Subcomm. on Patents, Trademarks, and Copyrights of the S. Comm. on the Judiciary, 85th Cong., An Economic Review of the Patent System, 32-33 (1958) (discussing four theses that are offered for patent protection: (i) the “natural-law” thesis; (ii) the “reward-by-monopoly” thesis; (iii) the “monopoly-profit-incentive” thesis; and (iv) the “exchange-for-secrets” thesis, and further elaborating on the last thesis that it works on the premise that in the absence of patent protection inventors would keep their inventions secret in order to prevent competitors from exploiting them);William D. Nordhaus, Invention, Growth, and Welfare: A Theoretical Treatment of Technological Change 89 (1969).

[105] See, e.g., Cole M. Fauver, Compulsory Patent Licensing in the United States: An Idea Whose Time Has Come, 8 J. Intl. L. Bus. 666, 668-70 (1998). That is, the inventor reveals the invention in return for the government’s promise of a specified statutory monopoly on the production of the idea. Id. at 681; see also The Clean Air Act, 42 U.S.C. § 7608 (2006); Jondora Music Publ’g Co. v. Melody Recordings, Inc., 351 F. Supp. 572, 577 (D.N.J. 1972).

[106] See Timothy Holbrook, The Treaty Power and the Patent Clause: Are There Limits on the United States’ Ability to Harmonize?, 22Cardozo Arts & Ent. L.J. 1, 2-3 (2004) (asserting that the language in Article 1, § 8, cl. 8 of the Constitution “to promote the Progress of the Useful Arts” is the mandate to promote patents, and that the reference to “science” relates to the Copyright Act).

[107] Ewin, supra note 37, at 481.

[108] U.S. v. Dubilier Condenser Corp., 289 U.S. 178, 186 amended by U.S. v. Dubilier Condenser Corp., 289 U.S. 706 (1933).

[109] Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 150-51 (1989).

[110] See Roin, supra note 16, at 2011-12 (“The Federal Circuit, which hears the bulk of patent infringement suits, frequently uses the same rhetoric, describing disclosure as the ‘linchpin’ and ‘quid pro quo’ of the patent system.”); see also W.L. Gore & Assocs. v. Garlock, Inc., 721 F.2d 1540, 1550 (Fed. Cir. 1983); Enzo Biochem, Inc. v. Gen-Probe Inc., 323 F.3d 956, 970 (Fed. Cir. 2002).

[111] See Roin, supra note 16.

[112] See Application of Rinehart, 531 F.2d 1048 (C.C.P.A. 1976); Application of Regel, 526 F.2d 1399 (C.C.P.A. 1975); Application of Avery, 518 F.2d 1228 (C.C.P.A. 1975); Application of Imperato, 486 F.2d 585 (C.C.P.A. 1973); Application of Andre, 52 C.C.P.A. 1019 (1965).

[113] ACS Hosp. Sys, Inc. v. Montefiore Hosp. (ACS Hospital Systems), 732 F.2d 1572, 1577 (Fed. Cir. 1984); see also Robert P. Merges & John F. Duffy, Patent Law and Policy: Cases and Materials 664 (4th ed. 2007) [hereinafterMerges & Duffy].

[114] See ACS Hospital Systems, 732 F.2d at 1577.

[115]Merges & Duffy, infra note 120; see also Ashland Oil v. Delta Resins & Refractories, 776 F.2d 281, 297 (Fed. Cir. 1985).

[116] Id.; see also In re Kemps, 97 F.3d 1427 (Fed. Cir. 1996) (holding that the Patent and Trademark Office’s factual determinations on the issue of obviousness, regarding which references teach and whether a reference teaches toward or away from claimed invention, are binding on the Court of Appeals, which employed the clearly erroneous standard). But see In re Gartside, 203 F.3d 1305 (Fed. Cir. 2000) (reversing the above decision and noting that the PTO Board’s decision will be subject to substantial evidence standard under the Administrative Procedure Act).

[117] See Application of Rinehart, 531 F.2d at 1052 (standing for the proposition that the burden shifts onto the patentee to prove nonobviousness of the claimed invention by putting forward objective evidence).

[118] Obviousness is an objective test conducted from the vantage point of a person of skill in the art. See 35 U.S.C. §103 (2012).

[119] Feroz Ali Khader & Srividhya Ragavan, Proof of Progress: The Role of Obviousness Standard in the Indian Patent Office, in Global Perspectives on Patent Law 571 (2014).

[120] Srividhya Ragavan & Feroz Khader, The Selection Of Patents: Regulatory Reforms versus Market Reliance To Weed Out Suspect Patents, 46(1) Int’l Rev. Intell. Prop. & Competition L. 38, 44 (2015).

[121] Id. at 44-45.

[122] See In re Dembiczak, 175 F.3d 994 (Fed. Cir. 1999) abrogated by In re Gartside, 203 F.3d 1305 (Fed. Cir. 2000).

[123] See id. at 1000.

[124] See Khader & Ragavan, supra note 119, at 596; see also Winner Int’l Royalty Corp. v. Wang, 202 F.3d 1340, 1348 (Fed. Cir. 2000); Ecolochem, Inc. v. S. Cal. Edison Co., 227 F.3d 1361, 1371 (Fed. Cir. 2000).

[125] See Timothy R. Holbrook, Possession in Patent Law, 59 SMU L. Rev. 123, 171 (2006) (asserting that the TSM test treats the nonobviousness requirement akin to the novelty test). Holbrook suggests that it is akin to having one reference “incorporating by reference” all of the other prior arts. Id.

[126] Id.

[127] Stephen G. Kunin & Andrew K. Beverina, KSR’s Effect on Patent Law, 106 Mich. L. Rev. 50, 50-51 (2007).

[128] See Brief of Intellectual Property Law Professors as Amici Curiae in Support of Petitioner at 9-11, KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007) (No. 04-1350); Brief of Amici Curiae Cisco Systems Inc. et al. in Support of Reversal for Petitioner at 2-3, KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007) (No. 04-1350) (arguing that the suggestion test’s low bar to patentability made patents of technologically trivial subject matter possible); Brief for the United States as Amicus Curiae Supporting Petitioner at 10, KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007) (No. 04-1350) (“[The suggestion test] exacts a heavy cost in the form of unwarranted extension of patent protection to obvious subject matter.”); see also Randall J. Hirsch, Well Duh: Obviousness, Gas Pedals, and the Teaching-Suggestion-Motivation Test, 6 Nw. J. Tech. & Intell. Prop. 89, 90 (2007) (asserting that the general criticism of the TSM test was that it set the threshold too low for patentability, allowing for the issuance of obvious patents, which contravenes public policy).

[129] William H. Brown, Trends in Patent Renewal at the United States Patent and Trademark Office, 17World Pat. Info. 225, 227 (1995) (noting that in 1994, statistics indicated that only about fifty-five percent of patents are renewed at the end of the eight-year period).

[130] KSR Int’l Co., 550 U.S. at 415-22. After KSR, the USPTO issued new examination guidelines outlining several bases for rejection under 35 U.S.C. § 103, one of which was the TSM test; see Manual of Patent Examining Procedure, § 2143 (U.S.P.T.O. 2008); see also Tom Irving, Lauren L. Stevens & Scott M. K. Lee, Nonobviousness in the U.S. Post-KSR for Innovative Drug Companies, 34 U. Dayton L. Rev. 157, 159 (2009).

[131] See Amy Maxmen, The Great Gene-Patent Debate: How the Myriad Genetics Gene­Patent Case Might Affect Personalized Medicine, Nature (July 20, 2012),; Julia Carbone et al., DNA Patents and Diagnostics: Not a Pretty Picture, 28 Nature Biotechnology 784 (2010); see also Mayo Collaborative Servs. v. Prometheus Labs., Inc. (Mayo), 132 S. Ct. 1289, 1302 (2012) (“The laws of nature at issue here are narrow laws that may have limited applications, but the patent claims that embody them nonetheless implicate this concern . . . [a]nd they threaten to inhibit the development of more refined treatment recommendations . . .”). See generally Ariad Pharms., Inc. v. Eli Lilly & Co., 560 F.3d 1366, 1371-77 (Fed. Cir. 2009); Petition for a Writ of Certiorari at 17, Ass’n for Molecular Pathology v. Myriad Genetics, Inc. (Myriad), 133 S. Ct. 2107 (2013) (No. 11­72517); Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124, 127 (2006) (Breyer, J., dissenting) (“The problem arises from the fact that patents do not only encourage research by providing monetary incentives for invention. Sometimes their presence can discourage research by impeding the free exchange of information, for example by forcing researchers to avoid the use of potentially patented ideas, by leading them to conduct costly and time-consuming searches of existing or pending patents, by requiring complex licensing arrangements, and by raising the costs of using the patented information, sometimes prohibitively so.”).

[132] See, e.g., Amgen v. Chugai, 927 F.2d 1200, 1203­04 (Fed. Cir. 1991). Amgen was a decision rendered under 35 U.S.C. § 102(g), and thus not a question of obviousness. The case enabled the patentability of an adequately conceived DNA sequence. The Federal Circuit held that DNA sequences adequately defined in a manner sufficiently disclosing its actual structure and method of preparation would be considered as having been reduced to practice, even though an inventor may be unaware of its actual structure and nowhere near disclosing the actual structure. Id. at 1211; see also U.S. Patent No. 4,703,008.

[133] In re Deuel, 51 F.3d 1552, 1560 (Fed. Cir. 1995) (holding that obvious to try is not obvious); see also Ragavan, supra note 99, at 211-12.

[134] Sara Dastgheib­Vinarov, A Higher Nonobviousness Standard for Gene Patents: Protecting Biomedical Research from the Big Chill, 4 Marq. Intell. Prop. L. Rev. 143 (2000).

[135] See Anita Varma & David Abraham, DNA Is Different: Legal Obviousness and the Balance Between Biotech Inventors and the Market, 9 Harv. J.L. & Tech. 53, 78 (1996) (“On the one hand, based on prior art knowledge, the biotechnologist knows that sequencing around twenty amino acids is sufficient to obtain the cDNA sequence that codes for a particular protein, absent unforeseen difficulties. On the other hand, under current law, the expected product of this scientifically obvious manipulation is legally unobvious and thus patentable.”).

[136] Dastgheib­Vinarov, supra note 134, at 165.

[137] Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 Sci. Mag. 698 (1998).

[138] Id.

[139] Cf. Dastgheib­Vinarov, supra note 134, at 165.

[140] Regents of the Univ. of Cal. v. Eli Lilly & Co., 119 F.3d 1559, 1566-69 (Fed. Cir. 1997); Shraddha A. Upadhaya, The Postmodern Written Description Requirement: An Analysis of the Application of the Heightened Written Description Requirement to Original Claims, 4 Minn. Intell. Prop. Rev. 65, 109-10 (2002).

[141] Eli Lilly, 119 F.3d at 1568; see also Lisa A. Karczewski, Comment, Biotechnological Gene Patent Applications: The Implications of the USPTO Written Description Requirement Guidelines on the Biotechnology Industry, 31 McGeorge L. Rev. 1043, 1078 (2000) (arguing that the court’s holding that a generic description of the genus such as “vertebrate insulin cDNA” or “mammalian insulin cDNA” distinguishes the claimed genus only by function and hence is an inadequate written description).

[142] See Enzo Biochem, 323 F.3d at 970; see also Univ. of Rochester v. G.D. Searle & Co., 358 F.3d 916, 922 (Fed. Cir. 2004) (quoting Enzo Biochem, 323 F.3d at 970).

[143] Ariad Pharmaceuticals et al. v. Eli Lilly and Company (Ariad), 598 F.3d 1336 (Fed. Cir. 2010).

[144] Id. at 1358 (finding the Ariad patent invalid on the grounds that the patent failed to adequately describe the invention and thus, to enable the specification).

[145]Drahos, supra note 15, at 220-23.

[146] See, e.g., Merges et al., Intellectual Property in the New Technological Age 191 (Wolters Kluwer Law & Business, 6th ed. 2012).

[147] See, e.g., U.S.Const. art. I, § 8, cl. 8.

[148] H.L.A. Hart, Essays on Bentham 165 (1982) [hereinafter Essays on Bentham].

[149] Id.

[150] Id. at 166.

[151] Id. at 165.

[152] Id. at 134.

[153] Id. at 131-32.

[154] Id. at 132-34.

[155] Id. at 168-69.

[156] Id.

[157] Id. at 169.

[158] Id. at 168-69.

[159] Id. at 168.

[160] Id. at 176-77.

[161] Daniel Sperling, Posthumous Interests: Legal & Ethical Perspectives, Cambridge University Press, at 72 (2008).

[162]Essays on Bentham, supra note 148, at 185 n.88.

[163] Id. at 185.

[164] Id.

[165] Id. at 169.

[166] See, e.g., 35 U.S.C. § 112.

[167] Id.

[168] Lisa Larrimore Ouellette, Do Patents Disclose Useful Information?, 25 Harv. J.L. & Tech. 545, 594-95 (2012) (highlighting that the disclosure requirements can convey benefits conducive to the objectives of the patent system).

[169] See Essays on Bentham, supra note 148, at 175.

[170]David Hume, A Treatise of Human Nature, Book III: Of Morals 519 (L.A. Selby-Bigge ed., Oxford 1896).

[171] Id.

[172] Id. at 495.

[173] Essays on Bentham, supra note 148, at 87-88.

[174] H.L.A. Hart, The Concept of Law 202 (Oxford Univ. Press 1961). See generally Richard M. Dworkin, Social Rules and Legal Theory, 81 Yale L.J. 855 (1972).

[175] Hart supra note 174; see also Essays on Bentham, supra note 148.

[176] See Drahos, supra note 15, at 22.

[177] Id. at 22-23.

[178]Ragavan, supra note 99, at 7-8. See also Edward C. Walterscheid, The Early Evolution of the United States Patent Law: Antecedents (Part II), 76 J. Pat. & Trademark Off. Soc’y 849, 879 (1994) [hereinafter Walterscheid (Part II)].

[179] See Drahos, supra note 15, at 31.

[180] Id.; see also Ragavan, supra note 99, at 4-5; Edward C. Walterscheid, The Early Evolution of the United States Patent Law: Antecedents (Part I), 76 J. Pat. & Trademark Off. Soc’y 697, 705-08 (1994); Walterscheid (Part II), supra note 178.

[181] See Drahos, supra note 15, at 220-23.

[182] Essays on Bentham, supra note 148, at 209.

[183] Id. at 209.

[184] Id. at 201.

[185] Id. at 168.

[186] Id.; see also Wesley N. Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning, 23 Yale L.J. 16, 32 (1913) (arguing that exclusion is considered important in property because it is “crucial to, and protects, a set of use privileges in relation to the res with which the owner is vested”).

[187] Balganesh, supra note 49, at 1669 (“The duty of forbearance, which operates once a resource is owned, signals to individuals to avoid interfering with the resource without the owner’s authorization.”).

[188] Under the old 1952 act, novel subject matter made someway public more than one year before filing could have barred the inventor from getting a patent. See 35 U.S.C § 102(b) (2007) (amended 2011).

[189] Allison et al., Valuable Patents, 92Geo. L.J. 435, 437 (2004) (highlighting that the value of the patent is different from the value of the invention). Importantly, exclusivity is not required functionally to increase the value of the invention.

[190] See Joseph E. Stiglitz, Prizes, Not Patents,Project Syndicate (Mar. 6, 2007),–not-patents; see also Benjamin N. Roin, Intellectual Property versus Prizes: Reframing the Debate, 81 U. Chi. L. Rev. 999, 1001-03 (2014); Marlynn Wei, Should Prize Replace Patents? A Critique of the Medical Innovation Prize Act of 2005, 13 B.U. J. Sci. & Tech. L. 25, 27-28 (2007).

[191] See Joseph E. Stiglitz, How Intellectual Property Reinforces Inequality,N.Y. Times (July 14, 2013),
(“[T]here are alternatives. Advocates of intellectual property rights have overemphasized their role in promoting innovation. Most of the key innovations — from the basic ideas underlying the computer, to transistors, to lasers, to the discovery of DNA — were not motivated by pecuniary gain. They were motivated by the quest for knowledge.”).

[192] See, e.g., Gideon Parchomovsky & R. Polk Wagner, Patent Portfolios, 154U. Pa. L. Rev. 1, 52 (2005) (discussing how a portfolio of patents as opposed each individual patents adds to an aggregate value that is greater than individual worth of each of the patents); see also Doug Lichtman, Aligning Patent Presumptions with the Reality of Patent Review: A Proposal for Patent Reform 5-6 (The Brookings Inst., Discussion Paper No. 2006-10, 2006). See generally Patents in the Knowledge-Based Economy 1-2 (Wesley M. Cohen & Stephen A. Merrill eds., 2003).

[193] Cf. John R. Allison & Ronald J. Mann, The Disputed Quality of Software Patents, 85Wash. U. L. Rev. 297, 304 (2007) (concluding that the difference between the patents obtained large firms and smaller firms are not substantial). The authors assert that the data does not support the need for patent reforms focused on a particular area of technology. The authors also conclude that patent reforms that increase the bar for patent filings may work to the detriment of smaller firms and inventors. Id.

[194] See Parchomovsky & Wagner, supra note 192, at 52.

[195] Id. at 35-36.

[196] Id. at 44; see also Microsoft-Patsnap,Microsoft (Feb. 2, 2016), (formatting omitted) (“Microsoft has a total of 56,841 granted patents and 88,857 patent applications distributed into 46,972 patent families. Based on the countries of patent applications, the key markets for Microsoft are USA, European Patent Office and WIPO(PCT).”); The Patent Wars: Apple versus Android, The Conversation (Sept. 3, 2012),; Reuven Brenner, Must All Patents Last for 20 Years? A flexible system that recognizes the needs of different industries might lead to less legal conflict, Wall Street Journal (Apr. 23, 2013),

[197] See Parchomovsky & Wagner, supra note 192, at 52-54 (attempting to explain the current trend of holding families of patents each with diminishing worth but collectively increasing the bargaining strength of the holder using the theory of patent portfolio). The authors outline that the real value of patents lies in the aggregate value of the portfolio as differentiated from the value of each single patent. Such strategic collection of patent portfolio, the authors assert, presents an important array of advantages to the portfolio holder. Id. See also Ronald A. Cass, Lessons from the Smartphone Wars: Patent Litigants, Patent Quality, and Software, 16 Minn. J.L. Sci. & Tech. 1, 25-26 (2015).

[198] Bronwyn Hall et al., Patent Thickets and First-time Patenting: New Evidence, Vox (Apr. 23, 2016), available at

[199] Id.

[200] See Parchomovsky & Wagner, supra note 192, at 52-54.

[201] See, e.g., Mayo, 132 S. Ct. at 1305 (discussing the effects of raising the price of using the patented ideas once created, requiring potential users to conduct costly and time-consuming searches of existing patents and pending patent applications, and requiring the negotiation of complex licensing arrangements).

[202] See, e.g., Indian Patents Act of 1970, 27 India A.I.R. Manual 450, (1979); see also Marrakesh Agreement Establishing the World Trade Organization Annex 1C, Apr. 15, 1994, 1869 U.N.T.S. 299. See generally Srividhya Ragavan, A Patent Restriction On ‘R & D: Infringers or Innovators, 1 Ill. J.L. Tech & Pol’y 73 (2004).

[203]Ragavan, supra note 99, at 42; see also Indian Patents Act of 1970, supra note 197.

[204]Ragavan, supra note 99, at 58.

[205] Id.; see also Loi du 5 juillet 1844 sur les brevets d’invention [Law of July 5, 1844 on Patents for Inventions],Périodique et Critique [D.P. III] [Periodic Review]; Patentgesetz [Imperial German Patent Law], May 25, 1877, Reichsgesetzblatt [RGBL].

[206] N. Rajagopala Ayyangar, Report on the Revision of the Patents Law in India, 1959, SCCOnline 23-24 (2013) [hereinafter Ayyangar Report].

[207] Id.; Ragavan, supra note 99, at 38.

[208] See generally Ragavan, supra note 99.

[209] See generally Merges, supra note 11, at 237-69. It is unlike the suggestion by Professor Merges of a Lockean sense of charity meant for the benefit of the destitute.

[210] Jeremy Waldron, From Authors to Copiers: Individual Rights and Social Values in Intellectual Property, 68 Chi.-Kent L. Rev. 841, 862 (1993).

[211] Mayo, 132 S. Ct. at 1305.

[212] Myriad, 133 S. Ct. at 2108.

[213] Ghosh, supra note 21, at 815.

Disrupting the Balance: The Conflict Between Hatch-Waxman and Inter Partes Review

Disrupting the Balance: The Conflict Between Hatch-Waxman and Inter Partes Review
Download a PDF version of this article here.

By Joanna Shepherd*



Inter partes review (IPR), a new pathway for challenging patents, is threatening the nature of competition in the pharmaceutical industry, drug innovation, and consumers’ access to life-improving drugs. Since its creation under the America Invents Act (AIA) in 2012,[1] this new administrative proceeding has produced noticeably anti-patent results. Whereas patents challenged in district court are invalidated in less than 40% of cases,[2] and patents challenged in the administrative predecessors of IPR were invalidated in less than one-third of cases, IPRs have resulted in patent invalidations in a shocking 70% of cases.[3] Moreover, the IPR process has been exploited by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company, then filing an IPR challenge in hopes of crashing the stock and profiting from the bet.[4]

Unfortunately, in recent decisions, courts have recognized the anti-patentee bias of IPR, yet punted to Congress the job of amending the provisions. In Cuozzo Speed Technologies v. Lee (Cuozzo) in June 2016, the U.S. Supreme Court found that an anti-patentee claim construction standard in IPR “increases the possibility that the examiner will find the claim too broad (and deny it),”[5] yet concluded that only Congress could mandate a specific standard.[6] Similarly, in Merck & Cie v. Gnosis in April 2016, the U.S. Court of Appeals for the Federal Circuit determined that an anti-patentee standard of review for IPR decisions “is seemingly inconsistent with the purpose and content of the AIA,”[7] yet decided that “the question is one for Congress.”[8] On the standing issue, the Patent Trial and Appeal Board (PTAB) concluded in 2015 that, under the AIA language created by Congress, hedge funds cannot be excluded from IPR proceedings.[9]

Congress generally intended IPR to improve patent quality by providing a more efficient pathway to challenge patents of dubious quality. Because IPR is available for patents in any industry, for pharmaceutical patents, IPR offers an alternative to the litigation pathway that Congress specifically created over three decades ago in the Hatch-Waxman Act. With Hatch-Waxman, Congress sought to achieve a delicate balance between stimulating innovation from brand companies who hold patents and facilitating market entry from generic companies who challenge the patents. By all accounts, Hatch-Waxman has successfully achieved these goals. Generic drugs now account for 89% of drugs dispensed,[10] yet brand companies still invest significantly in R&D, which accounts for over 90% of the spending on the clinical trials necessary to bring new drugs to market.[11]

Unfortunately, IPR proceedings that culminate in a PTAB trial differ significantly from Hatch-Waxman litigation that occurs in federal district court. The PTAB applies a lower standard of proof for invalidity than do district courts in Hatch-Waxman litigation. It is also easier to meet the standard of proof in a PTAB trial because there is a more lenient claim construction standard and a substantially limited ability to amend patent claims. Moreover, on appeal, PTAB decisions in IPR proceedings are given more deference than lower district court decisions. Finally, while patent challengers in district court must establish sufficient Article III standing, IPR proceedings do not have a standing requirement, allowing any member of the public other than the patent owner to initiate an IPR challenge. These inconsistencies have led to the significantly different patent invalidation rates in PTAB trials compared to rates in district court litigation.

It is imperative that Congress reduce the disparities between IPR proceedings and Hatch-Waxman litigation. The high patent invalidation rate in IPR proceedings creates significant uncertainty in pharmaceutical intellectual property rights. Uncertain patent rights will, in turn, lead to less innovation in the pharmaceutical industry. Drug companies will not spend the billions of dollars it typically costs to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them. And if IPR causes drug innovation to decline, a significant body of research predicts that consumers’ health outcomes will suffer as a result.

This Article proceeds as follows. Section II begins with a general discussion of the pharmaceutical market, explaining the nature of competition between brand and generic drugs and the importance of brand drug innovation. Section III explains the regulatory frameworks that Congress established to balance the interests of brand patent holders with generic patent challengers, focusing on the Hatch-Waxman Act and the Biologics Price Competition and Innovation Act. Section IV describes administrative pathways available for patent challenges; it discusses both IPR’s predecessors and the changes introduced with IPR under the AIA. Section V explains the critical differences between district court litigation in Hatch-Waxman litigation and IPR proceedings that give rise to the pro-challenger bias in IPR. Section VI proposes several reforms that Congress could institute to align IPR with Hatch-Waxman and restore the delicate balance between stimulating innovation and encouraging generic entry. Section VII concludes the Article.

I. Understanding the Pharmaceutical Market

A. The Nature of Competition Between Brand and Generic Drugs

Over the past several decades, the nature of competition in the pharmaceutical industry and the relative market shares of brand and generic companies have changed dramatically. The generic industry exploded after the 1984 Hatch-Waxman Act—discussed in greater detail in Section III—created various regulatory shortcuts and litigation incentives to spur the introduction of generic alternatives to brand name drugs. The generic industry was further assisted by drug substitution laws in every state that allowed, or sometimes required, pharmacists to automatically substitute a generic equivalent drug when a patient presents a prescription for a brand drug. These regulatory changes have allowed generics to capture significant market share from brand companies. As shown in Figure 1, generics’ market share has steadily increased from only 19% of drugs dispensed in 1984 to nearly 89% in 2015.

Shepherd Figure 1
Figure 1: Growth in Generics’ Share of Pharmaceutical Market[12]

The success of generic drugs can be attributed entirely to their lower prices. When a brand drug’s patent expires, generics initially enter the market at a price that is, on average, 50% less than their branded counterpart.[13] As months pass and more generics enter the market, the generic price eventually drops to 80% of the pre-expiry brand drug’s price. Generic companies are able to charge these lower prices while earning substantial profits because they face significantly lower costs than brand drug companies. In contrast to brand companies that spend an average of $2.6 billion on R&D and the FDA approval process, bringing a new generic drug to market costs only $1 to $2 million.[14] In addition, whereas brand companies spend millions of dollars marketing their drugs to physicians and patients,[15] generic companies typically spend very little on marketing. Because generics are automatically substituted for brand prescriptions at the pharmacy, generics can free-ride on the marketing efforts of brand companies and rely on automatic substitution laws for a large chunk of their sales. With these significantly lower costs, generic companies can afford to charge a lower price for their drugs and still earn impressive profits.

A significant number of existing brand drug customers switch to the lower-priced generics as they enter the market, swiftly eroding brand drugs’ market share. As shown in Figure 2, upon market entry, generics now routinely capture over 70% of the brand drug’s market share within only three months of generic entry. In contrast, as recently as 1999, generics captured less than 40% of the market within three months. Within twelve months, generics now capture over 80% of the brand drug’s market share, whereas in 1999, they only captured slightly over 50%.

Shepherd Figure 2
Figure 2: Generic Erosion of Brand Drug Market Share[16]

The expansion of the generic industry has produced significant savings for consumers; in the last decade alone, generic drugs have saved the healthcare system nearly $1.7 trillion dollars.[17] However, it has also raised concerns about brand companies’ ability to develop innovative new drugs. Brand drugs experience a significant drop in sales after generics enter the market and erode brand market share. For instance, in 1984 new brand drugs experienced a 12% decrease in net sales as a result of generic entry (a decrease which took place during the first decade after the enactment of the Hatch-Waxman Act).[18] And the expansion of generic drugs since then has further reduced brand sales. Brand drugs’ average lifetime sales are now lower than they were in the early 1990s.[19] In fact, just two in ten brand drugs now earn profits sufficient to cover the average R&D costs required to bring new drugs to market.[20] Moreover, between 2012 and 2018, it is estimated that brand drug companies will lose almost $150 billion in sales because of patent expirations and generic entry.[21]

B. The Importance of Brand Drug Innovation

Unfortunately, reductions in brand drugs’ profitability limits companies’ ability and incentive to engage in the expensive R&D necessary to develop innovative new products. Drug companies will not spend millions (or potentially billions) of dollars to develop new drugs if they cannot recoup (and earn an acceptable return on) the costs of said development. Moreover, since only 20% of marketed brand drugs will ever earn enough sales to cover their development costs, the sales of these successful drugs must not just recoup their own costs; they must also cover the costs of the other 80% of approved drugs that generate losses for drug makers.[22]

Less R&D spending by brand companies will result in less innovation throughout the pharmaceutical industry. Brand drug companies are largely responsible for pharmaceutical innovation.[23] Since 2000, brand companies have spent over half a trillion dollars on R&D,[24] and they currently account for over 90% of the spending on the clinical trials necessary to bring new drugs to market.[25] Because of this spending, over 550 new drugs have been approved by the FDA since 2000,[26] and another 7,000 are currently in development globally.[27] Yet brand companies’ R&D efforts and innovation are directly tied to their profitability. Numerous studies have found that policies that increase pharmaceutical profitability lead to increases in new clinical trials, new molecular entities, and new drug offerings.[28] Other studies have found that policies that reduce expected profitability lead to decreases in R&D spending.[29] Thus, reductions in brand drug profitability over the long term could very well lead to less R&D and less innovation in the pharmaceutical market.

A reduction in innovation will jeopardize the significant health advances that innovation achieves. Empirical estimates of the benefits of pharmaceutical innovation indicate that each new drug brought to market saves 11,200 life-years each year.[30] Another study finds that the health improvements from each new drug can eliminate $19 billion in lost wages by preventing lost work due to illness.[31] Moreover, because new, effective drugs reduce medical spending on doctor visits, hospitalizations, and other medical procedures, data shows that for every additional dollar spent on new drugs, total medical spending decreases by more than seven dollars.[32] Brand companies, and the profit incentives that motivate them, are largely responsible for pharmaceutical innovation. Thus, actions that reduce brand profitability could have long-term negative effects on consumer health and health care spending.

II. Regulatory Frameworks Balancing Drug Innovation with Generic Availability

Understanding the importance of stimulating innovation while encouraging generic entry, Congress created two regulatory frameworks that balanced the interests of brand patent holders with generic patent challengers. The Hatch-Waxman Act applies to traditional drugs, while the Biologics Price Competition and Innovation Act covers the new pathway for follow-on biologic drugs. This section discusses both regulations in turn.

A. The Hatch-Waxman Act

The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, was designed to balance the benefits of pharmaceutical innovation with consumers’ needs for affordable drugs.[33] With Hatch-Waxman, Congress recognized that drug companies will only have the incentive to innovate if they can earn sufficient profits during the patent period to recover the exorbitant costs of researching and developing the drug, obtaining FDA approval, and marketing the drug to physicians and patients. However, while preserving incentives for “brand-name” innovations, Hatch-Waxman also encourages companies to create bioequivalent drugs—generics—that copy these branded drugs and enter the market at a lower price as soon as the patents expire on the innovator drugs.[34]

Hatch-Waxman includes various provisions designed to incentivize innovation by brand drug companies. First, to help companies recover the costs of bringing a drug to market, Hatch-Waxman allows for an extension of the patent term lost because of delays attributable to the FDA approval process. It establishes a period of patent restoration, which extends a covered drug’s patent length by up to five years (to a maximum of fourteen years) for half of the brand drug’s clinical testing period and all time spent securing FDA approval.[35] In addition to patent term restoration, Hatch-Waxman confers on brand drugs five years of data exclusivity. Data exclusivity prohibits the FDA from receiving a generic application that relies on the brand drug’s safety and efficacy data. Protection from early generic filings helps to ensure that brand drug manufacturers have an adequate opportunity to recoup research, development and marketing costs.[36]

But in exchange for these new protections for brand drug manufacturers, Hatch-Waxman created various incentives for other companies to produce and market cheaper, generic drugs. First, to spur the introduction of low-cost generics, Hatch-Waxman created the Abbreviated New Drug Application (“ANDA”) process that allows a generic that demonstrates bioequivalence to rely on previously submitted brand drug safety and efficacy data.[37] Prior to Hatch-Waxman, generics were required to submit their own original safety and efficacy data, often duplicating the brand drugs’ tests. The new, greatly truncated process enables generics to quickly enter the market after brand patent expiration and to bring new drugs to market at a cost of only $1 to $2 million, compared to an average of $2.6 billion for brand drugs.[38] Moreover, Hatch-Waxman also immunizes generic companies from patent infringement liability for uses of the brand drug prior to expiration that are reasonably related to the filing of an FDA application.[39]

Second, Hatch-Waxman actively incentivizes generic companies to challenge the validity of brand patents before they expire by creating a pathway for such challenges and by offering a lucrative incentive to the first generic manufacturer to do so. Under a “Paragraph IV” challenge, a generic manufacturer submits an ANDA certifying that either the brand drug patent is invalid or unenforceable, or the generic drug will not infringe on the listed brand patent. As an incentive for filing Paragraph IV challenges, for the first generic that files a challenge and wins, Hatch-Waxman grants a 180-day exclusivity period during which the FDA will not approve any other generic versions of the drug. During this period, the first generic is the only generic on the market, and it can earn substantial profits by shadow pricing, or pricing slightly under the innovator’s price.[40] As a result of this lucrative incentive, Paragraph IV challenges have exploded in recent years: although only 9% of drugs facing generic entry in 1995 were challenged, 81% of drugs facing generic entry in 2012 were challenged.[41] Moreover, Paragraph IV challenges are occurring earlier in the lives of brand drugs. Brand drugs that experienced their first generic entry in 1995 faced their first Paragraph IV challenge 18.7 years after original launch. By comparison, drugs facing the first generic entry in 2012 saw only 6.9 years between market launch and the first Paragraph IV challenge.[42]

Thus, Congress designed the Hatch-Waxman Act to strike a delicate balance between promoting brand innovation and facilitating generic entry. By granting brand drugs a period of patent restoration and data exclusivity, the Act recognized that brand innovators must earn a sufficient return on their R&D costs for innovation to occur. Yet, by streamlining the generic approval process, incentivizing generic challenge of brand patents and providing a litigation pathway for such challenges as discussed below, the Act also sought to increase generic availability and lower drug prices. By all accounts, Hatch-Waxman has successfully achieved these twin goals; generics now account for 89% of drugs dispensed,[43] yet brand companies still invest significantly in R&D, accounting for over 90% of the spending on clinical trials.[44]

B. The Biologics Price Competition and Innovation Act

Congress reconfirmed its intentions to balance brand innovation with the entry of cheaper, follow-on alternatives in 2009 with the Biologics Price Competition and Innovation Act (BPCIA).[45] The BPCIA deals with biologic drugs that distinguish themselves from traditional drugs by their origins: biologics derive from living organisms, typically proteins; though occasionally include toxins, blood, viruses or allergens.[46] These medications are far more complex than traditional medicines; whereas a traditional drug might contain between a few dozen to a hundred atoms per molecule, a biologic’s complicated proteins can include several thousand atoms per molecule.[47] Because of this complexity, biologics are significantly more expensive to manufacture than traditional drugs. The average cost of a biologic drug is twenty-two times greater than a traditional drug, making them prohibitively expensive for many consumers.[48]

Fortunately, Congress recognized the need for cheaper, follow-on substitutes for biologic drugs—or biosimilars (the generic counterpart of biologic drugs). With the BPCIA, it achieved a compromise between biologics and biosimilars patterned after Hatch-Waxman’s regulatory scheme for traditional drugs. First, the BPCIA created an expedited biosimilar approval pathway—analogous to Hatch-Waxman’s approval pathway for generic drugs—under which a proposed biologic substitute does not have to demonstrate bioequivalence, but merely biosimilarity, to a reference product.[49] A product approved as biosimilar may further be deemed “interchangeable” with another biologic if its manufacturer can demonstrate that switching between the reference biologic and the proposed substitute presents no additional risk in safety or efficacy for consumers.[50] Similar to Hatch-Waxman’s 180-day generic exclusivity window, the first biosimilar deemed interchangeable receives an exclusivity window as well.[51]

However, the BPCIA also recognizes the importance of protecting the original biologic’s patent period to encourage biologic innovation. Innovative biologics—the biologic equivalent of brand drugs—receive twelve years of marketing exclusivity during which the FDA cannot approve a biosimilar substitute. [52] The BPCIA also confers four years of data exclusivity on innovative biologics during which a biosimilar is not permitted to use a reference drug’s safety information to file an abbreviated application for FDA approval.[53]

Thus, like Hatch-Waxman’s balance between protecting brand innovation and encouraging generic entry, the BPCIA protects biologics’ patent terms while incentivizing biosimilar entry in the market.

C. Legal Challenges to Patents Under Hatch-Waxman and BPCIA

Both Hatch-Waxman and the BPCIA establish frameworks for patent challenges that further balance the competing interests of brand and generic drug manufacturers. As noted above, when an ANDA applicant makes a Paragraph IV certification that the brand patent is either invalid, unenforceable or would not be infringed by the generic drug, Hatch-Waxman provides a structure for resolving the dispute.[54] First, the ANDA filer must give notice to the brand patent holder of the Paragraph IV certification. Hatch-Waxman makes the filing of an ANDA with a Paragraph IV certification an act of patent infringement even though no direct infringement has occurred. Thus, in contrast to many other industries in which the patent holder cannot sue for infringement until an infringing product has been produced and sold, the brand patent holder can bring suit against a generic rival before the infringing product is brought to market.[55] Moreover, the ANDA filer can resolve the patent dispute in court before exposing itself to patent infringement damages for bringing the challenged product to market. If the brand company does not sue for patent infringement within forty-five days of receiving notice of the Paragraph IV certification, the FDA may approve the ANDA and the ANDA filer can file for declaratory judgment of patent invalidity or noninfringement. If the brand company does sue for patent infringement within the forty-five days, the FDA is stayed from approving the generic ANDA until the generic company prevails in court or reaches a settlement, the brand patent expires, or a thirty-month stay expires. If the generic company wins at trial or reaches a favorable settlement, it receives a 180-day exclusivity period during which the FDA will not approve any other generic versions of the drug.

Similarly, the BPCIA creates a framework for patent challenges of biologic drugs that balances the interests of original biologics and biosimilars.[56] First, the biosimilar applicant must give notice to the biologic manufacturer that it plans to market a competing product, and it must provide access to the biosimilar application and relevant manufacturing details. Similar to a Paragraph IV filing under Hatch-Waxman, the BPCIA creates an artificial act of infringement that enables the original biologic manufacturer to bring a claim for patent infringement against a biosimilar manufacturer. If it chooses to bring an infringement claim, the original biologic manufacturer may provide to the biosimilar applicant a list of all patents it believes are infringed. The parties may then decide to exchange statements describing why each patent will or will not be infringed and negotiate as to which patents will be subject to the patent infringement action in the first round of litigation.[57] Unlike Hatch-Waxman, the BPCIA does not provide a stay of FDA approval during the course of patent litigation. However, by requiring the biosimilar applicant to give 180 days’ notice before going to market, the BPCIA does provide an opportunity for biologic manufacturers to seek a preliminary injunction against an “at-risk” launch (i.e., a launch while patent litigation is ongoing and there is a risk of incurring patent infringement damages) of the biosimilar. Furthermore, to encourage biosimilar development and patent challenges, the BPCIA grants an exclusivity period to the first interchangeable biosimilar that wins a patent dispute or is not sued for infringement.[58]

Thus, Hatch-Waxman and the BPCIA encourage generic and biosimilar manufacturers to challenge patents with a regulatory “bounty” system that provides a lucrative incentive for follow-on drug development and patent challenges. At the same time, they protect brand and biologic patent holders from generic/biosimilar competition in the marketplace until after a patent dispute has been resolved. Moreover, brand patent holders are afforded additional protections because federal district court is the venue for Hatch-Waxman and BPCIA patent challenges. The court presumes patents are valid unless a patent challenger can show invalidity by clear and convincing evidence. In addition, the court interprets patent claims using the “ordinary and customary meaning” standard, making invalidation less likely than under the more lenient standard used in administrative proceedings.[59]

III. Administrative Proceedings for Patent Challenges

A. Pre-IPR Proceedings

In addition to the litigation frameworks created under Hatch-Waxman and the BPCIA, patents can also be challenged in administrative proceedings. Congress has long recognized that imperfections exist in the U.S. Patent and Trademark Office (PTO) examination and issuance process and that some issued patents may require reexamination.[60] In creating an administrative pathway for patent reexamination, Congress intended to reduce both the number of doubtful patents and the cost of patent litigation.[61] This “second look” allows the PTO to withdraw improperly granted patents, thereby correcting its previous errors at a much lower cost than litigation. Indeed, Congress predicted that the administrative reexamination of doubtful patents would:

permit efficient resolution of questions about the validity of issued patents without recourse to expensive and lengthy infringement litigation. This, in turn, will promote industrial innovation by assuring the kind of certainty about patent validity which is a necessary ingredient of sound investment decisions. . . . A new patent reexamination procedure is needed to permit the owner of a patent to have the validity of his patent tested in the Patent Office where the most expert opinions exist and at a much reduced cost. Patent office reexamination will greatly reduce, if not end, the threat of legal costs being used to ‘blackmail’ such holders into allowing patent infringements or being forced to license their patents for nominal fees.[62]

Prior to the AIA in 2012, these administrative reexamination proceedings took place exclusively before the PTO. Ex parte reexamination, created by the 1980 Bayh-Dole Act, allows anyone, including the patent owner, to request reexamination of a patent. [63] The request can be made at any time during the life of a patent, but the reexamination is limited to issues of obviousness and novelty on the basis of prior art consisting of patents or printed publications.[64] The party requesting the reexamination submits prior art to the PTO that it believes calls into question the obviousness or novelty of the patent. The PTO will grant the petition and order an ex parte reexamination if the petition raises a “substantial new question of patentability.”[65]

If the ex parte reexamination is granted, it involves only the patent owner and the PTO; any third-party petitioners are excluded from the process.[66] The reexamination advances much like the original examination of the patent application: none of the patent claims are presumed valid and the PTO uses the broadest reasonable construction to interpret the claims.[67] Because this broad construction standard is more likely to interpret claims as invalid, patent owners are allowed to amend their claims to narrow their scope and avoid invalidation of the patent.[68]

Ex parte reexamination has never gained popularity because, as critics claim, it does not allow any third-party participation beyond the initial reexamination request.[69] In response to concerns of its underutilization, Congress enacted an alternative reexamination procedure in 1999: inter partes reexamination.[70] Although similar to ex parte reexamination in almost every way, inter partes reexamination could not be initiated by the patent owner,[71] and it allowed substantial involvement of third parties in the reexamination process.[72] The two procedures existed side-by-side until inter partes reexamination was replaced by the new administrative procedure established by the AIA in 2012.

B. Inter Partes Review

The AIA, perhaps the most significant reform to the patent system in sixty years,[73] created several new procedures for reexamining the validity of patents.[74] A primary goal of the AIA was to provide a swifter resolution to patent reexaminations than the pre-AIA procedures.[75] Congress had grown increasingly concerned that reexaminations were “too lengthy and unwieldy to actually serve as an alternative to litigation when users are confronted with patents of dubious validity.”[76] The average length of an ex parte reexamination proceeding in 2012 was about 27.9 months,[77] and the average length of an inter partes reexamination was thirty-six months.[78] In contrast, the average length of patent litigation in the courts prior to the AIA was 27.36 months.[79] Thus, the existing reexamination procedures were unable to offer a quicker resolution to patent disputes than litigation. To remedy this, Congress intended the AIA “to establish a more efficient and streamlined patent system.” [80]

Congress also sought, with the AIA, to “improve patent quality and limit unnecessary and counterproductive litigation costs.”[81] On the one hand, Congress recognized the importance of challenging weak patents because “patents of dubious probity only invite legal challenges that divert money and other resources from more productive purposes, purposes such as raising venture capital, commercializing inventions and creating jobs.”[82] Yet it also accepted that provisions under the pre-AIA reexamination procedures had threatened strong patents by making the reexaminations “too easy to initiate and used to harass legitimate patent owners.”[83] Indeed, combating patent-assertion entities, pejoratively known as “patent trolls,” was cited as a primary goal of the AIA.[84] Thus, to balance the role of patent owners and challengers, Congress transformed post-issuance proceedings “from an examinational to an adjudicative proceeding.”[85] The new “mini-trials,” it was believed, would more fairly balance the role of patent holders and patent challengers in a manner similar to litigation.[86]

Two of the new administrative procedures created by the AIA—covered business method review and post-grant review—are not the focus of this Article. Covered business method review applies only to business method patents within financial services, making it largely irrelevant to the pharmaceutical industry. Post-grant review, which allows an invalidity challenge on any grounds during the first nine months of a patent,[87] applies only to patents issued under the AIA’s new first-inventor-to-file regime, and thus is still in its infancy.

The AIA proceeding currently garnering the most attention from the pharmaceutical industry is inter partes review (“IPR”). The AIA created IPR to replace inter partes reexamination—therefore, IPR resembles the earlier reexamination procedure in many respects.[88] Like inter partes reexamination, IPR challenges are available to anyone other than the patent owner,[89] and the validity of the patent can only be challenged for either obviousness or lack of novelty.[90] An IPR can be requested at any point during a patent’s lifetime, beginning nine months after the patent’s issuance.[91] However, an IPR may not be sought if the petitioner has previously filed a civil action challenging the validity of the same claim,[92] or has been sued for infringing the patent in question more than a year prior.[93]

However, IPR differs from the earlier inter partes reexamination in two important respects. First, unlike the paper administrative proceeding of inter partes reexamination, IPR is an adjudicative proceeding before the newly-created Patent Trial and Appeal Board (PTAB). The PTO will grant an IPR request (i.e. make an “institution” decision) and order a full trial before the PTAB if there is a “reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.”[94] A PTAB trial resembles a traditional trial, but with more limited discovery, depositions, and cross-examination.[95]

Second, IPR offers users a significantly speedier resolution than did inter partes reexamination. An inter partes reexamination often took years to reach a decision. In contrast, the PTAB must, by statute, make a final decision on an IPR claim within twelve to eighteen months.[96]

IPR is much more popular than the previous reexamination procedures. Between 2000 and its abolition in 2012, there were a total of 1,919 inter partes reexamination requests filed, or on average, 148 per year.[97] Between 2000 and 2014, there were a total of 7,709 ex parte reexamination requests filed, or on average, 514 per year.[98] Additionally, in the first nine months of fiscal 2016, 1,126 IPR petitions have already been filed.[99] By contrast, fiscal years 2014 and 2015 saw the filing of 1,310 and 1,737 IPR petitions, respectively.[100]

Moreover, IPR is significantly more friendly to patent challengers than the previous reexamination procedures. Of the completed trials that have reached a final written decision, the PTAB has invalidated at least some of the patent claims in a patent in 85% of cases and all of the patent claims in a patent in 70% of cases.[101] By contrast, from 1999 to its abolition in 2012, only 31% of inter partes reexaminations resulted in the cancellation of all claims of the challenged patents.[102] Similarly, from its advent in 1981 through 2014, only 12% of ex parte reexaminations have ended with the cancellation of all of the challenged patents’ claims.[103]

IV. IPR’s Pro-Challenger Bias

Congress designed the new IPR proceeding to improve patent quality by providing a more efficient pathway to challenge patents of dubious quality. The popularity of IPR compared to the pre-AIA reexamination procedures suggests that many challengers perceive significant advantages in the new proceedings. For many types of patents, an increase in post-issuance proceedings should produce clear social benefits: the more efficient resolution of patent disputes will allow more resources to be allocated to productive purposes. However, for pharmaceutical patents, IPR proceedings may instead create significant social costs. Unlike other industries, specific qualities of both the pharmaceutical industry and pharmaceutical patent litigation combine to create very different effects for the new IPR proceeding.

With the Hatch-Waxman Act and the BPCIA, Congress provided a litigation pathway for challenging pharmaceutical patents that balances the interests of brand patent holders with generic patent challengers. By all accounts, Hatch-Waxman has successfully achieved its goals of promoting brand innovation while facilitating generic entry. Generic drugs now account for 89% of drugs dispensed,[104] yet brand companies still invest significantly in R&D, accounting for over 90% of the spending on the clinical trials necessary to bring new drugs to market.[105] Although the BPCIA is still in its infancy, it was also explicitly designed to protect biologics’ patent terms while incentivizing biosimilar entry in the market.

Yet with IPR, Congress created an entirely new pathway for challenging pharmaceutical patents. As this section discusses, critical differences between district court litigation and IPR proceedings jeopardize the delicate balance Hatch-Waxman and the BPCIA sought to achieve between patent holders and patent challengers. As IPR has grown in popularity, it has become evident that these proceedings favor patent challengers. This change threatens to disrupt the nature of competition in the pharmaceutical industry, brand companies’ incentives to innovate, and consumers’ access to life-improving and life-saving drugs.

First, in IPR proceedings, the PTAB applies a lower standard of proof for invalidity than do district courts in either Hatch-Waxman or BPCIA proceedings. In district court, patents are presumed valid and challengers must prove each patent claim invalid by “clear and convincing evidence.”[106] In contrast, no such presumption of validity applies in IPR proceedings, and challengers must only prove patent claims invalid by the “preponderance of the evidence.”[107] This significantly reduced burden of proof gives patent challengers in PTAB cases an important advantage over district court litigation.

In addition to the lower burden, it is also easier to meet the standard of proof in the PTAB trial. One of the most contested parts of patent litigation is claim construction. Claim construction is the translation of the technical patent claims that define the scope of the patentee’s legal rights into understandable language.[108] District courts construe claims according to their “ordinary and customary meaning” to a person of ordinary skill in the art.[109] By contrast, the PTAB uses the more lenient “broadest reasonable interpretation” standard in IPR proceedings.[110] In many cases, these two standards will yield the same construction and conclusions on invalidity. In some cases the PTAB will interpret patent claims as “claiming too much” (using their broader standard), resulting in the invalidation of more patents.[111] Indeed, the Supreme Court recently recognized in Cuozzo that these different standards “may produce inconsistent results and cause added confusion”[112] and that “use of the broadest reasonable construction standard increases the possibility that the examiner will find the claim too broad (and deny it).”[113] Yet the Court concluded that, because the AIA did not specify which standard applies in PTAB trials, the decision of claim construction standard was left to the PTO.[114]

The use of the broadest reasonable construction is not new in the patent office. The PTO uses this standard during its initial examination of patent applications and during ex parte reexaminations.[115] In these proceedings, the justification for broadly interpreting claims is that patent owners will have an opportunity to amend their patents, so claims can be scrutinized using the broadest lens without necessarily resulting in patent invalidation.[116] However, patent owners are rarely allowed to amend claims in IPR proceedings even though the PTAB uses the broadest reasonable interpretation. Of the 118 completed trials in which the PTAB decided a motion to amend (which were requests to substitute patent claims) the board allowed the patent owner to amend claims in only six trials, or 5% of the total.[117] Thus, the PTAB’s use of the broadest reasonable construction standard in IPR proceedings will necessarily result in more patent invalidations than in either district court litigation or in ex parte reexaminations.

PTAB decisions in IPR proceedings are also given more deference than district court decisions. A district court decision upholding the validity of a patent does not prevent a later PTAB challenge by the same patent challenger within a year, essentially giving patent challengers “two bites at the apple.”[118] As long as an IPR petitioner meets the requirements—it has not been sued for infringing the patent in question more than a year prior,[119] and has not previously filed a civil action challenging the validity of the same claim[120]—a patent challenger that was unsuccessful in invalidating a patent in district court may pursue a subsequent IPR proceeding challenging the same patent.[121] And the PTAB’s subsequent decision to invalidate a patent can often “undo” a prior district court decision. In fact, a patent challenger who prevails in a subsequent IPR proceeding can avoid a prior district court judgment finding infringement and imposing damages or issuing an injunction.[122] Thus, pharmaceutical patent holders face persistent uncertainty about the validity of their patents.[123] Even if a patent is found valid in district court, and the validity is affirmed on appeal, the patent could later be found invalid in an IPR proceeding because the PTAB applies lower standards of proof and broader claim construction standards. The Federal Circuit could then affirm the PTAB’s decision, because with the different standards, the PTAB’s finding of invalidity is not necessarily in conflict with the district court’s finding of validity.

Similarly, although both district court judgments and PTAB decisions are appealable to the Federal Circuit,[124] the court applies a more deferential standard of review to PTAB decisions. Whereas a district court’s factual findings in a bench trial are reviewed for “clear error,”[125] the PTAB’s factual findings are reviewed using the more deferential “substantial evidence” standard.[126] The closer judicial review of district court factual findings means that these decisions are more likely to be overturned on appeal than are PTAB decisions. The more deferential review granted to the PTAB’s factual findings is especially troublesome given the more limited fact-finding in IPR proceedings. In contrast to the expansive discovery and witness testimony that is common in district court litigation, discovery is significantly restricted and live testimony is rarely allowed in IPR proceedings.[127] Thus, the Federal Circuit applies a more deferential review of factual findings that are based on less evidence. This approach is not only nonsensical, it will inevitably lead to more errors.

Another critical difference between district court litigation and IPR proceedings lies in the standing requirement. To challenge a patent in district court, a petitioner must have sufficient Article III standing, which the courts have generally interpreted to require that the petitioner has engaged in infringing activity and faces the threat of suit.[128] In contrast, IPR proceedings do not have a standing requirement, allowing any member of the public other than the patent owner to initiate an IPR challenge.[129] As a result, approximately 30% of IPR challengers have not been defendants in district court litigation, and thus would likely not have had Article III standing.[130]

Legal commentators, including advocates of administrative proceedings, have recognized that the lack of a standing requirement in IPR proceedings could lead to harassment suits brought by competitors intending only to impose costs on the other party.[131] Indeed, the lack of a standing requirement has given rise to “reverse patent trolling,” in which entities that are not litigation targets, or even participants in the same industry, offensively use IPR or the threat of IPR to profit. Under this opportunistic practice, reverse trolls threaten to file an IPR petition challenging the validity of a patent unless the patent holder agrees to specific pre-filing settlement demands. These demands are arguably extortion,[132] but with the high rate of decisions to institute IPRs and the high rate of patent invalidations in IPR proceedings, companies take a big risk if they do not agree to such demands.[133]

Moreover, pharmaceutical patents face the threat of another, distinct form of abuse under IPR—the novel hedge fund practice of short selling a brand drug company’s stock, then filing an IPR challenge in hopes of crashing the stock and profiting from the short sale.[134] Pharmaceutical patents are especially vulnerable to this abuse because the stock value of a small or mid-size pharmaceutical company typically depends critically on the success of an individual drug, which in turn typically depends on an individual patent. Thus, while hypothetically invalidating a patent owned by Apple or Samsung may do little to affect the companies’ stock price because of the variety of product offerings and multitude of patents underlying their technology, invalidating a pharmaceutical patent could cause a pharmaceutical company’s stock to plummet. Indeed, the data on IPR petitioners suggest that pharmaceutical patents are especially vulnerable to this sort of abuse; whereas in most industries, over 70% of IPR challengers were defendants in district court litigation (granting them Article III standing), for the drug industry, this figure is less than 50%.[135] And while critics have argued that the hedge fund strategy amounts to illegal market manipulation,[136] the PTAB has thus far allowed the practice, concluding that “profit is at the heart of nearly every patent and nearly every inter partes review,”[137] and “Congress did not limit inter partes reviews to parties having a specific competitive interest in the technology covered by the patents.”[138]

The differences between district court litigation and IPR proceedings are creating a significant deviation in patent invalidation rates under the each pathway. From 1996 to 2015, patents were invalidated in 34% to 39% of district court cases.[139] Additionally, of the 1,046 PTAB trials in IPR proceedings that were completed by June, 2016, a shocking 70% resulted in the invalidation of all claims of the challenged patents.[140] This higher invalidation rate in IPR proceedings is especially meaningful because, while a challenged patent can only be invalidated in an IPR for lack of novelty or for obviousness, a challenged patent in district court can also be invalidated on other grounds.[141]

To date, IPR petitions filed on pharmaceutical patents have made up only a small percentage of the total petitions. Of the 4,253 IPR petitions filed as of March 2016, only 228, or 5.36% were filed on patented pharmaceuticals.[142] Yet the number of IPR challenges to pharmaceutical patents continues to increase; twice as many IPR petitions were filed on pharmaceutical patents in 2015 compared to 2014, and the number is on pace to increase again in 2016.[143]

Although only a handful of these pharmaceutical IPR petitions have reached a written decision in a PTAB trial, it appears that, similar to other industries, brand patent holders are faring worse in IPR proceedings. The PTAB has invalidated approximately 50% of the total claims considered in written decisions.[144] However, of the 220 Hatch-Waxman cases litigated to trial or summary judgment from 2000 to 2012, only 21% resulted in invalidation of the patents.[145]

V. Correcting the Imbalance

The growing popularity of IPR threatens to dislodge the delicate balance that Hatch-Waxman and the BPCIA sought to strike between brand patent holders and generic patent challengers. To achieve this balance, Hatch-Waxman’s litigation pathway includes several protections for patent holders. In contrast, IPR proceedings clearly tilt the balance in the patent challenger’s favor. Although IPR challenges to pharmaceutical patents do not yet occur in large numbers, their popularity is increasing swiftly. Moreover, even the risk of facing a pro-challenger IPR is enough to create significant uncertainty for brand drug companies. IPR makes intellectual property rights less certain: patents are more likely to be invalidated than they are in district court and even a favorable district court ruling doesn’t guarantee that a patent won’t be invalidated by a subsequent IPR.

Uncertain patent rights will, in turn, lead to less innovation in the pharmaceutical industry. Brand drug companies are largely responsible for pharmaceutical innovation; since 2000, they have spent over half a trillion dollars on R&D, and they currently account for over 90% of the spending on the clinical trials necessary to bring new drugs to market.[146] But if brand companies can’t rely on their patents, they will have less incentive to engage in costly R&D. Companies will not spend the billions of dollars it typically costs to bring a new drug to market when they can’t be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them.[147] Indeed, a substantial body of literature shows that strong, predictable patent rights are critical for innovation.[148] If IPR increases the uncertainty of pharmaceutical patent rights, innovation will suffer, harming consumers’ health outcomes.[149]

Although proponents of IPR claim that Hatch-Waxman “has been so thoroughly gamed” that it no longer promotes generic entry in the market,[150] the evidence does not support this assertion. Generic drugs now account for 89% of drugs dispensed,[151] and within twelve months of generic entry, these drugs regularly capture over 80% of brand drugs’ market share.[152] Moreover, generic utilization continues to grow; these drugs will soon account for over 90% of drugs dispensed in this country. While strategies adopted by certain pharmaceutical companies have been an attempt to avoid generics’ continued erosion of brand market share, the courts have typically addressed any practices found to be anticompetitive.[153] Certainly closing any occasional perceived loophole is smarter than providing an end run around Hatch-Waxman and creating an entirely new to pathway to challenge patents.

Instead, Congress should align certain provisions in IPR to mirror those in Hatch-Waxman. First, Congress should ensure that IPR patent claims are interpreted using the same claim construction standard as courts use in Hatch-Waxman litigation. Currently, district courts construe claims according to their “ordinary and customary meaning” to a person of ordinary skill in the art,[154] but the PTAB uses the more lenient “broadest reasonable interpretation” standard in IPR proceedings.[155] Changing the IPR claim construction standard to match that of the courts will ensure that the PTAB is not invalidating too many patents, particularly when patent owners cannot easily amend their claims. Alternatively, if the claim construction standards in IPR and Hatch-Waxman litigation are not aligned, the right to amend in IPR proceedings should be expanded. Then, the justification for using the “broadest reasonable interpretation” in IPR would correspond to the justification for using this standard in initial patent examinations and ex parte reexaminations: because patent owners will have an opportunity to amend their patents, claims can be scrutinized using the broadest lens without necessarily resulting in patent invalidation.

Indeed, the Supreme Court recently recognized in Cuozzo that these different standards “may produce inconsistent results and cause added confusion,”[156] and that “use of the broadest reasonable construction standard increases the possibility that the examiner will find the claim too broad (and deny it).”[157] However, the court concluded that only Congress was in a position to mandate a different statute:

We interpret Congress’ grant of rulemaking authority in light of our decision in Chevron . . . [w]here a statute is clear, the agency must follow the statute . . . But where a statute leaves a “gap” or is “ambigu[ous],” we typically interpret it as granting the agency leeway to enact rules that are reasonable in light of the text, nature, and purpose of the statute . . . The statute contains such a gap: No statutory provision unambiguously directs the agency to use one standard or the other.[158]

Second, Congress should provide that standards of review in the Federal Circuit are the same for PTAB decisions and district court decisions. Currently a district court’s factual findings are reviewed for “clear error,”[159] but the PTAB’s factual findings are reviewed using the more deferential “substantial evidence” standard.[160] The inconsistency is especially troublesome given that PTAB factual findings are based on less evidence than are court factual findings. Aligning the standards of review will ensure that, at least at the appellate level, court decisions and PTAB decisions will be reviewed with equal deference.

Indeed, courts have recognized the problems with the inconsistent standards. In April, 2016, the Federal Circuit denied an en banc review on whether the clear error standard should be applied in appeals from IPR proceedings.[161] The Court concluded that the “application of the substantial evidence standard of review is seemingly inconsistent with the purpose and content of the AIA,”[162] yet the Court was not the correct venue to change the standard: “Because Congress failed to expressly change the standard of review employed by this court in reviewing Board decisions when it created IPR proceedings via the AIA, we are not free to do so now.”[163] Instead, the Court called on Congress to align the standards of review: “a substantial evidence standard of review makes little sense in the context of an appeal from an IPR proceeding. But the question is one for Congress.”[164]

Third, Congress could eliminate certain abuses of IPR by adding a standing requirement that mirrors Article III standing. Currently, any member of the public other than the patent owner can initiate an IPR challenge.[165] The lack of a standing requirement has allowed reverse patent trolls and hedge funds to exploit IPR proceedings for profit. And although the pharmaceutical industry is fighting the abuses of reverse trolls,[166] and IPR challenges by hedge funds may ultimately prove to be an ineffective strategy,[167] even the risk of such predatory challenges create uncertainty for patent owners.

Congress currently has bills pending before it that would limit standing to exclude parties wielding the IPR for either extortionary purposes or for non-patent related consequences, such as affecting a company’s stock value. [168] Adding such a standing requirement would prevent abuse of the IPR proceedings by parties that do not have a direct interest in the validity of a patent.

Alternatively, Congress could conclude that amending the AIA to align all IPR proceedings with Hatch-Waxman litigation is overkill because the current inconsistencies are only relevant and meaningful to pharmaceutical patents. In this case, Congress could instead exempt biopharmaceutical patents from the AIA, excusing patents already subject to Hatch-Waxman or the BPCIA from the IPR process entirely.[169] There is certainly a precedent for such reform—Congress has treated pharmaceutical patents differently from other types of patents since at least 1984. A carve-out would preserve the efficiency benefits of IPR for all non-pharmaceutical patents while restoring the balance that was established by Hatch-Waxman over three decades ago and is critical to pharmaceutical innovation.


For patents in most industries, IPR offers a new, efficient alternative to challenge patents of dubious quality. However, for pharmaceutical patents, IPR is a means to avoid the litigation pathway created under Hatch-Waxman over thirty years ago. Critical differences between district court litigation in Hatch-Waxman proceedings and IPR jeopardize the delicate balance Hatch-Waxman sought to achieve between patent holders and patent challengers. As IPR has grown in popularity, it has become evident that these proceedings favor patent challengers; compared to district court challenges, patents are found invalid in almost twice as many IPR challenges.

In recent decisions, courts have recognized the anti-patentee bias of IPR, yet punted to Congress the job of changing the provisions. It is critical that Congress reduce the disparities between IPR proceedings and Hatch-Waxman litigation. The high patent invalidation rate in IPR proceedings creates significant uncertainty in intellectual property rights. Uncertain patent rights will, in turn, disrupt the nature of competition in the pharmaceutical industry, drug innovation, and consumers’ access to life-improving drugs.

* Professor of Law, Emory University School of Law.

[1] Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011).

[2] Cf. PricewaterhouseCoopers,​ 2016 Patent Litigation Study: Are We at An Inflection Point? 9 fig.11 (2016),

[3] U.S. Pat. & Trademark Off., Patent Trial and Appeal Board Update 10 (2016),

[4] See discussion infra Part V.

[5] See Cuozzo Speed Tech. LLC v. Lee (Cuozzo), 136 S. Ct. 2131, 2145 (2016).

[6] Id. at 2144.

[7] See Merck & Cie v. Gnosis S.P.A., 820 F.3d 432 (Fed. Cir. 2016).

[8] Id. at 2 (majority opinion).

[9] See Coal. for Affordable Drugs VI LLC v. Celgene Corp. (Celgene), Nos. IPR2015-01092, IPR2015-01096, IPR2015-01102, IPR2015-01103 and IPR2015-01169, at 3 (P.T.A.B. Sept. 25, 2015). Though they may be excluded from appellate review under Article III.

[10] See IMS Institute for Healthcare Informatics, Medicine Use and Spending in the U.S., A Review of 2015 and Outlook to 2020, 46 (2016),

[11] See PhRMA, 2016 Profile Biopharmaceutical Research Industry 1, 35 (2016),

[12] See U.S. Gov’t Accountability Off. GAO-12-371R, Drug Pricing: Research on Savings from Generic Drug Use 2 (2012),; see also IMS Institute for Healthcare Informatics, supra note 10, at 46; PhRMA, Chartpack: Biopharmaceuticals in Perspective 56 (2015),

[13] See IMS Institute for Healthcare Information, Price Declines After Branded Medicines Lose Exclusivity in the U.S. 3 (2016),

[14] See Office of the Assistant Sec’y for Planning & Evaluation, U.S. Dep’t of Health & Human Servs., Expanding the Use of Generic Drugs (Dec. 1, 2010),; see also Henry Grabowski, Patents and New Product Development in the Pharmaceutical and Biotechnology Industries, 8 Geo. Pub. Pol’y Rev. 7, 13 (2003) (“Generic firms can file an Abbreviated New Drug Application (ANDA), a process that takes only a few years and typically costs a few million dollars.”).

[15] Brand companies spent between $103 million and $249 million on the top-ten most heavily advertised drugs in 2014 alone. See Beth Snyder Bulik, The Top-10 Most Advertised Prescription Drug Brands, FiercePharma, (last visited Nov. 1, 2016).

[16] See Henry Grabowski, Genia Long & Richard Mortimer, Recent Trends in BrandName and Generic Drug Competition, 17 J. Med Econ. 207, 211-12 (2014).

[17] See U.S. Gov’t Accountability Off., supra note 12, at 2; see also Generic Pharmaceutical Association, Generic Drug Savings in the U.S. (2015),

[18] See U.S. Cong. Budget Off., How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry 38 (1998),

[19] See PhRMA, supra note 12, at 44.

[20] Id. at 43.

[21] See PricewaterhouseCoopers, From Vision to Decision Pharma 2020, at 6 (2012),

[22] See John A. Vernon, Joseph Golec & Joseph A. DiMasi, Drug Development Costs When Financial Risk is Measured Using the FamaFrench ThreeFactor Model, 19 Health Econ. 1002, 1004 (2010).

[23] See, e.g., Kenneth Kaitin, Natalie Bryant & Louis Lasagna, The Role of the Research-Based Pharmaceutical Industry in Medical Progress in the United States, 33 J. of Clinical Pharmacology 412, 414 (1993) (92% of new drugs are discovered by private branded companies).

[24] See PhRMA, supra note 12, at 46-47.

[25] Id. at 35.

[26] Id. at 20.

[27] Id. at 47.

[28] See Mark Duggan & Scott Morton, The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing, 121 Q. J. Econ. 1, 5 (2006); see also Amy Finkelstein, Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry, 119 Q. J. Econ. 527, 540 (2004); Daron Acemoglu & Joshua Linn, Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry, 119 Q. J. Econ. 1049, 1053 (2004).

[29] See Joseph Golec, Shantaram Hegde & John A. Vernon, Pharmaceutical R&D Spending and Threats of Price Regulation, 45 J. of Financial & Quantitative Analysis 239, 240-41 (2010); see also Frank R. Lichtenberg, Public Policy and Innovation in the U.S. Pharmaceutical Industry, in Public Pol’y and the Econ. of Entrepreneurship (Douglas Holtz-Eakin & Harvey S. Rosen eds., 2004).

[30] See Frank R. Lichtenberg, Pharmaceutical Innovation, Mortality Reduction, and Economic Growth 1 (Columbia U. & Nat’l Bureau of Econ. Res., Conf. Presentation on The Econ. Value of Med. Res., Working Paper No. 6569, 1998),

[31] See Craig Garthwaite, The Economic Benefits of Pharmaceutical Innovations: The Case of Cox-2 Inhibitors, 4 Applied Econ. 116, 118 (2012).

[32] See Frank R. Lichtenberg, Benefits and Costs of Newer Drugs: An Update, 28 Managerial & Decision Econ. 485, 485 (2007).

[33] Hatch-Waxman Act, Pub. L. No. 98-417, 98 Stat. 1585. (1984).

[34] See Margo Bagley, Patent Term Restoration and Non-Patent Exclusivity in the U.S., in Pharmaceutical Innovation, Competition, and Pat. L. 111, 114-15 (Josef Drexel & Nari Lee eds., 2013).

[35] 21 U.S.C. § 355(c)(3)(E)(ii) (2012).

[36] Id.

[37] 21 U.S.C. § 355(j) (2012).

[38] See Office of the Assistant Sec’y for Planning & Evaluation, supra note 14; see also Henry Grabowski, supra note 14.

[39] 35 U.S.C. § 271(e).

[40] See, e.g., U.S. Dep’t Health & Hum. Servs., Guidance for Industry: 180-Day Generic Drug Exclusivity Under the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act (1998),…/Guidances/ucm079342.pdf.

[41] See Grabowski, Long & Mortimer, supra note 16, at 207.

[42] Id.

[43] See IMS Institute for Healthcare Informatics, supra note 10, at 46.

[44] See PhRMA, supra note 11, at 35.

[45] 42 U.S.C. § 262(i)(2)(B) (2012).

[46] See Jason Kanter & Robin Feldman, Understanding & Incentivizing Biosimilars, 58 Hastings L.J. 57, 59 (2012) (citing 42 U.S.C. § 262(i)(I) (2006)).

[47] See, e.g., Joan Kerber-Walker, Small Molecules, Large Biologics, and the Biosimilar Debate, Ariz. Bioindustry Assoc. (Feb. 18, 2013),

[48] See Anthony D. So & Samuel L. Katz, Biologics Boondoggle, N.Y. Times (Mar. 7, 2010),

[49] See 42 U.S.C. § 262(i)(2)(B) (2012); see also Zachary Brennan, FDA Likely to Require Substantial Clinical Data for Interchangeable Biosimilars, Lawyers Say (Jan. 12, 2016), (noting that the FDA is still determining what pre-clinical and clinical data will be required for approval).

[50] 42 U.S.C. § 262(i)(3) (2012).

[51] Kanter & Feldman, supra note 46, at 69-72 (citing 42 U.S.C. § 262(i)(I) (2006)).

[52] 42 U.S.C. § 262(k)(7)(A); see, e.g., Elizabeth Richardson et al., Biosimilars, Health Aff. (Oct. 10, 2013),

[53] 42 U.S.C. § 262(k)(7)(B) (2012).

[54] See, e.g., Bagley, supra note 34.

[55] See Lang v. Pacific Marine & Supply Co., 895 F.2d 761 (Fed. Cir. 1990) (noting that in other industries, it is possible to seek a declaratory judgment prior to the good entering the market); see also 35 U.S.C. § 271(a) (noting that it is also an infringement to merely offer to sell the invention even if the sale is not completed). Compare 35 U.S.C. § 271(e)(2) (“It shall be an act of infringement to submit—(A) an application under section 505(j) of the Federal Food, Drug, and Cosmetic Act . . . for a drug claimed in a patent or the use of which is claimed in a patent . . . .”), with 35 U.S.C. § 271(a) (“[W]hoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States . . . during the term of the patent therefor, infringes the patent.”).

[57] Amgen Inc. v. Sandoz Inc., 794 F.3d 1347, 1360 (Fed. Cir. 2015) (holding that notice of commercial marketing is only effective after FDA approval of the biosimilar application and that the information exchange process is optional).

[58] See 42 U.S.C. § 262(k)(6) (2012) (noting that exclusivity extends until the earliest of: (i) one year after the first commercial marketing of the first-approved interchangeable biosimilar; (ii) eighteen months after a final court decision or the dismissal of a suit against the first interchangeable biosimilar; (iii) forty-two months after the approval of the first interchangeable biologic if patent litigation is still ongoing; or (iv) eighteen months after the approval of the first interchangeable biosimilar if the applicant has not been sued).

[59] See, e.g., Phillips v. AWH Corp., 415 F.3d 1303, 1312-18 (Fed. Cir. 2005) (en banc).

[60] See, e.g., Wayne B. Paugh, The Betrayal of Patent Reexamination: An Alternative to Litigation, Not a Supplement, 19 Fed. Cir. B.J. 177, 181-88 (2009).

[61] See Patlex Corp. v. Mossinghoff, 758 F.2d 594, 602 (Fed. Cir.), aff’d in part, rev’d on other grounds, 771 F.2d 480 (1985); H.R. Rep. No. 107-120, at 3 (2001) (“The 1980 reexamination statute was enacted with the intent of achieving three principal benefits. It is noted that the reexamination of patents by the PTO would: (i) settle validity disputes more quickly and less expensively than litigation; (ii) allow courts to refer patent validity questions to an agency with expertise in both the patent law and technology; and (iii) reinforce investor confidence in the certainty of patent rights by affording an opportunity to review patents of doubtful validity.”).

[62] H.R. Rep. No. 96-1307, pt. 1, at 3-4 (1980), as reprinted in 1980 U.S.C.C.A.N. 6460, 6463.

[63] See, e.g., Bayh-Dole Act, Pub. L. No. 96-517, ch. 30, § 302, 94 Stat. 3015, 3015 (1980) (codified at 35 U.S.C. § 302 (2012)) (“Any person at any time may file a re-quest for reexamination by the Office of any claim of a patent on the basis of any prior art cited . . . .”).

[64] 37 C.F.R. § 1.552 (2014); U.S. Pat. & Trademark Off., MPEP § 2258 (9th ed. Rev. Mar. 2014) [hereinafter MPEP].

[65] 35 U.S.C. § 303(a) (2012).

[66] 37 C.F.R. § 1.550(g) (2014) (“The active participation of the ex parte reexamination re-quester ends with the [grant of the petition for reexamination], and no further submissions on behalf of the reexamination requester will be acknowledged or considered.”).

[67] MPEP § 2111 (“During patent examination, the pending claims must be ‘given their broadest reasonable interpretation consistent with the specification.’”).

[68] Douglas Duff, Comment, The Reexamination Power of Patent Infringers and the Forgotten Inventor, 41 Cap. U. L. Rev. 693, 710 (2013) (“[R]eexamination affords the patent owner a chance to narrow the scope of the claims to avoid being invalidated based on subsequently discovered prior art.”).

[69] Shannon M. Casey, The Patent Reexamination Reform Act of 1994: A New Era of Third Party Participation, 2 J. Intell. Prop. L. 559 (1995); Marvin Motsenbocker, Proposal to Change the Patent Reexamination Statute to Eliminate Unnecessary Litigation, 27 J. Marshall L. Rev. 887, 898 (1994); Gregor N. Neff, Patent Reexamination—Valuable, But Flawed: Recommendations for Change, 68 J. Pat. & Trademark Off. Soc’y 575 (1986).

[70] American Inventors Protection Act of 1999, Pub. L. No. 106-113, 113 Stat. 1501 (codified in relevant part in 35 U.S.C. §§ 311-318 (2006)) (repealed 2012).

[71] Patent owners cannot request inter partes reexaminations of their patents because there would be no third party to participate. See 35 U.S.C. § 311(a) (2012).

[72] 35 U.S.C. §§ 311-318 (2012).

[73] Andrei Iancu & Ben Haber, Post-Issuance Proceedings in the America Invents Act, 93 J. Pat. & Trademark Off. Soc’y 476, 476 (2011).

[74] Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. at 299-305 (2011)(setting forth procedures for IPR).

[75] See generally Joe Matal, A Guide to the Legislative History of the America Invents Act: Part II of II, 21 Fed. Cir. Bar J. 539, 599-604 (2012) (summarizing legislative history); H.R. Rep. No. 112-98, at 45 (2011).

[76] Sen. Patrick Leahy, Senate Begins Debate on Leahy-Smith America Invents Act, Press Release (Sept. 6, 2011),

[77] U.S. Pat. & Trademark Off., Ex Parte Reexamination Filing Data, at 1 (Sept. 30, 2012),

[78] See PricewaterhouseCoopers, 2011 Patent Litigation Study: Patent Litigation Trends as the ‘America Invents Act’ Becomes Law 28 (2011)

[79] Id. at 28 (reporting the average time to trial as 2.28 years, or 27.36 months).

[80] H.R. Rep. No. 112-98, at 40 (2011).

[81] Id.

[82] Patent Quality Improvement: Post-Grant Opposition: Hearing Before the Subcomm. on Courts, The Internet & Intellectual Prop. of the H. Comm. on the Judiciary, 108th Cong. 1 (2004) (statement of Rep. Lamar Smith, Chairman, Subcomm. on Courts, the Internet & Intellectual Prop.).

[83] Sen. Patrick Leahy, supra note 74; see also 57 Cong. Rec. S5428 (daily ed. Sept. 8, 2011) (statement of Sen. Patrick Leahy) (asserting that the AIA post-issuance review proceedings provide more protections to patent holders against frivolous requests and harassment).

[84] See, e.g., 157 Cong. Rec. H4485-86 (daily ed. June 23, 2011) (statement of Rep. Lamar Smith) (explaining Congress’s thoughts regarding the predatory behavior of patent trolls).

[85] H.R. Rep. No. 112-98, at 46 (2011).

[86] Mark Consilvio & Jonathan Stroud, Unravelling the USPTO’s Tangled Web: An Empirical Analysis of the Complex World of Post-Issuance Patent Proceedings, 21 J. of Intell. Prop. L. 1, 12 (2014).

[87] 35 U.S.C. § 321 (2012).

[88] Id. §§ 311-319.

[89] Id. § 311(a).

[90] Id. § 311(b).

[91] Id. § 311(c)(1). An IPR request cannot be filed until the post-grant review window has expired. Id. § 311(c)(2).

[92] 35 U.S.C. § 315(a)(1) (2012).

[93] Id. § 315(b).

[94] Id. § 314(a).

[95] Id. § 326(a)(5); 37 C.F.R. § 42.51-42.53 (2012).

[96] 35 U.S.C. § 316(a)(11) (2012).

[97] U.S. Pat. & Trademark Off., supra note 77, at 2.

[98] Id. at 1.

[99] U.S. Pat. & Trademark Off., supra note 3, at 3.

[100] Id.

[101] Id. at 10. Specifically, out of the 1046 completed trials (as of June 30, 2016, 896 (85.66%) have invalidated at least one claim, and 736 (70.36%) have resulted in all claims being invalidated. Id.

[102] U.S. Pat. & Trademark Off., supra note 77, at 1.

[103] Id. at 2.

[104] IMS Institute for Healthcare Informatics, supra note 10, at 46.

[105] PhRMA, supra note 11, at 35.

[106] Microsoft Corp. v. i4i Ltd., 131 S. Ct. 2238, 2242 (2011) (holding that a clear and convincing showing of invalidity is required to invalidate patents).

[107] 35 U.S.C. § 316(e) (2012) (establishing a “preponderance of the evidence” standard in IPR proceedings).

[108] See generally Dennis Crouch, Claim Construction: A Structured Framework, PatentlyO (Sept. 29, 2009),

[109] See, e.g., Phillips, 415 F.3d at 1312-13.

[110] 37 C.F.R. § 42.100(b) (2012).

[111] See, e.g., PPC Broadband, Inc. v. Corning Optical Communications RF, LLC, 815 F.3d 734 (2016) (“This case hinges on the claim construction standard applied—a scenario likely to arise with frequency. And in this case, the claim construction standard is outcome determinative.”).

[112] Cuozzo, 136 S. Ct. 2131, at 2146.

[113] Id. at 2145.

[114] Id. at 2136.

[115] See, e.g., Phillips, 415 F.3d at 1316 (“The Patent and Trademark Office (“PTO”) determines the scope of claims in patent applications not solely on the basis of the claim language, but upon giving claims their broadest reasonable construction. . . .”); In re Yamamoto, 740 F.2d 1569, 1571 (Fed. Cir. 1984) (stating that claims subject to reexamination will “be given their broadest reasonable interpretation consistent with the specification, and limitations appearing in the specification”).

[116] MPEP § 2111 (“Because applicant has the opportunity to amend the claims during prosecution, giving a claim its broadest reasonable interpretation will reduce the possibility that the claim, once issued, will be interpreted more broadly than is justified.”).

[117] U.S. Pat. & Trademark Off., Patent Trial and Appeal Board Motion to Amend Study: 4/30/2016, at 4 (2016), But see the Federal Circuit order in In re: Aqua Products, Inc., No. 2015-1177 (Aug. 12, 2016), in which the full court granted en banc review of the petitioner’s argument that the PTAB has “unduly restricted” the ability to amend patent claims.

[118] The PTAB justifies this second bite by maintaining that the petitioner is not a party to district court proceedings and that the two venues possess different burdens of proof. See, e.g., Amkor Tech., Inc. v. Tessera, Inc., IPR2013-00242, Paper 37 at 12 (P.T.A.B. Oct. 11, 2013).

[119] 335 U.S.C. § 315(b) (2012).

[120] 35 U.S.C. § 315(a)(1) (2012). Importantly, a counterclaim challenging the validity of a patent claim in an infringement action is not considered a civil action. 35 U.S.C. § 315(a)(1), (3) (2012).

[121] 35 U.S.C. §§ 315, 325 (2012).

[122] See generally Jay Chiu et. al, Pharmaceuticals at the Patent Trial and Appeal Board, 30-32 (2015),; EPlus, Inc. v. Lawson Software, 789 F.3d 1349 (Fed. Cir. 2015) (vacating the injunction issued by the district court after a subsequent PTAB decision invalidated the patent); Fresenius USA, Inc. v. Baxter Int’l, Inc., 721 F.3d 1330, 1335, 1336 (Fed. Cir. 2013) (absolving the patent challenger of the damage award imposed by the district court after the USPTO subsequently cancelled the patent on reexamination).

[123] Some IPRs and district court litigation will naturally happen in tandem because IPRs will only consider invalidity determinations, while ANDA litigation also deals with infringement determinations. Generic companies may prefer to pursue a non-infringement determination in district court because, in contrast to a finding of invalidity, a finding of non-infringement keeps the patent in place so that competing generics will also have to show that they don’t infringe or that the patent is invalid or unenforceable. Moreover, non-infringement determinations will often be cheaper to litigate. In a non-infringement determination, the generic company has all of the information about its product, so the costs of evaluating non-infringement should be lower. In contrast, an invalidity determination requires a prior art search and analysis as to whether the claimed invention is novel, non-obvious and useful.

[124] 35 U.S.C. § 141 (2012).

[125] ​Fed. R. Civ. P. 52(a)(6); United States v. Cazares, 121 F.3d 1241, 1245 (9th Cir. 1997). Findings in a jury trial in district court are reviewed using the “substantial evidence” standard. However, review of claim construction will always be different between appeals from district court proceedings and PTAB trials because claim construction at the district court is always decided by the judge, and thus, reviewed for clear error.

[126] 5 U.S.C. § 706(e) (2012); Merck, 820 F.3d at 433.

[127] See 37 C.F.R. §§ 42.51-42.53 (2015).

[128] See, e.g., MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007) (quoting Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941)).

[129] See 35 U.S.C. § 311(a) (2012). Yet, a challenger who loses at the PTAB may have to meet Article III standing requirements in order to appeal. Cf. Consumer Watchdog v. Wis. Alumni Research Found., 753 F.3d 1258, 1261 (Fed. Cir. 2014).

[130] See Saurabh Vishnubhakat, Arti K. Rai, & Jay P. Kesan, ​Strategic Decision Making in Dual PTAB and District Court Proceedings, 31 ​Berkeley Tech. L.J. ​45, 76 (2016).

[131] Jonathan Masur, Patent Inflation, 121 Yale L.J. 470, 522 (2011) (“[IPR] could potentially be abused by parties interested only in delaying and harassing competitors.”).

[132] See, e.g., Joseph Herndon, IPRs Threatened/Filed as Money-Making Strategy, Patent Docs (Aug. 16, 2016),; First Amended Complaint at 4, Chinook Licensing DE, LLC, v. RozMed LLC, C.A., No. 14-598-LPS (D. Del. June 13, 2014), ECF No. 9; Allergan Inc. v. Ferrum Ferro Capital LLC, No. ​SACV 15-00992 JAK (PLAx​) (C.D. Cal. Jan. 20, 2016).

[133] See Joseph Gulfo, Hedge Funds,Reverse Trolls’ Crushing Biopharma Innovation, CNBC (July 22, 2015),

[134] See Joseph Walker and Rob Copeland, ​New Hedge Fund Strategy: Dispute the Patent, Short the Stock, ​Wall Street Journal ​(Apr. 7, 2015),

[135] Vishnubhakat, Rai & Kesan, ​supra note 130, at 85-86.

[136] Kevin Penton, ​Biogen Wants Kyle Bass to Give up Financial Docs at PTAB, ​Law360 ​(July 9, 2015),; see also 162 Cong. Rec. H4361 (daily ed. July 6, 2016) (statement of Rep. Duffy) (expressing concern about a “potential[ly]” “deceptive and manipulative practice by some hedge funds to challenge the legitimacy of a drug patent while simultaneously shorting the drug manufacturer’s stock. These particular hedge funds game the system” by “publiciz[ing] numerous patent challenges,” “provok[ing] fear in the marketplace” and “driv[ing] down [the stock] prices” of these smaller companies.).

[137] Celgene, Nos. IPR2015-01092, IPR2015-01096, IPR2015-01102, IPR2015-01103 and IPR2015-01169, at 3.

[138] Id. at 4.

[139] PricewaterhouseCoopers,​ supra note 2, at 9 fig.11. Earlier studies found invalidation rates in district courts were around 46%. See John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q. J. 185, 205-06 (1998); Donald R. Dunner, Introduction, 13 AIPLA Q. J. 185, 186-87 (1985); Mark A. Lemley, ​An Empirical Study of the Twenty-Year Patent Term, 22 AIPLA Q. J. 369, 420 (1994) (finding that 56% of litigated patents to be valid between 1989 and 1994).

[140] U.S. Pat. & Trademark Off., ​supra note 10, at 10.

[141] It is possible that the patent invalidation rate in IPR may eventually decrease assuming that, shortly after the creation of IPR, there was an abundance of “low-hanging fruit” (i.e. easily invalidated patents which were previously difficult to challenge: (i) because of the Article III standing requirement; and (ii) because IPR enabled more patent challenges than are possible in district court).

[142] Kevin E. Noonan, PTAB Statistics from Spring BIO IPCC Meeting, Patent Docs (Apr. 17, 2016),

[143] U.S. Pat. & Trademark Off., ​supra note 3, at 5 (indicating that there were ninety-two IPR petitions on pharmaceutical patents in 2014, 167 in 2015 and 159 as of June 30, 2016).

[144] Id. at 15.

[145] Jacob S. Sherkow, Litigating Patented Medicines: Courts and the PTO, at 5 (Stanford Law Working Paper, 2015),

[146] PhRMA, 2015 Profile Biopharmaceutical Research Industry 1, 26, 35-36 (2015), See generally Kaitin, Bryant & Lasagna, ​supra note 23, at 414 (showing that 92% of new drugs are discovered by private branded companies).

[147] See Joseph A. DiMasi, Dir. of Econ. Analysis, Tufts Ctr. for the Study of Drug Dev., Briefing: Cost of Developing a New Drug (Nov. 18, 2014),,_2014..pdf.

[148] See, e.g., In re Bilski, 545 F.3d 943, 977 (Fed. Cir. 2008), cert. granted sub nom. Bilski v. Doll, 129 S. Ct. 2735 (2009) (Newman, J., dissenting) (“Uncertainty is the enemy of innovation. These new uncertainties . . . diminish the incentives available to new enterprise . . . .”); Jason Scott Johnston, ​Uncertainty, Chaos, and the Torts Process: An Economic Analysis of Legal Form, 76 Cornell L. Rev. 341, 344 (1991) (“[U]ncertainty has been shown to have potentially serious economic consequences in discouraging certain socially desirable, but risky, activities.”). See generally Craig Allen Nard, Certainty, Fence Building, and the Useful Arts, 74 Ind. L.J. 759, 759 (1999).

[149] Frank R. Lichtenberg, Columbia University & National Bureau of Economic Research, Conference Presentation on The Economic Value of Medical Research, Pharmaceutical Innovation, Mortality Reduction, and Economic Growth (Dec. 2-3, 1999), (noting empirical estimates of the benefits of pharmaceutical innovation indicate that each new drug brought to market saves 11,200 life-years each year).

[150] Gene Quinn, ​Senators Mistaken, IPRs Do Not Frustrate Hatch-Waxman, ​IP Watchdog (June 4, 2015),

[151] IMS Institute for Healthcare Informatics​, ​supra note 10, at 46​.

[152] Grabowski, Long & Mortimer, ​supra note 16, at 207.

[153] These strategies include reverse payment settlements in cash, certain product hopping situations (in which the manufacturers fabricate safety concerns or falsely disparage the original drug to drive consumers to the new substitute), and abuse of the REMS program. See e.g., Joanna Shepherd, The Prescription for Rising Drug Prices: Competition or Price Controls?, Health Matrix (forthcoming 2017), available at

[154] See e.g., Phillips, 415 F.3d at 1312-13.

[155] 37 C.F.R. § 42.100(b).

[156] Cuozzo, 136 S. Ct. at 2146 (majority opinion).

[157] Id. at 2145 (majority opinion).

[158] Id. at 2142 (majority opinion).

[159] Fed. R. Civ. P. 52(a)(6); Cazares, 121 F.3d at 1245.

[160] 5 U.S.C. § 706(e) (2012); Merck, 820 F.3d at 433.

[161] Merck, 820 F.3d at 433.

[162] Id.

[163] Id.

[164] Id.

[165] 35 U.S.C. § 311(a) (2012).

[166] See Herndon, supra note 132.

[167] See J. Gregory Sidak & Jeremy O. Skogs, ​Attack of the Shorting Bass: Does the Inter Partes Review Process Enable Petitioners to Earn Abnormal Returns, 63 ​UCLA L. Rev. Disc. 120, 125-26 (2015).

[168] See Support Technology and Research for Our Nation’s Growth (STRONG) Patents Act, S. 632 (2015); Innovation Act, H.R. 9, 114th Cong. (2015).

[169] See Claire Laporte, One Patent Law, ​Two Economic Sectors: Is the One-Size-Fits-All Patent Law Still Workable?, ​Health Aff​. (Mar. 17, 2016),

Interview: Trial by Jury of Patent Cases Symposium

Interview: Trial by Jury of Patent Cases Symposium
Anne Hassett & Julian Pymento
Download a PDF version of this article here.
Anne Hassett joined NYU School of Law’s Engelberg Center on Innovation Law and Policy following a distinguished 30-year career as a trial lawyer in complex business litigation, and in particular, intellectual property litigation. Anne most recently was a senior partner in the patent litigation practice at Goodwin Procter LLP and previously a partner in the intellectual property practice at Kirkland & Ellis LLP. Anne received her BS summa cum laude in chemistry from SUNY Albany, AM in chemistry from Harvard University, and JD cum laude from U.C. Hastings College of the Law. Anne was editor-in-chief of the Hastings Law Review and named to the Order of the Coif and the Thurston Society. She is currently President-Elect and serves on the board of the New York Intellectual Property Law Association (NYIPLA), is Board Liaison to the NYIPLA’s Legislative Action Committee, and is a member of the Honorable William C. Conner Inn of Court. Anne is Of Counsel to Amster, Rothstein, & Ebenstein, LLP. Anne is also a research scholar at NYU School of Law, with a particular interest in how diversity enhances innovation.
Julian Pymento is a student at NYU School of Law graduating in May 2017 and the Senior Notes Editor for the NYU Journal of Intellectual Property and Entertainment Law. Julian has focused his studies on patent law and was co-chair for the Patent Committee of the Intellectual Property and Entertainment Law Society. Julian received both his BS and MS in Electrical Engineering from New York University Polytechnic School of Engineering and a minor in Business Studies from New York University Stern School of Business.

* * *

JP: Thank you for taking the time to speak with us. Before we get your views on the symposium topics, what was the inspiration behind Trial by Jury of Patent Cases, the choice of panels, and the order in which they were presented?
AH: So it was multivariate as you might expect. The question of what is the best way to handle deciding patent issues in litigation is something that is of interest to several of us at the Center – for me, because I‘ve spent many years working in the area, and in particular, Rochelle Dreyfuss, and Jeanne Fromer are also involved in looking at some of these issues, and other people as well. This issue has been of interest to us for a while, and then the Civil Jury Project approached us about doing a program on why civil jury trials are decreasing and what can be done about it. So it seemed like a good opportunity for the two of us to put our resources together. Just to give you a sense of how long it takes to get these things, we probably started talking to the Civil Jury Project, maybe February or March 2016 for a program that was at the end of September.
As for the choice of panels – when the Engelberg Center co-directors talked about the proposal to do this program, the co-directors had a number of ideas about what were important components of the question. And so a lot of the framing of the panel questions came out of that brainstorming discussion that we had. And then we proposed to Steve Susman of the Civil Jury Project our ideas for the framework. He and I also met to talk about what kinds of questions we thought would be of value, and then we put all this together and came out with a plan to fundamentally look at the issue of the 7th Amendment and whether there is, in fact, a constitutional right to jury trial in patent cases – and what parts of a jury trial might be protected by that right and which parts might not be.
And so we concluded that question should probably be the starting point of the conference, so everybody would have the same point of reference and be on the same page as we moved forward with the discussion for the day. So then we went to the judges’ perspective, because judges are the practical funnel for everything in patent litigation. Getting their perspective on things was, I think, the next most important thing. And then after that we had the scholars look at their issues, and then the practitioners. Why the practitioners last? Because they’re the ones who have to deal with all the attitudes of everybody else, including their clients. So it seemed reasonable for them to have a very broad sense of the overall discussion to frame what they were going to talk about and to be responding, in part, to issues that earlier panels were questioning. So the program would follow an iterative thought process.
JP: A theme throughout the symposium was an increased onus on advocates and judges to make jury trials more efficient, for example, by appointing an impartial technical advisor to the judge and allowing technological demonstrations in the courtroom. Do you agree with this assessment or do you find any potential problems with these approaches?
AH: I’m going to quibble with the question a bit here. I’m not sure that I agree that the two things you cite in the question, impartial technical advisers to the judge and technological demonstrations in the courtroom, necessarily make trials more efficient. I agree that there certainly is an interest in making trials more efficient. That is, using your time wisely and making sure that, as an advocate, you’re pushing the arguments that really matter and not just every argument that’s in the briefs. You want to make sure that those points are in the record to be dealt with but you may not want to present every single one of those at trial because that likely won’t make things more efficient. Efficiency is about how much time you use and how well you use it, whereas avoiding confusion and making it possible for the trier of fact to understand what is important may take more time.
For example, I think technological demonstrations in the courtroom can be very useful for the trier of fact, and depending on what the advocates propose to do, I would say most cases, you get permission to present them. I’m not aware of there being a time when we wanted to use, in my own trial practice, either through demonstration or a video, a way to explain and show how the technology worked, where it was not allowed.
Now the question of an impartial technical adviser to the judge – that is fraught with a lot of issues, so let’s talk a little bit about that. It may or may not make the case more efficient. Under the Federal Rules of Evidence, an impartial technical advisor can be appointed, and some judges, in fact, routinely have someone appointed who is available to them to use as a technical advisor. But most of the judges that I know and that I’ve spoken to at the program are very careful to say that they only want to use a technical advisor as someone to whom they could go and say, “Is this how that wiring diagram should be understood?” Or if I’m writing my opinion, and I’m putting in a picture of something from the patent that I am using to help explain my decision, “Technically, is this correct? Are the electrical ions are flowing in the right direction?” I think most judges are very reluctant and wary of using technical advisors in a fashion that says, “Tell me what the answer is” to how the law applies to the technological facts. Having technical advisors can make the judge’s decision making process more efficient. But it mostly means that there is a greater opportunity for the judge to be able to really evaluate what he or she is hearing from the experts on either side because these are advocates. Advocates can sometime emphasize certain things over others because that is better for their case. But advocacy can sometimes give a view of things that needs to be balanced, and judges’ access to their own technical advisors can be a way for these impartial technical advisors to be very useful.
So I agree that there are a number of techniques that advocates can use to make the process more helpful, but whether they make it more efficient is another question.
JP: Certain courts such as the Eastern District of Texas and the District of Delaware already have the lion’s share of patent jury trials. Might those advances in courtroom procedure lend further to the problem of forum shopping in the jurisdictions which do adopt such measures? And if so, is this downside outweighed by the benefits?
AH: Well, there are some assumptions implicit in the question, so let’s just talk about those first. One is a concern about having a lot of cases go to only a few courts – is that a bad thing? That’s actually an interesting question. One might say, and I’m not taking a position – just pointing out the assumptions built in there – that courts that handle a lot of these cases may have a better system to manage them. They can have a faster learning curve for any particular case, and they may be bolder, sitting down with the advocates and saying, “You know, let me tell you X, Y, and Z.” They may be able to give more direction to the parties than other judges who don’t have as many of these cases and may feel more intimidated by the process. So you have to think about this, whether in chambers with the parties before the case gets to trial, whether more experienced judges in patent-savvy courts are better able to signal to the parties news they may not want to hear, but news that they need to know so they can reconsider their assessments of whether they should go to trial, and what they should present at trial. So what I’m trying to focus on is that judges who handle patent cases infrequently, and I think this was suggested by some of the judges on the panel, can be somewhat intimidated by the process, just as jurors are going to be intimidated by the process because jurors only do this once. And the more you do it, the more comfortable you feel, and therefore, perhaps the more frank you may be in communicating things to the parties that they should know and should take into account. So that’s some food for thought on the assumption in the question.
Why are people forum shopping? They are looking for a perceived advantage – whether it’s true or not, whether they really have that advantage is another question. We don’t have a lot of empirical data to back up these perceived advantages that people bank on when they are making these forum selections.
I think to the extent that any district court can develop more effective ways to get the cases ready for trial and to help the parties appreciate what arguments are better for them to move forward with than others, and to the extent that the court respects the technology and allows the parties to have an opportunity to present it, that’s a very positive development. To my mind, such a court would make an excellent venue for a patent trial.
Of course, if the advocates want to do an animation or demonstration to explain the technology, it’s on the parties to make it technically correct. Judges should be evaluating whether it should be permitted in terms of how helpful it may be for the jury, not on whether it might prolong the trial.
Just as an aside, there’s a whole issue about demonstrations and animations, which can become very problematic in jury trials. You want your demonstration to be in evidence in the jury room, and not just something that the jury sees in the court room and then doesn’t have a chance to look at again. So you have to be very careful when you make these things to be sure that every piece of it is correct. And then, you want to be able to freeze a frame and say, “Okay, that’s the document I want to introduce – that picture of that frozen frame – as an independent piece of evidence to go into record.” The jury needs a way to have it during their deliberations, and that’s a can of worms on how you to accomplish that.
Bottom line is you’re never going to stop people from doing venue shopping. So really the issue is how we can make our courts the best at handling patent trials. And if people are picking a court because it’s the best, I don’t think that’s bad.
JP: Shifting gears a little bit, in her opening address, the Honorable Judge O’Malley described herself as an unabashed believer in juries: a jury’s competence, their good faith efforts, and their importance in patent trials. Taking all the speakers in sum, do you think that there was a majority dynamic in one direction or the other?
AH: I would say that the overwhelming dynamic, certainly from the judges, was that juries can do it. They can decide the issues they are presented with, and they can do it well. I would say this group was more pro-jury on the whole than you might have found twenty years ago, or even ten years ago, or that you may find among certain other judges who are not very pro-jury. One of the questions that Scott Hemphill asked the judge’s panel was, “When you’re sitting in a jury trial, do you agree with the juries and the results that they come to in the patent cases?” And what was interesting is that, at one level, the judges all said “Yes,” but then they all kind of said, “You know, we don’t listen the same way so it’s not the same as if we were making the decision.” So you have to recognize that there’s a little bit of a tension there. They’re saying, on one hand, that the juries get it right, but then that they didn’t really listen with the same degree of scrutiny that they would have if they were at a bench trial.
Then I think there’s another piece of this. They didn’t come out explicitly and say this, but I think it’s definitely a component that undergirds why judges these days are much more open to juries in patent cases: There is this a fear of the law becoming too elite. So if you have decisions about important things – and everybody I think agrees that what affects innovation is important to society – if you have those decisions being made by a smaller and smaller group of people who are the cognoscenti, the ones who “know,” the law becomes very elite and removed from everybody else. I think that even though some people might say, “I‘m not sure the juries always get it quite right,” those same people might say they would rather have the process involve the public than have it become the domain of just the experts. That’s an attitude that I think is very strongly held these days.
The last thing I’ll say is that one problem in evaluating what juries do is that it’s kind of a black box. Judges, in their opinions at bench trials, have to explain their reasoning piece by piece by piece. But it is rare that jury verdicts break down how the jury has evaluated each piece of the case and so we don’t necessarily have as good a read on their analysis.
JP: There were a number of statistics presented by the symposium participants, particularly from Professor Lemley, one of which showed that the number of jury trials in patent cases have risen since the 1970s. Among reasons given for this phenomenon are the trend shift of litigation conducted by IP boutiques to general practice firms and the 1982 formation of the Federal Circuit. Which way do you think these developments cut and to what extent do these explanations suffice?
AH: Certainly the number of patent cases tried to juries has changed tremendously. Kimberly Moore wrote a very interesting article, which is dated now, but contains a very good analysis for a certain period of time. One of things she points out is that in the late sixties and early seventies, the number of patent cases going to juries was two to five percent – something like that. Twenty years later, it was like fifty-two percent going to juries. That’s a huge change. So the evidence, as you can see from the statistics we presented at the conference, shows that jury trials are more common than bench trials in patent cases. I don’t think anyone has demonstrated empirically the “why.”
I kind of lived through some of this change. When I came out of law school in 1985, I was interested in being a trial lawyer. Yes, I had a technical background, and a lot of people said I should do patent litigation. But I wasn’t interested in it then because those cases rarely went to trial, certainly not jury trials, and jury trial were what I wanted to do. So I did other kinds of complex business litigation for almost fifteen years and got lots of jury trial experience. Then I had to try a criminal defense case for which we had to do present technical evidence – scientific evidence in a court. Long story short, that was my first opportunity, as a trial lawyer, to present scientific evidence to a jury and I decided, “Wow, that’s really a lot of fun!” So I started looking around for how I could do that more. I knew it wouldn’t come up come up more than once every fifteen years in the federal white collar criminal defense practice I was in at the time. I saw there are two places you could go to: product liability and patent litigation. That’s how I decided switch to patent litigation. I went to a boutique patent practice firm and kind of knocked on the door and said, “Would you take me in and teach me patent law?” There was already this phenomenon of general practice firms having identified how lucrative an IP practice could be and blending their IP teams with people having a lot of trial experience. The boutiques were also looking for people with trial experience because they could see this is what clients were now looking for.
By the time I was making this practice switch, the move to more patent jury trials was well underway. General practice firms had identified how much opportunity there was and started moving into this area and bringing in the focus of litigators, which was a very different perspective from what the predominantly prosecution-oriented lawyers who handled the boutique practice had. So my personal speculation is that the increase in jury trials in patent cases came because general practice firms identified IP practice as a kind of ore that could be mined, and brought the perspective that they had to treat these like regular trials. And quite honestly, from my talking to judges, it seems a lot of the judges thought, “Thank you!” When these cases were going to trial before that, many judges felt that the cases were just impossible to understand because it was very rare for people from the patent prosecution boutiques to be trying to make the technology and the law something that the average person could understand. They treated explanations to the judge like their explanations to the patent examiners at the USPTO. Many practitioners coming from the patent prosecution world didn’t want juries because they figured, “It was hard enough to get the judge to understand. How do I get twelve jurors?” I don’t know what to call that phenomenon. But honestly I think that’s what happened. So I agree the trend shift does have a big impact. But why did that trend shift take place? I think it’s because general practice firms were looking for places to expand, and not because we concluded that our system should have more jury trials in patent cases. It was more like general practice firms thought, “Here’s an area of practice we can take up,’ and then when litigation partners look at the cases, they applied their skills and that’s what led to those changes. In my view, the formation of the Federal Circuit was not important to this trend shift.
JP: Jury trials may tend towards certain biases, for example, tilts toward the patentee and possibly pro-American companies versus foreign corporations. Is jury bias something that should be worried about?
AH: I think certain biases that really exist. The statistics seem to bear it out that if you compare judge bench trial resolutions versus jury trial resolutions in patent cases you find that, overall, patent holders tend to win more often before juries when they are the ones who bring the lawsuits. And why is that? There are a couple of factors. I think juries often feel like litigation is a tough process and so you’re not going to bring that case unless you’re really sure you are right. And they give credibility to the party who brings the lawsuit, so there’s that component. And actually what’s interesting, if you look at the statistics that Kimberly Moore talks about in her article, when the alleged infringer brings the action through a declaratory judgment action, they tend to win more often before juries than judges, which credits the notion that jurors are biased in favor of the party that sues, inferring that if you take the time to go to court, you must really believe in the strength of your case.
There’s a second component to juror bias: There is an evidentiary advantage to the patent holder in assessing patent validity. I think a lot of jurors believe the Patent Office does a good job and so they give the patentee credit for that. The presumption of validity and the high standard of clear and convincing evidence to overcome patent validity – that’s a tough standard to meet! I think juries are impressed by those standards. And you can compare that with bench trials – the patentee-plaintiffs’ win rate on bench trials tends to be higher than the alleged infringers’ win rate – might be 53% to 47%, or something like that, whereas for jury trials, it’s even higher: About 65% in favor of the patentee-plaintiffs. But the patentee win rate is lower in bench trials than in jury trials, and it’s lower in a way that you cannot explain by anything other than bias differences. And so one thing I would infer is that this difference occurs in part because judges judge cases all the time. That’s their business. I think that, with experience, judges are less intimidated by patent cases and become bolder in their willingness to conclude that the U.S Patent Office was wrong and the standard for invalidating a patent has been met, and because they have the opportunity to judge these types of cases over and over again, they get better at applying a standard of evidence. I think experienced judges are less overwhelmed by the standards of evidence they have to apply to technical facts. But jurors are only doing deciding a patent case once. And I think their lack of experience handling such cases makes it harder for them to say, “Sorry, the U.S. Patent Office was wrong when it granted this patent.”
JP: Moving to the idea of specialization – by mere virtue of the existence of voir dire, isn’t that a de facto “special” jury that may not be representative of their community? And if so, does that mean that the creation of “special” juries comprised of individuals deemed ordinarily skilled in the art is not too far flung?
AH: Well, there’s a huge leap! It‘s a provocative question, but I don’t think you literally mean a “special jury.” There’s a huge leap between a special jury of technical experts and the actual voir dire process. The actual voir dire process is “Okay, we’re going to call in everybody from the venire and then figure out who among those people are the ones who we think cannot be impartial.” You’re not specializing in anything except in the ability to be impartial: to not have any obvious prejudice in favor of one party or the other. Of course, a lot of prejudices we know we are not really getting at very well in the voir dire process. But voir dire is very different from selecting persons of ordinary skill in the art. That’s like saying we’re only going to have engineers, chemists, or coders, and nobody else, as jurors for any particular case. And it assumes that those “specialized” jurors lack biases about the technical field. They won’t. There are attitudes and assumptions and biases about scientific matters, too, just as in other things. You can’t expect that a “special jury” of microbiologists will be impartial on points in microbiology – you’re going to find scientific biases apart from the evidentiary biases we discussed before. Some people will say, “Oh no, CRISPR method is the right way.” Some people will say, “No, this other method is better.” And so you‘re not necessarily getting a better set of decision makers. So that’s a problem: The notion that, “Oh, just get these experts and they’ll all be able to agree.” You might find you have more disagreement among them because they have their own biases about science.
That being said, it certainly was common to have people experienced in a commercial field assist judges in 18th-century England. Let’s say you came to the court in that era with an admiralty case. What was the judge going to do? He’d likely say, “I don’t understand this stuff. Here’s a bunch of folks who are admiralty experts. Go sort it out with them and come back and let me know what they figured out about these five things.” So there’s some logic to think that, at least in commercial cases, there may be value in letting the commercial community sort it out. But this is subject to the same concern, of course, that we spoke about earlier, which is letting elites make decisions and excluding the public from participating in those decisions when the public may be affected – I really don’t want to do that.
So I’ll say one more thing. This is a personal view. Since the America Invents Act was implemented, we have IPRs. You don’t have to be involved in a district court litigation to file an IPR, but if you are involved in a court litigation and file an IPR in time, you may well find that the judge will grant a stay on the district court action, hoping the Patent Office [PTAB] will resolve the issue of patent validity. So that is de facto giving us something that I think people wouldn’t swallow if we just proposed it flat out: Having the Patent Office resolve the validity issues, leaving infringement for the district courts. You could say, “Gee, that sounds like what those judges were doing in the admiralty situation, telling the experts to deal with these questions and come back with the answers.” My personal view is that we ought to be looking more carefully at whether that division of issues is a good pro-innovation way for our system to function, perhaps to always have validity issues go back to a special court like the PTAB, and let the general public decide infringement issues – perhaps that’s the question that the society in general should be involved in. Whether that solves the concerns about elitism, I don’t know. But I think it’s something that’s worth considering.
JP: So, as you mentioned, a highlight of PTAB proceedings is adjudication by specialized administrative law judges. Why may specialized judges be okay while specialized juries are not in district courts?
AH: Well, so if we just deal historically with how IPRs came to be part of the AIA, there was something called inter partes reexamination that the Patent Office had previously set up hoping to provide a forum for the people who fashioned and implemented the patent system to help make the decisions in reviewing validity. And that process wasn’t being used very often. I think they analyzed a few reasons why it might have been infrequently used, and they really wanted to change that. That was a big reason why the AIA implemented the PTAB with IPRs and PGRs. There was a strong interest on the part of the people who were pushing that reform to make our system more like the European patent courts where none of these issues are jury issues. The PTAB brought in specialized judges to focus on questions of validity, which was what the Patent Office wa really all about. And so, the goal was to bring in people to be judges and not examiners – you know their basic job function is very different – we could develop a system that would be more harmonious with the rest of the world. Whether it’s the best solution, I can’t say yet, but I think it offers a lot of advantages because it enable having technological experts judge patent validity and it allows the public to decide the questions of infringement and what innovation can go forward.
And I think one of the advantages of the way the PTAB is set up is that you have three judges, not just one, so there’s an opportunity similar to the kind that happens in a jury, which is that people with different points of view can challenge each other. And I think that PTAB judges generally feel comfortable challenging each other, so that’s a good thing. And in my view, it’s better than a bench trial in district court where the poor judge – it’s all on him or her. That can be very difficult. I think it’s very difficult for a single person operating alone to get these decisions right. Willfulness – or questions of inequitable conduct – those might be jury issues along with infringement. So yes, I think it’s something we should explore much more.
JP: On one side the 7th Amendment favors instituting jury trials for civil cases. However, on another side are practitioners, who prefer greater consistency in court outcomes, which is less feasible with jury trials. Is there a sense of whether one policy should weigh more heavily than the other?
AH: I’m going to interpret what you’re saying to mean that, because bench trials produce opinions supported by fact and legal principles, we can better discern principles of law from them and apply them whereas jury verdicts – well, all we know is that’s what the jury did. And what that jury verdict means for other cases, might be very hard to discern. So jury results provide less consistency in our understanding of the law and make it harder to advise your clients. Our conference did not explore the process that advocates go through to advise their clients before they decide to go forward with a jury trial – the legal and technical evaluations, the asymmetries of information, the estimations made for clients.
My personal view is that, because I care about the law, I’d like to encourage things that make the law more consistent and more apparent. The advantage of having judicial opinions is that it puts reasoning out there that can be studied and applied or criticized for failing to take into proper account facts or law, and it makes the law more apparent. Whether you are citizens – potential jurors – or judges, lawyers, or law students, everybody can look at that and try to understand it, which is not true with jury verdicts. In the case of juries, all you know is their decision; exactly what they relied on is very hard to appreciate. Even if you interview jurors afterwards, you’re not necessarily getting anything that’s very useful for the next case.
I suppose the benefit that, in the case of jury trials, post-trial motions may generate a post-trial opinion by the judge granting or denying the JMOL and therefore providing an analysis of why there is or is not enough to support a jury verdict, which would help explicate the principles that the judge views as important and relevant in that case. It’s tough. I believe firmly in the notion that we don’t want this to be a law of the elite. And yet, you want law that you can understand and apply, and that has consistency. So I guess I’m waffling but probably a little bit more in favor of having judicial decisions ratherthan black box jury verdicts.
JP: To close, during the symposium, an overarching theme was the dichotomy of patent exceptionalism and American exceptionalism. Patent exceptionalists argue that jury trials are inappropriate for patent cases because the issues are too complex and American exceptionalism stresses the importance of juries even in complex cases. With the passage of the AIA, PTAB proceedings, and other shifts in patent law, do you see the direction of our nation’s patent law structure shifting towards one view or the other?
AH: Well, certainly if I look at the proposed patent reforms that are on the radar screen today, I don’t see anything that is anti-jury. So I think they are all jury-neutral. And actually in some ways, they are geared towards making patent cases fit the same standards that a lotof other litigations must meet, like the standards of Iqbal and Twombly: “Throw out that Form 18! You should be like everybody else, patent people!” And the judges, when they decided eBay, said to the patent bar, “Why should prevailing patentees always get injunctions? You should go make your injunction case like everybody prevailing party.” So to a certain extent, there’s actually a move against patent exceptionalism, and I think that’s a good thing. Part of this is because I don’t agree with the attitude that ordinary people cannot decide patent issues. They can, if you, as the advocate, present them the facts and the law in the right way. You have a big responsibility as advocates to understand, for decision makers, which components of law matter, which facts matter, and how you can present the facts so that the jurors get it visually and orally. Always, advocates need to present information so every juror has the opportunity to understand. I know it can be done because I’ve seen it happen. I believe that jurors can make these decisions so long as we advocates teach them the right way.

Antitrust Treatment of the No Challenge Clause

Antitrust Treatment of the No Challenge Clause
By Thomas K. Cheng* Download a PDF version of this article here.


One of the anomalies in U.S. antitrust law, despite its comparatively vast jurisprudence, is that courts seem to have never ruled on the legality of no challenge clauses. These clauses generally prohibit a licensee from challenging the validity of the patent being licensed. Thus far, no challenge clauses have only attracted the attention of patent law and have been dealt with largely as a question of enforceability.[1] Different appellate courts have expressed diverse views on the enforceability of no challenge clauses, depending on the nature and timing of the agreement in which they are incorporated.[2] To the extent that these clauses are enforceable, it leads to the question of how they should be treated under antitrust law.

In the circuits in which they are unenforceable, no challenge clauses may be viewed as a non-binding agreement by licensees that they will not challenge the validity of the patent. In such cases, there is a legitimate question as to why licensees would make such a commitment, what enticements have been offered by the patentee to secure such a commitment, and what this tells us about the patentee’s own belief in the likelihood of patent validity.

In circuits in which no challenge clauses are enforceable, these clauses can exert anticompetitive effects by preventing challenges to invalid patents. No challenge clauses do not seem so competitively benign that one can conclusively assert that they do not inflict harm on consumers.

A focus on no challenge clauses is further justified by the attention that other jurisdictions have paid to them in recent years. In 2015, a Chinese enforcement authority fined Qualcomm close to $1 billion over the imposition of no challenge clauses, among other offenses.[3] Moreover, no challenge clauses are one of the areas in which the U.S. and the European Union (“EU”), the two leading antitrust jurisdictions in the world, have diverged. While U.S. antitrust law has largely left these clauses untouched, the EU, to the extent its view is embodied by the European Commission, has taken a fairly hostile attitude toward them.[4] In fact, largely due to the Commission’s view, these clauses have mostly been expunged from European licensing agreements.[5] In light of the international divergences, it is worth exploring how these clauses should be approached.

This Article fills an important gap in the U.S. antitrust academic literature by exploring antitrust treatment of no challenge clauses. As far as this author is aware, no academic article thus far has examined this issue. The only notable exception is an article by Miller and Gal, which focused on the enforceability of no challenge clauses from a patent law and total welfare perspective.[6]

This Article is divided into seven sections. Following this introductory section, Section I provides an overview of no challenge clauses and sets forth a taxonomy for these clauses. Section II surveys the jurisprudence on no challenge clauses in the three main antitrust jurisdictions in the world; the U.S., the EU, and China, highlighting the differences among them. Section III explains the circumstances under which no challenge clauses can create consumer harm and identifies the relevant factors for analyzing and predicting such harm. Section IV enumerates the various justifications for no challenge clauses and rebuts them. Section V summarizes the main ideas in the preceding Sections and outlines an analytical framework for analyzing no challenge clauses under antitrust law. The conclusion is the final section.

I. Overview of No Challenge Clauses

A. Definition of No Challenge Clauses

No challenge clauses are inserted in patent licensing agreements to prohibit the licensee from challenging the validity of the patent for a period of time, usually the duration of the contract.[7] Patentees incorporate such clauses into their licensing agreements to forestall potential validity challenges by the licensees. According to Orstavik, “[t]he object of a no-challenge clause is to fortify a position granted by law.”[8] These clauses, however, do not provide patentees with fool proof defenses against validity challenges; because they only govern licensees, they have no effect on the conduct of unrelated third parties.[9] Therefore, the patent could still be subject to challenges by third party actors. The degree of protection offered by these clauses therefore depends on the likelihood and willingness of unrelated third parties to challenge the patent. If there is a third party that is likely and willing to challenge the patent despite the clause, the degree of protection afforded to the patentee will be limited. However, if most of the possible challengers have already been recruited as licensees and are subject to the no challenge clause, the patentee can be assured of the continual validity of its patent.

In spite of the no challenge clause, the likelihood of third party challenges to the patent bears upon the continual validity of the patent and its competitive effects. Ultimately, this likelihood is circumstance-specific and requires detailed examination. The courts and commentators, however, have opined that licensees are the parties with the greatest economic incentives to challenge the validity of patents. In Lear, Inc. v. Adkins, the U.S. Supreme Court declared that “[l]icensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery.”[10] To the extent that this is true, no challenge clauses will effectively forestall validity challenges, which may allow an invalid patent to persist.

B. Different Types of No Challenge Clauses

There are different types of no challenge clauses, which can be classified into two main categories. The first category consists of outright prohibitions of validity challenges in the licensing agreement, which Miller and Gal have called no contest clauses.[11] Whether the clause in fact achieves outright prohibition depends on the willingness of the courts to grant injunctions or to bar validity challenges to enforce these clauses. To the extent that courts eschew injunctions for enforcing no challenge clauses, the patentee will only obtain damages. In that case, outright validity challenge prohibitions will only impose a financial penalty, which places them in the second category. Miller and Gal call these challenge penalty clauses.[12]

There is a wide variety of challenge penalty clauses. The penalty may be in the form of a financial penalty or a loss of contractual privileges, which ultimately will result in financial losses for the licensees. The financial penalty can be in the form of liquidated damages or higher royalties. For instance, in Rates Technology Inc. v. Speakeasy, Inc., LLC, the no challenge clause stipulated liquidated damages of a value of over twenty-four times the license fee.[13] One might argue that if the liquidated damages are so substantial that it would have a serious financial impact on the licensee, or perhaps even bankrupt the licensee, the challenge penalty clause effectively functions as an outright prohibition. The financial penalty may also exist in the form of elevated royalty.[14] In such case, the challenge penalty clause would stipulate that the royalty rate would increase in response to a validity challenge launched by the licensee.[15] A slight variation of an elevated royalty clause is a clause that provides for a higher royalty rate only when the validity challenge turns out to be unsuccessful.[16] A further variation is a clause that establishes three tiers of royalty rates, “with the rate increasing once a challenge is mounted, and providing for an even higher royalty if the challenge is not successful.”[17] These various types of clause create financial disincentives for the licensees to challenge a patent.[18]

Another kind of arrangement that similarly creates financial disincentives for licensees to challenge a patent is royalty front-loading.[19] Strictly speaking, this type of arrangement need not entail a financial penalty. If the royalty that is required of the licensee over the duration of the licensing agreement is the same as the amount that the licensee is liable to pay without front-loading, there is no financial penalty on the licensee. However, the licensee would be similarly deterred from challenging the patent as compared to a royalty increase upon challenge. This is because under current patent law, a licensee cannot recover the royalty that has been paid to the patentee prior to invalidation if the patent turns out to be invalidated, even though the licensee arguably should have never had to pay royalty to the patentee if the patent had always been invalid.[20] Therefore, if a patentee front-loads the royalty, the licensee will lose the incentive to challenge the patent because she will achieve little savings in terms of aggregate royalty payment. Even though the arrangement does not entail a financial penalty, it would achieve a similar result as a challenge penalty clause.[21]

The remaining type of challenge penalty clause is the termination-upon-challenge clause, which stipulates a termination of the licensing agreement upon the launch of a validity challenge by a licensee. This type of clause functions mainly by threatening the licensee with damages claims from the patentee if the licensee continues to deploy the licensed technology to produce the product. Upon the launch of a validity challenge, the licensing agreement either automatically terminates or gives the patentee an option to terminate the agreement.[22] Once the agreement is terminated, the licensee would be infringing the patent if she chose to continue to use the technology. If the patent is eventually upheld, the patentee can sue the licensee for patent infringement. The licensee may even be liable for trebled damages if the patentee can prove that the infringement is willful.[23] This gives the licensee a significant disincentive to bring validity challenges, at least unless she is quite confident of her chance of success. This may serve the laudable purpose of deterring frivolous validity challenges,[24] but the deterrent effect may be so great that it discourages meritorious challenges that are short of a slam-dunk.

Because of the mixed effects of termination-upon-challenge clauses, there are differing views as to whether they actually impose a penalty. Some commentators have argued that termination-upon-challenge clauses merely level the playing field between the patentee and the licensee in the course of litigation and will help promote innovation by protecting the patentee’s investment.[25] According to Taylor, “[d]uring litigation, the licensee profits from the product without paying royalties or incurring competition from other licensees. The licensor, on the other hand, must incur litigation without collecting royalties and, if the licensee holds an exclusive license, without the right to license the patent to another.”[26] Short of repudiating the licensing agreement, the licensee could continue to produce the product using the patentee’s technology while challenging the patent and holding the patentee bound by the agreement. Some critics argue that this is unfair to the patentee.[27] Meanwhile, other commentators have contended that termination-upon-challenges may have a deleterious effect on welfare and should be subject to scrutiny by the courts.[28] Regardless of whether the patentee is in a disadvantageous bargaining position vis-à-vis the licensee in the course of a validity challenge, it is clear that termination-upon-challenge clauses produce significant deterrent effect on licensees. Especially if willful infringement can be proved, the effect of these clauses could be similar to that of no challenge clauses with hefty liquidated damages, as in Rates Technology.[29]

The treatment of these various types of outright no challenge and challenge penalty clauses under U.S. patent law is still subject to debate. While most believe that an outright no challenge clause in a licensing agreement would be unenforceable, there is case law that suggests otherwise.[30] The situation is likewise unclear for termination-upon-challenge clauses.[31] Furthermore, while some commentators believe that the Supreme Court would invalidate no challenge clauses after MedImmune, Inc. v. Genentech, Inc,[32] others believe that the issue is still wide open.[33] With respect to the various royalty adjustment mechanisms, given the latitude that is usually given to the patentees to structure their royalty, it is unlikely that they will be deemed unenforceable.

Nonetheless, enforceability under patent law and legality under the antitrust law are two distinct issues. When determining whether a certain licensing practice should be enforceable under patent law, courts usually look to patent policy, which aims to encourage innovation by generating sufficient incentives.[34] When assessing the legality of the same practice under antitrust law, courts pay heed to antitrust policy and the overriding objective of the protection of consumer welfare.[35] Antitrust law emphasizes substance over form. If an outright no challenge clause and the various challenge penalty clauses exert the same effect on the licensee’s incentive to launch a validity challenge, they should result in similar impact on consumer welfare and therefore should be accorded the same treatment. The form in which the deterrent effect on licensees is achieved should not be dispositive from an antitrust perspective.

C. Timing of the Agreement

Apart from the form in which they take, no challenge clauses also may differ in the timing between when the agreement is entered and when the validity challenge commences and concludes. There are generally three time settings for the entry of the agreement. The first is a pure licensing agreement that is entered in the absence of any threat of litigation. The second is a settlement agreement that is entered when litigation is imminent or has commenced and has proceeded to various stages prior to conclusion. The third is consent decree, which concludes litigation by the agreement of both parties with the court’s approval. The question, therefore, is whether the timing of the agreement affects the enforceability of the no challenge clause under patent law and should affect the legality of the clause under antitrust law.

Overall, the timing of the agreement has had a bearing on judicial attitude toward no challenge clauses, although there is no clear consensus among the appellate courts.[36] Courts seem to have treated no challenge clauses in licensing agreement with the greatest hostility.[37] Most seem to agree that no challenge clauses incorporated in licensing agreements are unenforceable as a matter of patent law.[38] However, the Supreme Court has never expressly decided the issue. The Federal Circuit, which is the most important appellate court for patent issues, has indicated that a clear and unambiguous no challenge clause should be enforceable even in the absence of a threat of litigation.[39]

No challenge clauses in settlement agreement seem to have received more lenient treatment from the courts.[40] Again, consensus eludes the various appellate courts. The Second and the Ninth Circuits have struck down no challenge clauses in settlement agreements,[41] while the Sixth and the Federal Circuits have upheld them under specific circumstances.[42] More recently, the Second Circuit has held that a no challenge clause contained in a settlement agreement entered into after discovery would be upheld.[43] A similar circuit split is also observed with respect to the enforceability of no challenge clauses incorporated in consent decrees. The Second and the Seventh Circuits have refused to enforce no challenge clauses contained in consent decrees[44] whereas the Federal Circuit has largely enforced them.[45]

Courts have offered a range of reasons for offering disparate treatment to no challenge clauses contained in different types of agreements. For consent decrees, the Federal Circuit has argued that the doctrine of res judicata favors the definitive disposition of legal disputes, and parties should not be allowed to reopen the validity issue later.[46] For settlement agreements, there seems to be a predominant view that discovery affords parties the opportunity to fully inform themselves of the issues. Thus a no challenge clause incorporated in a settlement agreement entered into after discovery should represent an informed, binding decision by the parties.[47]

Whether no challenge clauses contained in licensing and settlement agreements should be treated differently from an antitrust perspective will be discussed subsequently. For now, suffice it note that consent decrees present slightly different issues from the other two types of agreements. While some courts have admittedly refused to enforce no challenge clauses contained in consent decrees, attaching antitrust liability to the clause is a different matter.[48] Even though the basis of a consent decree is an agreement between the two litigating parties, judicial supervision would suggest that the court approves of the provisions in the agreement.[49] It would be quite remarkable to assert that a clause that has been approved by the court should turn out to be illegal, giving rise to trebled damages and other liability. Therefore, no challenge clauses contained in consent decrees should be beyond the purview of antitrust law. Instead, the focus should be on licensing and settlement agreements.

II. Treatment of No Challenge Clauses in Different Jurisdictions

The treatment of no challenge clauses varies widely across the major jurisdictions. In the U.S., no court seems to have ruled on the legality of no challenge clauses under antitrust law or held them to constitute patent misuse.[50] As mentioned earlier, the various appellate courts have expressed different views on their enforceability under patent law. In the EU, the position on no challenge clauses under the Technology Transfer Block Exemption Regulations (“TTBER”) has evolved over time. The current position under the 2014 TTBER is that all no challenge clauses, including termination-upon-challenge clauses, fall within what are known as excluded restrictions.[51] Apart from a limited number of exceptions, these clauses will not benefit from the block exemption and will need to be justified under Article 101(3) of the Treaty on the Functioning of the European Union (“TFEU”) in order to be lawful under EU competition law. For all intents and purposes, most parties avoid clauses that are excluded restrictions in their licensing agreements, partly because justification under Article 101(3) is generally perceived to be difficult.[52] In other words, commercial parties practically treat no challenge clauses as illegal.

In China, one of the relatively recent but nonetheless important jurisdictions, no challenge clauses also seem to be practically illegal per se, as indicated by the one case in which they were examined. In the February 2015 decision on Qualcomm’s licensing practices, the National Development and Reform Commission (“NDRC), one of the Chinese enforcement authorities, effectively deemed no challenge clauses as illegal per se. In the IP-Competition Regulations issued in April 2015 by the State Administration of Industry and Commerce (“SAIC”) (another Chinese enforcement authority), Article 10 proscribes the use of no challenge clauses absent legitimate justifications.[53] The Regulations are silent on what constitutes a legitimate justification. The following sections provide a detailed overview of the status of no challenge clauses under U.S., EU, and Chinese law.

A. The United States

1. Lear, Inc. v. Adkins

U.S. courts have suggested that no challenge clauses would be illegal if they were incorporated into a market allocation agreement.[54] It has also been held that the use of reciprocal dealing to force a counterparty not to challenge a patent is an antitrust violation.[55] However, it seems that no courts have ruled on the legality of no challenge clauses on their own; instead, much of the action regarding no challenge clauses has been under patent law. Any exposition of the law on no challenge clauses must start with the 1969 Supreme Court case of Lear, Inc. v. Adkins. Prior to this case, the doctrine of licensee estoppel, which was first applied by the Supreme Court in 1856 in Kinsman v. Parkhurst,[56] had prevailed in the U.S.[57] The doctrine essentially states that once a licensee accepts a licensing agreement from a patentee, the licensee is deemed to have acquiesced to the validity of the patent underlying the agreement and is estopped from launching validity challenges later.[58] The doctrine was largely based on equitable considerations and paid little heed to the social harm of upholding an invalid patent.[59]

In Lear, Inc. v. Adkins, the U.S. Supreme Court ruled on whether the licensee estoppel doctrine estopped Lear, Inc. from pleading patent invalidity in the suit. In language that has been cited repeatedly by the lower courts ever since, the Supreme Court declared that the public policy of clearing invalid patents overrides the equitable considerations favoring the patentee:

Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.[60]

This paragraph is notable for developing the law on no challenge clauses in two respects. First, although the case did not in fact involve a no challenge clause,[61] lower courts have cited the balance of public policy in favor of the removal of invalid patents as justification for invalidating no challenge clauses of various kinds.[62] Some commentators have argued that Lear does not require this result at all.[63] Second, subsequent courts and commentators alike have cited with approval the court’s observation that licensees are often the only parties with economic incentives to mount a validity challenge.[64] The circumstances that affect a licensee’s incentive to challenge will be discussed subsequently.

Appellate courts applied Lear’s holdings to no challenge clauses in the ensuing decades.[65] There is quite a divide between the courts on their treatment of no challenge clauses. By and large, the Federal Circuit, unsurprisingly, has taken a pro-patentee approach and allowed these clauses to be enforced under various circumstances.[66] The other circuits have tended to take a more hostile attitude toward these clauses.[67] However, most cases from these courts tend to be of an older vintage, and judicial attitude may have since evolved.[68] The courts seem to distinguish between no challenge clauses based on the agreement they are embodied in. The exposition below will follow this practice.

2. No Challenge Clauses in Licensing Agreements

Two years after Lear, in Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., the Ninth Circuit confronted a case involving an explicit no challenge clause in a settlement agreement.[69] In determining the validity of the clause, the Ninth Circuit made extensive reference to Lear. The court reiterated that the Supreme Court had struck the balance between state contract law and federal patent law, decisively in favor of promoting the federal patent policy of allowing the free flow of ideas that are not patented.[70] The Ninth Circuit was cognizant of the difference between the doctrine of licensee estoppel at issue in Lear and the no challenge clause at issue.[71] However, to the Ninth Circuit, this difference was immaterial. The court declared that “[t]he parties’ contract, however, is no more controlling on this issue than is the State’s doctrine of estoppel, which is also rooted in contract principles,”[72] and that the no challenge clause “is in just as direct conflict with the ‘strong federal policy’ referred to repeatedly in Lear, as was the estoppel doctrine and the specific contractual provision struck down in that decision.”[73] Moreover, in dicta, the Ninth Circuit declared that for the purpose of the enforceability of no challenge clauses, there is no difference between a licensing agreement and a settlement agreement.[74] The court correctly recognized that a licensing agreement can be reached under the threat of a charge of infringement.[75] It also observed that such a distinction would be “less then [sic] workable,”[76] and would open the door to easy circumvention because “it would be just as easy to couch licensing arrangements in the form of settlement agreements.”[77]

In Bendix Corp v. Balax Inc., the Seventh Circuit struck down a no challenge clause in a licensing agreement that prohibited the licensees from challenging the validity of the patent even after the agreement had been terminated or lapsed.[78] The infringement defendants in that case alleged that the patentee used the no challenge clauses in the licensing agreements to “blanket” the market.[79] Citing Lear extensively, including the passage excerpted above, the court concluded that “the right to estop licensees from challenging a patent is not part of the ‘limited protection’ afforded by the patent monopoly.”[80] More relevant to the purposes of this article, the court noted that the arrangement at issue should be struck down because “it creates a danger of unwarranted monopolization.”[81] This danger was compounded by the fact that the obligation not to challenge extended beyond the duration of the licensing agreements.

More recently, in Rates Technology v. Speakeasy, Inc.,[82] the Second Circuit struck down a no challenge clause contained in a pre-litigation settlement agreement.[83] The court noted that what it was asked to do was “to balance the policy concerns of patent articulated in Lear against countervailing policy concerns that favor requiring parties to adhere to the terms of agreements resolving their legal disputes.”[84] Citing Massillon-Cleveland-Akron Sign Co. with approval, the court observed that “allowing such no-challenges whenever a license agreement is cast as a ‘settlement’ could ‘close the doors of the courts to a large group of parties who ha[ve] sufficient interest in the patent to challenge its validity,’ [internal citation omitted] and thereby render Lear’s prohibition of licensee estoppel—a prohibition that the Supreme Court held was required by strong public policy considerations—a dead letter.”[85]

Importantly, while acknowledging that “the important policy interests favoring the settlement of litigation may support a different rule with respect to no-challenge clauses in settlements entered into after the initiation of litigation,”[86] the court held that “enforcing no-challenge clauses in pre-litigation settlements would significantly undermine the ‘public interest in discovering invalid patents.’”[87] Despite the court’s reference to the initiation of litigation, the court pronounced that the crucial watershed between enforceability and unenforceability is the conduct of discovery. No challenge clauses contained in a settlement agreement entered into after discovery would be enforceable, while those in a settlement agreement entered into prior to discovery would be void. To the court, discovery serves two important purposes:

First, it suggests that the alleged infringer has had a full opportunity to assess the validity of the patent, and is therefore making an informed decision to abandon her challenge to its validity. Second, the fact that parties have conducted discovery is evidence that they had a genuine dispute over the patent’s validity, and that the patent owner is not seeking to prevent its monopoly from being challenged by characterizing ordinary licensing agreements as settlement agreements.[88]

Because, as mentioned earlier, it is often impossible to draw the line between a pre-litigation settlement agreement and a licensing agreement,[89] the court’s conclusion effectively means that no challenge clauses in licensing agreements are unenforceable.

The position on no challenge clauses in licensing agreements would have been quite clear but for the Federal Circuit’s decision in Baseload Energy, Inc. v. Roberts.[90] The court stated in dicta that “[i]n the context of settlement agreements, as with consent decrees, clear and unambiguous language barring the right to challenge patent validity in future infringement actions is sufficient, even if invalidity claims had not been previously at issue and had not been actually litigated.”[91] The court made this statement while trying to distinguish the facts of the instant case from a prior case, Flex-Foot v. CRP.[92] In Flex-Foot, the alleged infringer had challenged patent validity, had had an opportunity to conduct discovery regarding validity, and had agreed voluntarily to dismiss the suit with prejudice in a settlement agreement containing a clear and unambiguous no challenge clause.[93] In Baseload Energy, the Federal Circuit argued that the exact factual circumstances need not be replicated for a no challenge clause to be upheld.[94] The focus seems to have shifted from the existence of prior litigation and prior opportunity to conduct discovery, which would have aligned the Federal Circuit with the Second Circuit, to the existence of clear and unambiguous language barring future validity challenges. This opens the possibility that the Federal Circuit would uphold a clear and unambiguous no challenge clause contained in a licensing agreement in the absence of any pending or ongoing litigation.

3. No Challenge Clauses in Settlement Agreements

The appellate courts have gone in different directions in their treatment of no challenge clauses contained in a settlement agreement. There seems to be some consensus that the dividing line for enforceability is whether the settlement agreement was entered into before or after discovery, or expense of substantial judicial resources. However, a number of cases deviate from this consensus. There are cases that held, or at least proclaimed, that no challenge clauses would be deemed unenforceable regardless of whether they are incorporated in a licensing agreement or a settlement agreement. There are also cases in which the court refused to enforce a no challenge clause, or at least something similar to it, contained in a settlement agreement entered into after discovery. Finally, there are also cases in which the court enforced a no challenge clause in a settlement agreement entered into prior to discovery.

A number of appellate decisions that have dealt with the enforceability of no challenge clauses in settlement agreements have upheld them so long as the settlement agreement was entered into after discovery. As mentioned, the Second Circuit in Rates Technology held that the dividing line for enforceability is discovery. In Aro Corp. v. Allied Witan Co.,[95] the Sixth Circuit enforced a no challenge clause in a settlement agreement entered into after discovery. Although the court did not explicitly designate discovery as the dividing line as the Second Circuit did in Rates Technology, it noted that Lear “cannot be interpreted so broadly as to condone a kind of gamesmanship, wherein an alleged infringer, after employing the judicial system for months of discovery, negotiation and sparring, abandons its challenge to validity, executes a license in settlement, and then repudiates the license and seeks to start the fight all over again in the courts.”[96] The Federal Circuit has also consistently upheld no challenge clauses in settlement agreements that were entered into after discovery. Hemstreet v. Spiegel, Inc. did not concern an explicit no challenge clause.[97] It instead involved a provision that required the licensee to continue to pay royalty even after the patent had been otherwise invalidated, which in monetary terms functioned similarly as a no challenge clause. The Federal Circuit upheld the provision on the grounds of furthering settlement of lawsuits, despite the fact that the patent had been found unenforceable in a separate proceeding.[98] As noted earlier, in Flex-Foot, Inc. v. CRP, Inc., the Federal Circuit upheld a no challenge clause in a settlement agreement entered into after discovery between two parties to an existing license.

The three cases that do not conform to this rough consensus were Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., Warner-Jenkinson Co. v. Allied Chemical Corp.,[99] and Baseload Energy, Inc. v. Roberts. However, it is possible to reconcile the first two cases with the general rule that discovery is the dividing line for enforceability. In Massillon-Cleveland-Akron Sign Co., the Ninth Circuit did indicate in dicta that no challenge clauses would be deemed unenforceable regardless of whether they are incorporated in a licensing agreement or a settlement agreement.[100] It is nonetheless important to note that the no challenge clause at issue in the case, which the court refused to enforce, was contained in a settlement agreement entered into prior to the commencement of litigation.[101]

In Warner-Jenkinson, the Second Circuit struck down a clause that prohibited a licensee from terminating the license for two years on the grounds that the licensee should be able to terminate the license if she successfully challenges the patent’s validity.[102] While the clause was contained in an agreement reached by the parties after discovery in a prior litigation, the Court nonetheless refused to uphold it. However, this does not mean that the Court’s holding is inconsistent with the general rule. In fact, the Court noted that if the agreement had contained an explicit no challenge clause, the Court may have felt compelled to give effect to it.[103] The Court merely observed that the Lear decision cautions against reading an explicit no challenge clause into an ambiguous clause such as the one at issue in the case.[104] Therefore, one may perhaps treat this case as not being applicable to explicit no challenge clauses at all.

Perhaps the one true anomaly among the three cases is Baseload Energy. In this case, the declaratory judgment defendant sought to enforce a claim release clause, under which the plaintiff has relinquished all present and future claims against the defendant, against the plaintiff.[105] The Federal Circuit ruled against the defendant, stating that the claim release clause did not specifically refer to invalidity issues and therefore could not be used to bar validity challenges.[106] However, in responding to the plaintiff’s argument that the claim release clause should not bar its declaratory judgment action because the settlement agreement was not entered into after discovery and extensive court proceeding, the Court asserted that the absence of prior dispute or litigation as to invalidity is not dispositive of the enforceability issue.[107] If there was no prior dispute concerning invalidity, there clearly would have been no discovery on the issue. The Court implicitly noted that prior discovery on patent validity is not determinative of enforceability of no challenge clauses in settlement agreements.[108]

4. No Challenge Clauses in Consent Decrees

Given that this article will not focus on no challenge clauses in consent decrees, the discussion here will be brief. A few Federal Circuit cases can be interpreted as holding that a consent decree, which stipulates patent validity, bars future validity challenges absent express reservation of the right to launch such challenges. A majority of the appellate courts, however, have held that a consent decree (or a settlement agreement accompanied by a dismissal with prejudice) that stipulates patent validity and infringement precludes future validity challenges.[109] In other words, a no challenge clause stipulated in such a consent decree would be enforceable.

5. Termination-Upon-Challenge Clauses

The courts’ attitudes toward termination-upon-challenge clauses is similar to that toward general no challenge clauses, in that the Federal Circuit holds a more lenient position than the other circuits. In Crane Co. v. Aeroquip Corp., the Seventh Circuit held termination-upon-challenge clauses to be unenforceable on the grounds that under Lear, "[d]efendant was within its rights to test validity after entering into the consent judgment of validity.”[110] However, in C.R. Bard, Inc. v. Schwartz, the Federal Circuit implicitly held that a licensor can terminate the licensing agreement when a licensee sues to declare the patent invalid and ceases to pay royalty.[111] Despite the slightly complex facts in Schwartz, commentators have argued that in so ruling, “the Federal Circuit effectively held that license provisions which give licensors the right to terminate licenses are enforceable when licensees bring validity challenges and cease making royalty payments.”[112] Taylor argues that Federal Circuit case law such as Cordis Corp. v. Medtronic, Inc. lends further support to the notion that termination-upon-challenge clauses should be enforceable.[113] The gist of the Federal Circuit’s approach is that while Lear requires the courts to allow the licensee to challenge the validity of the patent, the licensee should not be spared of the consequences of a validity challenge.[114] The licensee should not be allowed to launch a validity challenge while continually enjoying the benefit of the licensing agreement. The implication would be that the patentee should be allowed to terminate the licensing agreement, at least when the licensee also ceases to pay royalty.[115] If termination-upon-challenge clauses are more likely to be upheld by the courts and are equally effective in deterring validity challenges, one may see them incorporated in licensing and settlement agreements more often, and they may end up featuring more prominently in antitrust cases.

B. The European Union

Unlike the U.S., the EU has dealt with no challenge clauses under competition law. Given the fact that patent law is still largely national law in the EU, relegating the treatment of no challenge clauses to patent law, like it has been done in the U.S., could result in a variety of approaches. A review of the EU approach to no challenge clauses entails an examination of both the case law of the European courts and the European Commission’s TTBER. On the whole, it is fair to say that both the European courts and the European Commission have taken a fairly hardline approach toward no challenge clauses, even though their approaches, especially that of the Commission, have evolved over time.

1. The European Courts

The European Court of Justice (ECJ), now renamed the Court of Justice of the European Union (CJEU), encountered no challenge clauses in Windsurfing International v. Commission.[116] In that case, the patentee imposed an express no challenge clause on its licensees, which the European Commission challenged as being incompatible with Article 101(1) (then Article 85(1)) of the TFEU. The ECJ condemned the clause in summary fashion, without an examination of competitive effects. Although the court stopped short of ruling that no challenge clauses restrict competition by object, it did hold that no challenge clauses infringe Article 101(1) because of the overriding public interest in removing invalid patents, without any regard to possible competitive effects.[117] The court further concluded that the clause did not benefit from the exemption under Article 101(3).[118] Using U.S. antitrust parlance, commentators have remarked that the ECJ in Windsurfing condemned the no challenge clause as illegal per se.[119]

The ECJ modified its position on no challenge clauses in a subsequent case, Bayer v. Süllhöfer.[120] The court began its discussion by rejecting the Commission’s two arguments. First, the court rejected the argument that no challenge clauses are, in principle, to be considered a restriction of competition under Article 101(1). Second, the court disagreed with the Commission’s argument that these clauses can be compatible with Article 101(1) if they are incorporated in a settlement agreement and some further conditions are met. The ECJ held that as far as no challenge clauses are concerned, it makes no difference whether they are in a licensing agreement or a settlement agreement.[121] Instead, the court held that one must take into account “the legal and economic context” in determining the legality of these clauses.[122] The court proceeded to enumerate two circumstances in which no challenge clauses would be permissible: (1) when the license that contains a no challenge clause is free, which means that the licensee does not suffer from the competitive disadvantage of royalty payment, and (2) “when the licence relates to a technically outdated process which the licensee undertaking did not use.”[123]

In the more recent Huawei Technologies v. ZTE Corp. case,[124] the CJEU had another opportunity to discuss the importance of the right of a licensee to challenge the validity of the licensed patent. In this case, Advocate General Wathelet stated in his opinion that:

[I]t is in the public interest for an alleged infringer to have the opportunity, after concluding a licensing agreement, to challenge the validity of an SEP (as ZTE did). As the Commission has pointed out, the wrongful issue of a patent may constitute an obstacle to the legitimate pursuit of an economic activity. Moreover, if undertakings supplying standard-compliant products and services cannot call into question the validity of a patent declared to be essential to that standard, it could prove effectively impossible to verify the validity of that patent because other undertakings would have no interest in bringing proceedings in that regard.[125]

This case has the added dimension of involving standard-essential patents (“SEPs”), which have more serious competitive implications because they tend to possess substantial market power. Echoing the U.S. Supreme Court’s observation in Lear, Advocate General Wathelet speculated that licensees may be the only party with the incentive to challenge the validity of a patent.[126] The CJEU agreed with Advocate General Wathelet, and stated in its judgment that:

[H]aving regard, first, to the fact that a standardisation body such as that which developed the standard at issue in the main proceedings does not check whether patents are valid or essential to the standard in which they are included during the standardisation procedure, and, secondly, to the right to effective judicial protection guaranteed by Article 47 of the Charter, an alleged infringer cannot be criticised either for challenging, in parallel to the negotiations relating to the grant of licences, the validity of those patents and/or the essential nature of those patents to the standard in which they are included and/or their actual use, or for reserving the right to do so in the future.[127]

Particularly noteworthy is the Court’s observation that standard setting organizations (“SSOs”) do not necessarily check the validity or essentiality of the patents seeking to be included in the standards.[128] In fact, most SSOs do not check the validity of the included patents.[129] Given the fact that standardization would give patents a great deal of market power, the harm of allowing an invalid SEP to persist is much greater than for a non-SEP.

2. The European Commission

The European Commission has had significant influence over the licensing practices of European patent holders. Patentees usually try to steer clear of what the Commission deems to be impermissible licensing practices to take advantage of the legal certainty provided by the TTBER.[130] The Commission’s view of no challenge clauses has evolved over time. In 2014, the European Commission issued the most recent set of TTBER.[131] In these regulations, the Commission revised its position on no challenge clauses, which continue to be an excluded restriction, meaning they will not automatically benefit from the block exemption and their compatibility with the Treaty will have to be individually assessed.[132] However, termination-upon-challenge clauses are now classified as an excluded restriction as well, which previously were not under the 2004 TTBER, except when incorporated in an exclusive license and the market share thresholds provided in Article 3 of the TTBER are met.[133] In the accompanying guidelines, the Commission asserted that no challenge clauses are likely to fall within Article 101(1) when the licensed technology is valuable, and therefore creates a competitive advantage for the licensees.[134] In such a case, a no challenge clause is unlikely to meet the conditions for Article 101(3).[135] This means that it would be outright illegal, which is reminiscent of the ECJ’s position in Windsurfing. Finally, the Commission incorporated the two exceptions provided by the ECJ in Bayer v. Süllhöfer.[136]

In the 2014 TTBER, the Commission made two major changes to its position on no challenge clauses. First, it took a slightly more cautious approach to no challenge clauses in settlement agreements.[137] After repeating its previous position that no challenge clauses in settlement agreements generally fall outside Article 101(1), it proceeded to caution that these clauses nonetheless could be anticompetitive under specific circumstances.[138] Second, the Commission included termination-upon-challenge clauses, except in exclusive licenses, as an excluded restriction. The Commission explained this change of position by saying that: “[s]uch a termination right can have the same effect as a non-challenge clause, in particular where switching away from the licensor’s technology would result in a significant loss to the licensee . . . or where the licensor’s technology is a necessary input for the licensee’s production.”[139] The key factor to consider is whether the loss of profit would act as a sufficient deterrent to challenges, which, according to the Commission, will need to be assessed on a case-by-case basis.[140]

C. China

1. Regulations and Draft Guidelines

Of the three jurisdictions surveyed in this article, China appears to take the strictest approach to no challenge clauses, as evidenced in the decisional practices of Chinese enforcement authorities. This may reflect a strategic concern that most of China remains a net importer of foreign technologies.[141] A more pro-licensee approach would stand to benefit Chinese companies. The three Chinese enforcement authorities, the NDRC, the SAIC, and the Ministry of Commerce,[142] are reportedly drafting the IP-Competition Guidelines under the auspices of the Anti-Monopoly Commission, which is an advisory body in the State Council overseeing and coordinating enforcement activity by the three authorities.[143] This article will make reference to the approach to no challenge clauses in the consultative drafts released by the NDRC and the SAIC. It will also refer to the Regulation on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights released by the SAIC in April 2015 (“the “SAIC Regulation”).[144] The SAIC Regulation also contains some discussion of no challenge clauses.[145] Lastly, and most importantly, in February 2015, the NDRC found that Qualcomm had abused its dominance through a variety of licensing practices, including imposing no challenge clauses on its licensees.[146] Qualcomm was fined RMB6 billion (approximately USD1 billion).[147] An examination of the decision will shed light on the prevailing Chinese approach to no challenge clauses.

Article 10 of the SAIC Regulation stipulates that a business operator with a dominant market position should not, without legitimate reasons, prohibit transaction counterparties from raising doubts about the validity of its intellectual property rights, thereby eliminating or restricting competition.[148] Although the article uses the phrase “raising doubts about”, it probably refers to launching a validity challenge. Otherwise, the language is so impermissibly broad that the SAIC could not have reasonably contemplated that interpretation.

A few distinctions are key to understanding Article 10. First, the provision refers to transactional counterparty and not licensee. Therefore, it probably has a broader reach than the EU TTBER, and could potentially cover buyers of products that incorporate the patented technology in addition to licensees. Second, the provision is worded in such a way that it seems to require a demonstration of a restriction of competition before a no challenge prohibition will be outlawed. If this is true, it appears that the SAIC has not adopted a per se approach to no challenge clauses, and may be more lenient with them than the European Commission. However, it is not clear how much importance should be attached to the language “elimination or restriction of competition”. There have been cases in the past in which the enforcement authorities’ guidelines indicated that the conduct at issue requires a showing of competitive effects, but the authorities did not make such a showing in their decisions. Third, the provision does provide for the possibility of justification by way of “legitimate reasons,” even though it stops short of defining these reasons. This may be further evidence that the SAIC does not adopt a per se approach. Finally, the provision refers only to a prohibition of challenges by transactional counterparties. At least on a literal interpretation, it does not seem to cover provisions such as termination-upon-challenge clauses or higher royalty-upon-challenge clauses that stop short of outright prohibiting challenges, but merely create hurdles for them. The seventh consultative draft of the IP-Competition Guidelines issued by the SAIC by and large repeats the same language as the SAIC Regulation regarding no challenge clauses.[149]

The NDRC draft IP-Competition Guidelines (“NDRC Guidelines”) provide more detail on no challenge clauses.[150] The first notable feature about these guidelines is that no challenge clauses are discussed under both the restrictive agreements section and the abuse of dominance section.[151] In the restrictive agreements section, the guidelines provide a relatively detailed discussion about these clauses. Article 2(1)(3) begins by acknowledging that no challenge clauses can serve the useful purposes of preventing excessive litigation and improving transactional efficiency.[152] The section then proceeds to assert that these clauses can also restrict competition, which is to be determined with reference to a number of factors, including: (1) whether the patentee imposes the no challenge clause on all licensees, (2) whether the underlying patent is being licensed for royalty and whether the patent may constitute entry barriers into the downstream market, (3) whether the underlying patent blocks the implementation of other competing patents, (4) whether the patentee obtained the patent by providing false or misleading information, and (5) whether the patentee compels the licensee to accept the no challenge clause through improper means.[153] In the abuse of dominance section, Article 3(2)(4) merely lists the prohibition of licensees from challenging the licensor’s patent as a prohibited unreasonable licensing condition, without any explanation of the relevant factors to be considered.[154] It is not entirely clear what explains the different treatment of no challenge clauses in the two sections. It may mean that if these clauses are treated as an abuse of dominance, the analytical process is simpler and there is no need to resort to the factors listed in Article 2(1)(3). Alternatively, it may simply mean that the factors listed in Article 2(1)(3) are tacitly incorporated in Article 3(2)(4). The latter explanation seems to make more sense, as there is no reason why different analytical factors are considered when no challenge clauses are treated as a restrictive agreement as opposed to an abuse of dominance.

2. The NDRC Qualcomm Decision

Apart from the SAIC Regulation and these draft guidelines, there has been one enforcement action that concerns no challenge clauses. In the NDRC’s decision against Qualcomm released in February 2015, one of the four claims raised by the NDRC is the imposition of unreasonable conditions on the sale of the baseband chips used in mobile communication terminals.[155] One of the unreasonable conditions is that Qualcomm will terminate the supply of chips if the licensee initiates litigation against it,[156] which the NDRC characterizes as a no challenge clause.[157] Because Qualcomm stopped short of outright prohibiting licensees from initiating litigation,[158] the provision was, at most, a challenge-penalty clause. However, the NDRC was convinced that cessation of supply was enough of a deterrent to Qualcomm’s customers, the terminal manufacturers, and thus, practically functioned as an outright prohibition.[159] Qualcomm admitted to the imposition of no-challenge clauses in the licensing agreements, but argued that its conduct was justified. The NDRC did not detail what the justifications were, but dismissed them as insufficient. According to the NDRC, it is within the licensee’s’ right to challenge patent validity or institute litigation with respect to the licensing agreements.[160] Qualcomm’s imposition of no-challenge clauses restricted, if not outright deprived, the licensees of this right. Moreover, the NDRC argued that competition was restricted when potential licensees that were unwilling to accept the no-challenge clauses were excluded from the market.[161]

The NDRC did not consider the competitive effects of no challenge clauses except by saying that licensees that are unwilling to accept the unreasonable licensing terms would be excluded from the market.[162] However, that would be tantamount to saying that any time Qualcomm turns away a potential licensee, there is restriction of competition. The NDRC’s alternative argument that no challenge clauses infringe upon the licensee’s right to challenge patent validity effectively means that these clauses are illegal on their face. It would therefore seem that the NDRC’s approach to no challenge clauses is stricter than that manifested in the SAIC Regulation and possibly in line with the approach taken in the 2014 TTBER.

III. Consumer Harm of No Challenge Clauses

In light of the differing approaches to no challenge clauses taken in these three jurisdictions, it is worth considering what the correct approach to these clauses should be. While the U.S. has largely regulated no challenge clauses under patent law, the EU and China have expressly subjected no challenge clauses to competition law. Nothing in U.S. antitrust law says that no challenge clauses are exempted from antitrust scrutiny. Nonetheless, as far as this author is aware, U.S. courts have not had the opportunity to rule on their legality under antitrust law. No challenge clauses also received no mention in the 1995 DOJ-FTC IP-Antitrust Guidelines.[163] There was brief mention of these clauses in the report issued by the DOJ and the FTC on IP-antitrust issues in 2007,[164] which states that “[i]nvalid patents impair competition, and as a matter of patent policy, challenges to their validity are encouraged.”[165] It is noteworthy that the report cited to Lear, Inc. v. Adkins and MedImmune Inc. v. Genentech, Inc., and not an antitrust case, as support for this statement. The report further refers to the Solicitor General’s brief in MedImmune for the observation that “public policy strongly favors ridding the economy of invalid patents, which impede efficient licensing, hinder competition, and undermine incentives for innovation.”[166] There is no allusion to consumer harm resulting from these clauses. Therefore, no challenge clauses are viewed through the lens of patent policy as opposed to antitrust policy. Meanwhile, the seemingly strict approach to no challenge clauses under EU and Chinese competition law would suggest that these two jurisdictions believe that these clauses can inflict considerable consumer harm that warrants the scrutiny of competition law.

Therefore, the first question to consider is whether no challenge clauses inflict harm on consumers. A short answer is that they do. Commentators have noted that no challenge clauses can create consumer harm under certain circumstances. Morris notes that “[t]he competitive harm associated with a no-challenge clause involves the risk that invalid intellectual property rights give their holders market power that is not justified by the policies underlying those rights. Such concentration of market power may lead to higher prices or lower output.”[167] Likewise, Orstavik observes that under a no challenge clause, a “licensee may be obliged to pay royalties when none are justified, or the agreement may contain other restrictions that continue to apply even if the original right is invalid, thus restricting competition. Because of the obligation to pay royalties, the no-challenge clause may contribute to an artificially high price level.”[168]

A. A Comparison with Reverse Payments

Reverse payments, in which the infringement plaintiff agrees to pay the defendant compensation, usually a very large sum of money, to settle the infringement suit, share important similarities with no challenge clauses. They both arise in the context of patent settlements (in no challenge clauses, also in licensing agreements), both entail the infringement defendant acknowledging the validity of the contested patent, and the legality of both practices hinge on patent validity. There are admittedly crucial differences between them, one of which being that, while reverse payments entail a large transfer from the infringement plaintiff to the infringement defendant, that need not be the case with no challenge clauses.[169] Therefore, if reverse payments have been roundly perceived to have serious anticompetitive potential—in fact, notable commentators have urged that they be held presumptively illegal[170]—no challenge clauses should at least deserve some antitrust scrutiny.

While acknowledging the similarities between reverse payments in pharmaceutical settlements[171] and licensing agreements, which may contain no challenge clauses, Miller and Gal justify their disparate treatment under antitrust law. They highlight a number of major differences between reverse payments and no challenge clauses that justify the hands-off approach of U.S. antitrust law to the latter. First, licensing agreements “are ongoing, they may further social welfare . . . , and they are generally based on the assumption that the patent is valid, at least when the contract is signed.”[172] Second, their effect on competition is different in that “[l]icensees already operate in the market, albeit with restrictions contained in their licences, so the anticompetitive harm stems from restricting the entry of third parties into the market. By contrast, in pay-for-delay agreements [reverse payments] the harm includes the prevention of entry of the potential patent challenger.”[173]

There are a number of problems with Miller and Gal’s arguments. First, it is not clear how distinct reverse payment agreements are from licensing agreements containing no challenge clauses. Both types of agreements are ongoing, and their legal obligations persist for the duration of the agreements. The difference is that reverse payment agreements involve ongoing inaction, where the obligation is to abstain from the market, whereas licensing agreements with no challenge clauses involve ongoing action. Here, the ongoing activity is the commercialization of the patented technology through licensing and the ongoing obligation is to refrain from mounting a validity challenge. Even if licensing agreements could be construed as more more ongoing in nature than reverse payment agreements, it is not clear what the relevance of that is to consumer harm, so long as the harm is continuous under both agreements.

Second, licensing agreements may further social welfare by encouraging the commercialization of technology, whereas the only conceivable social benefit of reverse payments is the minimization of litigation. However, the correct comparison with reverse payments are not licensing agreements, but no challenge clauses. No challenge clauses themselves do not promote the commercialization of technology (unless one argues that the patentee will not license the technology absent these clauses, which will be addressed subsequently). The only purpose they serve, like reverse payments, is the minimization of disputes over patent validity. Furthermore, even if we were to compare licensing agreements and reverse payments, licensing agreements are not immune to anticompetitive uses. The patentee may intentionally disguise reverse payments in the form of a reduced royalty by undercharging the licensee.[174] While this mechanism would most likely be less effective than a lump sum transfer from the patentee, it has the advantage of being more difficult to detect and police. In order to show that there is a reverse payment, the court would need to establish what the royalty would be without the disguised reverse payment, which would be very difficult.[175] In the aftermath of Actavis,[176] we are already witnessing reverse payment agreements that eschew lump sum transfers but instead resort to complicated licensing, co-marketing, or delayed entry arrangements.[177]

Third, while it may be true that licensing agreements are generally premised on the validity of the underlying patent, what matters is not whether the practice at issue is premised on patent validity, which only pertains to the subjective state of mind of the parties, but whether the legality of the practice turns on patent validity. That is the relevant issue as far as antitrust analysis is concerned. The legality of reverse payments would turn on the validity of the underlying patent. Reverse payments are only objectionable as a matter of antitrust law if the underlying patent is invalid.[178] If the patent was invalid, the patentee would be effectively splitting with the potential infringer the monopoly profit, which she does not deserve. The patentee and the potential infringer are both better off than if the potential infringer enters the market after invalidating the patent. Monopolist profit is always higher than the profit redounding to two competing duopolists.[179] Furthermore, invalidating the patent would expose the potential infringer to further entry by third parties. Meanwhile, if the patent were valid, the patentee would have no reason to pay the potential infringer anything, but would be free to split its monopoly profit as she sees fit. In this situation, the reverse payment may be irrational from the patentee’s perspective, but certainly would not be illegal. The patentee is entitled to exclude a potential infringer by exercising its patent right anyway. Similarly, no challenge clauses are only problematic if the underlying patent is invalid. By protecting an invalid patent, no challenge clauses augment the likelihood that invalid patents persist in the market and cause supra-competitive prices. If, however, the underlying patent were valid, the only consequence of no challenge clauses would be to eliminate needless litigation that would result in affirmation of patent validity anyway. This would be a socially beneficial outcome.

Lastly, Miller and Gal argue that reverse payment agreements exclude both the potential infringer and third parties, whereas licensing agreements with a no challenge clause only restrict the entry of third parties into the market.[180] Whether a licensing agreement with a no challenge clause truly excludes third parties depends on whether the underlying patent is perceived to be valid. If the patent is perceived to be valid, third parties are excluded from the market, to the extent that access to the patented technology is essential to market entry. However, what excludes the third parties is not the licensing agreement or the no challenge clause, but the patent—or the perception of the patent—itself. If the patentee does not quantitatively restrict the number of licensees, nothing stops a potential market entrant from reaching a licensing agreement with the patentee and entering the market. If, however, the patent is perceived to be weak, third party entries are restricted to the extent that a third party entrant does not have the economic incentive or the requisite knowledge to challenge the patent. This could be because the litigation costs are prohibitively high in relation to the potential gains from market entry, or the knowledge required to launch a successful challenge can only be gained through commercialization of the technology, which can only take place after a licensing agreement has been reached. Otherwise, third parties would be free to challenge the patent despite the no challenge clause. Meanwhile, a reverse payment agreement will exclude both the potential infringer and third party entrants, especially under the Hatch-Waxman Act.[181]

While it may seem that reverse payment agreements are more anticompetitive because they exclude more rivals, this need not be the case. For example, if the patentee does not produce the final product and only licenses the technology to a licensee on an exclusive basis, there will be only one firm selling products incorporating the patented technology in the market. This arrangement is akin to when a patentee enters into a reverse payment agreement with a potential infringer. In the former case, if the technology grants the patentee monopoly power due to a lack of reasonable substitutes, the monopoly profit will be split through the royalty mechanism. The patentee presumably will only extract part of the monopoly profit through royalty, leaving some monopoly profit to the exclusive licensee. In the latter case, the patentee shares the monopoly profit with the licensee directly through a lump sum payment. In both cases, there is only one producer in the market. Competitive harm is not confined to situations in which the patentee only grants an exclusive license. Even if the patentee grants multiple licenses, she can still maintain its monopoly profit through a variety of licensing practices such as territorial exclusivity, customer exclusivity, or a GE-style price fixing arrangement.[182] Therefore, the number of excluded rivals is a poor proxy for the amount of consumer harm resulting from a patent exploitation practice. What determines whether a particular patent exploitation practice should fall within the ambit of antitrust law should not be the number of excluded rivals, but the amount of possible consumer harm that may result from the practice.

In sum, attempts to distinguish reverse payments and no challenge clauses, and conclude that the latter should be beyond the purview of antitrust law, fail. No challenge clauses can cause consumer harm under certain circumstances. There is no strong justification for excluding no challenge clauses from antitrust scrutiny, as Miller and Gal have argued. One may then wonder why U.S. antitrust law has not addressed no challenge clauses, contrary to the situation in the EU and China. One possible explanation is that the various Courts of Appeals have generally taken a fairly hostile attitude toward no challenge clauses in licensing agreements, notwithstanding the more lenient approach of the Federal Circuit. The Second, Seventh, and Ninth Circuits have by and large held no challenge clauses to be unenforceable as a matter of patent law.[183] Given that the case law suggests that it is usually licensees that challenge the validity of no challenge clauses, it would be more straightforward for the licensee to seek to invalidate the clause under patent law than to attempt to challenge it under antitrust law. This is particularly the case given that the Rule of Reason, as opposed to the per se rule, most likely applies.[184] The relative attractiveness of patent law as an avenue for invalidating no challenge clauses probably explains the lack of case law under antitrust law.

B. Probabilistic Patents and Patent Validity

Having established that no challenge clauses should fall within the ambit of antitrust law, it remains to be determined exactly under what circumstances these clauses cause consumer harm A concept highly relevant to the determination of legality of no challenge clauses is the “probabilistic patent.” The idea is that unlike real property such as land, where there is much less uncertainty as to the boundary or even the existence of the property right, the validity and scope of a patent are often shrouded in uncertainty.[185] This uncertainty is underscored by statistics that show the failure rate of patentees in defending their patents. Allison and Lemley find that 46% of patents that were litigated to judgment were found to be invalid.[186] A later study found that patentees have their patents invalidated approximately 70% of the time.[187] In the specific context of litigation between generic manufacturers and branded manufacturers, it was found that the patentee loses 48% to 73% of the cases.[188] This is despite the fact that, under the Patent Act, a patentee is entitled to a presumption of validity and a challenger must show by clear and convincing evidence that the patent is invalid.[189] In fact, the success rate is even lower for patent assertion entities, otherwise known as “patent trolls.” According to one study, patent trolls win only 8% of the cases in which patent validity is litigated to judgment.[190]

A number of commentators have noted the probabilistic nature of patent rights. Pittman notes that “patent validity is an extremely slippery concept. Because the criteria regarding patent validity are so subjective, it is often unclear whether a patent is valid.”[191] To underscore the uncertain nature of patent rights, Carl Shapiro famously asserted that a patent does not confer the right to exclude, but only the right to try to exclude.[192] In fact, the U.S. Supreme Court itself expressed skepticism toward the the strength and prevalence of patents.[193]

There are a number of implications from the probabilistic nature of patents. First, a patent is a “bundle of uncertain and imperfect rights,”[194] which are “typically far less valuable than would be idealized ‘ironclad’ patent rights.”[195] This means that patent rights should be calibrated to reflect the probability that a patent will be held valid and infringed, which in turn depends on the scope of the patent.[196] Second, recall that whether no challenge clauses result in consumer harm crucially depends on whether the underlying patent is valid. If the patent is valid, all that a no challenge clause does is to eliminate needless litigation. If, however, the patent is invalid, a no challenge clause may help bolster an invalid patent and preserve the market power and monopoly profit that a patentee does not deserve. Therefore, it would seem that an assessment of the legality of no challenge clauses from an antitrust perspective would require a determination of patent validity. This would introduce a great deal of complexity to antitrust proceedings and would need to be addressed with care. Nevertheless, commentators have discussed the relevance of patent validity to legality under antitrust law at length in the context of reverse payment agreements.[197] Given the apparent similarity between no challenge clauses and reverse payment agreements, this discussion will shed light on how the issue of patent validity should be dealt with in the context of no challenge clauses.

C. No Challenge Clauses and Consumer Harm

1. Direct Consumer Harm

No challenge clauses, on their own, do not distort competition or inflict harm on consumers. Only when combined with the right to exclude of a patent and the various competition-distorting licensing practices permissible under patent law do no challenge clauses raise antitrust concerns. As mentioned earlier, if the underlying patent is valid, the patentee is entitled to the supra-competitive prices and the various licensing practices as permitted by patent law.[198] These may result in consumer harm, but this is part of the bargain struck under patent law to sacrifice short-run consumer welfare for long-run dynamic efficiency gains. Antitrust law should accept the implications of the bargain and not intervene. However, if the underlying patent is invalid, then the patentee does not deserve the supra-competitive prices and other profits that may result from the various licensing practices. This is where antitrust law should intervene.

Patent law gives a patentee the right to exclude, or at least the right to try to exclude. This right to exclude, however, need not result in higher prices for consumers if there are reasonable substitutes available in the relevant market. There was a time when the ownership of a patent created a presumption of market power.[199] But that presumption was overturned by the Supreme Court in Illinois Tool Works, Inc. v. Independent Ink, Inc. in 2006.[200] This decision stemmed from a realization that where there are reasonable substitutes in the market for the patented product, the patent will not wield market power, and the patentee will not be able to charge supra-competitive prices.[201] And without supra-competitive prices, the no challenge clause will not create consumer harm. Therefore, the patentee possessing market power is a prerequisite for antitrust intervention against no challenge clauses.[202]

The main problem with no challenge clauses is that they prevent licensees from challenging the validity of the patent. The preclusion of licensee challenge would not be of such grave concern if third party challenges were equally probable and likely to succeed. However, there are many reasons to think that licensees are often best positioned to mount a validity challenge, as the Supreme Court noted in Lear.[203] Not only do licensees, for myriad reasons, have greater economic incentives to mount a validity challenge, but they also enjoy an advantage in knowledge that increases the likelihood of success of their challenges.[204] First, licensees have more economic incentives than third parties because they are currently paying royalties; which can be avoided if the patent is invalidated. Second, third parties do not have as much incentive to enter the market as licensees because the market is already populated by the existing licensees. The market would be quite competitive by the time they enter, after invalidation of the patent. Third parties also do not have first mover advantage, which gives a competitor cost and marketing advantages over late comers to the market. In a market with homogeneous product and Bertrand competition, even a firm that is equally efficient as existing licensees would not enter the market.[205] Lastly, third party challengers would suffer from the free-rider problem. Each potential third party challenger would want to wait for someone else to shoulder the costs of challenge, because once a patent has been invalidated, it is invalid vis-à-vis all parties.[206] Of course, licensees may also suffer from the same problem. However, licensees have an advantage in overcoming the free-rider problem because they are aware of each other’s identity, and can organize more easily to share litigation costs. In contrast, potential third party challengers may not even be aware of each other and may have greater difficulty coordinating.

Licensees also have an informational advantage over potential third party challengers. They may have gained special knowledge about the patented technology through the license negotiation process,[207] and commercialization of the technology.[208] This is, in no small part, because the licensees will have physical possession of the patented invention, which significantly aids in their understanding of the technology.[209] Licensees will likely also have a good understanding of the prior art based on their experience with the industry in general, and will likely have dealt with similar technology or products in the past.[210] With respect to the specific requirements of patentability, “[a] licensee is likely able to understand, based on its own use, whether the invention falls within the broad scope of patentable subject matter and has a specific and substantial utility. The licensee’s use similarly provides a better understanding of whether the patent’s written description fully describes the invention and is sufficient to enable one to make and use it without undue experimentation.”[211] Therefore, licensees should be better positioned to furnish evidence to challenge patent validity.

If the underlying patent is invalid, no challenge clauses, by precluding licensee challenges, may artificially prolong the exclusion period of a patent, and compel consumers to pay supra-competitive prices for longer than necessary.[212] Therefore, to determine whether a no challenge clause has resulted in consumer harm, one needs to compare the “licensing exclusion period,”[213] that would obtain under the licensing agreement with a no challenge clause, with the “expected exclusion period”[214] that would materialize if the licensing agreement did not contain a no challenge clause.

Under normal circumstances, the licensing exclusion period would be at most the duration of the license, as most no challenge clauses last for the length of the license itself. However, it is possible for the no challenge clause to last longer than the length of the license. An example is the licensing agreement in Bendix Corp v. Balax Inc., which prohibited the licensee from ever challenging the validity of the patent, even after the agreement has lapsed.[215] In this case, the maximum licensing exclusion period would be the remainder of the patent term. The situation would be more complicated if the patentee has entered into a range of licensing agreements whose terms vary, or if the patentee, for some reason, has only imposed a no challenge clause on some licenses and not others. In this case, the licensing exclusion period will need to be weighted by the likelihood that a licensee not subject to a no challenge clause will bring a validity challenge. Licensees are not the only source of validity challenges. Unrelated third parties can also launch a validity challenge, which, if successful, will put an end to the patent term and hence the licensing exclusion period. This is likely the major source of uncertainty regarding the licensing exclusion period, as the main reason beyond the parties’ control that a license may end prematurely is a third party challenge to the patent. The exclusion period for a settlement agreement would similarly depend on the term of the agreement. If the settlement agreement is meant to remain in force in perpetuity, then the exclusion period would be again the remainder of the patent term plus taking into account third party challenges.

The “expected exclusion period” refers to the exclusion period that would be obtained absent a no challenge clause. Without a no challenge clause, there will be two sources of challenges: the licensees and unrelated third parties. The likelihood that these two groups will bring validity challenges will most likely be different, as explained above. In a world without licenses, the likelihood of a challenge would chiefly depend on the perceived validity of the patent and the resources at the disposal of the potential challengers. Once licensing agreements come into the picture, they affect the economic incentives of parties to bring challenges. When deciding whether to launch a validity challenge, a licensee will compare what she currently earns in the market as opposed to what she would earn in the post-challenge market. One main difference between the two markets is that the licensee would no longer need to pay royalties in the post-challenge market. The state of competition among the licensees may also differ due to current licensing restrictions imposed by the patentee, such as a GE-style price fixing arrangement, output restriction, or territorial exclusivity. Without a valid patent, these restrictions would most likely be illegal and dismantled.[216] A GE-style price fixing arrangement or output restriction would help to maintain supra-competitive prices, which benefit the licensees. Territorial exclusivity effectively creates regional monopolies and also benefit the licensees. Without these restrictions, a licensee would have access to the entire market, free from price, output or territorial restrictions imposed by the patentee. However, whether a licensee will stand to gain from such a situation depends on its comparative advantage vis-à-vis other licensees. If a licensee was a more efficient producer of the product due to cost advantages or superior production techniques, she would stand to capture market share from other licensees and would therefore benefit from the dismantling of the license restrictions. But if a licensee was a less efficient producer, she would be better off under the protection of license restrictions, which prevent its competitive disadvantage from being exposed by competitive pressure.

The most obvious difference between the pre-challenge market and the post-challenge market, regardless of the existence of license restrictions, is the entry of third parties. In the pre-challenge market, third parties would be deterred from entering the market to the extent that they are deterred by a perceivably valid patent, or the litigation costs or knowledge requirements of bringing a validity challenge. Once a licensee brings a validity challenge and prevails, the floodgates open for third parties to enter the market. Whether a licensee would achieve a net gain from the removal of the patent depends on its savings from the royalty payment and its competitive advantage vis-à-vis third party entrants. If the licensee was a more efficient producer than the third party entrants, she would worry less about them and would probably achieve a net gain from the removal of the patent. However, if a licensee was a less efficient producer than third party entrants, she would be better off under the existing license restrictions.

The next question is whether third parties would have the same incentives to challenge the patent with and without the no challenge clause. If they do, then the main difference between the licensing exclusion period and the expected exclusion period would be attributed to the licensees. One would think that the third parties’ incentive to challenge the patent would be the same with or without the no challenge clause. After all, the no challenge clause does not apply to them, it only affects the licensees. However, it is possible that the no challenge clause will have a signaling effect to potential third party challengers.[217] Such a challenger may think that if all these licensees are willing to accept a no challenge clause, it must mean that the licensees are fairly confident that the patent is valid. Otherwise, the licensees would not have agreed to pay royalty and give up their rights to challenge the validity of the patent. This would especially be the case if the licensees are perceived to be firms with intimate knowledge of the technology and would be in the best position to evaluate the validity of the patent. A third party challenger may be deterred from launching a challenge by the fact that a host of knowledgeable firms have willingly accepted a no challenge clause. The third party challenger may be right to put credence in the signaling effect of the licensees’ acceptance of the no challenge clause if the licensees have accepted the clause in good faith, after careful examination of the patent. If, however, it turns out that the no challenge clause is the result of a conspiracy between the patentee and the licensees, whereby the licensees would refrain from challenging a highly questionable patent and the patentee will split part of the monopoly profit with the licensees, then the no challenge clause will serve a plainly anticompetitive purpose. Unfortunately, third parties probably cannot distinguish the two situations. Therefore, whether or not the licensees accepted the no challenge clause on good faith, the mere existence of the no challenge clause would somewhat deter a potential third party challenger.

So far, we have only focused on the likelihood of challenges from various sources. A missing piece of the puzzle in determining the licensing exclusion period and the expected exclusion period is the probability that the patent will be upheld when challenged. Formally, the licensing exclusion period should equal the base exclusion period, here the full length of the licensing agreement (and if the no challenge clause prohibits the licensee from ever launching a challenge, it would be the remainder of the patent term),[218] adjusted by the expected invalidity factor, which in turn equals the probability that a third party challenge will be launched times the probability that the challenge will succeed. Let TLE stand for the licensing exclusion period, TL stand for the duration of the licensing agreement, θT stand for the probability of a third party challenge, and θIT stand for the probability that a third party challenge will succeed. The licensing exclusion period would be represented by:

TLE = (1- θT ∗θIT) TL

Likewise, the expected exclusion period needs to take into account the probability that the patent will be held invalid. Formally, the expected exclusion period should equal the duration of the licensing agreement reduced by the expected invalidity factor. This is calculated by multiplying the probability of a third party challenge by the probability that the challenge will succeed, plus the probability of a licensee challenge multiplied by the probability that the challenge will succeed. For reasons discussed previously, licensee challenges may be systematically more likely to succeed than third party challenges,[219] Thus it is important to distinguish them. The base exclusion period in this instance is also the duration of the licensing agreement, and not the full patent term, unless the licensing agreement, or the settlement agreement, lasts for the full term of the patent.[220] Let TEE stand for the expected exclusion period, θL stand for the probability of a licensee challenge, and θIL stand for the probability of success for a licensee challenge. The expected exclusion period is represented by:

TEE = [1- (θT∗θIT + θL∗θIL)] TL

The comparison will be slightly different if the no challenge clause is unenforceable in a particular jurisdiction, as in some of the circuits in the U.S.[221] If the no challenge clause is unenforceable, the licensing exclusion period and the expected exclusion period should in theory be the same, as the licensees are free to challenge patent validity. It would then seem that the no challenge clause inflicts no consumer harm. This would be true if the licensees truly deem themselves not bound by the no challenge clause.[222] It is possible, however, that despite the unenforceability of the no challenge clause, the licensees voluntarily agree not to challenge the validity of the patent, perhaps because the licensees have been offered preferential licensing terms in exchange for a promise not to challenge. In that case, the licensing exclusion period would be the same as if the no challenge clause were binding and enforceable. This would amount to a non-binding agreement by the licensees not to challenge a patent, probably in exchange for some benefit.[223] This possibility has been recognized by commentators. Miller and Gal note that “no-contest clauses may provide a method for parties to cartelize the market based on a patent that was wrongly granted.”[224] Hovenkamp, Janis, and Lemley remark that “[t]here is some risk that a patentee may seek to insulate its patent from antitrust challenge by co-opting the most likely challengers with licenses. Where co-option is a problem, the antitrust risks of a settlement are greater than where other potential defendants are likely to challenge the validity of a patent.”[225]

Where a no challenge clause is unenforceable, an agreement by the licensees to refrain from challenging the patent would be strongly indicative of a conspiracy between the patentee and the licensees to protect a questionable patent and split the monopoly profit between them, as in the case of illegal reverse payments. One may surmise that the licensees must be generously compensated in order to forego a right that they cannot bargain away under patent law. In addition, one might question why the patentee is willing to offer such generous compensation but for the fact that the patent is of highly questionable validity. The degree of consumer harm inflicted by such a conspiracy, however, would be the same as under an enforceable no challenge clause, because consumer harm is determined by the market power of the patent.[226] Regardless of the enforceability of the no challenge clause, where an agreement not to challenge patent validity exists between the patentee and the licensees, the circumstances under which such a clause would create consumer harm and the degree of consumer harm would be the same. The same analysis applies, but there would be serious reasons to question the validity of the patent.

Based on the foregoing discussion, the following factors should be considered when analyzing whether a no challenge clause results in consumer harm: (1) market power conferred by the patent, (2) the probability of a licensee challenge, which will depend on the licensee’s net gain from bringing a challenge, which in turn depends on the market structure, the licensee’s comparative advantage, the existence of further licensing restrictions, and third party entrants’ comparative advantage, (3) the probability of success for a licensee challenge, (4) the probability of a third party challenge, which may be lowered by the signaling effect of a no challenge clause, and (5) the probability of success for a third party challenge. The probability of a third party challenge and its likelihood of success will be formulated as an affirmative defense in the proposed framework in this Article and will be discussed in Section VI.A. The other three factors will be examined in detail in next Section. If the variables in the two expressions above can be accurately calculated, then a direct comparison between the licensing exclusion period and the expected exclusion period can be made. Otherwise, a qualitative assessment of the various variables will be needed.

2. Impairment of Innovation Incentives

Before moving to a more detailed examination of each of these factors, it is important to discuss some theories of harm that are premised on the impact of no challenge clauses on blocking patents and cumulative innovation. Recall that in the NDRC Guidelines, one of the factors to be considered is whether the underlying patent blocks the implementation of competing patents.[227] Presumably the concern is that if the underlying patent blocks another patent, and the underlying patent is protected by a no challenge clause, exploitation of the blocked patent will be retarded. Obviously if the underlying patent were invalid, then the impediment of the exploitation of the blocked patent would be socially wasteful. However, unless the owner of the blocked patent is itself subject to a no challenge clause, nothing prevents the owner from bringing a validity challenge. If the blocking patent is invalid, the block will be removed. If the underlying patent is found to be valid, then the block stems from the right to exclude of the underlying patent, and not the no challenge clause. The owner of the blocked patent would need to negotiate for a license from the owner of the original patent. If the owner of the blocked patent turns out to be an existing licensee subject to a no challenge clause, one would have expected the licensee to have negotiated for a cross license when entering into the initial licensing agreement. The only scenario in which no challenge clauses would hinder the implementation of a blocked patent is if the licensee subject to a no challenge clause only came up with the technology covered by the blocked patent after entering into the licensing agreement. The no challenge clause would be particularly damaging if the existence of this blocked patent increases the licensee’s incentive to challenge the patent, either because the invention process gave him or her new information about the patentability of the blocking patent, or the potential to commercialize the blocked patent provides new financial incentives to bring challenges.

The same argument can be made about cumulative innovation. If a cumulative innovation is premised on the underlying patent and cannot be used without a license to the patent, one may be tempted to think that exploitation of the cumulative innovation is retarded when the patent is protected by a no challenge clause. Again, the answer to this argument is that so long as the developer of the cumulative innovation is free to challenge the patent, the no challenge clause should not have any restrictive effect on cumulative innovation. However, that may not always be the case. It is entirely possible, and in fact likely, that the cumulative innovation comes from one of the licensees that developed the improvement during the process of commercialization of the patented technology. However, given that existing licensees already have a license to the patented technology, the innovating licensee should face no obstacles in making use of its improvement (even though the patentee will probably request a license for the improvement), unless the existing license has restricted uses. Therefore, in general, implementation of the cumulative innovation should not be hindered by the existence of a no challenge clause.[228]

D. Factors to Consider When Assessing Consumer Harm

This section examines four factors in determining the likelihood of consumer harm of no challenge clauses. The first factor is what constitutes a no challenge clause for the purpose of antitrust; that is, whether the myriad variations of no challenge clauses should be treated the same in the eyes of antitrust, and whether the kind of agreement which contains the clause alters the analysis. After defining the proper object of analysis, this section moves on to the second factor, market power, which is a prerequisite for consumer harm. A no challenge clause that applies to a patent with no market power will not cause consumer harm. This section then examines the factor of patent validity. A no challenge clause will not cause consumer harm if the underlying patent is valid. Lastly, this section analyzes the factor of market structure. Market structure creates different incentives for the licensees to challenge or not to challenge the patent. Licensee incentives matter for two reasons. First, they serve as a proxy for patent validity. A patentee that is unsure about a patent may want to offer the licensees more incentives not to challenge. Second, they tell us how much harm is being done by the no challenge clause; that is,how many potential challenges are being blocked.[229] If no challenge would be forthcoming from the licensees anyway, the no challenge clause would be relatively harmless.

1. Types of Agreements

The first question to consider is whether the analysis should differ based on the type of agreement at issue, be it licensing or settlement, and on the kind of clause at issue, whether it is an outright prohibition, termination-upon-challenge, or other kinds of challenge-penalty clauses.

A number of commentators have correctly observed that there should be no difference between a licensing agreement and a settlement agreement as far as antitrust analysis is concerned.[230] Shapiro observes that “a wide range of commercial arrangements involving intellectual property can be regarded as settlements of intellectual property disputes, either literally or effectively. Virtually every patent license can be viewed as a settlement of a patent dispute: the royalty rate presumably reflects the two parties’ strengths and weaknesses in patent litigation in conjunction with the licensee’s ability to invent around the patent.”[231] While a settlement agreement that is reached after litigation has commenced is clearly consummated in the shadow of ultimate judicial findings on patent validity and infringement, a settlement agreement that is entered into after a dispute has arisen but before litigation has begun likewise falls within the same shadow, albeit a slightly longer one. As Shapiro further notes, “both types of settlements raise the same antitrust issues.”[232]

There is no qualitative difference between a pre-litigation settlement agreement and a licensing agreement, especially one that incorporates a no challenge clause, which suggests that patent validity was within the parties’ contemplation and represents an implicit concession of validity on the part of the licensee. The Supreme Court has held in FTC v. Actavis, 570 U.S. 756 (2013), that settlement agreements are not immunized from antitrust scrutiny.[233] Recall that the Rates Technology court noted that if no challenge clauses in pre-litigation agreements were enforceable, parties could easily circumvent the ban on no challenge clauses in licensing agreements through creative drafting.[234] This is a tacit acknowledgement that the line between pre-litigation settlement agreements and licensing agreements is very thin, if not non-existent.

What about the distinction drawn by some courts concerning the enforceability of no challenge clauses in a settlement agreement that depends on whether discovery on patent merit has taken place? The argument made by those courts is that after discovery on patent merit, the parties have the ability to make a well-informed decision.[235] Presumably, the settling party would not accept a no challenge clause in the settlement agreement if it has grounds to doubt the validity of the patent. If the issue is enforceability of the clause, this argument should carry great weight. However, if the issue is whether the clause is anticompetitive, whether the parties entered into the agreement with full information should not be dispositive. There remains the possibility that the parties have entered into a conspiracy to split the monopoly profit despite both having serious doubts about the validity of the patent, and such an agreement can be anticompetitive even in the absence of a reverse payment.[236] The most that the courts could infer from a post-discovery settlement agreement is that there is a greater probability that the patent is valid.

Whether various kinds of no challenge clauses should be treated differently depends on whether the clause at issue creates a sufficient deterrent to the licensee to mount a challenge. This is because the effectiveness of a no challenge clause is determined by the deterrent effect it creates. Recall that even an outright prohibition in the agreement will only result in damages for breach of contract unless the court enforces it with an injunction.[237] Therefore, most of these clauses ultimately operate on financial incentives, and only differ in degree. That is certainly true of the challenge-penalty clauses. For example, the liquidated damages clause in Rates Technology probably provided a powerful deterrent to challenge even though it stopped short of being an outright prohibition.[238] Meanwhile, if the challenge penalty is insubstantial, the deterrent effect will be smaller, and the courts may not want to analyze the clause as an outright prohibition.

The controversy regarding the enforceability of termination-upon-challenge clauses notwithstanding, the practical consequence of termination of a licensing agreement is likely to be coercive enough on a licensee that it functions as an outright prohibition. So long as the licensee has made a substantial investment to commercialize the technology, and has not recouped its investment, the licensee is unlikely to be willing to cease production, which it would be required to do upon termination of the agreement. If the licensee has already recouped its investment and the fixed costs of production are not high, the licensee may be willing to cease production, but probably not for a long period of time. Given that a patent infringement suit can easily last for years, cessation of production is unlikely to be a viable option for most licensees. The alternative would be to keep producing and risk an infringement suit should the patent prove to be valid. If the damages are substantial enough—as they will be if willful infringement is proved—the licensee would only launch a validity challenge if she is highly confident of invalidity.

While it is possible to offer some predictions about the potential coercive effect of some of these challenge-penalty clauses and termination-upon-challenge clauses, in the end, whether a certain clause amounts to an outright no challenge clause will require a case-by-case analysis. This will be the first step in the analysis by a court facing these clauses.

2. Market Power

As explained previously, no challenge clauses will only harm consumers if they allow the owner of an invalid patent to continue to charge supra-competitive prices at the expense of consumers. A patentee will only be able to charge supra-competitive prices if the patent confers market power, which requires there to be few or no reasonable substitutes for the patented product. While determining whether a patent confers market power requires case-by-case analysis, a distinction can be made based on the correspondence between the scope of the patent and product boundary. Patent and antitrust law has long proceeded on the assumption that one patent results in one product, and hence there is a one-on-one correspondence between patent and product boundary.[239] While that may be true in the pharmaceutical industry, where the final drug product may only incorporate one patent, this is certainly not true in other sectors such as information technology, where products often incorporate hundreds, if not thousands, of patents.[240] The market power analysis will need to be conducted differently in these two scenarios. In the latter case, even if there were no reasonable substitutes for the final product, the market power of that product could not be facilely attributed to a single patent at issue in a case.

In fact, Sidak has gone one step further and argued that no challenge clauses applicable to standard-essential patents (“SEPS”) in a patent portfolio are never anticompetitive. This is because the presence of a handful of invalid patents in the portfolio will be inconsequential, and no challenge clauses in such a situation only serve to reduce transaction costs and deter opportunistic behavior by licensees.[241] According to Sidak, the socially optimal number of invalid patents in a portfolio of SEPs is not zero.[242] When the patentee and a licensee negotiate for a license to a portfolio of SEPs, both parties are aware that some of the patents in the portfolio, which may number in the hundreds or the thousands, may be invalid.[243] Parties do not invest the time or the resources to verify the validity of each patent in the portfolio because that would be too costly from a transaction cost perspective.[244] Instead, the parties will assess the value of the portfolio as a whole.[245] The final royalty will reflect the fact that some of the patents may be invalid.[246] Given that the existence of a handful of invalid patents may not make much of a difference to the overall market power of the portfolio,[247] a no challenge clause will not artificially protect the market power of the patentee, and there will be no consumer harm. Meanwhile, allowing licensees to challenge the validity of the patents in the portfolio will give rise to opportunistic behavior:

After extensive negotiations, the licensee signs the portfolio license agreement but nonetheless challenges the validity of a few licensed SEPs and refuses to pay the agreed-upon portfolio royalty until the court decides the validity of the challenged SEPs. After the court decides the validity of the few disputed SEPs, the licensee challenges the validity of another handful of licensed SEPs and postpones even further its payment of the portfolio royalty. Suppose the licensee repeats this process again and again. That course of action would allow the licensee to postpone its portfolio royalty payments indefinitely and deprive the SEP holder of fair and timely compensation for its innovative contribution.[248]

If this strategy succeeds, the patentee will be denied the royalty it is due. This would impair patentees’ innovation incentives in the future, which would be especially damaging for cash-strapped patentees. Therefore, according to Sidak, no challenge clauses in the context of SEP portfolios do not create consumer harm and instead serve the useful purpose of preventing opportunistic behavior.[249] Thus no challenge clauses should be per se legal in the context of SEP portfolios.[250]

There are two key problems in Sidak’s arguments. First, in asserting that having a handful of invalid patents is unproblematic, he implicitly assumes that the patents in the portfolio are equally important or valuable, which may not be the case. It is entirely possible for a patent portfolio to be built upon a handful of key patents, and a large number of patents that are either dispensable or can be invented around with relative ease. In such a case, the validity of the key patents would be of central importance to the continual market power of the portfolio. If it turns out that these patents are invalid, the licensees may decide to revoke the license and invent around the remainder of the patents or seek alternatives. Therefore, a categorical statement that having a handful of invalid patents in a portfolio is inconsequential is inaccurate.

Second, Sidak’s depiction of the opportunistic behavior by licensees assumes that a licensee can stop paying royalty upon launching a validity challenge. Under existing U.S. case law, it is not at all clear that licensees can stop paying royalties while maintaining the licensing agreement. In MedImmune Inc. v. Genentech, Inc., the Supreme Court explained that in Lear, “we rejected the argument that a repudiating licensee must comply with its contract and pay royalties until its claim is vindicated in court. We express no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent’s validity”.[251] In other words, if a licensee repudiates the licensing agreement, she is free to stop paying a royalty, but she will lose the benefit of the agreement if the patent turns out to be valid. If the licensee continues to use the patent during the litigation, the patentee will be able to sue the licensee for infringement and claim damages, including possibly trebled damages. If the patentee chooses not to terminate the agreement upon the cessation of royalty payment, the patentee will be entitled to recover all the royalty accrued during litigation.

This interpretation of Lear is echoed by the Federal Circuit in Cordis Corp. v. Medtronic, Inc., in which the court interpreted Lear as saying that while a licensee is free to stop paying royalty during the pendency of a validity challenge, the licensee is not free from facing the consequences of a cessation of payment.[252] If a licensee wishes to continue to invoke the protection of its licensing agreement, she should be required to continue paying royalty to the patentee. If the licensee stops royalty payment, she runs the risk of a breach of contract and liability for damages. Given the importance of these SEP portfolios, it is improbable that the licensee will repudiate the licensing agreement upon challenging the validity of a handful patents in order to save on royalty. The licensee will still need access to the remainder of the patents in the portfolio. Many of the cases in which the courts dealt with the issue of licensor rights and licensee obligations during a validity challenge concerned only a single or a handful of patents.[253] It would be highly unlikely for the courts to hold that a licensee can suspend royalty payment for an entire portfolio of hundreds or thousands of patents simply because she is challenging the validity of a handful of patents. This would be doubly so if the courts observe a pattern of repeated challenges over time with the goal of delaying royalty payment.[254]

While a rule of per se legality for no challenge clauses in the context of an SEP portfolio is unwarranted, it remains true that a patent, or a handful of patents, in a portfolio is less likely to wield market power than an entire portfolio of patents. Whether that is indeed the case will need to be determined on a case-by-case basis. Therefore, when facing a no challenge clause applicable to a patent portfolio, the court should first determine whether the portfolio as a whole wields market power. If it does, the court should next examine whether there is a considerable number of patents in the portfolio that are equally important or whether only a handful of patents are important. If the former is the case, then it is unlikely that the no challenge clause will contribute to artificially maintaining the market power of the portfolio, unless the licensee can prove that most of these important pate