After the Trolls: Patent Litigation as Ex Post Market-Making

Akron Law Review Volume 54 Issue 3 Intellectual Property Issue Article 3 2021 After the Trolls: Patent Litigation as Ex Post Market-Making Robert Merges Follow this and additional works at: https://ideaexchange.uakron.edu/akronlawreview Part of the Intellectual Property Law Commons Please take a moment to share how this work helps you through this survey. Your feedback will be important as we plan further development of our repository. Recommended Citation Merges, Robert (2021) "After the Trolls: Patent Litigation as Ex Post Market-Making," Akron Law Review: Vol. 54 : Iss. 3 , Article 3. Available at: https://ideaexchange.uakron.edu/akronlawreview/vol54/iss3/3 This Article is brought to you for free and open access by Akron Law Journals at IdeaExchange@UAkron, the institutional repository of The University of Akron in Akron, Ohio, USA. It has been accepted for inclusion in Akron Law Review by an authorized administrator of IdeaExchange@UAkron. For more information, please contact , . Merges: Patent Litigation as Ex Post Market-Making AFTER THE TROLLS: PATENT LITIGATION AS EX POST MARKET-MAKING Robert Merges ∗ Abstract ................................................................................ 556 I. Introduction ............................................................... 556 II. The Benefits of Waiting ............................................ 559 A. Strategic Delay in Patent Disputes ..................... 560 B. A Positive Role for Patent Litigation ................. 563 C. Litigation and Ex Ante Opportunity Cost .......... 565 III. Ex Post Market-Making............................................. 571 A. Beneficial Ex Post Licensing? ............................ 573 B. Product Components and the Patent Market ....... 574 C. More on Ex Post Market-Making ....................... 577 1. Ex Post Markets as Quasi-Historical Reconstruction ............................................... 579 2. The Importance of Patents for Companies Not in Product Markets......................................... 583 3. Summary: Formation of Ex Post Markets ..... 584 IV. Ex Post Markets vs. Rent-Seeking: Policing the Troll Line ............................................................................ 586 A. Policies to Prevent Rent-Seeking: Policing the “Troll Line” ......................................................... 587 1. Validity Procedures ....................................... 587 2. Validity Doctrines.......................................... 590 a. Nonobviousness ....................................... 592 b. Disclosure Doctrines................................ 594 3. Infringement Doctrines .................................. 596 4. Remedies ....................................................... 598 5. Procedural Rules ............................................ 600 ∗ Robert P. Merges is the Wilson Sonsini Goodrich & Rosati Professor of Law and Technology at the University of California, Berkeley, School of Law and co-founder of the Berkeley Center for Law and Technology. 555 Published by IdeaExchange@UAkron, 2021 1 Akron Law Review, Vol. 54 [2021], Iss. 3, Art. 3 556 V. AKRON LAW REVIEW [54:555 B. Rolling Up the Loose Ends of Patent Reform .... 602 Conclusion ................................................................. 602 ABSTRACT Patent policy has been dominated lately by efforts to reduce rentseeking patent troll litigation. As recent reforms begin to take effect, it is timely to consider the more constructive aspects of patent litigation. This Article contends that the lag between product development and patent litigation, which pushes the problem of patent valuation into the ex post (after product development) period, serves just such a positive function. Research, development, and product roll-out can all take place first. Then, at a later stage, patent litigation sorts out the relative merits and contributions of the various inventors and competitors who contributed to the new product or technology. In the time between early commercialization and litigation, a good deal of helpful information comes to light about the product and its market. This makes valuation more tractable, especially as compared with the early (ex ante) development period, when uncertainty is high. Litigation also serves as a structured process that promotes party settlement, adding another dimension to its potentially positive role. I. INTRODUCTION Patent policy has been shaped for the past 15 years by a single imperative: reduce rent-seeking patent litigation. 1 The strengthening of patents that began with the creation of the Federal Circuit in 1982 culminated in the rise of the patent trolls: companies in the business of acquiring and asserting patents whose social value is dubious. The trouble with trolls can be summed up this way: litigation instead of innovation. Trolls either bring nuisance value suits, settling them on the cheap but making up for low margins with high volume; or they target successful products manufactured by others, using patents as a way to extract as much of the value of these products as they can. Troll patents leverage 1. On the other hand, patent doctrine has long favored litigation as a way to weed out invalid patents. The value of patent litigation as a way to increase competition via patent invalidation has been challenged in recent years. See Stephen Yelderman, Do Patent Challenges Increase Competition?, 83 U. CHI. L. REV. 1943 (2016). https://ideaexchange.uakron.edu/akronlawreview/vol54/iss3/3 2 Merges: Patent Litigation as Ex Post Market-Making 2020] PATENT LITIGATION AS EX POST MARKET-MAKING 557 someone else’s large sunk investments, fixed designs, and high switching costs—allowing trolls to extract value when they did not help create it.2 Because the leverage in troll litigation comes from sunk costs, this type of litigation (and the troll licensing demands that go with it) is described as “ex post.” It comes after the target defendant has made its investment. The future profits associated with this investment constitute what economists call a rent. Patent owners bring ex post litigation hoping to capture the value of these rents. And so, targeted defendants end up paying money to patent owners as a way to keep from losing some of the value (rents) created by their own investments. 3 Ex ante patent activity is different. It comes before third parties have independently developed a technology. It also necessarily precedes the finalization of product designs, as well as irreversible investments, i.e., sunk costs. 4 It represents a positive role for patents: facilitation of market 2. On the social welfare costs of patent trolls, see Lauren Cohen, Umit G. Gurun & Scott Due Kominers, Patent Trolls: Evidence from Targeted Firms 4 (Harvard Bus. Sch., Working Paper No. 15-002, 2017), https://ssrn.com/abstract=2464303 [https://perma.cc/QUY7-VZN6]; Stephen Kiebzak, Greg Rafert & Catherine E. Tucker, The Effect of Patent (...truncated)