The Boundaries of IP at William & Mary

The Boundaries of Copyright and Trademark/Consumer Protection Law

Jason Mazzone, Brooklyn Law School, Who Should Regulate Fair Use?

Constitutional lawyers thinking about boundaries think about private/state action; separation of powers; division of authority between federal/state. Administrative agencies can develop expertise, fill in details of statutes, aid with enforcement, and provide specific rules to govern private conduct. So his paper is an effort to think about how agencies could play a helpful role in IP, particularly in fair use.

Fair use is a classic case where agencies could help. Standard ad law story: Congress crafted a deliberately broad and open-ended statute. The courts decide fact-specific disputes. Neither Congress nor courts allow us to predict in advance what use would be fair. Strict liability doesn’t tell you where the boundary is, only what happens once you’ve crossed. Result: copyright owners leverage vagueness and take advantage of fear of legal penalty. E.g., notices that claim that no portion of a book can be copied without consent. This chills a lot of valuable conduct. Another problem: contract law is being used to restrict rights that copyright would otherwise grant.

This is undesirable, and Congress and the courts haven’t helped prospective users abide by the law. When things go to private regulation, fair use erodes.

Administrative agency: Two models, though he’s still working through them. First, Congress would (1) make it unlawful to interfere with fair uses of copyrighted works, and subject offenders to civil penalties, a kind of consumer protection statute; (2) create an agency to enforce this statute, perhaps before an ALJ; (3) specify that federal fair use law, including agency regulations, preempt state contracts in case of conflict. The agency would define standards for fair use. Defendants could still assert fair use, but courts would defer to the agency’s regulations, which should be pretty specific, which would help make clear before getting to a judge whether any particular use is fair or not.

Second model: agency would have even more control over infringement determinations, including adjudicative authority. A copyright owner alleging infringement would be required to file a complaint with the agency; if no fair use defense were asserted, the case would proceed. If it were asserted, the agency would have authority to resolve the fair use claim; the case could go forward after, but again there’d be deference.

Agencies are good at adapting.

Rebecca Tushnet, Georgetown University Law Center, Economies of Desire: Fair Use and Marketplace Assumptions

I’m interested in the boundary between incentives and tastes. The incentive story, copyright’s standard justification: people only produce the stuff you want if they’re paid in money or other utility. Taste: people will consume the good at issue up until the cost is no longer worth it to them.

How do we get singers and painters and actors and writers? Creative production often functions like a taste, except instead of consuming creative works, people have a taste to produce them.

Won’t spend much time on the standard justification; just note that it’s everywhere in the literature, even among reform proposals. E.g., Judge Kozinski and Christopher Newman proposed eliminating fair use for derivative works, but requiring profits from derivative works to be shared. This has a baseline assumption that profits will routinely be available; noncommercial production doesn’t fit.

Creators’ accounts of production are about desire: addiction, obsession, excess. Arthur Miller said: “If somebody doesn’t create something, however small it may be, he gets sick.” Michael Chabon writes to entertain; his first story was a Sherlock Holmes pastiche, spurred on by the gaps in the original text that seemed to him an invitation to continue, as all enduring literature offers an invitation to continue. Steven Brust wrote a Firefly novel and released it under a CC license because, he said, “I couldn’t help myself.” Fans working in noncommercial spaces, often with limited cultural capital (though subcultural capital may be available to them), say the same things—writing is like a drug. Clay Shirky says that Perl is a viable programming language because millions of people woke up today loving Perl. People create ship designs for the game Pirates of the Burning Sea, researching in nautical museums, because they love to do it—some of them don’t even play the game; they just like to make ships.

Using the language of incentives is nonsensical with these types of creativity. You don’t need to give people incentives to speak; you need to threaten them to get them to shut up. The desire to create is self-renewing and self-reinforcing.

Implications: (1) Copyright law, even in its own economic terms, plays a minor role. Copyright isn’t the cost/benefit at issue. It’s the jobs the creators would be doing instead of writing/drawing/whatever: most artists pay for their time spent creating out of the opportunity cost.

(2) Incentive stories can mislead us about the value we want to protect. Under the First Amendment, we protect religious conviction not only, and not even primarily, because we worry about the chilling effects of persecution on religion. Devout believers have been willing to go to jail and even die for their causes; they’re hard to chill. We protect religious faith because it’s so important, and a core wrong of suppression is its disrespect of the believer.

(3) The standard move when people start talking about how creators gotta create is to punt to intermediaries/distributors, who are supposed to act like perfectly rational actors even if those crazy artists are unreachable through incentives. That’s not wrong, but it has implications. One of which is that intermediaries are essentially in the position of the proposer in the ultimatum game: Because creators really really want to create, intermediaries can offer a lower price, and creators will accept a lower price, than they would if incentives mattered more, just as proposers will offer a lower price and responders will accept a lower price in the ultimatum game when some reason is offered why the proposer has the role of proposer.

This creates distributional concerns. Themes of exploiting labor turn up both in discussions of the mature copyright industries—music, television (writers), book publishing—and also in discussions of user-generated content. The incentive model, while it has no idea why people create, is happily indifferent to questions of justice as well once people have started producing: people who don’t need incentives wouldn’t participate if they didn’t get sufficient psychic benefits from producing. But failure to interrogate tastes should disturb us when it has significant distributional consequences. How did those tastes get formed? What are the alternatives? Analogy: women’s assumed natural proclivity for housekeeping and childrearing—we haven’t been thought to need incentives/payment, because we do it for free, even as economic structures and social conditions made alternatives hard to find.

(4) Implications for fair use. Joanna Russ, the sf writer, suggested that the “what if” of slash fan fiction was “what if I were free?” What would I do, what would I write? That’s a very different stance than the rhetoric of freedom in open source; I’ve always hated “free as in speech, not free as in beer” because of the unexamined assumptions there about what counts as free speech. What free is for creators from subordinated groups is actually a pretty fraught question, as John Stuart Mill eloquently noted in The Subjection of Women. Women as writers have rarely had the luxury of exclusive control to give away.

Fan fiction foregrounds desire. Desire is of course central to economic life: we have to want stuff to work for it. But desire is hard to contain, and stories about desire tend to make homo economicus uncomfortable. Stories about desire—stories told outside the money economy—are fundamentally based on the inexhaustibility of the imagination. This should lead us to resist any contraction of fair use for noncommercial works, even if licensing markets are said to be developing, and even if the nontraditional sexualities often expressed in fanworks become more accepted in mainstream media. The logic of scarcity that copyright imposes is inappropriate for these creative works.

Jane Winn, University of Washington Law School, Better Regulation for Consumers: Integrating ICT Standards and Consumer Protection (with Nicolas Jondet, University of Edinburgh)

Her focus: ecommerce. Commercial transactions tend to bump into IP.

What is better regulation? Deregulation is widely discredited in the US due to the collapse of capitalism as we know it; in an abstract way, better regulation requires defining the policy objective then achieving it in the most efficient, equitable way. So what are our policy objectives? Balancing interests of consumers, producers, other producers; maximizing gains from trade/return to investors; other complex stuff.

Once we’ve done that, how to match it up with regulation? Language of IP is dominated by ex post government intervention: rights defined and enforced in litigation. Better regulation would have full ex ante consideration.

IP hasn’t yet been integrated with consumer protection law, which hasn’t yet assimilated the effects of information economy. What is consumer protection law? Narrowly: economic, designed to correct market failures. Uncontroversial in the US. Broader: health and safety, social regulation. More controversial in the information economy—we don’t generally have bodily injury from the information economy. Most controversial: dignitary protection. Europe is more open to that.

Standards: the literature is mostly about product standards; what about information standards? Standards tend to increase competition, decrease costs, accelerate adoption of new technology. Costs: tends to reduce choice; problem of the long tail—lots of mainstream applications and fewer for small markets; can be profoundly anticompetitive; can increase switching costs. In information markets, network effects merely intensify these issues.

Common in the US to just dump a standard developed by an outside org into a statute. This is dumb. Problems of obsolescence, ownership of the standard. Technology-forcing standards are controversial. Environmental protection law has left a lot of scars in the US: perverse effects of trying to integrate regulations with standards. But our sense of how to draft statutes has moved on since the 1970s. Everyone understands that there’s a problem with standard development once the drafters know it will have regulatory force: raises the stakes, makes consensus more difficult; political compromise may be wasteful or infeasible.

Legislative solutions in the EU exist. Different countries have different approaches to harmonizing standards and regulation. France got out ahead and decided to have an agency regulate TPMs. Why? Because France is a coordinated market economy; US regulates indirectly by enforcing private entitlements, relying on market discipline, whereas France has a social/political consensus in favor of direct regulation to protect the public interest, which Europeans think can actually be defined despite public choice theory. Europeans see market failures much more readily than Americans do, and they think social concerns can trump economic ones.

Coordinated market economies have de jure standards bodies, which coordinate with regulators. Contrast to informal, voluntary, private-sector standards in the US. US information consortia are relatively non-transparent; they can develop standards relatively quickly, but outside America they’re perceived as illegitimate. In 2006, the French passed a copyright law; they knew they needed to respect TPMs but they were also concerned about interoperability and consumers’ rights. Created an agency, though it’s been paralyzed by controversy and bureaucratic sloth; its mandate is to guarantee things like fair use (how many private copies must be permitted by TPMs). Unfortunately, focus is ex post, not ex ante; no standards for developing technologies. Its goals are unclear, but the strength is that they’ve identified the problem: interoperability and enforceability of limitations on IP rights. The solution needs to be public law.

Opportunity even in a liberal market economy to redefine the scope of consumer protection to include dignitary interests.

Commentators: Steven Hetcher, Vanderbilt University Law School

On Mazzone: The argument is (1) fair use doesn’t work, so (2) let’s have an agency. Important to disaggregate standards from definitions. Problem is that fair use functions like reasonableness; it’s going to be pretty hard to define in more detail unless you want to reject US fair use. Also, if fair use is out of the case, substantial similarity is still an issue—how do we define that? It’s not that courts haven’t gotten around to specifying fair use or substantial similarity standards, it’s that they can’t do it.

Play: Blanche Survives Katrina in a FEMA Trailer Named Desire. Is it a fair use? Other cases won’t tell you because no fair use case is ever on all fours with others, especially if the key question is whether the accused work targets, at least in part, the original.

Possibly the EFF/Prince case requiring copyright owners to do some fair use analysis before sending takedowns will help develop the law further, though.

Agency model: once again, no one’s going to admit that their case is similar to previous ones, so they’ll keep refighting battles even in the agency.

On me: Hetcher is on board with the basic idea that creative production functions like a taste. Everyone’s on Facebook, contributing often copyrighted content. Criticism/question: okay, great, we’re making stuff. What about when we remix using other stuff? Lessig says “make amateur remix legal.” Tushnet says it’s fair use. In the world of fan fiction, the author did all the work—took the characters, but wrote each word. Now, you can copy a whole movie and just do a little change: CleanFlicks making movies family-friendly. Digital remix allows everyone to be a filmmaker. Where do you draw the line? (Note the privileging of the second creator’s use of words over the first’s use of images, and then the privileging of the image over the editing, even though it’s the editing that produces the effect of the image. As someone who’s written fan fiction and made fan videos, I can tell you which one I find harder, and it’s not the former. Broader question: Whose work counts?)

James Gibson, University of Richmond School of Law

On Winn: Captures and describes tech/legal conflicts, but also a depressing read, because the summary of the European efforts look enterprising and even radical in a good way, but they don’t seem to succeed. They managed to harmonize cellphone standards, but that entrenched a 20-year-old standard. Tried to standardize e-signatures, but no one seems to have paid much attention. Similarly with the French law on TPMs and interoperability—cumbersome in administrative terms, rather than mandating interoperability; the only people allowed to petition for interoperability information are other tech companies, who might not be the best stand-ins for consumer interests. The best of a bad lot is still not that good.

Possibilities: be less ambitious. Conflicts in standard-setting have various sources. Microsoft has leveraged network effects, but the cause of standard-setting problem there is different than when the standard comes from an ex ante international consortium, which is different than when the standard comes from the public sector. He’s not really convinced that TPM regulations have huge impacts on how much circumvention goes on, in practice. The government might well be right to back up TPMs at least sometimes, to prevent destructive competition between hackers and content owners. TPM-free music is now becoming available and the market mechanism may be working, even though consumer preferences about TPMs filter less well through the system than preferences about price.

On Mazzone: His paper asks whether fair use should be alienable. Are fair uses just tradeable/waivable default rules. If we think some fair uses should be waivable, then we should ask what counts as waiver; a lot of attention has been paid to shrinkwrap/clickwrap. But now there are these hortatory statements by content owners, saying no use without permission: is seeing them sufficient to remove our rights? There’s no contract, but is notice sufficient? How does it change our behavior when we’ve been given this notice, regardless of its legal effect?

Mazzone: Most law is administrative law; this state is an administrative state. Let’s talk about administrative solutions, even if it’s tough.

Winn: Political scientists in the US are in direct communication with European regulators; what they lack are lawyers/law professors in the US to talk to about alternative theories of regulation.

Mark McKenna: He still doesn’t know what fair use is for. It’s a catchall for a bunch of stuff not covered by copyright. First Amendment, market failure, both, others—all true at times. The agency would need to know what it wanted before it could implement that.

Analogy: UDRP—a cheaper resolution, though not an administrative agency.

For me: McKenna heard two different things: (1) people creating because they have to should be able to do so as a matter of fair use; (2) perhaps people who do this should be paid. These are very different questions. (I think (1) is easy, and (2) very hard. I don’t have a firm conclusion on (2), and in the end we lose so much by trying to assimilate everything to the market that I think it’s not a good idea, but I think it’s what we should be talking about, since someone is getting paid in this exchange—Google, the ISP, etc.)

Jessica Silbey: Creating creates us; it’s constitutive of our lives as people. So rather than asking whether people should get paid, we could also ask why have a market at all? If we are interested in incentives, ask “what would you make if you were free?” We assume markets matter more than they do, and the “intermediaries need incentives” answer is no longer persuasive given current technology.

Samuelson: She thinks fair use is more predictable than others do. If we move away from leading cases and towards policy-relevant clustering, we can make better predictions.

Litman: We have an agency trying to make prospective rules on fair use: that’s the interpretation of the 1201 rulemaking that Judge Kaplan of the SDNY has, as a way to preserve a fair use lifeworld for us. Figure out how your proposal diverges from that model and the degree to which it succeeds or fails in getting anyone any actual fair use rights.

The Boundaries of IP at William & Mary

Belated introduction: What We Talk About When We Talk About Boundaries

Jessica Litman, University of Michigan Law School

Interesting boundary questions this morning: intraregime boundaries rather than extra (what does IP protect). We’ve spent less time thinking these intra-boundaries through than, say, where the public domain starts and copyright ends. All the IP regimes seem to be undergoing a shakeup between traditional roles/interests.

In TM, for example, we think of competitors and consumers, but the rise of viral marketing and the ubiquity of TMs with semantic meaning used regularly in ordinary speech, which undermines producer control, have changed things. Thus, e.g., the TM use doctrine as a way of sorting. In copyright, low-cost digital distribution and ubiquitous sound/image manipulation tools create challenges to what counts as authorship, distribution, exploitation, reading. In patent, the classic notion of the inventor is yielding to the inventor/operator/user amalgamation represented by the patent pool. IP-like interests have also matured and are generating new questions. Interactions inside our particular ponds may shed light on the relations between the different types of IP.

Wendy J. Gordon, Boston University School of Law

Internalizing externalities: people who don’t internalize benefits of production won’t make enough of the thing. Model already doesn’t fit well with patent from the get-go, because patent covers independent invention; the independent inventor is not benefiting from any externality conferred by the patentee. Causation is central to the idea of internalizing externalities. Likewise with TM: TM doesn’t require copying. TM is the most in flux; thus there’s most at stake in having us understand the shortfalls of the internalization model.

Calabresi: “What is the cost of what?” Who is the person who we want to internalize costs? Coase pointed out that in every transaction there’s multiple causes and people who can affect the outcome. More generally, then, Calabresi’s question is “what is the ‘cause’ of what?” When we talk about copying in copyright, we’re talking about causation: the defendant’s work wouldn’t look the way it does without contact with the plaintiff’s work.

Copyright makes mere boundary-crossing actionable. You don’t need to prove intent, or even knowledge (unconscious copying, or mistake about who has the right to grant permission). Why strict liability? Partly historical accident, based on trespass to land model. We should rethink this.

Lockean labor theory only makes sense if the premise is that the claimant does no harm to other people by the claim. In the world of intangibles, intangibles have lots of effects, and to suddenly withdraw it or say you can’t use your knowledge of it, that causes a harm. Gordon would like to see a requirement of proof that winning a lawsuit wouldn’t harm the user (except for disgorgement). When you say “this is the Mercedes of law schools,” that’s not about the car but about the person speaking, their preferences and values; you can’t stop that sentence without changing the person.

Litman: When you say “this is the Mercedes of law schools,” you’re taking a free ride on the characteristics Mercedes has invested in developing. Agrees it should never be actionable, but it has something to do with the car.

Gordon: Agreed, but it’s still also about the person speaking.

Litman: This business of to whom we give the entitlement is incredibly important within each regime, as well as for defining boundaries of the regime. Academics mostly agree the copyright incentive has gotten too large. The entity within the copyright ecosystem holding all the benefits may be the wrong entity: by giving the entrepreneur in the middle all the rights, making transfer of rights from creators to entrepreneurs really easy and recapture really hard, the entrepreneur in the middle has too much incentive because copyright was designed when paper was expensive and you had to bribe entrepreneurs to participate. One possibility, instead of weakening copyright, divest the entrepreneur of those rights and make it harder to acquire them, thus actually compensating authors. Boundaries also concern who gets to control what gets used.

Q: Is this really about strict liability or moving to a liability regime?

Gordon: No, liability rules are tempting. But because of how creativity works, that’s not the right way. Amabile: if you give kids rewards for making pictures, they make more pictures, but they’re less creative. Adults are similar. Compulsion is a bad thing for creativity, but there’s also a growing body of research suggesting that not just is compulsion bad, but so are rewards if they’re too explicit. Liability rules are explicit: your life work is worth X dollars. Copyright looks better as a natural extension of the person: it’s yours. Understands that she’s talking a bit at cross purposes: for granting rights, she wants a different standard than for evaluating remedies, because the remedy standard has independent psychological effects.

Litman: Attribution-only remedy?

Gordon: OK! Reverse Dastar.

Bride(vendor) Wars: dueling bridal expos litigate CFAA and other claims

Bridal Expo, Inc. v. Van Florestein, 2009 WL 255862 (S.D. Tex.)

Bridal Expo produces the Bridal Extravaganza Show in Houston, one of the largest bridal shows in the US. Hundreds of exhibitors and thousands of prospective brides attend; the show has been in business for 25 years and keeps databases of attendees and potential clients. Defendant Wedding Showcase scheduled the Houston Wedding Showcase for Feb. 2009, a few weeks after the Bridal Extravaganza at the same location. The individual defendants van Florestein and Moore, were key to creating the Wedding Showcase and are former Bridal Expo employees—show manager and assistant. They left Bridal Expo in July 2008, but not before Moore downloaded Bridal Expo’s databases and other information.

Defendants used Bridal Expo’s database to mail ads to vendors for Wedding Showcase’s November 2008 seminar. They used Google to advertise the Wedding Showcase as “Houston’s #1 Bridal Show,” and mailed a brochure to vendors using quotations attributed to “our” vendors and “our” brides that actually came from other bridal shows on the East Coast, produced by another company.

In an earlier state court suit, Bridal Expo brought claims for trade secret misappropriation, unfair competition, and related torts. The judge denied a TRO and after a hearing also denied a temporary injunction. Bridal Expo nonsuited the state case and sued in federal court, using the same claims along with a Lanham Act false advertising claim and a Computer Fraud and Abuse Act claim.

On the state claims, the district court refused to disturb the state court’s ruling on the temporary injunction. All the elements of collateral estoppel were present, though this of course only affected the availability of temporary relief, not a final adjudication on the merits. Given that only a month had passed since the state court denial, and that plaintiffs had held a successful bridal show in the interim (thus suggesting lack of harm), the court found no reason to revisit the state court’s decision.

On the false advertising claim, plaintiffs argued that “Houston’s #1 Bridal Show” was literally false, since Bridal Extravaganza is, in fact, the largest bridal show in Houston by any number of measures, and that the statement wasn’t puffery because it was unambiguous and needed no additional context to give it meaning. Also, they argued that the brochures were literally false because defendants have yet to produce a bridal show in Houston.

Defendants called the Google ads puffery, and argued that the use of “our” in the brochures referred to the principals of Wedding Showcase, who have produced many shows. Moreover, the brochures mentioned several times that the Houston Wedding Showcase is a new show.

The court held, based on Pizza Hut, that the Google ads were too ambiguous to be actionable, and were the kind of bald assertion or general statement of superiority on which no reasonable consumer would rely. See also In re Century 21-RE/MAX Real Estate Advertising Claims Litigation, 882 F .Supp. 915, 923 (C.D.Cal.1994) (holding that “# 1” was too vague to be actionable and “declared ... # 1 in the United States and the World" was puffery, because it was opinion and made no reference to what was #1). Anyway, defendants stopped running the ad.

As for the brochure, plaintiffs argued that the “our” statements were literally false, and also that the brochure made literally false claims that van Florestein and another defenant had a combined 25 years of experience. Moreover, they argued that, by scheduling their show shortly after Bridal Extravaganza at the same location, defendants were trying to confuse customers into thinking their show was the Bridal Extravaganza.

On this record, the court found no literal falsity. “Our” could readily, in context, refer to the show’s owners, one of whom ran the shows on the East Coast from which the “our” statements came. The brochure explained that the Houston Wedding Showcase would be “a new show … with a long history.” Likewise, “more than 25 years of combined experience” could refer to the sum of the two principals’ individual experience, not 25 years each. The court concluded that it was unlikely that a sophisticated vendor audience, familiar with the Houston wedding market, would be misled into thinking that the quoted brides and vendors were from Houston.

The evidence of confusion between the shows was that one of plaintiff’s employees heard from one vendor at the Bridal Extravaganza that he was confused about who was running the Wedding Showcase, but there was no evidence of any connection to the brochure, and this was insufficient to claim confusion overall, though this might be an issue for a jury.

The CFAA claim was based on 18 U.S.C. § 1030(a)(4), creating liability for a person who “knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value ….” For a civil claim, there are extra requirements; here, the key was “loss to 1 or more persons during any 1-year period ... aggregating at least $5,000 in value.” Loss includes costs of responding to an offense and conducting a damage assessment. Here, the claimed loss was the confidential trade secrets.

Defendants argued that their access wasn’t without authorization and didn’t exceed their authorization. Van Florestein and Moore accessed their work computers and took files to which they were allowed access as employees. They argued that there’s a difference between access to computers and use or disclosure of information obtained through that access.

There’s a split over the meaning of “authorization.” Some courts say that using files to harm the employer violates the CFAA even if the employee technically has authorization to access the files in the scope of her duties. Contrary to that, other courts have noted that, when Congress wanted to prohibit things like “communication” and “delivery,” it listed them. If Congress wanted to reach all wrongdoers who access information they then use to the detriment of their employers, it could have omitted the statute’s words of limitation altogether. Despite the conclusions of other courts, the district court determined that, given those statutory construction arguments and the rule of lenity (since the CFAA is also a criminal statute), “authorization” is not exceeded just because the employee breaches her duty of loyalty to an employer.

Here, the files were copied/downloaded on the defendants’ last day of employment. They hadn’t signed a confidentiality agreement or any other agreement restricting access to the files they’d been working on at Bridal Expo. It was “within the nature of their relationship” to use their computers and access the files at issue. Indeed, a key Bridal Expo employee saw them using the computer on their final day and didn’t complain, even though it was after they’d turned in their keys.

Thus, the court found plaintiffs were unlikely to succeed on the merits. Moreover, even had there been a likelihood of success, a preliminary injunction would have been unwarranted, based on the Fifth Circuit’s hesitance to grant injunctive relief against the use of information obtained through a past violation of the CFAA, where there was no potential for ongoing access.

The court stated, somewhat confusingly, that it would be willing to revisit the issue if defendants were continuing to use the vendor email list to advertise—even if there’s no likelihood of success on the merits? And then the court said that even if it had found likely success on the merits, it wouldn’t have entered an injunction, because plaintiffs hadn’t shown irreparable harm—that successful show they’d conducted since defendants entered the market—and defendants would suffer great harm if they couldn’t produce their show: they’d have to cancel contracts, unwind arrangements on short notice, and pay cancellation fees. About that email list: It’s unusual in a written opinion for a court to signal so overtly that, though it thinks there’s no legal basis for some behavior, it nonetheless expects a party to engage in that behavior, but that seems to be what happened here.

Reasonable royalties for uses that never would have been licensed

Masters v. UHS of Delaware, Inc., 2008 WL 5586244 (E.D. Mo.)

Plaintiff, part of the team of Masters and Johnson, is the owner of a service mark for “Masters and Johnson,” licensed to clinics who use the teachings, research, principles, and methodology they developed in the diagnosis and treatment of sexual disorders. She alleged that the defendant, a licensee, exceeded the scope of its license, and she sued for unfair competition and breach of contract.

The issue was damages. Plaintiff hired an expert, Hoffman, who proposed to offer opinions on (1) defendant UHS’s gross revenue from the allegedly infringing programs, (2) its profits, (3) an estimated reasonable royalty, and (4) prejudgment interest. UHS argued that, without evidence of actual confusion, a damage recovery was improper; that recovery of profits is an equitable remedy for the court, not for a jury; and that a reasonable royalty is an improper Lanham Act remedy.

To recover damages under the Lanham Act, a plaintiff must prove actual damages and causation, though courts have broad discretion to award monetary relief as long as they don’t impose penalties. Plaintiffs may get both actual damages and disgorgement of profits (as long as those aren’t duplicative). Reasonable royalty awards are also available, though less frequently, measuring revenues lost from failure to obtain a license when the marks are normally licensed. (This sometimes makes sense, but it's magical thinking when the licensor never would have licensed a particular use; our theories about how trademarks require and guarantee quality control can go out the window when we want to compensate a trademark owner for some sort of bad behavior by the defendant.)

Given the allegations of the case (misuse by a licensee), the court thought that actual confusion was inherent, thus plaintiff didn’t need further evidence of actual confusion to get damages. As for presenting the issue of profits to the jury, the court recognized that any award would be subject to review for inadequacy or excessiveness, but still wanted to put it before the jury in the first instance.

On reasonable royalties, the court thought that this was an issue of how damages should be measured; damage awards do require an evidentiary basis. UHS argued that no controlling authority had ever approved a reasonable royalty in a trademark case, and that such an award would vastly overstate the damages, given that the existing licensing agreement didn’t allow plaintiff to license the service mark to anyone else. The court rejected these arguments on the theory that, under the circumstances, a reasonable royalty might be the most exact measure of actual damages.

UHS also challenged a second expert, Dr. Woods, who offered opinions on UHS’s profits. Woods relied on statements made by Dr. Mark Schwartz, a therapist who was in charge of UHS’s programs who opined that the use of the service mark increased attendance at the programs by up to 20%. UHS called this a “guesstimate,” which sounds right to me (though it might be impossible to get better evidence), while plaintiff argued that Schwartz was uniquely positioned to testify about the programs and that the factual predicates of the expert opinion should be challenged through cross-examination and presentation of contrary evidence. The court agreed that disputes over methodology of damage calculations should be submitted to the jury.

The Boundaries of IP at William & Mary

Still behind; first panel to follow later.

Crossing Boundaries

Graeme Dinwoodie, Chicago-Kent College of Law, Developing a Private International Intellectual Property Law: The Death of Territoriality?

Greater interdependence means that territoriality is no longer entitled to the hold it has had over the private international law of IP. Rethinking: territoriality can be disabling or enabling of jurisdiction—see the extraterritoriality cases under the Lanham Act. Choice of law needs more explicit development. Generally, we should be less obsessed with national boundaries. And also we should question the boundary between IP and other forms of civil/commercial litigation transnationally: IP exceptionalism is common, especially with TM law, and Dinwoodie disagrees with this.

Most papers here want to erect certain boundaries, while Dinwoodie wants to tear them down.

The international IP treaties have very little to say about choice of law. National treatment isn’t a choice of law rule.

The typical rule: lex loci protectionis is the rule in IP. (Though we don’t necessarily know what that means.) It’s easy in easy cases where things happen in discrete markets. It’s never been very clear what the scope is: applies to infringement, but what about ownership/authorship? Lex originis for ownership is the emerging US rule, but some Europeans want a different rule.

Serial litigation of national rights. Computer Associates v. Altai: Altai prevails in the US, then gets sued again in France on the same theory, and the Second Circuit refuses to stop it. This is being modified a little: In Boosey & Hawkes, the Second Circuit says district court should have been willing to think about hearing claims under 18 different national laws. This tends to encourage a global settlement; he’s not aware of any trials resulting. Patent and TM haven’t been as consolidated, because of the registration requirements. The EU seemed like it was going to allow crossborder patent claims, but now they seem to have rejected that as well.

What about where infringement occurs? Can you do one step of a process in Canada, where it’s not patented, and the rest in the US where it is and avoid infringement? Recent answer from Federal Circuit: no. A localization principle. But should we have asked why the process wasn’t patented in Canada? That would have allowed us to assess Canada’s interest in the matter. We should also have asked whether this was a Canadian company, or an American company attempting to circumvent the law. Canadian government filed an amicus brief: national jurisdiction was at issue, but the opinion simply treated the issue as one of the definition of “use.”

Three points: (1) In an interconnected world, it’s perfectly possible that national courts will on occasion grant relief that has extraterritorial effects. (2) When we do that, we should use the tools of private international law to figure out how and when. (3) The Federal Circuit was indeed creating a tool of private international law, focusing on the place where the activity was controlled from.

Automatic incantation of territoriality blinds us. The normative claim of a sovereign to be the exclusive prescriber of laws has weakened in an age of interdependence, and the power to exclusively regulate within borders has declined. Increased private ordering, too—ISPs are setting norms.

You can think of extraterritoriality as disabling: if what we’re trying to do affects other jurisdictions, we can’t do it. We’ve never had a very strong version of that. Or we can say that extraterritorial effects enable us to regulate conduct elsewhere. But that’s too easy; US courts can find that anything happens here. So what is the approach of restraint and moderation? Qualitative assessment of effects. WIPO trying to figure out “use” of TM on the internet: tried to put a commercial effect + intent test into place to decide whether a mark used on the internet was used in a particular country.

Brett Frischmann, Loyola University Chicago School of Law, Spillovers Theory and Its Conceptual Boundaries

Starts with Wendy Gordon: “most of IP law is concerned with internalizing positive externalities.” He’d say that most of IP law is concerned with positive externalities, not necessarily internalizing them. Producing information involves producing a nonrivalrous public good with a lot of possible externalities. IP problems can be understood as questions of what types of externalities to leave alone and what types to promote.

His work is about spillovers: is his critique from within economics or without? This frames the question as one of the boundary between economic and noneconomic accounts of IP.

Standard economic story: information is a public good, undersupplied without a property right to make exclusion easier and create incentives to produce. Demand side assumption: the price mechanism best signals what we want. Function of property is to internalize externalities. Bearing the costs and capturing the benefits of one’s activity reduces distortions in resource allocation.

Spillovers argument: society may be better off letting some externalities go.

Externalities don’t necessarily distort resource allocation or behavior: actors won’t change behavior if they’re internalized. Even when they do, it may be preferable to let them flow or encourage unmetered flow. There’s a limit on the supply-side rationale—an incentives argument can always be made, but it lacks empirical support for infinite extension. People will continue to create/innovate at some level no matter what, and marginal changes in rights will not always have the same marginal effects. And the costs of internalization may be high. Moreover, reallocation may affect the behavior of third parties. Unless spillovers are internalized throughout society, which is impossible, the case for internalization in any particular context must account for cascading effects in other markets and in missing markets (including nonmarket systems).

Spillovers have a lot of implications. One question we might ask: do third parties realize costs and benefits with awareness and appreciation, and perhaps a willingness to pay if a market were to form, or are the costs and benefits realized more passively/taken for granted?

He thinks this is firmly rooted in economics, just an approach with fewer simplifying assumptions. One way to look at this: a set of costs that is overlooked in conventional theories. The difficulty: what social costs count? And how do we look at the difficult-to-measure foregone benefits of spillovers? Similar to concerns in ecosystem economics, but not beyond economics.

Mark McKenna, University of Notre Dame Law School, An Alternate Approach to Channeling?

The object of protection: a bunch of doctrines police the boundaries between regimes applying to a single object—functionality IDs features that don’t belong to TM and must be protected, if at all, by patent. Same with useful article doctrine in copyright.

These doctrines reflect an incomplete understanding of how these systems interact. You might be able to use one system to generate the benefits of another. Tylenol, acetaminophen, has been out of patent for 100 years. Nonetheless, it sells at a 50% price premium over generic brands, facing competition from the same product and from other pain relievers. This is a puzzle for IP theory. (Can’t you tell a bounded rationality story about why consumers pay this premium, relying not on the lack of difference between Tylenol and competitors but on the general experience that the national brand is somewhat different from the house brand? I don’t think I buy it, or at least I think that rationality so bounded becomes unpredictable using the standard tools, but I want McKenna’s take.)

If competitors copy the unpatented product faithfully, and produce things of similar quality, then TM doesn’t do much for consumers. If we think that there will be consequential differences between the TM and the generic, then TM matters a lot more. How much supercompetitive price the TM owner can command depends on the market.

Patent system makes decisions about scope and term by asking how much time people need to get an incentive to produce and disseminate the product. But if we ask that without asking how alternative forms of protection, like TM, do, then we’re likely to calibrate the patent incentive wrong. Patent protection increases the effectiveness of branding during the branding period—there aren’t many competitors, which increases the value of the brand and can be leveraged when the patent expires. If patent ignores the effects it has on TM, then we’re likely to make patent rights too big. (I really like this insight.)

Gideon Parchomovsky and Peter Siegelman argue that the intersection is good, because the patentee will price lower-than-monopoly during the patent period to create brand loyalty, and after the patent expires people will continue to pay the slightly-higher price. McKenna disagrees, among other things because that assumes there’s only one, binary TM right. But TM owners can claim lots of kinds of rights—21 TM/trade dress claims made by the owners of Tropicana for one bottle, along with the word Tropicana. Assume the OJ was patented. When it goes off patent, everyone can sell it, but they may not be able to sell it in similar-looking containers. Parchomovsky & Siegelman also think that it’s not problematic for people to continue to pay slightly higher prices, because that’s just a distributional consequence of having prior experience with the brand; no one but a prior user would pay the higher price. But brand preferences come from things other than prior experience: what you grew up around; what your doctor is used to using; what it’s cool to have; etc.

If the overlap is a problem, what to do? Could we create an election doctrine at a product level—you could patent the drug or you could brand it? The person in the best position to make a decision about value is the inventor, and forcing the person with the best information to make the choice is a tool we use in a lot of places in law. That’s interesting but not practicable because of the number of different branding elements; a court would need to be able to decide which branding elements you were disabled from using if you elected patent, and that’s really hard.

General rule: Try to strike the balance in a way that reduces the ability of any one actor to get the same economic benefit more than once.

Pamela Samuelson, Berkeley Law School, Evolving Conceptions of Patent and Copyright Subject Matter

Early letters patent were subject matter agnostic: land, machines, books, music. Patents had greater prestige than the cartel of the Stationers, and they could be broader (e.g., books on X), but patents were time-limited. Mario Biagioli, From Print to Patents: Early patent regimes didn’t distinguish between books and machines; some early scientific instruments like astrolabes were published as parts of books (one could cut out parts to assemble them), so they were protected by printing privileges and some even by copyright in the 1700s.

Early modern American law is the Constitution, which speaks of the respective writings and discoveries of authors and inventors, suggesting a division between the two. Of course books were “manufactures,” but early on excluded from patent as printed matter. Copyright protected “books” at the beginning, not the more abstract “original expression” or “work,” which was a 19^th-century development. Patent and copyright were in some ways quite similar: required registration and compliance with formalities; conferred exclusive rights over commercial use; courts sometimes used similar tests for infringement; and they even had the same duration, though copyright could be renewed. Courts sometimes confused the terms (hey, they still get confused today).

Until the 1850s, that which we now call IP was unsettled and diffuse. Early IP recognized some property rights in “mental labor,” but was in flux as to subject matter, rationale, and scope. Over time, literary and technical mental labor were distinguished: there would be no Hamlet without Shakespeare, but someone would have developed the steam engine without Watt. (Interesting to choose Hamlet, who in fact was without Shakespeare.)

IP scholars today seem to consider copyright and patent “mature” regimes at the highest stage of evolution, enshrined in national treaties, needing only fine-tuning. Occasional efforts to reconceive patent and copyright, most recently Jeanne Fromer’s Claiming IP. Copyright and patent are in ferment because of the digital revolution.

Why care about subject matter? Divergent requirements create potential arbitrage: it’s so easy to get copyright, protection lasts longer, requires no application or disclosure; if we allow people to protect invention with copyright, that has harmful consequences. This is reflected in Baker v. Selden. Davis v. Comitti (1885) hasn’t gotten as much attention, but it’s similar. Davis created a weather forecast barometer; won prizes, but didn’t patent. Someone copied, and Davis sued, claiming that printed matter on the face of the barometer qualified as a “book.” British court articulated a boundary: that was only for patent.

19^th century design protection: Parliament enacted a design law protecting ornamental designs for manufactures, such as ornamental fireplace screens and chairs. Design law was not as onerous as patent—cheap, fast—inventors flocked to it. Needed to refine subject matter: design protection was aimed at beautification, with a focus on form/shape. Patents focus on function. Less concern with overlap between copyright and design right.

Baker and Davis suggest a categorical exclusivity between copyright and TM. But the Supreme Court hasn’t found categorical exclusivity arguments persuasive in recent decades; that argument (that some interface hierarchies had been patented, therefore copyright was inappropriate) in Lotus v. Borland created a 4-4 split; Mazer v. Stein said that a design patent didn’t preclude copyright. The broadest statements from the Court suggest huge overlap—Goldstein v. California says “writings” are any “fruits of intellectual labor” and Diamond v. Diehr says “everything under the sun made by humans” is patentable. But that can’t be right. Traffix (also I think Wal-Mart) suggests the contrary.

There are lots of important things in fuzzy territory, hard to assign to one regiime. Computer programs, programming languages, interfaces, etc.

How to manage boundaries?

Doctrinal chanelling: printed matter exclusion in patent; useful article exclusion in copyright.

Sui generis law, such as semiconductor chip protection and vessel hull design protection, for subject matter in need of some protection against lazy copying but not needing full-dress protection. She still thinks that would have been right for software.

Incorporate subject matter in existing regime through legal fiction then use common law principles to adapt the existing principles: what actually happened with software. Called software “literary works” then changed infringement law—sui generis treatment created within doctrine.

Accept overlap in theory, but recognize that practical considerations will avert clash. What happened with design patent and copyright. Patent adopted a rule that you can’t patent “programs per se”—claims made at higher levels of generality.

Final strategy: develop a set of heuristics to facilitate migration to a more appropriate mode. Interfaces, early on, weren’t considered IP but revealted to customers to enable them to use a computer system. Over time, claimed as trade secrets and worried about reverse engineering, so they used license terms against it and claimed it was copyright infringement. IBM and Computer Associates claimed interfaces were part of a program’s copyrightable structure, sequence and organization. Altai ruled that interface design was constrained by external factors, not within scope of copyright; Sega said reverse engineering was fair use. Now, shift to patent, but maybe that’s not right either.

The conditions that promote innovation in literary/artistic fields are sufficiently different from those that promote innovation in tech to justify different regimes.

Factors to consider in sorting: tilt towards copyright: is it vulnerable to lazy copying? (not sufficient for copyright, otherwise DNA will be copyrightable.) Does it have aesthetic or literary appeal? Is informational content the key source of value? Are there lots of creative possibilities, unconstrained designs? Etc.

If we were starting from a clean slate, we’d want more sui generis regimes, and we’d want more evidence of market failure before acting, wanting just to solve the market failure and not go more broadly.

Lemley: Samuelson in dialogue with McKenna: Samuelson assumes some sort of election is in order; McKenna thinks it’s not possible (because he’s thinking TM, I think). Are we replacing one form of protection with another, or is there overlap at a different level of generality (e.g., patenting a program at a higher level of generality than the code)? Are TM-patent overlaps going to be different than patent-copyright?

McKenna: Yes, he wants to think more about copyright-TM. We’re talking about election in different ways. McKenna thinks election at the product level wouldn’t work, while Samuelson focuses on election at the feature level, with which McKenna is basically fine.

Samuelson: We’re very clear on election when it comes to trade secrets and patents.

Meurer for McKenna: Need a separate discussion for drugs than from everything else. State laws govern substitution of generics; lots of other policies (including FDA regulation of names and use of generic names). Marketing is so different that you need to split drugs out. More generally: Your comments suggested weakening TM, but better policy might be to weaken patent.

McKenna: Yes, focusing on the overlap doesn’t tell us which way to go to reduce overlap—could cut back on either patent or TM.

Sarnoff: How does Samuelson view constitutional questions?

Samuelson: she started out as a strong constitutional advocate of “writing” and “discovery” as limits but softened over time. Congress couldn’t decide to move everything from patent to copyright. She’s fond of Chris Sprigman’s Indirect Enforcement of the IP Clause. Constitutional values are reflected in the language of art. I s. 8 cl. 8 and those should be considered in interpretation, including in channeling decisions.

Sarnoff for Dinwoodie: Judicial competence has a huge role to play—American judges can understand effects, but they might be really bad at interpreting Chinese claims.

Dinwoodie: This goes not so much to a per se rule, but to a standard—can refer questions to other courts or can simply decline jurisdiction. But it should be discretionary. Much as we’d love to think patent lawyers are geniuses, we apply complex foreign laws all the time. Patent judges around the world collaborate and communicate.

Hetcher: For Frischmann: Challenge is to cleanly distinguish normative and descriptive. If you’re making a normative claim for using economics, spillovers are no more intractable than any other huge question the government confronts, like “should we give more money to TARP?” Filesharing is an amazing success for spillovers: extraordinary utility gains from sharing; the music industry claimed (1) it would die without internalization, and (2) it was a gateway crime. Now, we can measure how much filesharing goes on, so we can see the benefit; we can ask whether teen crime has gone up, and how much the music industry has been hurt (labels going down, other music going up). There’s some tractability of measurement here.

Frischmann: Demsetz, as an economist, strongly resists the claim that his thesis is normative. He says he’s just describing when internalization through property rights occurs. But even dropping certain complexities from the analysis because they’re hard to quantify or identify at the micro level is a value judgment. Broader argument: if measurement is intractable, maybe we have the wrong focus—maybe we should look at the types of activities that tend to generate certain benefits or costs. Fair uses, for example, are more likely to have beneficial spillovers; might then raise the burden of proving harm on those who would seek to suppress fair-use-like behavior.

Heymann: How do design patents fit into Samuelson’s scheme?

Samuelson: Interesting history there. Election theory operated early on in design patent/copyright, but Mazer v. Stein killed that. As a practical matter, it’s not a big overlap, because any time there’s an intermixture of functionality and aesthetic elements, that’s not going to qualify for copyright under the useful article doctrine, so there’s not much room for both ornamentality and separability. Firms don’t tend to seek both kinds of protection at once; the copyright industries are copyright industries, while others—like the shoe industry right now—go for design patents.

Heymann for McKenna: You mention in the paper that even post-patent, TMs have a quality control function. Consumers might not trust the statement that the products are identical. Say more?

McKenna: The statement that consumers rely on the TM for quality is overblown, given the scope of modern TM law. But even if it’s true, that actually just reinforces the point that branding can prevent the apocalypse of indistinguishable products without/after patent: maker can capture value through branding. Important question, then: how much forced distinction do we need to allow consumers to get the quality message without allowing the TM owner to capture additional value? (I’m not sure we can separate those out, because different consumers will have different reactions to the same mark/trade dress. But I’m willing to be convinced. Anyway, I think the reason we were pressing Mark on this was that he wanted to say that TM’s strength made it possible to think about decreasing the scope of patents, but then also wanted to say something about the consequences of protecting trade dress v. protecting only trademark in the classic sense, and that part of the argument is harder to connect up to the idea of channeling doctrines.)

Me, for McKenna: I wonder about the TM-false advertising boundary, too. Courts are really confused about what a false association claim is, false advertising or TM—e.g., Midler, the recent Facenda case. Channeling has very clear consequences: competitor standing and materiality.

Mazzone: Think about branding and placebo effects. People will say, regardless of studies, that the branded version works better. (Note that the literature on this is all over the place.) If the placebo effect works, why interfere with it?

McKenna: He’s not necessarily a fan of the placebo effect. If we protect that kind of value, it’s hard to prevent infinite expansion. Anyway, they’re still paying a supercompetitive price. If everyone got to sell the drug and call it Tylenol, that effect would go away.

Conclusion: Where Do We Go From Here?

Wendy J. Gordon, Boston University School of Law

Questions of boundaries between people: how much do we constitute each other? How much do authors create us? We think by making divisions. But our current divisions are dependent on history. McKenna: There are all sorts of ways to combine incentives, durations, scope, subject matter. The hypothetical product-by-product election regime helps us to see the world anew.

Jessica Litman, University of Michigan Law School

Yesterday she heard a whole lot about how the copyright and patent systems were sick. The ecosystems they’re creating aren’t particularly hospitable to inventions and works of authorship. Today, with the exception of McKenna, she heard that the system was working, or at least could work if we expended sufficient mental effort to get our boundaries right. Her conclusion: our systems are deeply ill, and some evolution is necessary to help them continue to promote creativity and competition. While we may define ourselves with respect to each other by what ponds (branches of IP) we’re in, we need to be focusing on the water, and what it is we want to generate with our different regimes, doctrines, etc.

Congratulations to Laura Heymann & the Law Review for running a provocative and entertaining conference.

The Boundaries of IP at William & Mary

Intro and first panel later, when I've written up my notes.

The Boundaries of Patent Law

Usual disclaimers, squared: I’m not a patent person. I will get stuff wrong.

Margo A. Bagley, University of Virginia School of Law, Invention Creation Activity as a Boundary in Patent Law

Perfume, book/movie set in 1800s, about a man born with no smell, which caused people to be uncomfortable around him. So he decided to create the perfect scent, and was successful. Unfortunately, he did it by (spoiler alert) killing young women. Suppose he wants a patent on his new and nonobvious process/result. Should the illegality and immorality of his actions impact patentability?

We usually don’t look at inventor behavior. But your patent can be unenforceable if you (post-filing) withhold info from the patent office with intent to deceive; or prosecution laches; or patent misuse post-issuance. What about pre-filing? The existing doctrines rely on the idea of unclean hands.

Real situations where illegal activity is taken into consideration: a number of countries have made noncompliance with genetic resource access laws a reason for denying patentability to any invention. India, Brazil, Costa Rica, Andean community, and China (#3 in patent applications worldwide and growing fast). New amendments: if the acquisition and exploitation of genetic resources used to complete an invention was contrary to law, no patent; and if your patent depends on genetic resources, you have to indicate the source. Done to give effect to Convention on Biological Diversity: fair and equitable sharing of benefits with sovereigns, on mutually agreed terms and with informed consent.

Proposals in multilateral fora like WIPO and WTO to include mandatory disclosure of origin, and even the possibility of post-grant sanctions if requirements weren’t met.

Other instances: Germany: using human embryonic stem cells created in Germany; US: falsifying data to obtain a federal grant. What kind of causation should count? If the researcher speeds on the way to the lab and makes a discovery, that probably shouldn’t preclude patentability.

Other than illegality, there’s also immorality in invention creation. Normal inquiries are about use of invention or nature of invention—gambling machines, abortion pills, torture devices; transgenic animals, human/animal chimeras. What about invention creation activity? Generally ignored. But the patent office did reject a patent based on ground up skeletal remains acquired by digging up graves within a week after burial—that’s immoral activity.

Recent example: the European Patent Office had to apply European Patent Convention art. 53, which says that patents shall not be granted if they’re contrary to ordre public or morality, provided that exploitation of the invention shall not be deemed to be contrary merely because it’s prohibited by law or regulation in some or all European states. Challenges of application: balancing tests; public acceptability/abhorrence; no clear standard. Amendment: included a list of immoral inventions: processes for cloning humans, modifying the germ line identity of human beings; uses of human embryos for industrial or commercial purposes. None of these dealt with invention creation, but patentability of those things. But a patent application for a cell culture was rejected because the only way to make the invention was to destroy human embryos, on the ground that that was commercial use. Euro. Patent Office took a broad view of what counts as commercial use, and what counts as an invention. Other patent offices have rejected similar types of inventions.

The research is legal, but has been deemed immoral. Whose morality will control? So for example, Switzerland moved to honor the interests of plants in themselves; researchers concluded that decapitating flowers on the roadside would be immoral.

In the US, we don’t read moral into useful, though the Weldon Amendment prevents the PTO from issuing patents on human organisms by use of appropriations power.

Unethical activity in patent creation: violation of duty of informed consent in Moore v. Regents of the University of California; use of Nazi data.

Possible remedies: claim invalidity; unenforceability; ownership transfer. Invention creation activity can and should be a boundary in patent law.

Mark A. Lemley, Stanford Law School, Distinguishing Lost Profits from Reasonable Royalties

Boundary issues in doctrine: how we distinguish between remedies for patent owners. Two basic types of remedies: either lost profits or in no event less than a reasonable royalty, designed to compensate patent owners, not to punish infringers or require disgorgement of profits. Patent infringement is almost never a culpable offense; you can infringe a patent without knowing and with your own inventions. Outside pharma, only 2-3% of cases involve allegations of copying. So we don’t want plaintiffs to get windfalls.

If you lost profits, you get those back; if you didn’t, you still get something, like what the parties would have negotiated in a counterfactual where they negotiated.

As a general matter, you want lost profits. Reasonable royalty is thought of as a floor. A patent owner with a monopoly can sell at a monopoly price; an infringer will drive the price down, and their total surplus will be lower. There is therefore no price that would compensate the owner as a license fee; owner’s lost profits will be greater than infringer’s profits. But a reasonable royalty by definition assumes that the parties could agree, and the infringer would be unwilling to pay more than profit, so it is theoretically lower.

Turns out to be very hard to show lost profits: owner has to show it had the production capacity to make the sales, that there were no available substitutes, and a number of other things. If you don’t get lost profits, you’re relegated to reasonable royalty even if you’re a direct competitor. This is not a realistic royalty, as discussed above. So courts think that the number they come up with is too low. So increasingly, as lost-profits-entitled plaintiffs get kicked into reasonable-royalty territory, courts find ways to jack up “reasonable royalties.” Sometimes courts just say expressly that they need a kicker, and the Federal Circuit approved “discretionary increases.”

Courts also have rejected the idea of apportionment, when a technology is only one part of a larger picture. Imagine a hybrid auto; invention of the engine’s a big part of the value. But there are other parts of the car that also contribute to value, like the wheels and the windshield. But the Federal Circuit excludes those from the assessment of the reasonable royalty—just figure out what the product is and calculate a percentage. That could lead to the right result, if you’re lucky, but it doesn’t always.

Lost profits world has “entire market value” rule. If I’m the inventor of the hybrid engine, and people only buy the car because of the engine, then all the infringer’s sales are at the cost of the inventor, because the inventor would have made the sale without the infringement even if the infringer has a better windshield wiper. This makes sense in lost profits, but no sense in the reasonable royalty context, yet courts have imported it. So the patent owner, who may not be practicing, comes in and says I’m entitled to the entire value of the hybrid; then the patent owner on the wheels use comes in and says so am I; you quickly get well over 100% of value.

And it gets worse. Sometimes goods are sold in packages: if I sold you a car, I would have sold you a service package and tires etc.—convoyed sales. Again, makes sense with lost profits, but now we’ve imported it into reasonable royalties, giving owners percentages of sales of completely noninfringing products. WTF?

Patent owners have now decided they’d rather have the supposed floor than the supposed ceiling. In the Monsanto seed-saving cases, where Monsanto sues farmers for replanting seeds in violation of the license, we know exactly how much Monsanto is injured: $6.50 per bag of soybeans, which is the price to everyone in the world. Monsanto doesn’t want lost profits; the reasonable royalty in this brave new world hovers between $35-50 per bag. No wonder they want reasonable royalties! That can’t be the right result.

Suggestion: need a boundary. Market participant-owners should get lost profits, and we should do our best guess about what those are, even if it’s imperfect. Non-market participant-owners have a different injury: the amount they could have licensed the invention for, and reasonable royalty should compensate them for the value of their contribution, but not for the value of the other components of the product. Easing proof of lost profits, we’d stop importing those concepts into reasonable royalties.

Michael J. Meurer, Boston University School of Law, Patent Examination Priorities

The time patent examiners spend examining applications: 18 hours on average. Want to consider: error costs; strategic responses by patent applicants (don’t want reforms to be evaded); ability to monitor how examiners implement whatever the rules are; the extent to which patent examiners can help define clearer boundaries of patents; effort cost—maybe some things are better addressed after issuance/at trial; benefit of information provided by patents to the public.

Errors can be false positives or false negatives; add in errors on scope, which can be too narrow or too broad. Where should examiners concentrate effort to reduce errors? Scope.

There’s a “piece rate” which keeps the assembly line moving, connected to a customer service culture. This minimizes false negatives but encourages bad applications. The current system has failed, but he’s still looking for improvements. (1) Auditing: a second pair of eyes, an innovation pushed by people unhappy with the quality of business method patents; applicants therefore evaded it by drafting to get out of the class of business method patents. Auditing could be made unevadable. (2) Reform training and culture to pay more attention to the scope of claims that issue.

What’s the PTO good at compared to the courts? Some kinds of prior art are hidden from the examiner, making the cost infinitely high. PTO’s probably also bad at policy judgments, like 102(b) public use or maybe even 103 nonobviousness. Some examiners will be good at enablement, others won’t. We should try to increase technical expertise.

Some tasks are harder when claim scope is unclear. You don’t need claim boundaries to figure out whether there’s utility, and not so much to figure out enablement. Where you really want to nail down boundaries is in 102(a)/prior art—need to know what the claim is to know whether the prior art reads on the invention.

Do rates of licensing and litigation depend on the mix of examiner error? Error that induces more applications increases search cost an thereby encourages litigation and harms “good licensing.” Breadth errors are greater threats than validity errors.

John F. Duffy, The George Washington University Law School, Rules and Standards on the Forefront of Patentability

There are two standard ways of thinking about articulating legal principles: rules and standards. (Or, as Carol Rose might say, crystals and mud. You can tell I’m teaching Property this semester, eh?)

In re Bilski: Duffy advocated a standard, and the court wanted a rule. His motivation to write this paper: rules fail in this area of law. But innovation is unpredictable (it wouldn’t be innovation otherwise) so the idea that rules can guide innovation will probably fail in the long term. But there may be value to failure.

List of historical failures: Early doctrine was supposedly that you can’t patent a principle—tried to say this was a rule, though it sounds standard-like; by the end of the 19^th century, commentators noted that the subject matter covered by the invention was known as the principle of the invention—so the rule failed as a rule. Another example: you couldn’t patent a new use of an old machine, recognized by SCt in 1875. Seventeen years later (one patent life later) they backtracked. Another example: you can’t patent life. 5-4 decision ultimately allowed it. Federal Circuit rules have a half-life of about 10 years, which is bad given that patents last for 20.

Why do rules fail? Because the law in the US is broad and vague, and has no obvious limits.

Rules do, in the short term, permit property rights. Rules of inclusion—safe harbors—might be a good thing. That’s probably the best defense of Bilski. But courts should try to keep them stable. Failures can also contain the seeds of appropriate new standards.

Recommendation: courts should try to avoid big rules, especially at the higher levels of appellate courts. It would be a catastrophe to grant cert in Bilski, no matter how it comes out. If it’s codified in SCt precedent, it’s much harder to change. Also, if we create rules, we must tolerate their over and underinclusiveness.

Commentator: Joshua D. Sarnoff, American University — Washington College of Law

When he hears “boundaries,” he thinks “transgressive.” The doctrines we’re dealing with are attempts to naturalize politics; these papers make them unnatural so that we look at alternatives. What people think is out of bounds—moral restrictions on the grant of property rights—happens actually all the time, so we should think about when and why we do that. Given the narrowness of the current interpretation of the experimental use exception, perhaps almost all research using patented materials is illegal and we should be denying patents left and right.

Lemley’s paper: concerns how patent owners are supposed to be treated by the patent system. Sarnoff doesn’t agree with Lemley’s view of lost profits; in the lost profit situation, we don’t try to put the patentee in the position it would be in absent infringement; we give lost profits and reasonable royalties—compensation that’s “adequate” is a legal question.

Meurer and Duffy are about how the system should be structured to better effectuate policy goals; they don’t take the system for granted. Sarnoff finds Meurer’s assumptions problematic, though: if you change the legal doctrines, it will change examination priorities. So let’s start with the doctrines and figure out what they’re doing, not necessarily start with the examiners. For example, definiteness; pre-KSR obviousness—shift from rule to standard changes the examination process.

Lemley: Believes in compensation. If you say adequacy is a legal conclusion, you accept undercompensation.

McKenna: If you think of real situations of lost profits, you’ll largely have a patent owner who should be getting more than what the infringer makes; that’s effectively an injunction, because it’s not worth it. If that’s available only to market participants, that fits really well with eBay.

Brett Fischmann: What counts as failure? If legal doctrine evolves over time, is it failure just because it changes?

Duffy: It’s not a failure if it provides short-term stability and reduces litigation. If that’s their goal, that will be a success. It’s a temporary compromise, like a truce. He thinks the need for change will be obvious within a few years, but maybe we can tolerate under/overinclusiveness for now.

Lemley: If he thought Bilski had given comprehensive guidance on anything, he’d agree.

Q: Is our goal to stop inventors from doing immoral research, or to prevent immoral research from gaining legitimacy? Relying on Nazi research won’t change anything, but it may grant wrongful legitimacy.

Bagley: We haven’t answered that question, and we should. US tends to want the invention out there, regardless of source.

Q by me: Crystals and mud? Isn’t this just an inevitable cycle?

Duffy: The cycling happens really fast here. Some things have been clear/stable for 200 years, like if the invention has been open for more than a year. What makes this area different from areas in which we see stability? (Carol Rose-inspired answer: considerations of equity—the bumbling good guy and the sharp operator?)

Samuelson: Destabilizing expectations in the middle of the game isn’t always bad; Duffy’s been willing to change the rules in other areas. Is Duffy offering a standard for patentable subject matter, in which some things are outside patentability, or is he rejecting any limits on what can be patentable? That’s not a standard, that’s just a rule that’s very broad. Patents on a storyline?

Duffy: No. He’d exclude some stuff. We may be able to refine our intuitions about what’s patentable by looking at these specific patents.

Lemley: He’s uncomfortable with that, willing to be more hardline about allowing everything in. People’s instinctive reaction to the new is that it’s bad, so you wouldn’t have gotten software patents, biologicals, etc.—you’d exclude the things that are most innovated.

Duffy: Software patents were originally heavily restricted, but they were allowed. Eventually we began to realize this stuff was like other fields of engineering: recognition of facts on the ground, and there was no ironclad rule in the way of patentability.

EFF seeking to help remix artists on YouTube

YouTube's content screening has gotten more aggressive of late, barring a number of remixes with strong fair use claims. Individual creators can be nervous about using YT's protest mechanism. The EFF is looking for remix creators who want help using YT to disseminate their work and are willing to think about asserting fair use: "If Warner Music Group took down your video, ask yourself if your video is (1) noncommercial (i.e., no commercial advertisements or YouTube Partner videos) and (2) includes substantial original material contributed by you (i.e., no verbatim copies of Warner music videos). If so, and you'd like to counternotice but are afraid of getting sued, we'd like to hear from you. We can't promise to take every case, but neither will we stand by and watch semi-automated takedowns trample fair use."

This is why I don't believe in most forms of "genericide"

These days, consumer understanding of branding allows Google, Kleenex and Xerox to preserve their marks while also being conversational terms for their categories. The following quote from an article on stadium naming rights is crazy talk from black-letter trademark law's perspective, but that's because the black-letter law doesn't reflect current reality:

The greatest desire of any marketer is for her product's name to work its way into conversations. When I was growing up, it was common to say, "I want a Coke" when you were referring to any kind of soda. People ask for a Kleenex when they mean a tissue, say they're going to Xerox a document even if they're using a Ricoh copier, and speak of Googling when they refer to an Internet search. Stadium naming rights can help products and brands gain that sort of status.

New note on 43(a)(1)(A) standing

Peter S. Massaro, III, Filtering Through a Mess: A Proposal to Reduce the Confusion Surrounding the Requirements for Standing in False Advertising Claims Brought Under Section 43(a) of the Lanham Act, 65 Wash. & Lee L. Rev. 1673 (2008): “The goal of this Note is to establish that the current state of Section 43(a) false advertising standing jurisprudence is unstable and that this instability in the law is troubling because it permits courts to reach outcomes which remove the teeth from Section 43(a)’s false advertising protection.”

Readers of this blog will be aware of my sympathy for this project. It appalls me that I need a “standing” tag with such regularity.

CFP: assertions of rights by insurgent groups

I would love to see some IP papers come out of this conference.

San Francisco State University has circulated the following call for papers for "a conference exploring rights in American history":

The conference will meet on the campus of San Francisco State University on September 17 and 18, 2009. Rights, both individual and collective, have long been a theme in American history, often seen in conflict with governmental power. We welcome papers on assertions of rights by insurgent groups, resistance to rights claims, and governmental efforts to suppress or promote rights. Our goal is to examine the place the history of rights occupies within the larger American history narrative.

We invite proposals from graduate students and established scholars on topics dealing with the history of rights--broadly defined--covering all time periods.

The deadline for submission of proposals, consisting of an abstract(s) and a one-page c.v. is July 1, 2009. Complete panels or individual paper proposals will be considered. Send your proposal to Christopher Waldrep, Department of History, San Francisco State University, San Francisco, California 94132. Alternatively, you can send your proposal as an e-mail attachment to [email protected].

HT: Exclusive Rights

Pointy-haired boss counsels false advertising

Note that after the Lori Drew conviction, the Pointy-Haired boss is not only wrong about the civil law (his proposed course of action would violate the Lanham Act and various state laws), but also deliberately breaching the terms of service is now a crime.