Ex-post liability rules in modern patent law

Transcription

1 University of Bologna From the SelectedWorks of Rosa J Castro 2010 Ex-post liability rules in modern patent law Rosa J Castro, University of Bologna Available at:

2 3 Rosa Castro Bernieri About the author Rosa Castro Bernieri is a PhD researcher at the University of Bologna and Erasmus Rotterdam University and this book corresponds to her doctoral dissertation in the European Doctorate in Law and Economics (EDLE). She holds a Law degree from the Universidad Catolica Andres Bello in Venezuela and a Master degree in Law and Economics from the University of Bologna and Hamburg University. She has lectured on Intellectual Property at the University of Bologna and University New York Tirana. Her research and teaching interests include law and economics, international intellectual property and patent law with a focus on biotechnology, health and development. In the last few years, she has authored several articles on these issues. European Studies in Law and Economics Ex-Post Liability Rules in Modern Patent Law About this book This book examines alternative ways of protecting patent rights using the law and economics framework of property and liability rules. Traditional compulsory licenses are compared with the most recent discussions on the choice between granting or denying injunctive relief for patents (ex post liability rules). The debate about strategic behaviour triggered by the patent system, especially in the aftermath of the U.S. Supreme Court decision in ebay v. MercExchange is discussed along with policy perspectives on both sides of the Atlantic. The problem of calculating the level of compensation, which is one of the most important critiques against the use of liability rules in patent law, is also examined in depth. The book concludes by suggesting that a coherent patent system could opt for property rules in general cases while leaving enough space for exceptions and limited liability rules. Curtailing exceptions and limitations to patent rights, including the use of patent liability rules, could otherwise risk stifling innovation and even contradicting the goals of patent law. 3 Ex-Post Liability Rules in Modern Patent Law Rosa Castro Bernieri ISBN _118_16_EDLE_NET_editie3_v4.indd 1 16/07/10 15:42

3 EX-POST LIABILITY RULES IN MODERN PATENT LAW

4 A commercial edition of this dissertation will be published by Intersentia under ISBN

5 EX-POST LIABILITY RULES IN MODERN PATENT LAW Ex-post aansprakelijkheidsregels in een modern octrooirecht Proefschrift ter verkrijging van de graad van doctor aan de Erasmus Universiteit Rotterdam op gezag van de rector magnificus Prof.dr. H.G. Schmidt en volgens besluit van het College voor Promoties. De openbare verdediging zal plaatsvinden op 17 september 2010 om uur door Rosa Julieta Fiorella Maria Castro Bernieri geboren te Londen, Verenigd Koninkrijk

6 Promotiecommissie Promotoren: Prof.dr. R. Van den Bergh Prof.dr. M.G. Faure LL.M. Prof.dr. Avv. M. Lamandini Overige leden: Prof.dr. W.H. van Boom Prof.dr. V. Denicolò Prof.dr. K. Heine

7 ACKNOWLEDGMENTS My sincere recognition to my supervisors: Professor Marco Lamandini who has supported my academic and professional career; Professor Roger Van den Bergh for his guidance throughout this EDLE journey and Professor Michael Faure for his warmth encouragement and support. My gratitude also goes to the members of the Inner Committee, Professors Vincenzo Denicolò, Willen Van Boom and Klaus Heine, and to the Plenary Committee conformed by Professors Luigi Franzoni, Anselm Kamperman and Alessio Pacces, who have kindly accepted to assess my thesis. I am also grateful to Professors and staff of the University of Bologna and Erasmus Rotterdam University and I acknowledge the financial support of a Ph.D. scholarship from the University of Bologna and financial support from the Max Planck Institute for Intellectual Property, Competition and Tax Law for a research visit. I am also indebted to several scholars and Professors who gave me their feedback on previous drafts, among others, to Professors Hans-Bernd Schäfer, Rochelle Dreyfuss, Lawrence Lessig, Tim Wu, Stefan Bechtold, Uma Suthersanen, Lilla Montagnani, Gertrui Van Overwalle, Alessandra Arcuri and Andrea Renda. I further want to acknowledge my fellow colleagues from the EDLE as well as Ph.D. students of Bologna and Hamburg for their comments. Needless to say, all errors remain my own. My recognition goes to my friends and family for their unconditional help, especially to Franca, Jorge A., Jorge A.R., Fiorella and Andrea, to whom I am indebted for any achievement. While acknowledging the support received from every person would be impossible, my gratitude goes to all the people that directly or indirectly facilitated me to reach this step in my academic career. Intersentia v

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9 CONTENTS Acknowledgments v List of Abbreviations xi Introduction Chapter I. Property and Liability Rules: Implications for Patent Rights Introduction Economics of patent protection The economic rationale of patents The economics of patent enforcement The interface between substantive and enforcement patent law Property rules and liability rules Property rules and liability rules in IP Descriptive studies Critics against IP liability rules Privately organized liability rules Property and liability rules in patent law The case against liability rules for patent rights The case for patent liability rules: Transaction costs Strategic behavior and patent hold-ups Patent hold-ups The modern patent landscape Multi-parties negotiation: The anti-commons Network externalities Uncertainty over rights Patent quality problems Conclusions Chapter II. Ex-Post Liability Rules: A Historical View Introduction Compulsory licensing in international history Intersentia vii

10 Ex-Post Liability Rules in Modern Patent Law 2.1. Early patent times The first compulsory licensing provisions Origins of the principal national patent systems U.K U.S France Germany Ex post liability rules in the TRIPS Agreement Article 31 of the TRIPS Agreement Article 44 of the TRIPS Agreement A post-trips landscape Remedies for patent infringement Common law countries Civil law countries Creation of rights and choice of remedies The inibitoria in the industrial property context The European landscape with respect to IP remedies Conclusions Chapter III. Ex-Post Liability Rules: A Comparative Legal View Introduction Ex-post liability rules U.S. ex-post liability rules The ebay case Post ebay interpretation of the four-factor test Irreparable harm Inadequate remedies Balance of hardships Public interest The post ebay decision landscape Willful v. inadvertent infringement Preliminary Injunctions Other liability rules in the U.S U.K Injunctions as an equitable remedy Discretion to award damages in lieu of injunctions The rationale of ex-post liability rules in the U.K Other ex-post liability rules: Compulsory licenses Italy Property rules: Final injunctions viii Intersentia

11 Contents 5.2. Judicial discretion: How much space? Preliminary injunctions Willful and Inadvertent infringement Other ex-post liability rules: Compulsory licenses Conclusions Chapter IV. Ex-Post Liability Rules: When Should They Be Used? Introduction Patent hold-ups: Economic theory Economics of patent hold-ups: The Lemley and Shapiro model Refinements and critics Assumptions of the models From patent hold-ups to patent strategic behavior Strategic behavior and ex-post liability rules Problems put forward by ebay v. MercExchange Strategic behavior Multi component patents Dubious quality patents The landscape of strategic behavior in Europe Incidence and effects of strategic behavior A case study: the European pharmaceutical sector Patent strategies in the European pharmaceutical sector Policy suggestions of the Final Report Beyond the European pharmaceutical sector Patent strategic behavior: Towards a broader framework Actors: Non-manufacturing entities, trolls, ambushes and others Definition and business models Evolution of patent strategic behavior The conduct: Trolling behavior Conclusions Chapter V. Ex-Post Liability Rules: Towards an Efficient Design Introduction The Efficient implementation of ex-post liability rules How could courts efficiently apply ex-post liability rules? The balancing test in post-ebay cases A monetary substitute for a property rule TRIPS: Adequate compensation and adequate remuneration Determining the level of compensation: An impossible task? Intersentia ix

12 Ex-Post Liability Rules in Modern Patent Law 3.3. Remuneration for compulsory licenses after the TRIPS Agreement Patent infringement: The goals of damages substituting injunctions Post-eBay application Law and economics of damage remedies Other costs of patent liability rules Interference with bargaining outcomes Ex-post liability rules and legal uncertainty Cost-benefit analysis of the rules A comparative overview of costs and benefits of rules Conclusions Chapter VI. Conclusions The research question Findings of the research Chapter I Chapter II Chapter III Chapter IV Chapter V Impact and applications of this research Lessons from the entitlements literature to the patent field Patent policy: Efficiency and other goals of public interest Intellectual property as property Rules of interpretation: The role of courts and agencies The design of patent liability rules Future research Other IP rights: Copyright, trademarks and unfair competition law Public choice applications Antitrust and IP interface Further national, international and European harmonization List of References Appendix x Intersentia

13 LIST OF ABBREVIATIONS ACTA BIRPI CAFC CC CPC CPI EPLA EPO GADI GATT IP Paris Convention R&D TRIPS USPTO WIPO WTO Anti-Counterfeiting Trade Agreement International Bureaux for the Protection of Intellectual Property U.S. Court of Appeals for the Federal Circuit (Italian) Civil Code (Italian) Civil Procedural Code (Italian) Industrial Property Code European Patent Litigation Agreement European Patent Office Giurisprudenza Annotata di Diritto Industriale General Agreement on Tariffs and Trade Intellectual Property Paris Convention on the Protection of Industrial Research and Development Trade Related Aspects of Intellectual Property Rights United States Patent and Trademarks Office World Intellectual Property Organization World Trade Organization Intersentia xi

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15 INTRODUCTION THE PATENTS RIGHT TO EXCLUDE A patent grants a right to exclude others from using the patented invention, i.e. an ius excludendi alios. The patentee s right to exclude is also interpreted as allowing the patentee that alleges patent infringement to ask before a court not only damage compensation but also remedies that aim at stopping the infringing activity, mainly, injunctive relief. In economic terms, the exclusiveness of patent rights is conceived as a necessary mechanism to ensure further innovation, facilitate further research and efficient market transactions on patent rights. In fact, patent laws have been largely justified by mainstream economic theories as a mechanism to provide innovation incentives by securing temporary exclusive rights for a limited period. During that period of exclusivity, patents produce a deadweight loss that is in theory compensated by the benefits of fostering further innovation. In addition it is often argued that patents facilitate the process of bargaining in the market for technologies; are a mechanism to render the results of R&D available to the public through patent documents and provide a signalling mechanism that facilitates raising financial resources for R&D companies. More controversial is the contention that broad patent rights on first innovations are an efficient mechanism to induce sequential innovation, an argument put forward by the prospecting theory of patent rights. Yet this theory and its following critiques have importantly highlighted the special problems surrounding most modern technologies that occur sequentially or incrementally rather than through breakthrough advancements. The patent system indeed attempts to balance two goals that are often in tension: providing innovation incentives and allowing access to patented technologies. Innovation incentives attain efficient outcomes from a dynamic efficiency point of view by allowing the creation of new and improved technologies and products. From a static efficiency viewpoint a loss occurs during the life of a patent due to the fact that patented products are sold at a price higher than marginal cost. Access to technologies allows final users to enjoy the benefits of innovative products but it also permits producers of second innovations to use and develop further technologies. While access to patented technologies is often restricted to Intersentia 1

16 Ex-Post Liability Rules in Modern Patent Law allow innovation incentives in a pure trade-off between static and dynamic efficiency goals, when innovation is sequential, both the incentives of first and second innovators are implied in such trade-off. Notwithstanding the exclusive nature of patents, economic studies have indeed provided compelling reasons to transform or to mitigate the exclusiveness of patents, at least under specific circumstances. In spite of the enormous contribution of economics to the analysis of patent law, the results of many studies, especially those in the context of incremental innovation remain largely contradictory. At the moment, no study can claim to offer a definite answer on the overall effects of patent s exclusivity and limitations of such exclusivity and most studies rely on highly restrictive assumptions. While the majority of results depend on variables that would have to be empirically ascertained, their assessment is often impossible or too costly. Whereas the exclusiveness of patent rights is generally assumed by the legal and economic scholarship, patent laws have historically established limitations on the right to exclude. Among other mechanisms to limit the exclusiveness of patents, different laws have devised compulsory licensing provisions. A compulsory licensing provision allows the use of a patented technology without the authorization of the patent owner. While it is often argued that this practice might affect innovation incentives by diminishing the expected payoff from exclusivity, numerous critics have also been formulated and arguments put forward for the inclusion of limitations and exceptions on the patentees right to exclude. A similar effect to that of compulsory licensing is obtained when a court deciding on patent infringement limits the relief granted to owners to damage compensation and refuses to issue an injunctive order. This might happen especially in Common Law countries were injunctive relief is conceived as a harsh remedy governed by equity principles and hence, the award of injunctions is subject to a factual examination. PROPERTY AND LIABILITY RULES The field of economic analysis of law has formulated a framework, which is suitable to study the effects of the patent s right to exclude and the design of limitations such as compulsory licensing provisions as well as the aforementioned limits on remedies available for patent owners. The categorization of entitlements into property and liability rules is able to capture such differences and yet to recognize the underlying similarities between different legal provisions that transform a right to exclude into a right to receive a monetary remuneration. Indeed, law and economics scholars have categorized compulsory licenses as a 2 Intersentia

17 Introduction liability rule mechanism by which legal entitlements in this case those awarded by patent law are protected against the unauthorized use by others only through the payment of remuneration. Along with patent compulsory licenses, there are other patent doctrines and even the application of antitrust statutes which can convert the patentee s right to exclude into a liability rule. Conversely, a property rule puts the owner in the position of deciding whether to allow the use by third parties. Law and economics has also developed an important analysis with regards to the most important problems with the use of such liability rules, namely the possibility that the remuneration for patent holders might be too low and/or might not reflect the subjective value of the patent hence diminishing innovation incentives. Also, the case is often made that liability rules might diminish incentives for efficient negotiation over the use of patent rights. In addition, it is often posed that liability rules might create uncertainty surrounding the enforcement of patent rights, hence diminishing innovation incentives. Indeed, different legal doctrines embedded in patent statutes and case law coinciding with economic reasoning, allow what the law and economics literature describes as a switch from a property to a liability rule. Theoretical discussions and case law have also highlighted the main justifications for this switch and the main problems associated with the administration of liability rules. Notwithstanding the prolific quantity of studies on this subject and their application to Intellectual Property (hereinafter IP) and patents, this literature has also yielded highly contradictory conclusions that range from calls to the unlimited use of property rules to a more or less limited role for liability rules in the patent field. As predictable, the practice of compulsory licensing and other patent doctrines permitting similar effects remain highly controversial. In particular, disagreement about the use of these provisions has emerged during the negotiation of patent harmonization treaties from the Paris Convention to the TRIPS Agreement and including the recent wave of free trade agreements and bilateral investment agreements covering IP issues. JUSTIFICATION FOR THIS RESEARCH Recent events have stimulated the debate on the exclusivity of patents and the use of property and liability rules to protect patent rights. A first motivation for these events is extrinsic to patent law and reflects the evolution of modern technologies towards highly complex and multi-component products. A second Intersentia 3

18 Ex-Post Liability Rules in Modern Patent Law motivation for such recent events is often found in the uniformity of patent laws (one-size-fits-all) that might impede its adaptation to such complex technologies, especially as it regards the protection of the right to exclude. A third reason arises out of this increasingly complex landscape with the rigidity of patent law, a combination that is said to enhance the opportunities for patent strategic behavior. Instances of patent strategic behavior might comprise the acquisition of patents as well as their strategic use, enforcement and litigation. However, many gaps and misunderstandings remain with respect to the use of liability rules in the patent field. Confusion has been nurtured by economic as well as legal studies. Economic studies have led to ambiguous conclusions with regard to the effects of different patent doctrines, especially in settings characterized by incremental and sequential innovations. Misunderstandings have also been stimulated due to the confinement of legal discussions to the TRIPS Agreement and the use of compulsory licensing provisions solely in the context of developing countries and the protection of public health. In addition, the law and economics literature has largely reduced the definition of patent liability rules to compulsory licensing provisions. The study of liability rules provisions has been furthermore limited to the U.S. prevailing view, which does not contain special compulsory licensing provisions for patents and which until very recently, considered such provisions as a rarity. 1 As a result, most law and economics studies focusing on IP and patent liability rules mainly referred to statutory compulsory licenses which exist in copyright laws or to the presence of compulsory licensing provisions in countries outside of the U.S. as a rarity of general patent law. This gap has started to be filled, firstly by the insights of scholarly work and most recently by the debate following the U.S. Supreme Court decision in the ebay case. 2 In 2006, the U.S. Supreme Court decided, in the context of a specific litigation between patentee MercExchange and the ebay company, that in patent law cases, injunctive relief should be granted upon the same grounds required in other law fields. As a result, courts deciding patent law cases were requested to use a factual test that assesses the convenience of granting an injunctive order upon the particular circumstances of the case. Such factual test had been bypassed for a long time and patentees had enjoyed a privileged position in litigation due to the emergence of a presumption that once a patent was infringed, the patentee had suffered irreparable harm, a prerequisite for obtaining injunctive relief. The ebay case confronted the U.S. Supreme Court with a new reality of patent law, in which patents are used strategically in order to extract large 1 See Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 215 (1980) at 215, stating that: compulsory licensing is a rarity in (the U.S.) our patent system. 2 EBay Inc. v. Mercexchange, 126 S. Ct (2006). 4 Intersentia

19 Introduction settlements. In this new landscape, patents are not viewed as instruments that generate innovation incentives as legal and economic theory sustain but simply as bargaining chips that companies can commercialize but also employ as a sword to be used in litigation rather than a shield to protect valuable innovations. 3 Applying the ebay precedent, an important number of decisions have denied injunctions for owners of valid and infringed patents, thus changing a traditional practice in the U.S. against any form of compulsory licensing or forced access to patented inventions. As a consequence, many scholars and political actors have questioned such move as a radical change. Some critics turned to property rights theory and the necessity of applying it to patent law. Yet others have taken the opportunity to remind of the differences between property and IP that justify a wider use of liability rules for IP rights. Although this debate has not attained an equivalent impact in Europe, the exclusivity aspect of patents has been also recently put in evidence with regard to an alleged decline in the quality of patents as well as an increase in the number of cases reflecting potential strategic behavior practices and litigation from patentees. The European patent landscape is however, largely fragmented in spite of the European Patent Convention and the creation of an European Patent Office. Patents remain territorial rights throughout Europe and importantly, patent litigation is decentralized and pertains to the jurisdiction of each country in the absence of a Community Patent and a unified patent jurisdiction as foreseen in the project for a European Patent Litigation Agreement (hereinafter EPLA). Surprisingly, the problems surrounding the indiscriminate use of property rules to protect patents and the increasing impact of patent strategic behavior have been recently interpreted as plainly favoring the abovementioned projects for further patent harmonization. Clearly, the problem of this Thesis only refers to particular patent doctrines and provisions allowing non-authorized uses upon the payment of compensation. Nonetheless, a warning emerges from this analysis against potentially curtailing the use of such provisions and doctrines through forthcoming harmonization. As it will be highlighted in the analysis that follows, it is the design of such doctrines and provisions that might enable or restrain their appropriate use when such use is justified upon efficiency reasons and other public interest purposes. 3 See MercExchange, L.L.C. v. ebay Inc., 500 F. Supp. 2d 556 (E.D. Va. 2007), which revising the case on remand in the light of the U.S. Supreme Court decision considered that: Such consistent course of litigating or threatening litigation to obtain money damages by a company of two employees, the inventor of the patents, a former patent attorney, indicates that MercExchange has utilized its patents as a sword to extract money rather than as a shield to protect its right to exclude or its market share, reputation, goodwill, or name recognition, as MercExchange appears to possess none of these (emphasis added). Intersentia 5

20 Ex-Post Liability Rules in Modern Patent Law Such recent discussions confirm that innovation, technological changes, groundbreaking decisions and proposals for reform call for a constant assessment of the patent system. While economics has largely contributed to the understanding of IP, its effects and the way in which policy levers 4 shape innovators incentives, the study of enforcement mechanisms, limitations and defenses, including compulsory licensing provisions and other patent liability rules have recently brought new perspectives to important national 5 and international debates. Discussions on a patent reform in the U.S., European harmonization plans of a Community Patent and the EPLA as well as international debates within the WIPO 6 and WTO have all acknowledged possible imbalances of the patent system as well as the potential role of liability rules. These debates need to be constructed on the basis of policy-oriented analysis, including the economic analysis of law, which in spite of being one out of different alternative approaches, is widely recognized in all negotiation forums. Indeed, while economic reasoning can either contradict or support other policy goals of public interest, it is growingly recognized as a fundamental tool to assess the costs, benefits and unintended effects of any patent reform on private parties and society, both at national and global forums of negotiation. RESEARCH QUESTION This Thesis aims at contributing with the debate surrounding the exclusiveness of patent rights. In this sense, the Thesis examines whether and in which specific cases is it efficient to transform the patentee s right to exclude into a right to receive remuneration, i.e. a liability rule. This question is both timely and 4 Policy levers refer to the design tools that policy makers have at their disposal to adjust patent or IP policy in general. This name was initially used by Pamela Samuelson & Suzanne Scotchmer, The Law and Economics of Reverse Engineering, 111 Yale L.J. 1575, 1581 (2002). See also Dan Burk & Mark Lemley, Policy Levers in Patent Law, 89 Va. L. Rev. 1575, (2003). 5 Carl Shapiro, Injunctions, Hold-Up, and Patent Royalties (Aug. 2006), available at faculty.haas.berkeley.edu/shapiro/royalties.pdf, last accessed on August 10, 2009, stating that the U.S. patent system is widely seen as out of balance. See also Federal Trade Commission (October, 2003), To Promote Innovation: The Proper Balance Between Competition and Patent Law and Policy, available at innovationrpt.pdf and National Academies of Science (2004), A Patent System for the 21 st Century, available at expressing concerns about bad quality of patents issued by the Patent and Trademark Office. 6 See WIPO, Exclusions from patentable subject matter and exceptions and limitations to the rights (SCP/13/3) Standing Committee on the Law of Patents, Thirteenth Session, Geneva, March 23 to 27, 2009, available at: See also the discussions related with the Proposal for a Development Agenda within the WIPO (2004), Harmonization of Substantive Patent Law (WIPO), available at and the Final Report of the WHO Commission on Innovation, Intellectual Property and Public Health, available at: 6 Intersentia

21 Introduction controversial. Controversial, as it was already mentioned that the issue of property vs. liability rules in patent law has been historically debated with regards to the use of compulsory licensing provisions and more recently proposed in the context of liability rules used by courts crafting the remedies for patent infringement. Controversy also surrounds the consequences of this debate within the broader context of theoretical questions on the nature of IP rights and the advantages and disadvantages of applying property law insights to IP law, the justification for patent protection and the interface between rights and remedies, e.g. whether it is the right that determines the remedy or the remedy that conceptualizes the right. From a policy-oriented perspective, the debate on the use of property and liability rules for patent protection is fundamental for the interpretation of limitations and exceptions in patent law, especially in the light of controversies regarding the interpretation of the TRIPS Agreement. This global Agreement set a minimum and global level of harmonization with regard to IP rights, including significant provisions on patent law; yet it left the possibility for countries to apply more rigorous standards within the limits set for by the same Agreement and also a significant space for a flexible application of its standards. Many obligations deriving from the TRIPS Agreement have been the object of diverging views and some of them, especially with regards to the limitations and exceptions to rights conferred, have confronted countries with problems of interpretation. The research question of this Thesis is also timely, as the 2006 ebay decision by the U.S. Supreme Court, which arrived at the beginning of this research project, actually opened the possibility for the use of liability rules for patents in the U.S. As a consequence of the simple re-interpretation of a long-standing traditional principle of equity which governs the grant of injunctions, a major change in patent law followed this decision. Whereas the effects of post-ebay litigation are still unclear, this Thesis examines an important number of decisions granting and denying injunctive relief after a factual consideration by different U.S. courts. 7 This important patent policy change has occurred in the context of several other decisions by the U.S. Supreme Court, which have presumably aimed at restraining an increasingly protective trend initiated after the creation of the Court of Appeals for the Federal Circuit (hereinafter CAFC), which centralized the appeal of patent cases in the U.S. 8 In a somehow surprising way, the U.S. Supreme Court has granted certiorari in several occasions during the last few years, and it has reiteratively compressed what was perceived as an unwarranted extension of patents rights. In several cases, the Supreme Court has asserted the importance of using standards rather than rigid rules as tools to interpret various 7 Decisions applying the ebay precedent were monitored since 2007, and a summary of the most important cases examined is contained in the Appendix. 8 See infra note 314. Intersentia 7

22 Ex-Post Liability Rules in Modern Patent Law patent doctrines. 9 Such decisions have been interpreted as redressing a lost balance in the U.S. patent system. 10 At the same time, the European patent landscape is facing important challenges. Whereas the latest discussions have focused on the problems due to the fragmented system and the projects of harmonization, these debates confront the difficult task of harmonizing many substantive patent law standards among European countries before proceeding to create a patent valid throughout the community and enforced by a centralized court. The controversy of this Thesis involves also an important global dimension. At the international level, the question is mostly one of interpretation of the TRIPS Agreement with regard to the space allowed to the practice of compulsory licenses in their traditional way (Article 31 of the TRIPS Agreement) and to the possibility of denying injunctions for infringed patents and substituting a property rule with the protection through a liability rule (Article 44 of the TRIPS Agreement). In this context, the objectives set for by article 7 of the same Agreement suggest that such interpretation should be guided by the aforementioned balance between innovation incentives and access to innovations as well as suggest a primordial role for economic analysis in the interpretation of the Agreement 11 : The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations (emphasis added). Further harmonization at regional and global levels will have potential consequences in the context of social and economic welfare as well as economic development. Hence, it would be desirable that any such proposal be addressed in the light of a balanced patent system that takes into account all stakeholders. In this sense, this Thesis aspires at contributing towards such interpretation of the patent system. 9 See the KSR decision infra note 314, with regard to the non-obviousness standard and the ebay decision, supra note 2, with regard to the equitable standard to decide the grant of injunctions. 10 In addition, the CAFC has itself issued an important decision in the case of Seagate, see infra note The interpretation of International Treaties is based upon the text of the Agreement as well as the preambles that might further clarify the intention of the contracting states. Nonetheless, it is usually argued that articles similar to Article 7 of the TRIPS Agreement do not contain operational rules. 8 Intersentia

23 Introduction OUTLINE OF THE THESIS The structure of the Thesis proceeds as follows. The first chapter puts forward a general framework for liability rules in patent law, in a sense broader than that developed by previous research. For these purposes, the insights of the law and economics literature on property and liability rules are brought together with the literature on traditional compulsory licensing and the most recent use of patent liability rules contained in the law of remedies of common law countries. Both property and liability rules are then analyzed in their efficiency outcomes both at a general level and in the specific IP and patent contexts. In this latter framework, property and liability rules are examined from both a substantive and remedies-based perspectives. Secondly, the chapter compares different types of liability rules sharing a similar rationale while differentiating these rules from systems that are justified upon different policy goals such as public interest. Thirdly, the theoretical framework of property and liability rules is confronted with the modern landscape of the patent system. A particular emphasis is given to the impact of remedies in current discussions about the alleged failure of patent systems to provide efficient incentives within a changing technological and economic landscape. This critical review of previous literature and research aims at contributing to this dissertation and to further debates by describing the main insights that will guide the analysis in the next chapters and by identifying loopholes and empty spaces for scholarly contribution. The chapter mainly adds to current theoretical and policy debates by identifying several flaws in the property and liability rules literature as applied to patent law. Firstly, and in contrast with the profuse and long-standing presence of liability rules in patent law, this literature has often condemned its use based upon U.S. practices, which have, simultaneously changed in a dramatic way over the last years. Secondly, property and liability rules are often treated in the literature as complementary tools even in the property law field. In contrast, scholars have followed a rather different method in their application to IP and patent law. Thirdly, the chapter proposes a categorization of two different types of liability rules as a suitable framework to classify liability rules in the IP field, i.e. ex-ante and ex-post liability rules. Fourthly, the chapter suggests that in the light of the TRIPS Agreement, current patent law only admits or at least markedly favors the use of the ex-post type of liability rule. The second chapter provides a historical view on the use of patent liability rules, focusing on the legal as well as the economic reasoning surrounding their use. The chapter discusses the origins of patent law and compulsory licensing provisions, the process of international patent harmonization and negotiations Intersentia 9

24 Ex-Post Liability Rules in Modern Patent Law preceding and following the TRIPS Agreement from the perspective of the property and liability rules debate. According to the enhanced definition of patent liability rules provided in the first chapter, a discussion of the pertinent enforcement rules devised in the TRIPS Agreement, especially with regards to the issuance of injunctions and the possibility of substituting injunctions with damage compensation is also included. Secondly, the chapter analyzes the debates following the implementation of the TRIPS Agreement both with regards to compulsory licensing provisions and patent remedies. Thirdly, a brief overview of patent harmonization in Europe and the implementation of the Enforcement Directive pertaining to the property and liability rules debate are provided. Finally, a brief outline is provided on the different historical and legal treatment of injunctions and damages in Civil law and Common law countries. This historical overview is important in order to understand both the origin of liability rules as a policy design mechanism to balance the goals of patent law with the protection of competition and the avoidance of strategic behavior as well as the evolution and implementation of different types of patent liability rules. History is also central to understanding the legal divergences and convergences in the use of remedies in general and their special evolution in patent law both in Civil law and Common law countries, which is further analyzed in the third chapter. The third chapter aims at contributing to the debate about property and liability rules in patent law precisely by examining the use of ex-post liability rules administered by courts in three selected countries: the U.S., the U.K. and Italy. The chapter provides a comparative law and economics analysis of patent law provisions and case law allowing the switch from a property to a liability rule ex-post. The concept of ex-post liability rules serves to highlight the fact that, in spite of originating either in law provisions or in case law, all the rules examined are judicially-administered and taken on a case-by-case basis and thus resemble much more accurately the type of liability rules used in the entitlements literature, in comparison, for instance with ex-ante compulsory licenses. Moreover, the justification of such rules is often based on the need to avoid strategic behavior and bargaining collapse in the senses of the debate about property and liability rules, rather than on the impact, for instance, of high search costs. Three particular cases are examined: 1) compulsory licensing provisions for lack of working 12 ; 2) compulsory licensing provisions for a patent that depends on the 12 The term lack of working or failure to work refers to the absence of exploitation or commercialization of a patented invention. The term is often used in relation with local working or national working, that is, a requirement by which the patentee is obliged to work her patent in the territory of the state granting patent protection or otherwise risk that the patent might be subjected to a compulsory license. In order to determine whether a patent 10 Intersentia

25 Introduction use of a previously patented invention; and 3) damages substituting injunctive relief when this latter is denied after a judicial finding of validity and infringement of a patent, which is typically allowed by equitable doctrines of Common Law countries. The contrasting vision of Civil Law countries on the use of remedies, including injunctive relief is also discussed. The chapter finds that in spite of the new harmonized framework set up by the TRIPS Agreement, the conditions to opt for a liability rule diverge widely within national laws. However, in all the aforementioned cases, courts and agencies are allowed to opt for protecting a patent through an ex post liability rule and face similar obstacles in the application of a case by case reasoning. In addition, and as pointed out by the law and economics literature, calculating the compensation due to the patent holder and fostering efficient bargaining between the parties are important concerns in all the systems under study. The chapter also highlights how law and economics contributions have typically focused on U.S. law and practice, in noticeable contrast with the overly importance of international Treaties regulating substantive and enforcement patent law and the complex and diverse rules in place in different countries. The fourth chapter aims at broadening such seemingly restricted view by applying the insights developed by the law and economics literature to the particular features of the selected patent systems and international framework discussed in the previous chapter. The chapter analyzes the standard models used by several law and economics scholars in order to study patent hold-ups and discusses their principal assumptions and results. Secondly, the chapter confronts such assumptions and results with the most important cases described in the previous chapter in order to discuss the grounds for using ex post liability rules in efficiency terms. Such grounds include the most recent discussions about patent hold-ups, the emergence of patent trolls and in general, of patent strategic behavior. The chapter proposes to broaden discussions on the grounds allowing the use of ex-post liability rules according to the experience about emerging practices of patent strategic behavior both in the U.S. and Europe. The fifth chapter discusses the issue of calculating the appropriate compensation that substitutes a property rule, which is one of the most important critiques is being sufficiently worked, some legislations also refer to whether their exploitation is able to meet consumer s demand and moreover, some patent laws require that the public demand is met at reasonable prices. Article 5-A of the Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, 828 U.N.T.S. 307 (revised at Brussels on Dec. 14, 1900, at Washington on June 2, 1911, at the Hague on Nov. 6, 1925, at London on June 2, 1934, at Lisbon on Oct. 31, 1958 and at Stockholm on July 14, 1967)in fact establishes that: Each country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work. Intersentia 11

26 Ex-Post Liability Rules in Modern Patent Law against the use of liability rules in patent law. The chapter discusses the theoretical insights about property and liability rules and applies them to the different options with regard to the calculation of such compensation. Afterwards, the chapter concludes by comparing the different available rules for patent protection in terms of costs and benefits. The general conclusions of this Thesis are various and pertain to the legal as well as the law and economics field. Most of the conclusions and suggestions can be applied only to this specific research and hence to the analysis, in law and economic terms of the use of property and liability rules in patent law. However, some of the conclusions also refer to more general questions such as whether property law should be necessarily reflected in IP law or whether the object and aims of IP protection differ so importantly that the benefits of applying the insights of property law to IP law will be outweighed by the costs of so doing. Such arguments were often made in the context of the ebay litigation against the curtailment of injunctive relief for patentees. However, the same arguments have led to contradictory calls for applying the insights developed in property rights law to IP and at the same time, a call against using general rules as the equitable evaluation of injunctions by judges in common law countries that also applied to tangible property. A closely related question, which is often posed at the intersection of Antitrust and IP law, is whether patent rights deserve a differential treatment. If the answer is affirmative, it is nevertheless debated whether such differential treatment should tilt towards more or less protection than that granted to other property. In answering this question, many analysts have rushed in concluding that to protect innovation incentives; patents should enjoy deference in the application of antitrust statutes. But such conclusions ignore the access side of the patent balance, so that in some cases, the application of antitrust law might affect innovation incentives but this might be nevertheless less costly than obstructing access to further innovation. In this sense, access does not only mean to diminish prices and to correct market failures in static efficiency terms but also the possibility for further innovators to use patents and continue the path towards scientific and technological progress, hence deriving potential gains to the market in terms of dynamic efficiency as well. 12 Intersentia