Bold Proposal on U.S. Patent Reform: Eliminate the U.S. Court of Appeals for the Federal Circuit

The Cato Institute is "a public policy research organization — a think tank – dedicated to the principles of individual liberty, limited government, free markets and peace," which operates the Cato Unbound forum, an online journal.  This month's journal features a discussion titled, "Patents and Public Choice."  The feature essay is authored by Eli Dourado, a research fellow at the Mercatus Center at George Mason University, and critically tackles the U.S. patent system.  There is one responding essay by Professor Zorina Khan (I recently highlighted one of her papers concerning patent trolls, here).  Forthcoming essays will be published by Professor John F. Duffy of the University of Virginia Law School and Professor Christina Mulligan of the Brooklyn Law School.  Mr. Dourado's essay is titled, "The True Story of How the Patent Bar Captured a Court and Shrank the Intellectual Commons."  The essay essentially argues that the U.S. Court of Appeals for the Federal Circuit, the supposedly specialist patent court in the U.S. with nationwide jurisdiction over patent appeals from U.S. district courts and jurisdiction over patent appeals from the United States Patent and Trademark Office, has been captured by the patent bar and has continuously expanded patent eligible subject matter to the detriment of innovation.  He points to software patents as a problem, including a discussion of the tragedy of the anticommons, as well as patent trolls.  Despite the U.S. Supreme Court's attempt to reign in software patents, he believes the Federal Circuit will continue to evade Supreme Court precedent (maybe true, but the composition of the court has been changing).  Here are his proposals for reform:

It would be better instead simply to abolish the Federal Circuit and return to the pre-1982 system, in which patents received no special treatment in appeals. This leaves open the possibility of circuit splits, which the creation of the Federal Circuit was designed to mitigate, but there are worse problems than circuit splits, and we now have them.

Another helpful reform would be for Congress to limit the scope of patentable subject matter via statute. New Zealand has done just that, declaring that software is “not an invention” to get around WTO obligations to respect intellectual property. Congress should do the same with respect to both software and business methods.

 . . . Current legislation in Congress addresses this class of [patent troll] problem[s] by mandating disclosures, shifting fees in the case of spurious lawsuits, and enabling a review of the patent’s validity before a trial commences.

What matters for prosperity is not just property rights in the abstract, but good property-defining institutions. Without reform, our patent system will continue to favor special interests and forestall economic growth.

I am not so convinced that returning to the uncertainty and splits of jurisdiction existing before the creation of the Federal Circuit and “races to the courthouse” is going to put us in a better position.  And, the party advocating for change and carrying the burden of proof may need to make a stronger case for reform given the relative success of the biotechnology and information technology industries in the U.S.   Professor Khan offers an incisive rebuttal, here.  This blog has featured posts challenging the assertion that patents in the information and technology communications space are inhibiting innovation, here,  [Although I do wonder about price.] and describing counter-arguments to proposals to reduce the Federal Circuit's influence over patent law, here.  We look forward to Professor Duffy and Professor Mulligan's essays.  [Hat Tip to Professor Dennis Crouch's Patently-Obvious Blog for a lead to the essay.]  

The End of Encarta, the Innovator's Dilemma, and the Tragedy of the Anti-Commons

It was widely reported towards the end of last week that Microsoft will cease production of its encyclopedia software-Encarta. Sales of the PC software will be discontinued by June 2009. Subscribers with premium content will receive a refund for fees paid beyond April 30th, but they will be able to still access the contents on-line until it finally goes offline in October 2009 (a sort of Halloween gift). Japanese subscribers will have access until the end of December 2009 (in time for Christmas).

For those of you who remember the launch of Encarta in the early 1990's, it was widely heralded as spelling the death knell of the printed encyclopedia, first by the easy search and rich text capabilities of the PC software, and later by the added contents available to it via the Internet. (In fact, the original contents of Encarta were licensed from the mass-sale Funk & Wagnalls encyclopedia.) This largely happened in 1996, when the "gold standard" of the encyclopedia world, the Britannica, was forced to sell its rights at less than book value, the victim of the Encarta product.

So what happened? In a statement, Microsoft noted that "Encarta has been a popular product around the world for many years. However, the category of traditional encyclopedias and reference material has changed. People today seek and consume information in considerably different ways than in years past." In more simple terms, it has been replaced by Wikipedia.

I have two related observations in connection with the demise of Encarta. The first is that Clayton Christensen's famous "The Innovator's Dilemma," as described in his landmark book of that name, is at least partially germane. As Christensen noted recently in a Harvard Business School podcast, his notion is based on a product that is blind-sided by a cheaper and more efficient alternative, for which the incumbent is unwilling, or unable, to match, given the nature of is product and the corporate culture in which the incumbent's product is embedded. Here, the decline in cost and increased efficiency came about by the rise of the Wikipedia movement, where royalty payments for contents became a thing of the past due to the royalty-free, collaborative nature of the content providers as well as the sheer scope and ease of both search and content update, all of which left Encarta far back in its wake.

One view of the innovator's dilemma

Second, the Wikipedia movement has put paid the issue of the "tragedy of the anti-commons", which at one time threatened content-gathering exercises such as Encarta. Based on the well-known notion of the "tragedy of the commons" first articulated in the early 1960's (you know, the notion that there are circumstances which are characterized by overuse of an asset when no one person has an interest in preserving the asset, while everyone has a short-term interest in exploiting of the asset, much like the over-grazing of the village commons in pre-modern times), the "tragedy of the anti-commons" turned this notion on its head.

In this situation, developed by Michael Heller in the late 1990's, too many discrete property rights may have the result that a desired project will never get off the ground. Copyright is a great example, where rights clearance may lead to a situation where obtaining rights in the aggregate collection of such proprietary contents may not be achievable. I seem to remember that at the outset of the Encarta project, there was discussion of whether Microsoft could obtain all of the necessary contents if it wished to provide a genuinely broad and diverse array of rich contents, and not simply a digital version of a print encyclopedia. Maybe yes, maybe no, at the time, but certainly irrelevant now, when the issue of proprietary rights in contents is subsumed within a critical mass of content creators, all of whom are willing to part with their individual copyright in favor of the collaborative efforts of the greater community.

No problem of the anti-commons here

So for those of you who keep a scorecard on this kind of thing, it seems that the result of the demise of Encarta is "one to one": the "innovator's dilemma" is alive and well, but "the tragedy of the anti-commons", at least in this context, is a a thing of the past.