Introduction to Intellectual Property Law & Policy

The Devil Wears Prada: Why Fashion Should Not Be Protected Under Patent Law

There has been much talk lately about intellectual property protection for the fashion industry, which is responsible for more than $750 billion of apparel each year globally [1]. The only type of protection currently available for fashion design is trademarks, allowing designers to protect their distinctive brands and logos from potential consumer confusion. The proposed legislation HR5055 seeks to expand copyright protection to cover fashion [2]. However, fashion is not purely an expressive element and is largely functional. Therefore, it has been proposed that fashion should be protected by patent law instead, specifically by design patents. This essay examines how fashion fit in the scope of design patents, and why patent law is not the right source of protection for fashion due to conceptual and practical difficulties.

Overview of Design Patents
Design patents cover any “new, original and ornamental design for an article of manufacture” and have a term of fourteen years from the date of grant [3][4]. Unlike utility patents, design patents do not protect how an invention is used or how it works, but only how it looks. In addition to originality, design patents are also subject to the requirements of ornamentality, novelty, and non-obviousness, which make obtaining protection even more difficult.

If the design of an article of manufacture comes mostly from its functional aspects, then it is not “ornamental” and cannot be covered under a design patent [5]. To be truly original, the ornamental design cannot be that of a known object, person, or naturally occurring form. The requirement for novelty in design patents only pertains to how the ornamentation looks to an observer; therefore an article of manufacture that is not novel for utility patentability can still be novel for design patentability purposes. The standard for non-obviousness uses a “designer of ordinary skill of the article involved” and closely mimics the standard in utility patents [6].

Applying Design Patent Standards to Fashion
Merchandise in the fashion industry is not only restricted to clothing, but covers a wide spectrum from handbags, shoes, jewelry to designer eyewear, fragrance, and other lifestyle accessories. All of these categories fit the requirement of an “article of manufacturer” in that they are not abstract designs or ideas, bur rather tangible man-made articles. However, the ornamental/utility nature of these goods varies greatly from category to category, implying that not all fashion may fit the “ornamentality” requirement of design patents. It can be argued that although clothing is functional in nature, everything pertaining to how a piece of clothing looks is ornamental for the purpose of design patents. However, this distinction becomes harder to make in other areas of fashion. For example, the metal clasp on a handbag is highly functional in the sense that it holds the bag closed, but the specific construction and design of the clasp could be for pure ornamentation purposes. Therefore, drawing the line between designs that are mainly based in its functional aspects and those that are truly ornamental can be difficult.

More problems arise when originality and novelty are considered with respect to fashion. Although a certain amount of innovation is seen on the runways every season, it can be argued that none of these innovations are truly “original” or “novel” considering the recycling nature of the fashion industry. The current trend of “skinny jeans” is not a new design, but just a revival of a popular style in the 1980s, which will likely see another resurgence years after it goes out of style. There may have been countless reincarnations of the “little black dress,” but the basic design behind it has not changed. Whereas one designer may place a bow on the back of the dress another designer may place two, and an ordinary observer would not see the dress with two bows as a novel design. While true innovation is prized in the fashion world, adherence to traditional designs is also a staple of the industry and the foundation of much of its profits.

The same difficulties can be seen when the standard of non-obviousness is applied. Taking the same example of the “little black dress,” a designer of ordinary skill in dress making could have very well have foreseen putting multiple bows instead of one on the dress. Especially when the one ornamental element is viewed in the context of the design of the dress as a whole, it seems to be the exact type of small change that the obviousness standard is meant to exclude. However, these “small changes” can actually be significant for the consumer deciding between the two dresses who might consider the two as entirely different designs.

Lastly, the term of a design patent is also ill fitted to the fashion industry. Fashion has an extremely fast turnover rate, with certain designs being extremely profitable one season and suddenly out of favor just a short six month later. Therefore, by the time a design patent is processed and granted the design could have long gone out of style. On the other hand, the fourteen year protection period would give the sole designer an unfair monopoly if the design or variations on it come in to style as in the case of the “skinny jean.” Given how fashion is consistently recycling and combining old elements together, this could lead to a form of “design patent trolling” that’s even worse than the patent trolls seen now.

Why Patent Protection is Unnecessary for the Fashion Industry
As seen above, the fashion industry should not be protected under the patent regime because it does not fit into the current standards for patentability. Proponents of fashion protection argue that the rampant piracy of fashion designs and “knock-offs” of designer goods are hurting the fashion industry and will decrease the incentives for innovation. However, despite the presence of knock-offs on the market, the fashion industry is still thriving with fashion houses like Armani experiencing a 22.7% net profit increase in 2005 [7].

In their article “The Piracy Paradox: Innovation and Intellectual Property in Fashion Design” Raustiala and Sprigman explain this phenomenon by proposing fashion operates in a low-IP equilibrium, and does so successfully because copying allows for a process of “induced obsolescence” which speeds up the fashion cycle with styles constantly going in and out of style. This in turn actually encourages innovation in the fashion industry as a whole, encouraging designers to come up with new designs to satisfy consumers. In addition, Raustiala and Sprigman suggest a low-IP regime helps the industry establish trends through a process of “anchoring,” where copying allows each season’s new designs to quickly gain recognition amongst consumers and in turn accelerates the fashion cycle [8].

In addition to the explanations set forth by Raustiala and Sprigman, there are other reasons why fashion does not need further IP protection. Not only does copying foster the fashion cycle and encourage innovation, the fashion houses and designers themselves engage in a large amount of copying by borrowing from past trends and their competitors. In addition, a large amount of fashion design involves “status goods” which appeal to a different market than those who would buy knock-offs. Therefore, the copying that occurs in the fashion industry should be not treated in the same manner as copyright and design patent infringement. Trademark also offers fashion designers brand protection, which counteracts against direct copying by reducing consumer confusion. In addition to a name brand, other elements of a design can be trademarked, such as the distinctive shape of the Hermes Birkin bag or Burberry’s check pattern. Therefore, the most unique and truly innovative elements of fashion design are already adequately protected under the current regime, and further protection, especially under patent law, will only confuse and frustrate an industry which is fueled and largely dependent on various degrees of copying.

References
[1] 92 Va. Law Review 1687. December 2006. Kal Raustiala and Christopher Sprigman. “The Piracy Pradox: Innovation and Intellectual Property in Fashion Design.”
[2] “Statement of the United States Copyright Office Before the Subcommittee on Courts, the Internet, and Intellectual Property, Committee on the Judiciary.” 109th Congress, 2nd Session. July 27, 2006
[3] 35 USC 171 – Patents for Designs
[4] 35 USC 173 – Term of Design Patent
[5] “A Guide to Filling a Design Patent Application.” http://www.uspto.gov/web/offices/pac/design/toc.html
[6] In re Nalbandian, 661 F.2d 1214 (Court of Customs and Patent Appeals)
[7] www.fashionwiredaily.com/first_word/news/article.weml?id=352
[8] 92 Va. Law Review 1687

The Devil Wears Prada: Why Fashion Needs Patent Protection

The ultimate point of the patent system is to create an optimal tradeoff between inventors and the public. The public gives the inventors limited monopoly rights in their invention in exchange for their creating more in the future. Inventions should also be refined over time through competition and further technological improvements. This paradigm should apply to all industries and give the optimum result for the public and the inventors. However, for the fashion industry the balance is off and should be restored with a fashion-specific patent regime.

The fashion industry generates $750 billion in the U.S. alone [1] and therefore is important to the American economy. Elements of the fashion industry are already taken care of by other intellectual property regimes such as branding through trademarks (where fashion status gets much of its value) and competition, copying, and knockoffs through copyright law [2]. Fitting fashion into the patent paradigm is problematic since as the industry stands currently, the protection is fractured among different elements of the industry and thus gives less than optimal protection to fashion design. To remedy this deficit, a fashion-specific patent regime should be created.

Neither Utility Patents nor Design Patents Suffice For Fashion Design Protection
Using utility patents to protect fashion design is insufficient because the only aspect of the fashion industry that would be protected would be the functional aspect of clothing. In order to receive a utility patent, the clothing would need to pass the required elements of novelty, usefulness, and non-obviousness [3]. Fashion runs into problems especially with the novelty requirement since so much prior art exists for the functional element of clothing. It would not be inconceivable to suggest that almost nothing is left to invent in terms of the functionality of clothing. However, clothing would still be considered a subject of patentability under the statutory requirements of: “process, machine, manufacture, or composition of matter” in the manufacture category, if anything else was invented. Just because it might be difficult at this point in time to conceive of a new functional clothing invention does not mean that none will exist in the future. This potential functional fashion innovation deserves protection as much as any other patentable item.

Because fashion does not sufficiently fit into the utility patent system, design patents seem to cover more of the important aspects of fashion protection. Design patents protect the “ornamental design of a functional item” and the requirements are that it be ornamental, novel, and non-obviousness [4]. To get a design patent, shape or configuration and surface decoration can be used separately or together to prove patentability of the design element [5]. However, the design patent system also does not sufficiently protect the fashion industry because a design patent can be invalidated if it has practical utility, and the application process can be longer than the life of the design (the application process is around 1-2 years, life of the design can be as little as the life of a design season which is 6 months, or less) [6]. Fashion is not merely ornamentation nor clothing function but a combination of the two.

Design sensibility for the fashion industry can include making a wearable piece of clothing with ornamentation aesthetics or using tailoring techniques to create new shapes, to name only a few. The fashion industry includes “ready-to-wear” fashion but also haute couture which can be extremely unwearable clothing that ends up being more sculpture or art [7]. Technology is increasingly being incorporated into clothing, with the result that some designs are extremely innovative electronically [8]. These high tech fashion designs have an even more difficult time fitting into either the utility system or the design system because the way the electronics fit into the design are even less clearly functional or ornamental. All of these facets are included in the fashion industry which makes the distinction between utility and design for the purposes of patenting a fashion design even more difficult to parse.

Patentability Should be Expanded Either Internally or Externally to Include Fashion Design
Intellectual property has experienced internal and external expansion over the years. Internal expansion is the concept that patents would be expanded to include fashion as a patentable industry, similar to the way in which business methods were determined by the courts to be patentable [9]. External expansion is the concept that there are three bubbles of exclusivity, trademark, copyright, and patents, and expanding externally would be adding a fourth bubble of exclusivity for fashion design. The closest the courts have ever come to creating a new property right in intellectual property was creating a quasi-property right in news [10]. In Cheney Bros. v. Doris Silk [11], the court declined to give fashion design seasonal protection because it would infringe on competition and decrease design innovation. However at issue in Cheney Bros. was the textile design on silk. Currently design patents cover textile design, and indeed are frequently used for such products. Therefore Cheney Bros. is not a controlling set-back for the expansion of intellectual property to include fashion design.

Either way of expanding protection for fashion design would be not only appropriate but also helpful as a reflection of the importance of the fashion industry to the American economy. The fashion industry clearly does not fit into neither the utility patent scheme nor the design patent scheme. In order for the public to get the full benefit of the fashion industry competition must be allowed to exist and bring prices down but on the other hand emerging designers and the powerful fashion houses must also be incentivized to innovate. A possible solution for the fashion industry would give a more time-limited patent protection to fashion design, and only for designs that truly are innovative [12]. Only truly innovative designs would pass the patentability tests of non-obviousness and novelty.

In this way fashion would still be subject to competition and pricing adjustment through the market once the patent runs out and then the innovation can become part of the public domain. However, for the limited time that the patent is in effect the designer can have a limited monopoly. This should serve to incentivize especially the smaller designers to be as innovative as possible so that during the time their fashion design is patented they can get their name out, strengthen their trademark and establish their copyright rights before the design goes back to the public. In this proposed scenario the public will still have the benefit of competition in the fashion industry giving them lower prices and a larger number of designs and innovation. However this will not come at the expense of the designer’s rights who will get a limited-time patent protection for their truly innovative design. This will allow smaller designers with less capital to put effort behind innovation without worrying about not being able to establish themselves before they begin. In addition, this type of regime might actually spur innovation in the fashion industry which at this point has just been recycling past decades of designs ad nauseum. A limited-time patent protection for fashion design would be a win-win situation for all involved.

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[1] 92 Virg. Law Rev. 1687, Dec 2006 Kal Raustiala and Christopher Sprigman, The Piracy Paradox: Innovation in Intellectual Property in Fashion Design; according to one source, others put the total at least a multi-billion dollar industry
[2] A proposed bill in Congress H.R. 5055 would amend Title 17 of the U.S. Code to give fashion design more protection.
[3] 35 U.S.C.
[4] 35 U.S.C. 171, 173
[5] Saidman DesignLaw Group, http://www.designlawgroup.com/tools_design_patent.cfm
[6] H.R. Rep. No. 105-436 at 12 (1998).
[7] See, e.g. Christian Dior couture fall 2007, Viktor & Rolf fall 2007, Yohji Yamamoto, Commes des Garcones
[8] See, e.g. Hussein Chalayan spring 2007
[9] State Street Bank v. Signature, 149 F.3d 1368 (Mass. 1998)
[10] INS v. AP, 248 U.S. 215 (1918)
[11] Cheney Bros. v. Doris Silk, 35 F.2d 279 (N.Y. 1929)
[12] Truly innovative designs could include past designs such as the wrap dress, bias cut, drop waist, bubble hem, and A-line skirts. The motivation is that if these such innovations were to be invented nowadays, they would get protection.

A New, Comprehensive Patent System

I. Structure

The patent system is driven by incentives. Inventors desire to secure rights in their ingenuity to maximize the value between research effort input and profitable output. The U.S. Patent Office (PTO) must balance the recognition of innovation while scrutinizing the extent of claims so as not to limit competition and social utility. In the litigation context, patentees seek to broadly construe and solidify the scope of their rights while infringers seek to scrutinize the extent of the patent. All of these competing actors and forces participate in an economic “game” that is defined by the legal foundations of both patent award and litigation. [1]

The incentives faced by the actors in this game centrally evolve from the terms of the right at issue. Particularly, the evaluation on all sides turns broadly on the breadth and length of the protection at issue. In patent prosecution, the broad incentive is fairly simple: only inventions that have positive expected value over 20 years that is greater than obtainment costs will be pursued by inventors. The PTO recognizes the market effect of patents and scrutinizes claims during the obtainment phase to a level it deigns appropriate with the prospective right to be granted. In this sense, the incentive system acts with feedback because the obtainment costs are dependent on the extent of the final terms of the patent and the desire to seek a patent is based on the final terms and the obtainment cost. [2] More complex models have taken into account the flow of costs and revenues in different industries and inventions, changes in the term structure of interest rates and other variables.[3] However, at their core, these complexities derive from the length and the breadth of the rights granted.

Once rights are granted, litigation incentives are based on the terms too. Recognizing potential profits of an invention over a certain period of time, potential infringers implicitly weigh the costs of litigation based on the breadth of rights recognized by court decisions against the gains to be had by becoming a producer of a good (or less directly, by not performing exhaustive, and costly, patent searches before producing an item). Similarly, the patent holder defends her patent to the extent that she expects value over the term of the patent. In this sense, the incentives all trace from the basic terms that evolve from securing exclusive rights to inventors for a limited time. [4]

II. History and Issues

Over time, innovation has evolved. In the past, inventions were less diverse and of limited value because the economy was less technical. Further, transaction costs of evaluating patent claims were arguably higher in the past because communication of information was less efficient. It thus was sensible to give a certain fixed time of protection for patents as a means of economizing the patent system.[5]

However, an historic choice for economy reflects only a specific balance of forces that is subject to inefficiency as the underlying conditions change. As industries and inventions have grown more sophisticated, the failure to recognize different terms of inventions mean that more inventions will not have access to adequate protection and there will be underinvestment in development.

Further, as more industries apply for more diverse patents, the costs of evaluating all patents centrally by the PTO will lead to increased costs in obtaining patents and further exclusion of inventions from the patent system. In this age, where the global economy is based on innovation and research, a patent system that is justified based on an historical balance imposes needless costs and limits the welfare of society.

As an example, evolving, fast-paced industries like software complain that patent terms overburden innovation by supplying too much protection or are too costly to obtain in a marketplace where obsolescence is measured in months.[6] Many companies will not seek protection because the average costs of obtaining patents (in both time and money) make patents inefficient. The current system leads to underinvestment in research and less products. Further, some companies with more resources will have patents awarded that are too broad and preclude future development leading to societal losses as well. Conversely, capital and “sunk cost” intensive industries, like pharmaceuticals, claim that the limited time of patents precludes development of more drugs that could aid “less profitable” maladies (e.g. vaccines) that may require more years of protection to be viable.

III. A New System and Guidelines

This paper proposes an inventor bid system of variable time patent right grants coupled with correlated, multiple breadths of rights. A variable time patent system is not new,[7] but the difference in this proposal, is keyed off the recognition that the inventor is in the best position to make a judgment about the expected value of her invention and the terms of right needed to recognize positive utility ex ante. The second key to this system would be a change in the patent office structure for the granting of rights that is consistent with the length and breadth of the rights sought. The third key is a doctrine of judicial evaluation based on scrutiny correlated with the extent of the right sought. In implementing such a system, the legal framework would present avenues for different choices that maximize efficiency because patentees would get to choose the length and breadth of rights based on their superior information about their claim.

First, users would seek the time they feel their invention needs to be profitable. This would allow for capital intensive companies to seek patents for more rights and for fast-moving industries to submit applications for fewer rights. However, given a fixed cost of obtainment, all patentees would generally petition for the maximum terms so as to increase the expected value of their invention. Thus, the system must have variable costs of obtainment linear and flexible to the commensurate rights granted in order to induce different inventors to seek appropriate rights.

One option is to decentralize the PTO’s role and procedures in adjudicating all patent claims. Other industries provide an example of efficient private adjudication for time-sensitive rights.[8] Additionally, the use of expertise in determining certain matters is not unparalleled in law either.[9] The role this paper envisions is the PTO acting as an overseer that distributes patent applications to private groups or contractors organized by industry and/or by terms of right sought. The PTO could then evaluate trends from a policy level and adjust procedures and scrutiny to maximize total utility from the rights. For example, 6 month rights in software would have a binding adjudication within 3 weeks after submission. But, 20 year rights in chemical processes will be subjected to a 1 year evaluation of claims. More specific economic and social studies could set bins and feasible review times and scrutiny doctrines for each right.[10]

Alternatively, the PTO could maintain its current monopoly over granting rights through its own inspectors as well and merely parse applications by the time sought and establish internal procedures and tracks. However, the system must have variable length of examination correlated with the scope of rights granted rather than a relatively static average of 18 months as it stands now, in order to encourage diverse applications from inventors.

As part of the dynamic rights evaluation system, the PTO and Congress could utilize the extensive law and economic studies [11] about the appropriate breadth of rights and standards of judicial and prosecution review for the multiple lengths of patent rights granted. Such a system could grade the doctrine of equivalents, degree of similarity to prior art, presumption of irreparable harm and other doctrines in order to match the scope of rights with the scrutiny of review. Ideally, a system of private arbitration could evolve that would allow more certainty and expediency in back-end litigation that would feedback to enabling more diversity of patent terms and granting of rights.

IV. Conclusion

The current fixed patent is a function of historical balancing of social utility and economy in processing claims. This balance fails to provide adequate incentives for the growing number of industries and creates a more costly prosecution and litigation system. By utilizing the advances of our innovative society, a new legal framework can enable further growth by reducing costs of securing rights and allowing for more dynamic industry equilibriums. The system must recognize the superior information held by inventors ex ante and allow them to choose their path to defined bundles of rights. In doing this, the patent system will build on the technological sophistication it helped create to bestow value-maximizing grants of rights into the future.

[1] See generally, The Patent-Antitrust Intersection: An Appraisal, 97 HARV. L. REV. 1813 (1984)
[2] For examples of this type of discussion, Rewards Versus Intellectual Property Rights, http://www.papers.ssrn.com/paper.taf?abstract_id=226404 (2000)
[3] Partnoy, Frank, Finance and Patent Length, http://papers.ssrn.com/abstract=285144
[4] Paraphrase of Art. I Section 8, Clause 8 of the U.S. Constitution.
[5] DONALD CHISUM, CHISUM ON PATENTS (1999).
[6] See, Jeff Bezos, An Open Letter from Jeff Bezos on the Subject of Patents,
http://www.amazon.com/exec/obidos/patents.html/104-5354614-3959959 (2000)
[7] e.g., C. Michael White, Why a Seventeen Year Patent, 38 J. Pat. Off. Soc’y
[8] ICANN arbitration procedures, www.icann.org
[9] See Special Masters (Federal Rules of Civil Procedure 53)
[10] e.g., Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent
Scope, 90 COL. L. REV. 839 (1990).
[11]e.g. Donald G. McFetridge & Mohammad Rafiquzzaman, 8 THE SCOPE AND DURATION OF THE PATENT RIGHT AND THE NATURE OF RESEARCH RIVALRY, RESEARCH IN LAW AND ECONOMICS 91 (1986)

“Efficient Infringement?”: The Use of Liability Rules for Business Method Patents

“Efficient Infringement?”: The Use of Liability Rules for Business Method Patents

This essay will combine research discussing “efficient infringement” in the patent context with the recent controversy surrounding business method patents. The essay will hypothesize that moving to liability rules rather than property rules for patents specifically in business method cases may preserve the patentability of business methods while potentially increasing efficiency of the patent system in a limited change context, with the caveat that more empirical research should be done on this topic.

I. Business Methods Should Remain Patentable Subject Material.

The first attempt to legally define business method patents is found in HR 5364 and reads: “(1) a method of--(A) administering, managing, or otherwise operating an enterprise or organization, including a technique used in doing or conducting business; or (B) processing financial data; (2) any technique used in athletics, instruction, or personal skills; and (3) any computer-assisted implementation of a method described in paragraph (1) or a technique described in paragraph (2).” [1]. In State Street Bank, the Federal Circuit held that business methods were patentable subject material.[2]. Although the PTO had issued business method patents prior to 1998, after State Street, the number of BMPs issued exploded [3]. However, criticism also followed just as readily, with observers expressing discontent at several aspects of BMPs including the basic idea of patenting software embodied business models, the lack of quality of business model as patents, and the perceived failure of the PTO to account for prior art [3]. Some examples of cases that have been particularly noteworthy include Amazon’s patent on its one-click technique [4] and Priceline’s patent on its reverse auction technique[5]. Allison and Tiller allayed critic’s concerns to some extent by performing an empirical study comparing the most prevalent business method patent, the internet business method patent (IBM), to patents in general and to patents in fourteen technology fields [3]. They found, among other things, that IBM patents have more references than patents in general, that the references are not inferior, that IBMs spent a good deal of time in the patent office and had a large number of claims relative to general patents and patents in several technological fields [3]. In summary, they presented a very convincing case that IBM patents should continue to be issued, especially in light of recent work suggesting that the non-obviousness doctrine is consistently strong [6].
The US constitution declares that the purpose of the intellectual property system is to promote the progress of science and the useful arts [7]. Surely, business methods, especially those in the internet context, meet this criteria. One of the reasons people may be so opposed to the idea of BMPs in the internet context is that there is a fear they will stifle the developing potential of the internet. For example, Lawrence Lessig has argued that these patents will create a “threat to small business” and essentially cause the internet to be big business controlled[3]. Indeed, the delicate patent balance is certainly upset if BMPs are used too often for anti-competitive reasons. This is particularly concerning in the context of a business method which provides a “service” (online shopping, a way of keeping records, etc). Though I do not have empirical research, I suggest that consumers of services have very idiosyncratic preferences in this context, especially in a world of marketing. For example, a person may very strongly prefer Barnes & Noble to Amazon or Priceline to Hotwire because of name recognition, visual effects, inventory, etc. B&N isn’t necessarily as good of a substitute for Amazon (or vice versa) as a name brand drug is for a generic (assuming the drugs truly function the same). Thus, I suggest there may be large consumer welfare losses associated with granting a property right to BMPs which provide a service or method of accomplishing a result. (Of course, one could also make this “imperfect” substitutes argument for improvements on existing patents which are held defensively. That argument has value and isn’t inconsistent with my conclusions here.)
Finally, Allison suggests efforts to single out BMPs for stricter scrutiny have no justification and are likely to cause problems due to the difficulty of defining exactly what a BMP is and the fact that often categories of patents overlap, so a business method patent may be in a different category at the PTO [3]. One way this problem of categorization could be solved would be to only treat business method patents differently with respect to the right to efficiently infringe (i.e. after the patent is granted), thus taking the strain off of the PTO. Of course, this could lead to a social cost of increased litigation. However, I think there is at least a possibility that the efficiency gains from liability rules in this context, the ease of any strain on the PTO, and the abolition of grants of erroneous preliminary injunctions (such as in eBay) could potentially more than offset welfare losses from the any social cost of potentially increased litigation regarding threshold questions of what constitutes a BMP.

II. What are liability rules and why apply them to business method patents?

The basic difference between a liability rule and a property rule is that a property rule is enforced through an injunction or by keeping a person from trespassing on their property by shutting them down. [8]. A liability rule is enforced through allowing the person to “trespass” but forcing them to pay a fee for infringing, such as a percentage of their profits, etc [8]. Many commentators have suggested that there are some times when infringement of the patent right may be “efficient.” For example, in her 1998 article Julie Turner suggests that it may be better to have liability rules and efficient infringement where the patent owner is a non-manufacturer and so the patent isn’t commercialized.[9][10][11]. Turner discusses incentives to sit on rights, including two that are clearly bad for society: overvaluation and defensive patenting [9]. Again, in the business method context, preventing competition is particularly egregious as the “products” are not perfect substitutes and the valuation problem can be hard in the internet context. Also, in light of the still-developing internet technology and Lessig’s earlier comment, it is very critical that business method patents do not stifle small start-ups. However, that issue aside, efficiency losses are still more likely to occur in the IBM context because of the fact that there isn’t much capital investment needed to develop an IBM patent and also because, though the total amount of material that can be patented may be very small, the grant of an injunction can have a huge impact (see Amazon). Finally, the “innocent infringer” problem is particularly bad in the IBM patent context.
The innocent infringer problem is particularly bad in the context of the “patent” thicket [12]. Because of the innocent infringer problem, one recent article has discussed inefficiencies of defensive patent portfolios in the context of other subject material and concluded that a small owner does not have a sufficient incentive to commercialize given the risk of infringing innocently [12]. This risk is very relevant for IBMs. The innocent infringer problem in business method patents could be greatly ameliorated by compulsory licensing . Permanent (or preliminary!) injunctions may overcompensate a non-manufacturing patent owner. Transaction costs may also lead to no deal being reached at all (as was the case in eBay where eBay had TRIED to license the patent)[14]. Public interest should favor the increasingly common innocent infringer [12], especially in the internet context. Finally, because of the time it takes to get a patent and the low capital start up costs involved in this arena, many business methods and IBMs have already been in use for a significant portion of time by the time the patent issues [3]. Thus, there is an additional sort of estoppel issue making the innocent infringer argument more compelling.

III. Rationales for Patent Protection and Conclusion

Turner summarizes four rationales for patent protection: the incentive to invent, the incentive to disclose, the incentive to innovate, and the prospect theory[9]. The incentive to innovate is at least one of the most important. The idea is that there is a bargain in which society gets innovation by giving a monopoly. But there are contexts in which this bargain fails. For example, if there are transaction costs or impediments to bargaining, Kaplow and Shavell have pointed out that liability rules will increase welfare more than property rules[9]. Because of the high stakes and low capital investment, as well as the large number of innocent infringers, the business method context is an area in which liability rules may be more efficient.
In conclusion, moving to a system of liability rules for business methods may preserve the important interest in maintaining their patentability while minimizing some of the social welfare losses associated with granting injunctions. Thus, more empirical research should be done to test whether the move to compulsory licensing would greatly increase efficiency for business method patents.

References
[1] HR 5364 §4.
[2] State Street Bank & Trust v. Signature Financial Services, 149 F.3d 1368 (Fed. Cir. 1998)
[3] John R. Allison and Emerson H. Tiller, The Business Method Patent Myth, 18 Berkeley Tech L.J. 987 (2003).
[4] Amazon.com v. BarnesandNoble.com, 239 F. 3d 1343 (Fed. Cir. 2001)
[5] U.S. Patent No. 5,797,127 (issued Aug. 18, 1998)
[6] See 82 Notre Dame L. Rev. 911 discussing Lee Petherbridge & R. Polk Wagner, The Federal Circuit and Patentability: An Empirical Assessment of the Law of Obviousness, 85 Tex. L. Rev. (forthcoming June 2007), available at http://ssrn.com/abstract=923309 (examining empirically the Federal Circuit's nonobviousness jurisprudence and finding that the court has not weakened the standards for obtaining patents).
[7] U.S. Const. art. 1 § 8 cl. 8.
[8] Liability rules and property rules are summarized in the famous Cathedral article: Guido Calabresi and A. Douglas Melamud, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
[9] Julie S. Turner, The Nonmanufacturing Patent Owner: Toward a Theory of Efficient Infringement, 86 Cal. L. Rev. 179.
[10]*This behavior was deemed legal by the Continental Bag case: Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 US 405 (1908).
[11] See also Section 283 of the patent act: 28 USC §283
[12] David B. Conrad, Mining the Patent Thicket: The Supreme Court’s Rejection of the Automatic Injunction Rule in Ebay v. Mercexchange, 26 Rev. Litig. 119 (2007).
[13] eBay, Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006).

Criminal IP Infringement Prosecution

I assume this is beyond the scope of our class, but in addition to civil remedies there are also criminal sanctions for some infringements. If anyone is interested, DOJ has some good resources about prosecution of IP crimes.

Intellectual Property Legal Resources

Prosecuting Intellectual Property Crimes Manual

Me-Too Drugs: What’s Ailing the Pharmaceutical Industry

Pharmaceutical patents, in theory, serve an important purpose: aside from the investment incentives they provide, drug manufacturers rely on profits from patented medications to fund new research. Patent proponents claim that without these market protections pharmaceutical companies would be unable to finance expensive drug development; [1] they are incorrect. Drug prices are rising at a rate that greatly outpaces general inflation, and patents may be partially to blame. [2] Under the status quo not enough money is being devoted to R&D, which has led to stagnant drug innovation. In addition, excessive pharmaceutical advertising has resulted in overpriced prescriptions. Both problems could be adequately addressed however, by strengthening short term patent protection while allowing more generic competition in the long run.

Some critics suggest that continuously high profit margins are responsible for both elevated drug prices and the industry’s failure to properly fund more beneficial drug research. [3] Yet, profits account for only 10% of the total resources involved in creating new medications. [4] Advertising and legal support, on the other hand, make up nearly 50% of industry finances. [5] In fact, the top 30 representative firms spend “about twice as much in promotion and advertising as [they] do in R&D.” [6] In other words, funds currently used for advertising could be spent in a more productive manner, such as price reductions or additional research. One reason such colossal advertising budgets exist is due to medications known as “me-too” drugs. [7]

Rather than invest time and money in creating new drugs from scratch, pharmaceutical companies often chemically re-engineer drugs already sold to the public, provide them with new names, develop massive advertising campaigns, and sell the “newly” created medications to the public as “the latest innovative breakthrough[s].” [8] These new drugs are sometimes referred to as “me-too” drugs because of their copycat nature; manufacturers use the same active ingredients of medications already on the market but achieve novelty by altering “dosage forms, routes of administration, or combinations with other ingredients.” [9] Me-too drugs are different from generic drugs, which the FDA defines as the “identical, or bioequivalent to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use.” [10] The problem with me-too drugs in terms of patent policy is that they contribute few additional social benefits over their original counterparts, yet are often just as costly due to their high litigation and advertising expenses. [11]

The National Institute of Health Care Management determined that between 1989-2000, “54% of FDA-approved drug applications involved medications that contained active ingredients already in the market.” [12] In addition, only a portion of these drugs were judged to have sufficient clinical improvements over existing treatments. “In other words, about 77% of what the FDA approves is ‘redundant’ from [a] strictly medical point of view.” [13] The pharmaceutical industry is not making as significant a contribution to medicine as they could if they focused more R&D dollars on drugs that could be more beneficial to society. When corporate pharmaceutical research is compared to university and government funded projects, the publicly supported projects are often more effective at creating useful new drugs. [14] This may be a result of their focus on researching more socially beneficial drugs, rather than pouring resources into replica drugs that will demand a large amount of advertising.

Marketing campaigns for erectile dysfunction (ED) drugs provide a model example of an inefficient use of funds. There are currently three ED drugs on the market, Viagra, Cialis, and Levitra. Viagra spends over $100 million dollars annually on advertising to distinguish itself from its competitors, despite the fact that all three drugs work in a similar fashion. [15] There are subtle differences in how long and quickly each drug works, but this does not justify forcing consumers to pay higher prices for such little innovation. [16] Although market competition is usually advantageous to consumers, in the case of me-too drugs competition is actually harmful because it forces companies to direct too much of their profits towards advertising and away from R&D. Manufacturers are forced to advertise their products in an attempt to distinguish themselves from the competition (which is usually an insignificant distinction).

One possible solution to correct this funding imbalance would be to eliminate direct to consumer (DTC) advertising. But this may do more harm than good. Not only would drug companies find new ways to spend large budgets to entice consumers to use their products, but DTC advertising has some significant benefits. The FDA recognizes that DTC advertising encourages patients to be “more involved in their health care,” and it helps “educate patients about their health problems, and provide[s] greater awareness of treatments.” [17]

A better solution is to change existing patent policy. Currently generic manufacturing is regulated by the Drug Price Competition and Patent Term Restoration Act of 1984, better known as the Hatch-Waxman Act. [18] Although there have been several alterations to this act, its basic provisions have remained the same. The Act provides that any drug with a patent will receive a twenty year protection from generic competition from the time of filing or seventeen years from the time of grant, which ever was longer. [19] However, the Hatch-Waxman Act does not block patent protections for me-too drugs. Me-too medications are capable of receiving their own patents because of their slight alterations on the original compound.

My proposal is as follows: all drugs should receive a ten year patent that includes current patent rights, as well as a complete protection from me-too competition (to be appropriately defined by the FDA). The patent would then continue for an additional ten years, but without the added protection from me-too competition. Therefore, after a medication is patented it still has a twenty year patent life, but under this proposal the first half will be free from all me-too and bioequivalent medication competition, and the second half will only be protected from bioequivalent compounds competition. Furthermore, me-too drugs, unlike new and innovative medications, would not receive any type of patent protection. Instead, these medications would be open to generic manufacturers as soon as ten years expire on the original patent.

This proposal would be beneficial to every party involved in the pharmaceutical industry. Original drug manufacturers could face a greater amount of competition up to ten years earlier in their patent life if a generic me-too version of their drug is developed; but, they should also receive higher profits over the first ten years of their patent because they will not be burdened by a substantial portion of the legal and advertising costs they currently endure due to market competition. Higher revenues coupled with lower advertising demands should lead to additional capital that can be devoted to future R&D. If advertising and litigation currently represent 50% of a drug’s cost, it is easy to imagine a drug may be more profitable under this new proposal when a) it will not share any of its market revenue for ten years and b) advertising and litigation costs will be greatly reduced (though not eliminated) both before and after this ten year mark.

Other manufacturers will also benefit from a change in patent policy. If they are able to develop a me-too alternative, generic manufacturers will be permitted to produce this less expensive medication alternative, as a generic, ten years sooner. Although they will need to make additional investments to have the me-too generic developed and approved, pharmaceutical companies should be willing to make these investments as they will lead to quicker access to a profitable market. Rival manufacturers not interested in manufacturing generic medications may object to this proposal because they will no longer be able to produce patented me-too drugs. Instead, these companies will be forced to research new and innovative compounds. Despite potential objections, these companies may nevertheless benefit because if they discover new medications through increased R&D, they will receive the same protection all branded manufacturers receive, a ten year competition-free patent and the profits that accompany it.

Finally, the public will benefit the most from this new proposal. Drug costs will be significantly reduced due to the early availability of generics. Additionally, consumers may save on drug costs because drug prices should drop due to decreased advertising budgets both before and after patent expiration. Consumers will also benefit from the creation of an increased amount of innovative drugs. Manufacturers, who once spent a large amount of their budget pursuing me-too drugs, will now have a stronger incentive to use their capital to research original chemical compounds that currently have no patent protections.

The successful discovery of a new medication is a difficult task. This policy may force some manufacturers into bankruptcy. However, evidence of higher success rates from university and government researchers indicates pharmaceutical manufacturers can and should conduct more efficient and successful R&D. In an ideal world, rather than having three ED drugs, we would have one ED drug and two medications for diseases that are currently untreatable. A change in patent policy could bring us one step closer to that world.

[1] Lehman, Bruce, The Pharmaceutical Industry and the Patent System, 2003 http://www.earthinstitute.columbia.edu/cgsd/documents/lehman.pdf
[2] AARP: Drug Prices Still Rising
http://www.consumeraffairs.com/news04/2005/aarp_drug_prices.html
[3] Pharmaceutical Companies are in the Business of Making Money from People’s Sickness
http://www.actupny.org/treatment/PharmcoProfits.html
[4] Boldrin, Michele, and David Levine, Against Intellectual Monopoly, 2005, chapter 9
http://www.dklevine.com/papers/anew09.pdf
[5] Id.
[6] Id.
[7] Spector, Rosanne, Me-too drugs; Sometimes they’re just the same old, same old
http://mednews.stanford.edu/stanmed/2005summer/drugs-metoo.html
[8] Id.
[9] Boldrin, chapter 9
[10] United States Food and Drug Administration, Office of Generic Drugs
http://www.fda.gov/cder/ogd/#Introduction
[11] Goozner, Merrill, The $800 Million Pill: The Truth Behind The Cost of New Drugs http://onthecommons.org/node/22
[12] Boldrin, chapter 9
[13] Id.
[14] Id.
[15] Stephens, Michael, E(rectile) D(ysfunction) TV,
http://www.alternet.org/mediaculture/19551/
[16] http://www.webmd.com/content/article/57/66227.htm
[17] Lewis, Carol, The Impact of Direct-to-Consumer Advertising,
http://www.fda.gov/Fdac/features/2003/203_dtc.html
[18] Mossinghoff, Gerald, Overview of the Hatch-Waxman Act and Its Impact on the Drug Development Process
http://www.fdli.org/pubs/Journal%20Online/54_2/art2.pdf
[19] Id.

Patent Trolls or Patent Holding Companies? Damages or Injunctions?

EBay, Inc. v. MercExchange, L.L.C was a disappointing case for many interested parties, because the decision was so narrowly drawn that there was not an outright win for either side. [1] The Supreme Court held that when determining whether to issue a permanent injunction, a court must apply the traditional four-factor injunction test based in the principles of equity. It rejected the Federal Circuit’s presumption that cases in which the patent is found to be valid and infringed should result in a permanent injunction. On the other hand, it also rejected the District Court’s reasoning that a firm’s willingness to license technology negates the irreparable harm element. It was unwilling to affirm either side’s desire to establish a general rule.

Although the decision was unanimous, Chief Justice Roberts’s concurrence suggested that the court also consider the reasons behind the long tradition of granting injunctions when assessing the four factor test, particularly the difficulty of exercising the right to exclude with only damages. On the other hand, Justice Kennedy noted the changing times, recognizing that when the patented invention is just a small component of the product the defendant is seeking to produce, an injunction can have tremendous public consequences and also overly compensate the patent holder. The narrow decision and divided reasoning demonstrate the controversial nature regarding patent injunctions as a remedy.

At the core of this controversy are a collection of patent holding companies, inventors, patent owners, and sometimes, technology transfer offices who have been dubbed “patent trolls.” These “patent troll” companies and individuals share a few common characteristics: (1) they have no significant assets except patents, (2) are not developing technologies and products based upon these patents, and (3) are threatening or undergoing patent infringement lawsuits. These patent trolls develop their extensive patent portfolio in numerous ways: they are the original owner or inventor, they purchased the technology from patent owner, they purchased patents on the cheap at the auctions of bankrupt companies or as some opponents of patent trolls say, they are the creative genius of a few entrepreneurial scientists and informed patent lawyers who seek to exploit the system.

The increasing presence of such patent trolls has certainly caused a dilemma in whether to support injunctions or damages as the appropriate remedy to such patent infringement cases. Perhaps the Supreme Court has avoided an outright rule because the controversy arises from the patent system itself, a tension between (1) the goal of the patent system: “to promote progress of science and useful arts” [2] and (2) the purpose behind the patent system: to benefit society with technological advances and artistic developments.

The patent holding companies do not directly benefit society because they are not producing products themselves but rather seeking to license their technology or enjoin other companies such Research in Motion from providing useful services such as the Blackberries. [3] However, patent holding companies do arguably promote the progress of science and useful arts, through the incentive system so strongly advocated by Jefferson. Many proponents of the holding companies note that without such companies, small inventors do not have the clout or resources to face and challenge large companies who infringe upon their patents. The patents of small inventors are effectively worthless if companies do not recognize their existence and appropriately license. Thus, the legally created incentive to invent is eliminated for small inventors, who the government historically has made an aim to protect. By banding together or selling their rights to litigious holding companies, individuals and small companies can deal with large companies on a more level playing field to establish licenses and receive monetary compensation for their innovative contributions.

Critics of these patent holding companies argue that granting injunctions [4] gives these patent trolls too much leverage in licensing negotiations and drives up the cost of operations. In a normal patent infringement case where both companies are developing related products, the companies will negotiate cross-licenses or license its technology at a reasonable price knowing that it may have to license other technology from its competitor in the future. However, because patent trolls do not develop products, they never have to worry about infringing other patents. Thus, there is no incentive to maintain good relations and settle upon a fair price. Rather, the incentive is to engage in years of litigation, a crippling personnel and financial burden on all but the largest companies, with as many companies as possible regardless of the merit of the infringement claim, since most companies would opt to settle rather than avoid the huge burdens of litigation. The recent $60 million settlement between Burst.com and Microsoft indicates the magnitude of money at stake. [5]

Yet, if courts award damages [6] instead of injunctions, it effectively creates a compulsory license similar to the British system. [7] This practice would drastically cut the bargaining power of the patent owner, discourage settlements, and increase the number of trials. Moreover, instability and uncertainty, which discourage investment and investors, would be introduced since damages are now decided on a case-by-case basis at the mercy of the judges and juries. Most importantly, it removes the power of deciding to what extent the patent owner should be rewarded and the infringer punished from the players themselves, and burdens the justice system, which is less equipped to understand the market, with this decision.

Proponents of the patent holding companies find support in injunctions in the property right to exclude. Furthermore, they argue that infringers have plenty of notice to settle or agree to a license or develop non-infringing technology. [8] Either way, proponents say that the settlements are not outrageous but rather an indication of the market value of the patent. Infringers will not agree to pay for use of the technology, unless it is sufficiently important and valuable. Lastly, these MercExchange supporters argue that it is unlikely that the small company is the victim in an injunction-based remedy system. Patent holding companies will tend to challenge large companies, just as tort plaintiffs go after defendants who have deep pockets. Rather, the small companies are more likely to benefit under an injunction-based remedy since they can better protect their own technology and assert their demands when negotiating licenses with larger companies.

So what are some possible solutions to this current battle? My personal opinion is to keep the four-factor injunctions test as prescribed by principles of equity and reaffirmed by eBay v. MercExchange. There is great merit in encouraging companies to develop their own solutions and determine the appropriate value for the infringed technology. Moreover, companies found to infringe have a significant amount of time and notice prior to the injunction, from the initial cease and desist letters through the extensive litigation process until the final decision. However, the present state is insufficient. Numerous fantastic suggestions are addressed in the hearings by the House Committee on the Judiciary Subcommittee on Courts, the Internet, and Intellectual Property, particularly in the testimony by Edward Reines [9] and Nathan Myhrvold.

Beyond improving the quality of approved patents and response time, I am a proponent of limiting the use of doctrine of equivalents, so that patents are limited in scope to precisely what their owners had prescribed. In this day and age, DOE is unnecessary as it is common practice to file numerous patents on the same invention, to file continuations, and make modifications which allow lawyers to fix any holes in their patent coverage or expand its scope. If a new use is developed for an invention, inventors can patent the new use. Removing DOE will improve notice for all potentially infringing companies as well as limit the number of potential infringers, thereby reducing litigation. DOE will also encourage settlement since infringement cases are more clear. Large companies are also more likely to invest in developing technologies that circumvent those that are patented since the boundaries of infringement are better defined.

Secondly, I support a more centralized system of tech transfers such that when companies (often those that are bankrupt) wish to auction off some or all of their patent portfolios, companies that have relevant technologies have an opportunity to acquire these patents. The system could be as simple as a eBay-like auction. This suggestion would alleviate or minimize market failures resulting from information costs about available patents. With this centralized tech transfer system, opponents of patent trolls no longer have a legitimate complaint about trolls acquiring random technology at bargain prices since all companies are on notice of the available patents and can now drive up the demand and price for that piece of technology. If they are found to infringe a patent they could have purchased in the patent, it is their own fault for not having the foresight.

Overall, I think the patent system should hold patent holders and companies dealing with intellectual property more accountable for their actions, whether through their writing and structuring of claims or their strategies in acquiring and disposing patents.

[1] EBay, Inc. v. MercExchange, L.L.C . 126 S.Ct. 1837 (2006).
[2] U.S. Constitution, Article I, Section 8.
[3] Research In Motion, Ltd. v. NTP, Inc. 126 S.Ct. 1174 (2006). See also DataTreasury Corp. v. First Data Corp. 243 F.Supp.2d 591 (N.D.Tex. 2003)(seeking to enjoin commercial banks from using the check imaging technology).
[4] 35 U.S.C. 29 § 283
[5] Underdog Or Patent Troll?: How Burst.com went from making software to suing tech giants http://www.businessweek.com/magazine/content/06_17/b3981070.htm
[6] 35 U.S.C. 29 § 284
[7] Patents Act 1977, Section 48
[8] “Patent Quality and Improvement”: Testimony of Nathan Myhrvold for the House Subcommittee on the Courts, the Internet, and Intellectual Property, Committee on the Judiciary, House of Representatives, on April 28, 2005
[9] “Patent Trolls: Fact or Fiction”: Testimony of Edward R. Reines for the House Subcommittee on the Courts, the Internet, and Intellectual Property, Committee on the Judiciary, House of Representatives, on April 28, 2005

Non-obviousness in the Science of Making Things Smaller

Nanotechnology, broadly defined as the study of matter at the atomic or molecular scale (1-100 nm), raises many potential issues for inventors seeking patent protection. This paper will explore the circumstances under which making something smaller is non-obvious, the multi-disciplinary challenges faced by the USPTO in examining these patent applications, and the policy implications of granting exclusive rights in a rapidly emerging field.

I. Obviousness in miniaturization – 35 U.S.C. §103

The miniaturization of an invention, standing alone, is unlikely patentable. In In re Rose, the US Court of Customs and Patent Appeal held that “differences in degree and/or size [are] not patentable distinctions” [1], suggesting that the mere scaling down of a claimed object is not sufficient to distinguish patentability over prior art. Recently, in In re Rinehart, the US Court of Appeals held that when the only difference between the prior art and the claims was a recitation of relative dimensions of the claimed device but the claims did not “exhibit qualitatively different phenomena” from the prior art, the claimed invention was not distinct from prior art [2]. However, as matter is reduced to the nano-scale, physical properties of materials often change drastically, giving rise to unexpected or previously unknown properties. For example, quantum dots – semiconductor nanostructures that have properties different from conventional-sized semiconductors – have remarkable properties based on quantum effects. Quantum dots, when excited with a beam of light, fluoresce with a narrow and symmetric emission spectrum that directly correlates with its crystal size, and can be fine-tuned to emit light at various wavelengths by altering the size of the core [3]. Thus, this invention is not merely a smaller version of the standard semiconductor. The new and improved properties that result when prior art is miniaturized may likely satisfy the “qualitatively different phenomena” necessary for finding non-obviousness.

While Gordon Moore, Intel co-founder, predicted that engineers would double the number of transistors on a chip every 18 months (Moore’s law), one might argue that nanotube transistors are obvious in the computing industry. 35 U.S.C. §103 restricts patents against inventions that “would have been obvious at the time the invention was made to a PHOSITA to which said subject matter pertains” [4]. Using the “teaching, suggestion, or motivation to combine” test, first mentioned by the Court of Appeals in In re Dembiczak, the non-obviousness analysis is squarely focused on the intellectual context at the time of the invention’s creation, and the miniaturization of existing macro-scale patented inventions will likely be deemed obvious if prior art describes with reasonable expectation of success a way to make the nano-scale version [5]. The creation of nano-scale structures often requires novel methods to overcome difficulties in manipulating miniscule molecules with bigger and bulkier instruments, as well as methods that deal with the tendency of molecules adhering to the manipulating apparatus. Furthermore, nano-scale structures can also be built by self-assembly, which involves the design of molecules that aggregate into the desired structure. Therefore, if nothing has been put forth publicly to teach, suggest or provide a motive for overcoming some of these fundamental hurdles, the requirement for non-obviousness is likely met with a proposal of an enablement method for the nano-scale invention.

The use of the TSM test is at the heart of the recently argued Supreme Court case, KSR International Co. v. Teleflex Inc., in which the petitioner is urging the Court to abandon the TSM test [6]. If the Supreme Court were to follow this recommendation, the inquiry would likely be focused on whether the claimed invention manifests the extraordinary level of innovation beyond the capabilities of a PHOSITA to warrant the award of a patent [7]. Abandoning the TSM test will take away some certainty and definiteness in determining obviousness for nanotechnology inventors. Some scholars have proposed the “reverse doctrine of equivalents” as an alternative legal doctrine to assessing the non-obviousness requirement [8]. Applying the two-prong test articulated in Texas Instruments, (1) the nano-scale device must have literally infringed the original inventor’s patent claims whereby the language of the claim “reads directly, unequivocally, and word-for-word” on the accused device, and (2) the nano-scale device must be “sufficiently different” from the macro-scale device [9]. Under the first prong, a broad patent without reference to scale might likely lead to infringement by the nano-scale invention if it performs the same function as the macro-scale counterpart. However, under the second prong, the inventor of the nano-scale device would emphasize the unique chemical and physical properties at the nano-scale. In the quantum dots example, the unique properties would be the quantum mechanical effects that were not seen in the macro-scale semiconductors. Thus, the reverse doctrine of equivalents might provide a possible legal framework to give inventors in the nanotechnology industry incentive to develop, while preventing literal infringement of already existing patents.

II. Challenges in the USPTO

The knowledge of the examiners and the expertise of the technology group at the USPTO is crucial to the grant of nanotechnology patents since the determination of non-obviousness requires intimate knowledge of the particular technology to get a sense of what a PHOSITA would know in light of all prior art. Historically, expertise in only one field of science was sufficient to effectively research and grant competent patents [10]. However, expertise in one field might not be sufficient to thoroughly understand nanotechnology patent applications, which will often involve some combination of biology, chemistry, physics, material science, electronics, telecommunications and engineering.

The UPSTO has previously evolved to meet the peculiarities of different fields. In 1988, the USPTO established a biotechnology examining group to address the unique issues that arise in less predictable biological systems [11]. While the USPTO might entertain the idea of establishing a specialized nanotechnology group or subgroups within existing groups to address nanotechnology, such a change will be unlikely in the near future since nanotechnology is still at its early stages of scientific development and the predictability of nanotechnology systems is not yet established. Until then, the shortage of qualified examiners, the ever growing number of nanotechnology patent applications and the ongoing backlog in the patent prosecution process are likely to add to the delay that may potentially stifle the growth of the nanotechnology industry in the US.

III. Policy considerations for granting exclusive rights

Refusing nanotechnology patents because of the mere existence of a macro-scale version would create unfair gains for prior art patent holders by giving them rights over subsequently developed nano-scale inventions. Such a result does not further the patent system’s underlying goal to “promote the progress of science” [12], and the public is less likely to benefit from the discovery of a nano-scale application. Various policy reasons justify the grant of property rights to nano-scale inventors. In situations where the claims of the original patent may block the nano-scale improvements, the nano-scale inventor will be forced to license the invention from the macro-scale patentee. High transactions costs from such negotiations may potentially reduce the incentive for the scientific community to research and develop this new area of science. However, even if the nano-scale inventor decides to enter into a licensing agreement, negotiations may breakdown if the parties hold diverging valuations of their invention. Finally, the nano-scale inventor is likely to be better equipped with the relevant technical expertise to commercialize the new technology, thereby absorbing some of the nontrivial costs that the prior art patent holder would face [13]. However, in granting these exclusive rights to nanotechnology inventors, the USPTO should also recognize that the multi-disciplinary nature also implies that a significant number of these patentees will own rights not just in the industry in which they participate, but in other industries as well. Thus, these building-block patents have the potential of creating a greater deadweight loss than improvement patents [14].

IV. Conclusion

While nanotechnology inventors face the surmountable obstacle of demonstrating non-obviousness, UPSTO and judges face the challenge of understanding these multi-disciplinary inventions to avoid granting and upholding overly broad patents. In a rapidly emerging field, a balance has to be struck between the benefits of exclusive rights that support research and development investments, and costs of exclusive rights that may impede improvements necessary to take nanotechnology from interesting lab results to commercial viability.

References:

[1] 220 F.2d at 463
[2] 531 F.2d at 1053
[3] See generally http://www.sciencenews.org/articles/20060603/bob8.asp
[4] 383 U.S. at 14
[5] 179 F.3d at 999
[6] Brief in Opposition, 2005 WL 1492885
[7] Brief of the United States, 2006 WL 2453601
[8] 2004 Duke L. & Tech. Rev. 10 (2004)
[9] 846 F.2d at 1371
[10] 2004 UCLA J.L. & Tech Notes 12 (2004)
[11] http://www.wws.princeton.edu/ota/disk1/1989/8924/8924.PDF
[12] U.S. Const. Art I, § 8, cl. 8
[13] 12 B.U. J. Sci. & Tech. L. 127
[14] 58 Stan. L. Rev. 601

Reinventing Obviousness: A New Standard for Patentability

Obviousness in Patent Law is a bit of an enigma. On its face it doesn’t seem very complicated. Yet, it has created more confusion and controversy than perhaps any other aspect of Patent Law. With the Supreme Court expected to re-evaluate the current obviousness standard in the upcoming months, the question of which direction the Court should take has become a hot topic.
In the following essay I will propose a new standard for obviousness. My test follows the current standard with the exception that it drops the motivational requirement for stylistic or design-choice matter. This essay will I) explore competing interests, II) identify the need for a new test, III) and outline the proposed test with arguments why it should be adopted.

I. Competing Interests

Twenty-three years ago the Court of Appeals for the Federal Circuit (hereafter CAFC) began invalidating patents when motivation to combine references could not be pointed to in the references themselves [1]. By narrowly interpreting the statutory language of 103(a) established by the Patent Act of 1952 to require an evidentiary basis to combine references, the court in many ways legitimized patent prosecution by imposing accountability. At the same time, however, the CAFC created problems by limiting an examiner’s flexibility to make rejections. Most recently, the current test has come under fire by twenty-four law professors who jointly filed an amicus brief before the Supreme Court last year [2]. According to this group, the current test should be expanded to a broad test which allows an examiner to reject based on intuitive assessment of obviousness. A broad test, the professors argue, would eliminate the current “inability to weed out obvious patents” [3].
Despite the lack of flexibility, there are vital interests at stake in maintaining the current test. To begin with, application of a broad test creates a time frame dilemma which makes examination a guessing game. Obviousness must be present at the time of invention, not when an examiner gets around to examination which may be more than four years later. Examiners – especially in areas of rapidly changing technology - must awkwardly ponder what would have been obvious several years earlier. The current test obviates this by looking only at references which predate the claimed invention.
Along similar lines, a broad test leaves the issue of hindsight defenseless as an examiner may “steal” motivation from the patent application itself. As Chief Justice Roberts remarked during KSR v. Teleflex, “In hindsight everybody says I could have thought of that… If you don't have the sort of constraint that [the current] test imposes, it's going to be too easy to say that everything was obvious” [4]. The CAFC has echoed this sentiment: “It is impermissible to use the claimed invention as an instruction manual or ‘template’ to piece together the prior art” [5]. Under the current test, motivation has to be found in the prior art and thus cannot be “stolen” from the application. Since the broad test requires no objective accountability, however, an examiner may glean motivation directly from the application itself and use it to piece together the claimed invention.
Most importantly, a procedural concern arises in that the broad test permits a deficient evidentiary record. The courts have consistently held that a documentation trail must exist for obviousness; hand-waving with nothing of substance to point to doesn't cut it [6]. Professor Charles Cotropia notes that a main reason for this insistence is that objective proof required by the current standard is necessary for evidentiary purposes in litigation [7]. Secondly, from an administrative law perspective, the CAFC has held that the USPTO as a federal agency must ground rejections in “objective evidence of fact” [8] and that reliance on common knowledge and common sense does not fulfill the agency’s obligation to cite references to support its conclusions [9].

II. Need for a New Test

The discussion above can be distilled into two needs with an obviousness standard: flexibility (solved by the broad test) and accountability (solved by the current test). While these needs are perhaps adversarial, my proposed test satisfies both. My test centers on the idea that the current test is flawed in its comprehensive nature and a flexible standard should be in place for stylistic or design-choice matter (i.e. matter not functionally enhancing the invention).
Why is the current test flawed in its comprehensive nature? Put simply, the current test wrongly presumes that obviousness requires motivation. Certainly obviousness usually entails motivation. For example, it is obvious to use an umbrella because one is motivated to stay dry. But obviousness doesn’t require motivation. Contrary to mainstream criticism [10], the problem examiners face with the current test is not in finding motivation where it exists and is hard to find, but rather in finding motivation where it doesn’t exist.
To illustrate my point, suppose a claim calls for performance of two independent processes in a certain order to achieve a result. A prior art reference that teaches performance in the reverse order to achieve the same result likely will contain no motivation as to why the processes should be reversed. This type of situation is stylistic or design-choice. Trying to find motivation here is like trying to find motivation for why someone puts his right shoe on before he puts his left shoe on.
Not only is motivation absent in instances like the one above, but it is also antagonist in other obvious situations. For example, suppose a method uses 4 variables to achieve a particular result when the prior art teaches use of 3 variables to achieve the same result. Of course, the 4 variable method is “obvious” over the 3 variable one in the sense that the equation Y=X+1-1 is “obvious” over the simpler Y=X, but what motivation could an examiner possibly find to make something more difficult? Finding none, the examiner would likely allow the patent to an applicant whose invention is more complex and thus detrimental to society.
The issuance of many ludicrous patents illustrates the problem of non-existent motivation. For example, the USPTO issued a patent for a “method of swinging on a swing” [11] in which a patent attorney patented his son’s stylistic method of swinging. What motivation could possibly be found to swing in the son’s individual style? Given examples like this, the need to modify the current standard to provide more flexibility is clear. However, one must also be cautious to balance the need for flexibility with the need for accountability.

III. Proposed Test

I propose that the obviousness standard should be altered to eliminate the requirement of motivation when the difference between the prior art and the claimed invention is stylistic or design-choice. In all other instances, my test retains the current standard because of the accountability benefits previously discussed. The proposed test should be adopted because it would provide needed flexibility, better the goals of the patent system, and make examination more efficient.
Eliminating the motivation requirement to reject stylistic or design-choice matter would give an examiner more flexibility. Under the proposed test, an examiner would be able to reject a “method of swinging” by noting that swinging is known in the art and the applicant’s personal swinging method is merely stylistic or design-choice. With greater flexibility, examiners will issue higher quality patents.
The proposed test will also better the goals of the patent system and obviate the need for accountability. Since stylistic or design-choice matter does not constitute an invention, accountability is unnecessary. The Constitution empowers Congress “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” [12]. Stylistic or design choice matter does not “promote the progress of science” and should not be afforded the same protection as functional matter. “Patents are awarded as inducement to bring forth new knowledge” [13] and benefit society, not to benefit people who have merely added their personal spin on known processes. The applicant who unnecessarily switches the order processes are performed, the “inventor” who clogs up an efficient 3 variable method by adding an unnecessary variable, and the boy who wants to patent his method of swinging all have no constitutional right to a patent because they have not promoted the “progress of science”.
Lastly, the new test would make examination more efficient. With greater flexibility, the examiner would not spend time digging through references to find motivation that doesn’t exist. Given the overwhelming backlog now at the USPTO, it would be particularly desirable to expedite prosecution.

IV. Conclusion

I propose a new standard for obviousness which retains the current standard for functional matter but eliminates the motivation requirement for stylistic or design-choice matter. This test would provide needed flexibility, better the goals of the patent system, and make examination more efficient. I submit that this test best satisfies the needs of accountability and flexibility and should be adopted.

References:
[1] ACS Hospital Systems, Inc. v. Montefiore Hospital, 732 F.2d 1572, 1577 (Fed. Cir.1984).
[2] See Br. of Twenty-Four Intellectual Property Law Professors as Amici Curia in Support of Petitioner, No. 04-1350;
[3] Id. page 9.
[4] retrieved 3/8/06 from: http://www.patenthawk.com/blog/2006/11/supreme_court_obviousness_moti_1.html
[5] Interconnect Planning Corp v. Feil, 774 F. 2d 1132 (Fed. Cir. 1985)
[6] retrieved 3/11/06 from: http://www.patenthawk.com/blog/2005/07/impermissible_hindsight.html
[7] Cotropia, Charles A. Patent Law Viewed Through an Evidentiary Lense: the “Suggestion Test” as a Rule of Evidence . BYU L.Rev (2006). Page 32.
[8] In re Lee, 277 F.3d 1338, 1344 (Fed. Cir. 2002)).
[9] see also Merges, Robert P et al. Intellectual Property in the New Technological Age. Aspen Publishers: New York, New York. 4th Edition. 2006. Page 233.
[10] See Br. of Twenty-Four Intellectual Property Law Professors as Amici Curia in Support of Petitioner, No. 04-1350. pages 22-23.
[11] U.S. Patent No. 6,368,227, issued April 9, 2002
[12] US Constitution, Article I, Section 8, Clause 8
[13] Graham v. John Deere Co. 383 U.S. 1 (1966)

Sirius, XM Sued on Patent

http://www.thestreet.com/newsanalysis/techstockupdate/10345292.html

This article goes along with what we were discussing in class today regarding patentees attempting to craft their patents to be as broad as possible.

Keystone Autonics is alleging that both XM and Sirius are infringing upon their patent. Keystone claims that their broad patent covers the technology that beams data to to the radios display, helps enable mobile features such as global positioning system, or GPS, location services, as well as crash- and theft-detection functions.

I wasn't able to find anything on Keystone, but they filed their patent in 2001. Here is a link for more information on their patent: http://www.uspto.gov/web/patents/patog/week03/OG/classification/classGroup_71.htm

YouTube found trouble in trademark law too...

The complaint (see link below) raised an issue about likelihood of confusion in trademark law: The popularity of the YouTube video-sharing site has led scores of confused consumers to mistakenly visit a tube supplier's Web site at utube.com, creating unwanted traffic and causing damage.

http://pub.bna.com/eclr/062628.pdf

Machinima: The Legal Landscape of a New Art Form

Machinima is film-making using the computer-generated images of a video game. The three-dimensional physics engines of modern video games provides computer animation in real-time, without the need for time-intensive rendering. Screen capture technology, available in most video games, allows a user to record the action as various players control characters in the game. Voice-overs are recorded independently and layered onto the visual recording.[1] Machinima has become increasingly popular, not just among video game fans, but among independent artists in general, for its low cost and time efficiency relative to live action film or other forms of computer animation.
Some artists have already succeeded in turning this art form into a commercial enterprise, and to date there has been no litigation concerning machinima.[2] However, as the genre grows in popularity, future machinima artists may face legal challenges in distributing their creations. While video game publishers may be reluctant to sue fans who distribute machinima videos for free, commercial machinima works are more liable to face legal challenges from copyright holders.
This paper will discuss the potential liability for copyright infringement for machinima works, and the possibility of a fair use exception, focusing primarily on commercially distributed machinima. Several potential schemes under which machinima can remain a legally viable art form will then be considered.
Copyright Infringement
In general, a machinima video will be considered an infringing derivative work of the particular video game used in production. A work is derivative if the material it incorporates from a copyrighted work would by itself be considered an infringing work.[3]
Most examples of machinima incorporate graphics (known as art assets) directly from the video game. In such a case, the direct copying of art assets would qualify as infringement, and it would not be necessary to apply a “substantial similarity” test in comparing the machinima graphics to the video game assets.[4]
Fair Use
In addition to being infringing derivative works, machinima videos would be unlikely to receive a fair use exception, especially if distributed commercially. §107 of the Copyright Act sets out four factors to consider in a fair use analysis.
The first factor, the purpose and character of the use, largely focuses on whether the use is transformative, and should favor machinima creators. Machinima uses an interactive video game to create a dramatic or comedic performance, an entirely new form of entertainment. Such use is clearly transformative.
On the other hand, commercial distribution would undermine a finding of fair use. Nonetheless, courts have found that a highly transformative use will support a finding of fair use, even if distributed commercially.[5]
It is also important to note that most machinima are not parodies of the original video game. While some machinima videos do criticize or comment on the original video game, machinima as a genre includes a diverse set of styles, including satire, music videos, and dramatic works. Thus, machinima in general should not merit special protection as commentary that needs to copy material from the target of its criticism in order to be effective.
The second factor, focusing on the nature of the copyrighted work, would favor copyright holders, as video games are largely fictional (as opposed to factual) works.
The third factor, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, will vary according to each particular machinima work. In almost all cases, the amount of copied material would be limited to the art assets, as opposed to the game’s computer code or its plot. Nonetheless, the graphics of a video game are a substantial element of the work. A court would further consider the substantiality of the art assets taken in light of the video game assets as a whole.[6] Machinima works which use central characters in the game, for example, would be less likely to be granted fair use status.
Another source of variation would be the amount of copyrighted assets used in any given machinima work. Certain machinima creators use exclusively graphics from the video game, whereas others may develop their own art assets. However, given the importance of ready-made graphics to the desirability of machinima over standard computer animation, it is likely that most creators will rely heavily on protected art assets.
The fourth factor in the fair use analysis is the effect of the use on the potential market for the copyrighted works. In this case, it is unlikely that machinima works would displace the market for the video games themselves, since the two works serve entirely different purposes. However, most commercial machinima works in existence have negotiated licensing agreements with video game copyright holders. Thus, there is a legitimate market for machinima licenses, and allowing fair use for these derivative works would eliminate the need for this market.
Although the transformative nature of machinima strongly favors fair use, this would be somewhat diminished by the commercial nature of a work. On the other hand, the high likelihood of harm to the licensing market strongly weighs against a finding of fair use. Thus, commercial machinima would be unlikely to be considered fair use. Non-commercial machinima works would be more likely to be granted a fair use exception, perhaps depending on the amount and substantiality of the work copied.
The Future of Machinima
Individual Licensing Agreements
Individual licensing is the current model for commercial machinima. Video game copyright owners are willing to grant licenses to these established creators for several reasons. A machinima production serves as an effective marketing device for a video game title, and also builds brand loyalty.[7] Moreover, a machinima work may increase the interest of others in creating machinima works using the same video game, resulting in increased sales of that title.
However, this system may ultimately limit the overall number of artists who can produce machinima works. Copyright owners may become more discerning about the types of projects with which it wishes to associate, fearing the tarnishment of its video game brand. Copyright owners may also find diminishing returns for each subsequent machinima project, especially in light of the transaction costs involved in negotiating individual licenses. At some point, the marginal license will no longer be profitable, and the number of licenses will be capped. Moreover, successful machinima creators may seek to leverage their bargaining power to gain an exclusive license to generate machinima works derived from a particular title.
Group Licensing Schemes
Machinima groups, such as Machinima.com, are currently attempting to obtain blanket licenses for use of particular game titles in machinima.[8] Success in these negotiations would certainly go a long way to opening legitimate commercial machinima to the masses.
From the standpoint of the copyright owners, such a scheme has the benefit of reducing transaction costs, while retaining the benefits in advertising, brand loyalty, and the direct increase of sales for machinima production. Indeed, the increase in brand loyalty would likely outstrip what would be possible under an individual licensing scheme, based on the goodwill generated by a blanket license.
The inability to control objectionable uses will remain a substantial concern of copyright holders, although this could be mitigated through terms of the licensing agreements. More importantly, a group licensing scheme may provide less revenue than would otherwise be possible under an individual licensing scheme.
Open Source Licensing of Video Games
Video games are occasionally distributed under an open source of free software license, most frequently under the General Public License (GPL).[9] Although the GPL applies to software code, it also includes copyleft licensing terms, which would apply to derivative works. Since the copyleft guarantees free use, modification, and sharing of the work it protects, it would permit the creation machinima, while effectively precluding its commercial distribution.
User Owned Intellectual Property
Advances in video game technology have allowed publishers to give their users more control over the creation of in-game art assets. Publishers could then grant their users intellectual property rights in any art asset they create within the video game. One early example of this system is Second Life, a new genre of video game described as an online virtual world. Almost all art assets in the game are created by Second Life users, which currently number over 4 million worldwide.[10] Under this model, rather than seeking permission of the game publisher/developer, a machinima creator deals with individual content owners.[11]
Conclusion
While most machinima productions will infringe upon copyrighted video games, and may not receive the benefit of a fair use exception, these legal issues are not likely to impede the development of the genre as a whole. Indeed, commercial machinima seems likely to flourish. Holders of video game copyrights have strong incentives to license their intellectual property in order to encourage this art form. Indeed, the only question seems to be how generous they will be in the licenses they grant. Finally, as both video games and users become more sophisticated, open source licensing and user-owned content will provide opportunities to those unable to receive a license from copyright holders.

References:
[1] http://www.machinima.org/machinima-faq.html (viewed on 03/08/07)
[2] Machinima and Copyright Law, Journal of Intellectual Property Law. (Fall, 2005)
[3] Anderson v. Stallone, 11 USPQ2d 1161 (C.D. Cal. 1989)
[4] Id.
[5] Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994)
[6] Machinima and Copyright Law
[6] American Geophysical Union v. Texaco Inc., 60 f.3d 913 (2d Cir. 1994)
[7] http://www.muproductionsonline.com/2006/01/machinimas-future-and-games.html (viewed on 03/07/07)
[8] http://lsolum.typepad.com/copyfutures/2004/10/machinima_red_v.html (viewed on 03/09/07)
[9] http://www.codeproject.com/managedcpp/Quake2.asp (viewed on 03/09/07)
[11] http://en.wikipedia.org/wiki/Second_life (viewed on 03/09/07)
[11] http://www.secondlifeinsider.com/2007/01/04/permission-to-shoot/ (viewed on 03/09/07)

Open-Source Soft Drinks?

Apparently, the open source philosophy has been applied to soft drinks; here is an open-source recipe for something called OpenCola. It is interesting that this, too, is a close facsimile of an already available product. The Wikipedia article on the stuff mentions that as recipes are exempt from copyright, the legal grounds for applying the open source license to this are rather shaky. I think it's more of a way to publicise the open source movement than anything more serious.

DMCA’s Safe Harbor Is Dangerous For Business

The Online Copyright Infringement Liability Limitation Act [1], or Title II of the Digital Millennium Copyright Act (DMCA), is a compromise achieved in Congress between the interests of online service providers (OSPs) and copyright holders. The legislation protects OSPs from secondary liability for users’ copyright infringements in exchange for providing an effective mechanism for “expeditious” takedown, upon notice by the copyright holder, of allegedly infringing materials. The Congressional intent of the legislation was to achieve a balance between “securing copyright in the global, digital environment” and the necessity to protect OSPs from the legal uncertainties of copyright jurisprudence and potential crushing secondary liability, both of which undermined “substantial investments necessary to continue the expansion … of the Internet” [2]. In pursuit of this goal, Congress created an unprecedented extra-judicial mechanism for private enforcement of copyrights. Numerous commentators have expressed concern that DMCA’s “safe-harbor” provisions potentially infringe on the First Amendment rights of the Internet users [3]. This paper argues that in addition to these much discussed constitutional concerns, “safe harbor” provisions can also potentially have a negative effect on development and growth of commercial enterprise on the Internet, thereby negating one of the Act’s stated goals of expansion of the Internet.

Procedural protections provided by §512 were designed to protect the users of the Internet. In its “Notice-Takedown-Putback” framework Congress focused on the Act’s impact on an individual Internet user: “If material is wrongly taken down … end user will be given notice of the action taken, and … [has] a right to initiate a process that allows them to put their material back on-line” [4]. However, the safety valve of “safe harbor” provisions is not an adequate protection of individual user’s First Amendment rights. Supposedly infringing material is subject to removal, not only before a judge reviews the complaint, but also likely before the alleged infringer even receives the notice. While “safe harbor” provisions provide for a mechanism to protest against the complaint by submitting a counter-notice, the material, once removed, must stay down for at least 10-14 days [5]. Ten days to two weeks may greatly diminish the value of the time-sensitive information. In addition to being a clear threat to First Amendment rights, this process can have a tremendously chilling effect on commercial enterprise doing business on the Internet. Any E-commerce venture would sustain serious damage from being taken offline for two weeks.

Furthermore, while counter-notice provides for a mechanism to have the content restored, in practice the complaining party must merely file an action for injunctive relief in federal court to have the OSP maintain the allegedly infringing content offline until the judicial resolution [6]. Litigation in the federal courts is costly and time-consuming. The alleged infringer must defend the legitimacy of use of the expressive material in question, while that material remains offline. In the case of the E-Commerce enterprise this could mean that the company must litigate the merits of the copyright action while its business has been completely suspended. This result is equivalent to an award of a temporary restraining order and preliminary injunction without any hearing before a court or the posting of a bond [7]. Generally, “a preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion” [8]. “Safe harbor” provisions allow a moving party to overcome the high burden necessary for the preliminary injunctive relief through quick and cheap self-help measure. This creates an incentive for cease and desist DMCA actions of questionable merit by parties seeking to gain competitive advantage or otherwise hurt competing interests. In the case of the E-Commerce enterprise, DMCA provides a way for a business to maliciously inflict financial harm on a competitor.

DMCA includes a provision to discourage malicious behavior: “any person who knowingly materially misrepresents under this section … shall be liable for any damages, including costs and attorney’s fees” [9]. In practice, however, this provision sets a very high threshold for remedy. The copyright law is full of uncertainties about protectability and fair use of various materials. Specifically, in the case of E-Commerce, product information is generally not copyrightable but certain other creative elements such as original product photos might be. In most cases a malicious party can likely make a showing of a “good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law” [10]. In Rossi v. MPAA, [11] the Ninth Circuit established that for the purposes of DMCA the “good faith” standard should be subjective and does not require an objective showing of suspected infringement, such as results of a “reasonable investigation” [12] The burden of establishing that a complaining party “knowingly materially misrepresented” becomes nearly unreachable in the courts that adopt the subjective “good faith” standard. Since adoption of DMCA, the remedies for misrepresentation have been granted in only one case where the court found that the company “deliberately sought to suppress publication of content it knew was not subject to copyright protection” [13]. This case is an exception as it involved a particularly egregious misuse of DMCA cease and desist action by a clearly malicious actor. “While the Diebold decision shows the willingness of courts to sanction this kind of behavior, the ease with which the DMCA can be invoked to further improper ends is unsettling” [14]. In the context of E-Commerce enterprise, DMCA provides an incentive for a financially stronger company to destroy or significantly hurt a smaller competitor by forcing them into litigation while their business has been taken offline.

The negative effects of DMCA are exacerbated by the incentive that it offers OSPs to take advantage of “safe-harbor” provisions. Economics and assumption of risk instruct rationally behaving OSPs to shut down an allegedly infringing website with little or no investigation [15]. Search engines provide a good illustration of this effect. Application of contributory and vicarious liability to search engine providers is a largely undecided area of law. DMCA “safe harbor” provisions do not clarify the extent of any potential secondary liability but specifically limit all liability if the search engine provider follows the set of “notice and takedown” procedures [16]. “Given the uncertainty, it is not surprising that service providers have embraced the opportunity to take advantage of these provisions” [17]. The wide adoption of DMCA prevents development and clarification of copyright jurisprudence. The unsettled questions of secondary liability will remain unresolved because all economically rational service providers choose to protect themselves from liability by “safe-harbor” provisions [18]. Submission of DMCA cease and desist letter to a search engine can be particularly damaging to an E-Commerce enterprise because removal from the search engine index eliminates users’ ability to find the products offered by the business. Furthermore, search engines do not have a relationship with most of the sites in their index. Oftentimes, they are unable to provide a notice of a takedown because of lack of contact information. Finally, because of the nature of search engine indexing, reinstatement in the search results is not instantaneous. After the site is reinstated, it can potentially take months to achieve the same standing as before the take-down. Because of the dynamic nature of the Internet, the damage can often be irreparable.

The effects of DMCA legislation are difficult to evaluate because of the private nature of the DMCA action. The cease and desist letters and counter-notifications are not part of the public record. However, based on the empirical study by ChillingEffects.org DMCA legislation is routinely misused [19]. Corporations and business entities are the primary senders of DMCA notices. Nearly a half of all notices in the study were targeted against competitors. At least a third of notices surveyed contained serious flaws relating to substantive legal questions of the underlying claims or technical statutory noncompliance of the notices. Startling 31% of §512(c) and (d) notices raised significant questions relating to the underlying copyright claim such as fair use defenses, other substantive defenses, very thin copyright, or non-copyrightable subject matter. Finally, the study indicates very few counter-notices and cases of putback. While the methodology of this early study is not perfect, with small sample size of voluntarily submitted notices, the results indicate that DMCA is having a chilling effect on both expression and commercial enterprise on the Internet.

Most commentators have focused on the impact of DMCA on the First Amendment rights. While the chilling effect on expression is widely discussed, the effect on E-Commerce enterprise has been mostly overlooked. DMCA poses a threat to online business. Small E-Commerce ventures, that and play a key role in development of online marketplace, are particularly vulnerable. DMCA’s unprecedented extra-judicial self-help provisions put E-Commerce entrepreneurs at risk. The private nature of DMCA disputes keeps the extent of the problem from the spotlight. The effects of “safe harbor” provisions on E-Commerce must be evaluated to see if DMCA’s stated purpose of promoting the growth and development of the Internet is being achieved.

References:
[1] 17 U.S.C. 512.
[2] 144 Cong. Rec. S11, 887-02 (Oct. 8, 1998) (Statement of Sen. Hatch).
[3] See, e.g. Jonathan Bank & Matthew Schruers, Safe Harbors Against the Liability Hurricane: The Communication Decency Act and the Digital Millennium Copyright Act, 20 Cardozo Arts & Ent. L.J. 295 (2002); Matt Jackson, One Step Forward, Two Steps Back: A Historical Analysis of Copyright Liability, 20 Cardozo Arts & Ent. L.J. 367 (2002); Alfred C. Yen, Internet Service Provider Liability for Subscriber Copyright Infringement, Enterprise Liability and the First Amendment, 88 Geo. L.J. 1833 (2000).
[4] 144 Cong. Rec. S4884-01, 4889 (May 14, 1998) (Statement of Sen. Ashcroft).
[5] 17 U.S.C. 512(g)(2)(C).
[6] 17 U.S.C. 512(g)(2)(C).
[7] Alfred C. Yen, Internet Service Provider Liability for Subscriber Copyright Infringement, Enterprise Liability, and the First Amendment¸ 88 Geo. L.J. 1833 (2000).
[8] Mazurek v. Armstrong, 520 U.S. 968, 972 (1997).
[9] 17 U.S.C. 512(f) (emphasis added).
[10] 17 U.S.C. 512(c)(3)(A)(v).
[11] 391 F.3d 1000.
[12] Id. at 1003-1004.
[13] Online Policy Group v. Diebold, 337 F. Supp. 2d 1195 (N.D. Cal. 2004).
[14] Diane M. Baker, Defining The Contours Of The Digital Millennium Copyright Act: The Growing Body Of Case Law Surrounding The DMCA, 20 Berkeley Tech. L.J. 47 (2005).
[15] Lawrence F. Rozsnyai, Easy Come, Easy Go: Copyright Infringement And The DMCA’s Notice And Takedown Privision In Light Of Rossi v. MPAA, 2 Shindler J.L. Com. & Tech. 15 (2006).
[16] 17 U.S.C. 512(d).
[17] Craig W. Walker, Application Of The DMCA Safe Harbor Provisions To Search Engines, 9 Va. J.L. & Tech. 2 (2004).
[18] See e.g. Google’s DMCA policy at http://www.google.com/dmca.html.
[19] Jennifer Urban & Laura Quilter, Efficient Process Or “Chilling Effects”? Takedown Notices Under Section 512 Of The Digital Millennium Copyright Act, 22 Santa Clara Computer & High Tech. L.J. 621 (2006).

DVDs not just rip protected

A friend of mine ran into this problem when trying to make a legal copy of a DVD of The Outsiders for backup purposes:

http://whatsonhdtv.blogspot.com/2006_11_01_archive.html

ArccOS is a DRM which, according to Sony (who developed it), adds a layer of protection in conjunction with CSS to prevent "1:1 duplication" as well as ripping.

http://www.sonydadc.com/americas/news.news3.go

I guess motion picture content owners are not limiting their measures to protecting only "ripping" anymore. How can a law-abiding consumer make a copy for archival purposes anymore? Although there are reports that Sony has discontinued the use of this technology, Wikipedia provides this list of recent DVD releases with ARccOS protection: "Hostel" (18 April 2006), "Underworld: Evolution" (6 June 2006), "The Pink Panther" (13 June 2006), "RV" (15 August 2006), "Lucky Number Slevin", and "Pirates of the Caribbean: Dead Man's Chest" (5 December 2006), as well as current releases of "Flightplan".

Oh well, my other friend bought a pirated copy of Flightplan in a Beijing market and said it was no good anyway.

Anti-DMCA forces

While doing a simple Google search for "DMCA" I came across the following anti-DMCA website. The site provides quotes, summaries of DMCA lawsuits, and information about "DMCA-like" legislation in other countries. It also gets into issues which don't seem directly related to the DMCA, like the vulnerability of electronic voting machines to hackers. Here's the URL:

http://www.anti-dmca.org/

Make sure you check out the quotes. Apparently Pres. Lincoln and austin@computershop.calgary.ab.ca.nospam alike are big anti-DMCA advocates.

Windows Vista DRM cracked

Since we will be discussing DRM in class, I thought this might be of interest to the PC users who are thinking about upgrading to Vista in the near future. Microsoft has been advertising Vista for its higher security, but it also comes with a whole new set of DRM protection mechanisms. With HD content and Blue Ray discs being the new hot thing, Vista has labeled a lot of that content "premium content" that can only be displayed if you use hardware that offers DRM support. Which means many users might face many frustrations when trying to play their HD content on a system loaded with Vista, but it turns out their audio or video card isn't compatible with the new stricter DRM standards. There's a really good article about this at:
http://blog.wired.com/monkeybites/2007/02/vista_month_wel.html

But of course, where there is Microsoft there are hackers, and Alex Ionescu has written a code to bypass the Vista DRM system. You can see the details on his blog: http://www.alex-ionescu.com/?p=24. Sadly, due to the DMCA he is unable to release the code to the public (which could be used for legitimate reasons such as playing HD content you've paid for on older hardware), for fear of law suits.

"Music Wants to be Free

In the Feb 10-16th edition of The Economist, there is an article entitled “Music wants to be free.” It discusses Steve Jobs recent essay published on Apple’s website entitled “Thoughts on Music” (http://www.apple.com/hotnews/thoughtsonmusic/). Digital Rights Management (DRM) is the technology everyone, including Apple, uses to guard against theft of downloaded music. Jobs, under criticism from European regulators to open up Apple’s DRM technology (“FairPlay”) so that music purchased from iTunes can be played on digital devices purchased from other companies, offers a different solution.

Previously, Apple has supported DRM because it kept the “pirates at bay.” But in his essay, Jobs says that the record companies demands that Apple protect the music using this technology is the reason for the current system Apple has in place:

“Apple was able to negotiate landmark usage rights at the time, which include allowing users to play their DRM protected music on up to 5 computers and on an unlimited number of iPods. Obtaining such rights from the music companies was unprecedented at the time, and even today is unmatched by most other digital music services. However, a key provision of our agreements with the music companies is that if our DRM system is compromised and their music becomes playable on unauthorized devices, we have only a small number of weeks to fix the problem or they can withdraw their entire music catalog from our iTunes store.”

Mr. Jobs now advocates for the position that music companies sell their music unprotected. This new “solution” seems like a shrew political move by Jobs to shift the blame (which I know from personal knowledge comes from consumers as well) away from Apple to the record companies. But the Economist article argues that getting rid of DRM would promote competition between MP3 players. Apple is in a good position to fare well in a competitive market due to their current situation. This freeing of the market would of course greatly benefit the consumers who are currently locked into a particular player due to the difficulty in transferring music. As the article and Jobs point out, record companies may be in favor of a switch to selling unprotected music for the simple reason that piracy may be impossible to stop.

I have a couple of quick thoughts of my own on this situation. I believe that a far bigger problem than the transferability of the music is the fact that iPods seem to brake every two seconds. In fact I read an article about a year ago in the NYTimes that this fragility in the iPod was an increasing source of consumer frustration. Hopefully, if music begins to be sold unprotected, the increased competitiveness in the market will force Apple to improve this aspect of their product.

Also, a big part of this story is what partly prompted this essay from Jobs. European regulators are putting a lot of pressure on Apple to license FairPlay to rivals. It seems that our current IP regime will face ever increasing clashes from the rest of the world (including the ever more powerful China) that may create a whole new set of problems.

Fair Use & Google News

Fair Use and Google News

In a recent decision by a Belgium court on February 13th, 2007, Google News was found to have violated copyright laws by publishing links to articles from Belgian newspapers. While it is possible that this decision could have an impact across Europe since copyright laws and notions of fair dealing are relatively uniform throughout the continent, it is unclear yet what impact, if any, this adverse verdict will have on Google News in the United States. However, courts should apply the fair use doctrine codified in 17 U.S.C. §107 and allow it to serve as an affirmative legal defense to copyright infringement for search engines whose automated software scours the internet to assemble an aggregate of news articles for public use. This is in accordance with the broader goals of United States copyright statutes of promoting the advancement of arts and sciences through the dissemination of information.

Google recently confronted a virtually identical case in Agence-France Press v. Google, where AFP, one of the world’s top news agencies, sued Google for copyright infringement under U.S. laws for reproducing its photographs, headlines, and story leads. The fair use doctrine provides a four factor test in assessing a defense to an alleged claim of infringement: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. This test properly applied to Agence-France Press v. Google as well as prevailing public policy concerns provides a sufficient legal basis to reject copyright infringement claims against search engines that aggregate news.

Purpose and Character of Use
Google News serves to provide a convenient one-stop source for users to view headlines and leads from over 4,500 English-language news sources. The website does not display the full text for any article but rather provides users with computer-generated links to the source of the article through the headline and lead or in some cases a thumbnail image of the article’s picture. In order to assess whether the purpose and character of Google News favors newspapers or Google, the commercial or lack thereof and transformative or consumptive nature of the website must be examined.

The Google News website does not display any advertisements nor is any revenue generated through the direct use of that service. Therefore, on the surface, the service does not appear to be commercial. However, it may be argued that while Google does not derive any direct financial benefit from the site, it is not precluded from indirect financial benefits in the form of increased traffic and greater brand recognition. Such remote benefits can hardly be seen as a form of commercial exploitation of the user’s copyrighted materials. Even if such use is considered commercial, courts have held that this alone does not defeat a fair use defense to copyright infringement action, particularly when it benefits the public in the dissemination of creative works.

The next part of the inquiry into the purpose and character of Google News’s use of newspaper articles is whether it is transformative or merely a consumptive use . Google’s service is a transformative use and satisfies the requirements described in American Geophysical Union, et al. v. Texaco, Inc. The court in Texaco defines a transformative use as “making some contribution of new intellectual value and thereby fostering the advancement of arts and sciences” American Geophysical Union, et al. v. Texaco, Inc, 60 F.3d 913, 923. Granted Google News reproduces headlines, leads, and in some cases, thumbnail images, the service also serves a productive function by categorizing articles, aggregating similar news under a single headline, and remembering a user’s interests to provide relevant recommendations. The totality of these services can hardly be dismissed as consumptive.

The purpose and character of use factor is clearly in Google’s favor. Even if the service is held to be commercial, that alone does not preclude a fair use defense.

Nature of Copyrighted Work
Courts have uniformly upheld a broader fair use doctrine in situations where the work in question is factual as opposed to fictional. In evaluating this factor, the public interest concern is particularly important as the law generally favors dissemination of factual information for the advancement of science and arts. The Supreme Court in Harper & Row, Publishers, Inc held this element to be in favor of the plaintiff because a copyright holder is entitled to the right of first publication. Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 555. However, this is not the situation here because Google is only able to access and link to the article after it has been published online. Given the strong interest in promoting the dissemination of news as well as the fact that the information has already been published online by the news agency, courts would adopt a broader fair doctrine framework here and find this factor to be in favor of Google as well.

Amount and substantiality of the portion used in relation to work as a whole
This factor is rather ambiguous in this case and may even been seen as favoring AFP or other news agencies. In Harper & Row, the Supreme Court rejected the argument that an “infinitesimal taking” of quotes verbatim would provide a defense to infringing on a copyrighted work. Harper & Row, 471 U.S. at 566. Furthermore, courts have held that there is both a qualitative and quantitative component that must be assessed under this factor. While quantitatively this may not constitute a significant percentage of the article, qualitatively, the headlines and lead might arguably be the copyrighted work’s most important component. Although the quantitative component favors Google, the qualitative factor here may not and lead this factor to be weighted against them.

Effect of use upon the potential market for or value of copyrighted work
Courts have treated this element of the test to be the most important and rightfully so. The goal of copyright law is primarily to promote the free flow of information of artists to the general public. Artists would certainly be deterred in doing so if their work could be reproduced in a manner that prevents them from reaping the benefits of their efforts.

In this instance, in order to demonstrate that the alleged infringement by Google News has a negative impact on AFP’s market value for its services, AFP would need to establish that internet users are deterred from using their services and reading the full text of the article. However, it is doubtful that such a deterrent effect would exist, and it is likely that it would even encourage some users to read the entire article available through AFP. Furthermore, in other instances where such “snippets” of information was provided, it enhanced the marketability of the copyrighted product. While the true outcome of this hinges on whether this use supplants AFP’s normal market, it is likely that Google News expands AFP’s normal market by reaching out to users that might not normally reach AFP while simultaneously providing a public benefit.

Conclusion
Although copyright protection can be justified through moral justification or in terms of Locke’s labor theory, the monopoly privileges granted under patent, trademark, and copyright laws are not granted for the purpose of conferring a private benefit upon an individual or corporation but rather to motivate authors and inventors to allow public access to their products. Sony Corp. of America v. Universal City Studios, Inc. 464 U.S. 417, 429 (1984). Google News is a service that allows users to quickly and systematically find breaking and general news stories from across the globe and from multiple sources. Providing headlines, leads, and photos are a necessary part of the service, and in doing so, Google News has not taken more of the copyrighted material than is reasonably necessary. Although Google itself is a commercial entity, Google News does not display any advertisements or directly profit from the copyrighted works of others. In fact, in some sense, Google News serves as a research tool that would be in accordance with the aims of the fair use doctrine. The Supreme Court in Campbell v. Acuff-Rose Music, Inc. held that each factor in the four factor test must be analyzed together with the broader purpose of copyright law in mind. The majority of the four factor test for fair use, especially when seen in light of the aims of copyright law, favors extending the fair use doctrine to search engines providing services like Google News. Placing restrictions on such services would reduce the free flow of information and exclude valuable research tools from the public domain.