INNOVATION (Update: Patent Law)

OP-ED COLUMNIST

Innovation Nation at War

By JOE NOCERA

Published: February 8, 2013 

“I decided it would be fun to do patent trials,” said Richard Posner.

We were sitting in his spacious office in the federal courthouse in downtown Chicago, where, for more than three decades, Posner, 74, has been a judge on the United States Court of Appeals for the Seventh Circuit. Posner is one of the most prolific writers in the country, not just of legal opinions but of books and articles on a staggering variety of subjects.

He is also one of the most highly regarded appeals court judges. His first book, “Economic Analysis of Law,” written in 1973, “showed how economic principles could be fruitfully applied to many legal problems,” as the legal writer Roger Parloff once put it in Fortune magazine. It has had a profound effect on the law.

In recent years, Posner has done something you don’t see appeals court justices do very often. He has volunteered to serve as a district judge in lawsuits involving patent claims. One case, Apple v. Motorola Mobility, was a high-profile smartphone lawsuit. The other, Brandeis and GFA Brands v. Keebler, involved a patent for cookie formula, and was mainly of interest to the patent cognoscenti.

But “fun” is hardly Posner’s only motive. To put it more bluntly than he ever would, he is adjudicating patent cases in an effort to change a legal system that now gives companies rich incentives to bring costly, time-consuming and often prideful patents lawsuits. It desperately needs to be done.

America’s patent system is a mess. The United States Patent and Trademark Office, understaffed and overwhelmed, issues too many needless patents. Patent trolls buy or create patent portfolios whose only purpose is to extort fees from the companies that actually make the things that the patents supposedly cover. Technology companies sue competitors for billions for infringing patents that are nothing short of silly — the rounded corners on the iPhone, for instance. Google spent $12.5 billion to buy Motorola Mobility in no small part to get its patent portfolio, which became a legal weapon.

In Posner’s view, many patents are unnecessary. Patents, he believes, are important for drug companies that spend hundreds of millions of dollars bringing a new drug to market — a drug that can easily be copied by a competitor. Without the protection that a patent affords, pharmaceutical companies would have far less incentive to come up with new drugs.

But patents in fast-moving industries like technology? “When you are dealing with products that have very short lives, you often don’t need patents because by the time competitors wise up, you’ve moved on,” Posner says. Indeed, in such industries, patents — which are primarily intended to encourage innovation — have the exact opposite effect: they discourage innovation. The smartphone industry, meanwhile, led by the ever-litigious Apple, is spending more time and effort filing lawsuits over patents infringement than it is coming up with innovative new products.

Posner told me that among the things a judge can do is assign a neutral expert to assess the claims of damages from both sides. He can make sure he has a deep understanding of the issues, and can explain it to a jury in a jargon-free manner.

But by far the most important thing he has done is to change the calculation by which companies can demand damages for patent infringement. Instead of allowing companies and their experts to come up with pie-in-the-sky estimates of what they are owed by the infringer, Posner insists that they calculate precisely how much the infringing component is driving demand for the product. For things like rounded corners, it’s probably not much. “If they can meet that challenge, then fine. But it’s difficult,” he says.

Thus, in the Apple-Motorola litigation, Posner tossed the case out of court after concluding that neither party had come close to calculating damages appropriately. As the Reuters legal blogger, Alison Frankel, put it last June, when Posner rendered his withering decision, “Would any rational economic actor engage in litigation under those terms, spending millions on an apparently impossible quest” to satisfy Posner’s damages criteria?

Which is exactly the point. Just a few weeks ago, Posner severely narrowed the damages calculation in the cookie formula case. Their incentives thus radically changed, the two sides came to their senses. They e-mailed Posner to say they had settled the case (though they have yet to submit a motion to that effect).

Apple, of course, has appealed Posner’s decision in the Motorola case. If he is upheld, there is a decent likelihood that his new formulation will become the standard in the federal judiciary — and the costly patent wars, which take money from shareholders and consumers alike, will finally come to an end.

It won’t make Apple very happy. But it’s the best thing that could happen for American innovation.