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Misuse of patent law to address misuse of patents

January 2018  |  SPECIAL REPORT: INTELLECTUAL PROPERTY

Financier Worldwide Magazine

January 2018 Issue


There has long been a perceived tension between patent rights and antitrust or competition law, although when applied properly, the two should work in harmony. As noted in a footnote to the 1983 Federal Circuit Court of Appeals decision in Carl Schck A.G. v Nortron Corporation: “The patent right is but a right to exclude others, the very definition of ‘property’. That the property right represented by a patent, like other property rights, may be used in a scheme violative of antitrust laws creates no ‘conflict’ between laws establishing any of those property rights and the antitrust laws... A valid patent gives the public what it did not earlier have.”

For a period from the 1930s until the 1970s there was, however, a tendency within the courts to treat patents with suspicion and as tools to suppress competition, such that it was common for antitrust suits to be brought with respect to assertion of patent rights and in 1948 Justice Jackson in Jungerson v. Ostby and Barton Co. said “the only patent that is valid is one which this (the Supreme) Court has not yet been able to get its hands on”. After Milton Friedman and other economists from the University of Chicago arguing for reduced regulation of markets started to mop up Nobel prizes in economics, however, the climate changed and antitrust suits became less common and upholding the validity of patents more common. This has, in turn, led to problems when patents have been used in a manner that has been regarded as ‘improper’, to a large extent as a result of the emergence of the ‘patent troll’ phenomenon after the dotcom collapse. Largely, it could be argued that we have failed to learn from the past and that rather than addressing the problem of misused patents, we have undermined the patent system itself by limiting the protection afforded by patents generally, rather than by addressing specific instances of improper conduct under antitrust laws or by the application of the patent misuse doctrine.

During the 1990s, particularly during the ‘dotcom boom’, we started to see an increasing number of patent applications filed for non-traditional inventions and after the Court of Appeals for the Federal Circuit upheld Signature Financial’s patent on a method of cost allocation between investment funds in State Street Bank v. Signature Financial, a large increase in the number of patents for business methods and financial instruments. The problem was exacerbated by the fact that Patent Office examination of many patents granted during the dotcom boom had been made at a time when the Patent Office had only limited experience with this type of invention. Then, in 2001, came the dotcom bust and patents that had originally been obtained by companies that had hoped to commercialise them became part of the assets acquired by trustees in bankruptcy of failed dotcom companies and were ultimately acquired by companies which were simply looking for ways to profit from the assets they had acquired. In this way, patents, which had traditionally been looked on primarily to protect the inventor’s investment in developing the invention, became swords to be used to derive revenue from others. Although perfectly logical, this change generated a public backlash with the acquirers of the patents being dubbed ‘patent trolls’.

Techniques for revenue generation by the new owners led to increased numbers of lawsuits. The first reaction to this came in the Supreme Court’s decision in E-Bay v. MercTech that a patent owner had no automatic right to an injunction when patent infringement had been found, but that the rules of equity had to be applied, making it harder for a patent owner that did not itself use the patented invention to obtain an injunction. Although reversing a long-term assumption that because the purpose of patent protection was to exclude others from using the patented invention and that equity would normally only come into play where there might be harm to the public by granting an injunction, this decision did at least require that the particular circumstances of the case be considered before denying an injunction.

Subsequent decisions of the Supreme Court applied a broader brush to change patent law. In 2010, in Bilski v. Kappos, the Court declined to hold that there could never be patent protection for business methods but held that one had to be very careful not to allow patents for purely abstract ideas. Unfortunately, the Court gave no real guidance as to what it thought constituted an ‘abstract idea’. In spring 2012, in the case of Mayo Clinic v. Prometheus, the Court, in attempting to limit patent protection so that patents do not cover routine applications of the laws of nature, held that certain diagnostic methods were not patentable. The following year, in Molecular Pathology v. Myriad Genetics Inc., it was held that isolated DNA having the same structure as natural DNA (which was being used in tests to evaluate possible pre-disposition to breast and ovarian cancers) was not patent eligible, thereby causing concern in the biotechnology industry and in 2014, in Alice v. CLS Bank, the Court expanded on its decision in Bilski to tighten the requirements for certain types of software-related inventions.

There is a general perception that these decisions have significantly weakened patent law. On the other hand, many have welcomed their effect. The Bilski and Alice decisions are seen by many as ways of combatting patent trolls since many of the patents they seek to enforce are seen as inventions on abstract ideas. The Mayo and Myriad decisions are seen as ways of reducing what were seen by many as excessive profits being made by the patent-owners and so a cause of high healthcare costs.

The effects of these decisions has, however, been to deprive large swathes of the economy of the benefits of patent protection, even if their sole intention had been to use patents in the traditional manner to protect their own investment. As a result we have seen reduced investment in the sectors affected, with probable long-term negative effects on the economy as a whole.

If there were legitimate concerns about the ways in which patents were being used, there were alternative ways of addressing these concerns.

The doctrine of patent misuse derives not from statute, but from the old equitable doctrine that one who seeks an equitable remedy, for example an injunction, must have ‘clean hands’. It has, however, always been clear that the unclean hands in question must relate to actions in which one seeks to use a patent to secure more than the patent was intended to give. Misuse of a patent makes it unenforceable.

Although the doctrine of patent misuse has traditionally been confined in its application to attempts to extend or obtain a monopoly going beyond the terms of a patent by way of restrictions or requirements in licensing agreements, it is submitted that the policy underlying the doctrine is broader than this and should be applicable more generally where a patent is used to obtain an unjustified advantage, going beyond the reasonable reward that is to be expected from introduction of new inventions. Arguably, the Court of Appeals for the Federal Circuit missed an opportunity to adapt this doctrine to deal with the issues raised above in its decision in Primco Corporation v. International Trade Commission when, reversing a decision of the International Trade Commission, it held that there was no patent misuse in a case where Phillips and Sony formed a pool requiring potential licensees to take a licence of the patents of both companies as a package. Primco argued that this was a misuse of the patents since it required manufacturers to take licences under patents that they had not wanted to licence and so in effect gave the patent owners more that the patent was intended to give. The Federal Circuit, however, disagreed and rather than broadening the possible application of the patent misuse doctrine in a way that might have avoided the need for limiting patent rights in general and focusing on the acts of specific patent owners, narrowed the application of the doctrine to situations in which the actions complained of would have the effect of increasing the physical or temporal scope of the patent in suit, which was not the case here.

We are therefore left with the prospect that at some point an attempt will be made to remedy the damage done by the Supreme Court’s decisions in Bilski, Mayo, Myriad and Alice. Current thinking is to try to amend the definition of the type of inventions that are eligible for patent protection. However, experience in Europe and Japan shows that when this is done, the courts may still have to ‘bend’ the language of the statute to provide industry with an incentive to promote the useful arts and it is submitted that it may be better to extend the situations in which the acts of the alleged abusers can be considered patent misuse, rather than to try to define what is or is not patent eligible in an era when the rate of development of technology makes it difficult to predict what may come next.

 

John Richards is of counsel at Ladas & Parry LLP. He can be contacted on +1 (212) 708 1915 or by email: jrichards@ladas.com.

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