Congress Should Proceed Cautiously in Weighing Proposed Patent Reforms

Patent reform legislation is under serious consideration by the Senate and House of Representatives, a mere four years after the America Invents Act of 2011 (AIA) brought about a major overhaul of United States patent law.  A primary goal of current legislative efforts is the reining in of “patent trolls” (also called “patent assertion entities”), that is, firms that purchase others’ patents for the sole purpose of threatening third parties with costly lawsuits if they fail to pay high patent license fees.  A related concern is that many patents acquired by trolls are “poor quality,” and that parties approached by trolls too often are induced to “pay up” without regard to the underlying merits of the matter.

In a Heritage Foundation paper released today, John Malcolm and I briefly review developments since the AIA’s enactment, comment on the patent troll issue, and provide our perspective on certain categories of patent law changes now being contemplated.

Addressing recent developments, we note that the Supreme Court of the United States has issued a number of major decisions over the past decade (five in its 2013–2014 term alone) that are aimed at tightening the qualifications for obtaining patents and enhancing incentives to bring legitimate challenges to questionable patents.  Although there is no single judicial silver bullet, there is good reason to believe that, taken as a whole, these decisions will significantly enhance efforts to improve patent quality and to weed out bad patents and frivolous lawsuits.

With respect to patent trolls, we explain that there can be good patent assertion entities that seek licensing agreements and file claims to enforce legitimate patents and bad patent assertion entities that purchase broad and vague patents and make absurd demands to extort license payments or settlements.  The proper way to address patent trolls, therefore, is by using the same means and methods that would likely work against ambulance chasers or other bad actors who exist in other areas of the law, such as medical malpractice, securities fraud, and product liability—individuals who gin up or grossly exaggerate alleged injuries and then make unreasonable demands to extort settlements up to and including filing frivolous lawsuits.

We emphasize that Congress should exercise caution in addressing patent litigation reforms.  Despite its imperfections, the U.S. patent law system unquestionably has been associated with spectacular innovation in a wide variety of fields, ranging from smartphones to pharmaceuticals.  Thus, in deciding what statutory fixes are appropriate to rein in patent litigation abuses, Congress should seek to minimize the risk that changes in the law will have the unintended consequence of weakening patent rights, thereby undermining American innovation.

We then turn to assess proposals dealing with heightened patent pleading requirements; greater patent transparency; case management and discovery limits; stays of suits against customers; the award of attorneys’ fees and costs to the prevailing party; joinder of third parties; reining in abusive demand letters; post-grant administrative patent review reforms; and minor miscellaneous reforms.  We conclude that many of these reforms appear to have significant merit and could prove useful in reducing the costs of the patent litigation system. Nevertheless, there is a serious concern that certain reform proposals would make it more difficult for holders of legitimate patents to vindicate their rights. In addition, as is the case with all new legislation, there is the risk that novel legislative language might have unintended consequences, including the effects of future court decisions construing the newly-adopted language.

Accordingly, before deciding to take action, we believe that Congress should weigh the particular merits of individual reform proposals carefully and meticulously, taking into account their possible harmful effects as well as their intended benefits.  Precipitous, unreflective action on legislation is unwarranted, and caution should be the byword, especially since the effects of 2011 legislative changes and recent Supreme Court decisions have not yet been fully absorbed. Taking time is key to avoiding the serious and costly errors that too often are the fruit of omnibus legislative efforts.

In sum, careful, sober, detailed assessment is warranted to ensure that further large-scale changes in U.S. patent law advance the goal of improving the U.S. patent system as a whole, with due attention to the rights of inventors and the socially beneficial innovations that they generate.

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Predatory Pricing Reform Rides the Marrakech Express

 

As I noted yesterday, last week the 13th Annual Conference of the International Competition Network (ICN) released two new sets of recommended best practices.  Having focused on competition assessment in my prior blog, I now turn to the predatory pricing recommendations. 

Aggressive price cutting is the essence of competitive behavior, and the excessive application of antitrust enforcement threatens to deny consumers the benefits of lower prices and to the extent it chills such discounting.  That is why the U.S. Supreme Court’s Brooke Group decision, which limited predatory pricing    

As then FTC Chairman Tim Muris observed in 2003, in highlighting the importance of combating government-imposed competitive restraints, “[a]ttempting to protect competition by focusing solely on private restraints is like trying to stop the flow of water at a fork in a stream by blocking only one of the channels.  Unless you block both channels, you are not likely to even slow, much less stop, the flow. Eventually, all the water will flow toward the unblocked channel.”  Indeed, anticompetitive government regulations that restrict entry, protect state-sponsored firms, and otherwise dampen the competitive process are legion, and widely viewed as imposing far greater harm to consumer welfare than the purely private restraints traditionally condemned by antitrust.  Because they operate openly and are backed by the enforcement power of government, public restraints, unlike private restraints, cannot be undermined by market forces, and thus are far more likely to have sweeping and harmful long-term effects. 

The FTC and other competition agencies have employed “competition advocacy” to argue against particular anticompetitive government restrictions, but those efforts historically have been limited in number, scope, and effectiveness.  Despite the huge potential welfare benefits from lifting anticompetitive restrictions, those restraints typically are the fruits of successful lobbying by private beneficiaries of competitive distortions, or by “public interest” groups which trust rule by government fiat over market forces.  Moreover, consumers at large are generally ill-informed about regulatory harms and the costs to organize them in favor of reform efforts are prohibitive.

Recently, however, international organizations, including the Organization for Economic Cooperation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD), and the World Bank, have stepped forward to highlight the costs of public sector regulatory restraints and to help competition agencies spot and advocate against different sorts of restrictions.  Building on these initiatives (and in particular the OECD’s Competition Assessment Toolkit), the ICN’s Advocacy Working Group drafted Recommended Practices on Competition Assessment (RPCA) that the ICN adopted and released as a new consensus product in Marrakech.

The RPCA apply broadly to proposed and existing legislation, regulations, and policies that may restrict competition.  Recognizing that government competition agencies differ greatly in their capacities and ability to influence other government bodies, the RPCA note that competition assessments can take many forms, ranging from recommendations drawn from application of general economic theory to resource-intensive competition impact assessments, with many variations in between.  The RPCA stress that they are intended to provide guidance, not require particular assessments, and that government entities other than competition agencies can carry out valuable assessment work. 

The RPCA provide a comprehensive “soup to nuts” template for agencies tasked with assessments, comprising both process-related and substantive elements:

  • A competition assessment should identify an existing or proposed policy that may unduly restrict competition and evaluate its likely impact on competition;
  • Competition agencies should advocate for a policymaking environment that promotes consideration of competition principles (including delineation of legal authority and openness to outside sources of advice);
  • A transparent process should be used to conduct assessments;
  • Agencies should focus assessments on types of restrictions that pose the greatest threat to competition, and design selection criteria (which are described) to prioritize competition assessment among other advocacy activities;
  • Agencies should consider institutional arrangements and relationships with policymakers in building assessment programs (practical advice designed to enhance the political viability of assessments);
  • Agencies should consider whether a competitive restriction is reasonably related to the goals of the policy under review and whether the policy goal could be achieved without harming competition or in a less restrictive manner;
  • A competition assessment should start by identifying and considering the goals and objectives of the policy in question and review prior work in the area;
  • Agencies should consider how a policy’s restrictions are likely to influence the market structure and behavior of firms and customers in the market or neighboring markets;
  • Once a restraint and its possible competitive effects have been identified, agencies should evaluate the likely competitive effects on the basis of sound economic theory, and, where feasible, on empirical evidence; 
  • Agencies should carefully consider the form of competition assessment most appropriate for a particular situation (i.e., agencies should be free to issue a formal or informal opinion with flexibility as to the manner of delivery);
  • Agencies should seek to deliver a competition assessment in a timely fashion; and,
  • Agencies should engage with interested third parties (e.g., policy organizations and domestic peer agencies) to promote policymakers’ consideration of an assessment.

The RPCA shine particularly bright in providing a concise yet nuanced evaluation of the sorts of restraints that are most likely to undermine the competitive process, including a cogent discussion of barriers to entry, exit, or expansion within a market; of policies that control how firms are allowed to compete in a market; of policies that shield firms from competitive pressure; and of policies that control the choices available to consumers.  The RPCA also highlight the value of attempting, where feasible, to derive quantitative welfare estimates of the costs of particular restrictions, based on a neutral metric and other tools of economic analysis.  Over the next year further work will be done on cataloguing existing case studies that contain welfare estimates and on the derivation of a metric.

The RPCA are no short-term panacea, but rather a practical manifesto for long-run regulatory reform.  They shed a useful spotlight on categories of economically harmful regulations that occur in a wide range of countries – not just in historically state-dominated economies.  Rent-seeking is ubiquitous, and regulations too often reflect wealth-destructive competitive limitations masquerading in public interest dress in all sorts of jurisdictions, including the United States.  Given the recent rapid rise in U.S. regulatory activity, the identification of U.S. federal and state government rules that undermine competition surely will remain a target-rich zone for competition advocates.  It may be hoped that, over time, when the political tides yield greater support for economic liberty, the lessons of Marrakech may point the way to repealing welfare-destructive regulatory impositions across the globe. 

Lessons from Marrakech for U.S. Regulatory Reform – All Aboard the Train

Representatives of over 100 competition agencies from around the globe, joined by “non-governmental advisors” (NGAs) from think tanks, universities and the private sector, gathered in Marrakech last week (April 22-25) for the 13th Annual Conference of the International Competition Network (ICN).  The ICN, founded in 2001, seeks to promote “soft convergence” in competition law and policy by releasing non-binding (but highly influential) recommended “best practices,” holding teleseminars and workshops, and disseminating educational and training materials for use by governments.  ICN members produce their output through flexible project-oriented and results-based working groups, dealing with mergers, unilateral conduct, cartels, competition advocacy, and agency effectiveness (how to improve agency performance).  (I have been involved in ICN work since 2006, as a U.S. Federal Trade Commission (FTC) representative and an NGA.  The term “competition” is generally employed in lieu of “antitrust” in most foreign jurisdictions.)

The Marrakech Conference yielded two new sets of recommended practices, focused on competition assessment and predatory pricing.  (I will have more to say on predatory pricing tomorrow.)  To the extent they are eventually implemented in the U.S., the competition assessment recommendations could lower the burden of government-imposed regulatory restrictions to the benefit of American consumers and American competitiveness.

As then FTC Chairman Tim Muris observed in 2003, in highlighting the importance of combating government-imposed competitive restraints, “[a]ttempting to protect competition by focusing solely on private restraints is like trying to stop the flow of water at a fork in a stream by blocking only one of the channels.  Unless you block both channels, you are not likely to even slow, much less stop, the flow. Eventually, all the water will flow toward the unblocked channel.”  Indeed, anticompetitive government regulations that restrict entry, protect state-sponsored firms, and otherwise dampen the competitive process are legion, and widely viewed as imposing far greater harm to consumer welfare than the purely private restraints traditionally condemned by antitrust.  Because they operate openly and are backed by the enforcement power of government, public restraints, unlike private restraints, cannot be undermined by market forces, and thus are far more likely to have sweeping and harmful long-term effects.

The FTC and other competition agencies have employed “competition advocacy” to argue against particular anticompetitive government restrictions, but those efforts historically have been limited in number, scope, and effectiveness.  Despite the huge potential welfare benefits from lifting anticompetitive restrictions, those restraints typically are the fruits of successful lobbying by private beneficiaries of competitive distortions, or by “public interest” groups which trust rule by government fiat over market forces.  Moreover, consumers at large are generally ill-informed about regulatory harms and the costs to organize them in favor of reform efforts are prohibitive.

Recently, however, international organizations, including the Organization for Economic Cooperation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD), and the World Bank, have stepped forward to highlight the costs of public sector regulatory restraints and to help competition agencies spot and advocate against different sorts of restrictions.  Building on these initiatives (and in particular the OECD’s Competition Assessment Toolkit), the ICN’s Advocacy Working Group drafted Recommended Practices on Competition Assessment (RPCA) that the ICN adopted and released as a new consensus product in Marrakech.

The RPCA apply broadly to proposed and existing legislation, regulations, and policies that may restrict competition.  Recognizing that government competition agencies differ greatly in their capacities and ability to influence other government bodies, the RPCA note that competition assessments can take many forms, ranging from recommendations drawn from application of general economic theory to resource-intensive competition impact assessments, with many variations in between.  The RPCA stress that they are intended to provide guidance, not require particular assessments, and that government entities other than competition agencies can carry out valuable assessment work.

The RPCA provide a comprehensive “soup to nuts” template for agencies tasked with assessments, comprising both process-related and substantive elements:

  • A competition assessment should identify an existing or proposed policy that may unduly restrict competition and evaluate its likely impact on competition;
  • Competition agencies should advocate for a policymaking environment that promotes consideration of competition principles (including delineation of legal authority and openness to outside sources of advice);
  • A transparent process should be used to conduct assessments;
  • Agencies should focus assessments on types of restrictions that pose the greatest threat to competition, and design selection criteria (which are described) to prioritize competition assessment among other advocacy activities;
  • Agencies should consider institutional arrangements and relationships with policymakers in building assessment programs (practical advice designed to enhance the political viability of assessments);
  • Agencies should consider whether a competitive restriction is reasonably related to the goals of the policy under review and whether the policy goal could be achieved without harming competition or in a less restrictive manner;
  • A competition assessment should start by identifying and considering the goals and objectives of the policy in question and review prior work in the area;
  • Agencies should consider how a policy’s restrictions are likely to influence the market structure and behavior of firms and customers in the market or neighboring markets;
  • Once a restraint and its possible competitive effects have been identified, agencies should evaluate the likely competitive effects on the basis of sound economic theory, and, where feasible, on empirical evidence;
  • Agencies should carefully consider the form of competition assessment most appropriate for a particular situation (i.e., agencies should be free to issue a formal or informal opinion with flexibility as to the manner of delivery);
  • Agencies should seek to deliver a competition assessment in a timely fashion; and,
  • Agencies should engage with interested third parties (e.g., policy organizations and domestic peer agencies) to promote policymakers’ consideration of an assessment.

The RPCA shine particularly bright in providing a concise yet nuanced evaluation of the sorts of restraints that are most likely to undermine the competitive process, including a cogent discussion of barriers to entry, exit, or expansion within a market; of policies that control how firms are allowed to compete in a market; of policies that shield firms from competitive pressure; and of policies that control the choices available to consumers.  The RPCA also highlight the value of attempting, where feasible, to derive quantitative welfare estimates of the costs of particular restrictions, based on a neutral metric and other tools of economic analysis.  Over the next year further work will be done on cataloguing existing case studies that contain welfare estimates and on the derivation of a metric.

The RPCA are no short-term panacea, but rather a practical manifesto for long-run regulatory reform.  They shed a useful spotlight on categories of economically harmful regulations that occur in a wide range of countries – not just in historically state-dominated economies.  Rent-seeking is ubiquitous, and regulations too often reflect wealth-destructive competitive limitations masquerading in public interest dress in all sorts of jurisdictions, including the United States.  Given the recent rapid rise in U.S. regulatory activity, the identification of U.S. federal and state government rules that undermine competition surely will remain a target-rich zone for competition advocates.  It may be hoped that, over time, when the political tides yield greater support for economic liberty, the lessons of Marrakech may point the way to repealing welfare-destructive regulatory impositions across the globe.