It's an age-old question that we've blogged about here before - what role do patents have on firm value? And is any effect due to signaling or exclusivity? Does the disclosure in the patent have any value? Does anybody read patents?
These are all good questions that are difficult to measure, and so scholars try to use natural experiments or other empirical methods to divine the answer. In a recent draft, Deepak Hegde, Baruch Lev, and Chenqi Zhu (all NYU Stern Business) use the AIPA to provide some useful answers. For those unaware, the AIPA mandated that patent applications be published after 18 months by default, rather than held secretly until patent grant. The AIPA is the law that keeps on giving; there have been several studies that use the "shock" of the AIPA to measure what effect patent publications had on a variety of dependent variables.
So, too, in Patent Disclosure and Price Discovery. A draft is available on SSRN, and the abstract is here:
We focus in this study on the exogenous event of the enactment of American Inventor’s Protection Act of 1999 (AIPA), which disseminates timely, detailed, and credible public information on R&D activities through pre-grant patent disclosures. Exploiting the staggered timing of patent disclosures, we identify a significant improvement in the efficiency of stock price discovery. This improvement is stronger when patent disclosures reveal firms’ successful, new, or technologically valuable inventions. This improvement is more pronounced for firms in high-tech or fast-moving industries, or with a large institutional ownership or analyst coverage. We also find stock liquidity rises and investors’ risk perception of R&D drops after the enactment of AIPA. Our results highlight the importance of timely, detailed, and credible disclosures of R&D activities in alleviating the information problems faced by R&D-intensive firms.
This is a short abstract, so I'll fill in a few details. The authors measure the effect on intra-period timeliness, a standard measure used to proxy for "price discovery," or how quickly information enters the market and settle the price of a stock. There are a lot of articles on this, but here's one for those interested (paywall, sorry).
In short, the authors look at how quickly price discovery occurred before and after the AIPA, correcting for firm fixed effects and other variables. One of the nice features of their model is that patent applications occurred over a period of years, and so the "shock" of patent publication was not distributed only in one year (which could have been affected by something other than the AIPA that happened in that same year).
They find that price discovery is faster after the AIPA. Interestingly, they also find that the effect is more pronounced in high-tech and fast moving fields -- that is, industries where new R&D information is critically important.
Finally, their results say something about the nature of the patent disclosure itself - the effects come from disclosure of the information, and not necessarily the patent grant. Thus, the signaling effect may really relate to information, and (some) people may well read patents after all.
I greatly enjoyed Professor Adam Mossoff's new article, Statutes, Common-Law Rights, and the Mistaken Classification of Patents as Public Rights, forthcoming in the Iowa Law Review. Mossoff's article is written in the wake of Oil States Energy Services v. Green's Energy Group,where the Supreme Court held it is not unconstitutional for the Patent Trial & Appeals Board (PTAB), an agency in the Department of Commerce, to hear post-issuance challenges to patents, without the process and protections of an Article III court. Justice Thomas' opinion concluded that patents are "public rights" for purposes of Article III; therefore, unlike, say, property rights in land, patents can be retracted without going through an Article III court.
Mossoff's article objecting to this conclusion is a logical follow on to his prior work, while also providing new insights about the nature of patents, property, and the public rights doctrine. He does so quite concisely too, with the article coming in at only 21 pages.
The Public Rights Doctrine The general rule is that Article III mandates that disputes involving "private rights"—rights that arise as between citizens, such as rights arising under contract, tort, or property law—must be adjudicated in Article III courts. (Mossoff, at 5). But there is an exception for rights classified as "public rights," created not from relations between individual citizens, but from relations with the sovereign. (Mossoff, 4) ("[A] public right is a privilege granted to or created in a citizen 'in connection with the performance of the constitutional functions of the executive or legislative departments.' ") (quoting Crowell v. Benson, 285 U.S. 22, 50 (1932)). If a legal entitlement is classified as a public right, this means the legislature has discretionary power to retract it, and to give non-Article III agency courts in the political branch, such as the PTAB, power over this process. Mossoff summarizes the basic idea behind the public rights exception thus: " '[as] Congress giveth, Congress [can] taketh away' ..." (Mossoff, at 5) (quoting NGS American, Inc. v. Barnes, 998 F.2d 296, 298 (9th Cir. 1993) (referring to Congress’ authority with respect to employee benefit plans under ERISA)).
Importantly, Article III's mandate that disputes over private rights be adjudicated by the judicial branch arises from a concern over separation of powers, not procedural due process. As Professor Greg Dolin puts it in his recent article,Yes, The PTAB is Unconstitutional, Article III's solicitude for adjudications involving private rights has two purposes: to protect litigants’ right to have claims decided before judges whose decisions are not affected by other branches of government, and to preserve separation of powers at an institutional level by dividing responsibilities and maintaining the balance between the legislature, the executive, and the judiciary. Due process, which mandates certain procedural safeguards when government takes actions that threaten "liberty" or "property" interests within the meaning of the Due Process Clause of the Fifth or Fourteenth Amendment, is a separate issue. A right that is classified as "private" for purposes of Article III receives a fuller panoply of protection, including both a guarantee of an Article III forum and potential compensation against a Taking under the Fifth or Fourteenth Amendment. But a right that is classified as "public" for purposes of Article III's public rights exception still triggers procedural due process. Thus, the Court's' decision in Oil States that patents are public rights does not deprive patentees of standard due process protections.
It is not surprising that Mossoff would object to Justice Thomas' decision classifying patents as public rights. In his 2007 article, Who Cares What Thomas Jefferson Thought About Patents? Reevaluating the Patent 'Privilege' in Historical Context, Mossoff questioned the common assumption that patents are merely "privileges" that are granted at the whim of the sovereign. By retracing what the term "privilege" actually meant in historical context, Mossoff argued patents were in fact not viewed as rights contingent on the sovereign, but as private property rights based on a Lockean labor theory of property and natural rights philosophy.
Although many may disagree with Mossoff's argument that patents are based on natural rights, it is hard to ignore the historical case law Mossoff unearthed. His work, in that article and thereafter, has clearly been influential. The dissent in Oil States, written by Justice Gorsuch and joined by Chief Justice Roberts, cited extensively to Mossoff's scholarship in order to support their view that allowing an executive agency to revoke patents was a departure from historical practice, since, Justice Gorsuch wrote, "[o]nly courts could hear patent challenges in England at the time of the founding[," and risked undermining "the promise of judicial independence."
Mossoff's new article is not duplicative of his prior work. Nor is it duplicative of Gorsuch's dissent. Rather, Mossoff makes important insights about how patents are classified in the private rights/public rights framework, and about how we tend to think about the private rights/public rights framework more generally. In short, his article illustrates the inaccuracy of a common assumption, which both sides sometimes made in the course of the Oil States case: that property rights created through common law are "private rights," while property rights created through statutes are "public rights." Here is an excerpt from Justice Thomas' opinion in this regard (case citations and Latin removed):
... [P]atents are “public franchises” that the Government grants “to the inventors of new and useful improvements.” The franchise gives the patent owner “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States.” That right “did not exist at common law.” Rather, it is a “creature of statute law.”
Mossoff, I think rightly, argues that this distinction, between statutes as public rights and common law rights as private rights, is far too simplistic. It actually makes little sense in light of history and in light of how property law works today. Many property rights having mixed statutory and common law origins. Mossoff draws this out in the paper, with comprehensive citations to historical case law. Here is the key argument:
At common law and in the early American Republic, courts and commentators recognized that the distinction between statutes and common law rights was merely a generalized distinction that did not reflect the complex institutional relationship between legislatures and courts in creating and applying legal rights. ... The reason is simple: all legal rights share a mixed provenance in both statutes and judicial decisions, and thus this distinction between statutes and judicial decisions could never serve as a coherent rule for distinguishing public rights and private rights.
Mossoff goes on to document copious examples of property rights with their basis in (often both) statutory and common law:
The fundamental role of statutes in creating property rights in land has continued in the states from the early years of the American Republic up through today. State legislatures have enacted statutes codifying and securing the rights of adverse possessors, creating title recordation requirements, defining and securing conveyance rights, defining and securing wills and the creation of future interests in land... ... Even the notorious common-law doctrine, the rule against perpetuities, has been codified in many states.
The upshot, for Mossoff, is as follows. The fact that patents are created under a statutory regime codified in the Patent Act (which incidentally was passed pursuant to a specifically delineated constitutional power under Article I, Section 8, Clause 8) is not determinative of whether patents are private or public rights for purposes of Article III.
There are two reasons. First, as just explained, many classic property rights are, to quote Justice Thomas' quotation, a "creature of statute law." Thus, patents being creatures of statute law does not answer whether they are private or public rights. Second, patent law has evolved through a lawmaking process that resembles common law. As Mossoff puts it, citing to case law and appropriate scholarship on the issue,
[In patent law,] courts have created out of whole cloth new substantive legal rights that are not listed anywhere in the patent statutes. For instance, courts created the exhaustion doctrine, secondary liability, the experimental use defense [...etc.]... [I]n addition ... courts have created substantive doctrines in interpreting and applying statutory provisions in the Patent Act. These judicially-created doctrines become “the law” that is subsequently applied by courts, and patent law is replete with them. For example, the “all elements rule” in comparing a patent to a product or process in finding either literal or equivalents infringement is found nowhere in § 271... [etc.]
The implication of the fact that patent law, despite being statutory, proceeds through a common law method, is to melt away the notion that patents are simply creatures of statute. If anything, patents are creatures of mixed statutory and common law—not that different from certain property rights in land like those generated through adverse possession.
I think this reasoning is sound, and am grateful for the impetus to reexamine my own assumption about the nature of a "public right." Of course, it will almost certainly not change people's minds on whether patents are public rights or on whether Oil States was rightly decided. Even after we dispose of the overly simplistic distinction between statutory and common law property rights, many will still argue, quite reasonably, that patents are public rights. But this is a different argument that Professor Mossoff can have with Justice Thomas, and the others whose work Mossoff discusses in the paper, such as Professor Mark Lemley and Professor Greg Reilly.
Public Rights, State Patents, and State Courts
I do have one comment. I was surprised not to see more discussion, or citation to literature, regarding state and colonial patents. Mossoff mentions them, but only very briefly.
From the first enactments of copyright and patent statutes by the states under the Articles of Confederation, and then by Congress enacting the first federal patent and copyright statutes in 1790, courts interpreted, applied and extended these statutes in common law fashion in crafting the doctrines that comprise the fundamental rights and duties in U.S. patent law.
As I discussed in my article on this subject, State Patent Laws in the Age of Laissez-Faire, state and colonial patents (at least those I reviewed) do resemble, superficially, "public rights" that could be retracted by the sovereign if the requirements of the grant were not met. Indeed, some were retracted, such as John Fitch's steamboat patent from the state of New York. As I wrote, "New York’s retraction of Fitch’s 1787 grant in 1798 suggests that the state could have rescinded an inventor’s patent for failure to establish a working technology in state jurisdiction even when the patent contained no explicit working clause." (Hrdy, 66, n. 83) (quoting Livingston v. Van Ingen, 9 Johns. 507 (N.Y. 1812)).
After reading Mossoff's article, I agree that the fact that state and colonial grants were statutory rights is not dispositive on the issue of whether they are public rights or private rights under Article III. But I would like to see Professor Mossoff's answer as to whether state patents were, despite appearances, more like private rights than public rights, and what state and colonial practice tells us about patents' status today under the federal Patent Act. If patents were being retracted by state legislatures before, and after, ratification of the Constitution with very little legal process (probably not even due process in Fitch's case), doesn't this suggest patents were seen as "public rights" at the time of ratification, and when the first Patent Act was passed in 1790?
I raised this question with Professor Dolin. His response was that the grounds for the cancellation matter, as does the process through which the revocation is effectuated. If the state cancelled the patent based on a failure to meet the requirements of a working clause, for instance, this may not undermine the notion that this was a private right. The patent grant may have been akin to a real property right granted subject to a condition subsequent, with a right of reentry, depending on the terms of the original grant. The real question, Dolin said, is whether such revocations of state patents were contestable in courts with some degree of independence from the political branches. At that time, this would have been state courts. (Federal courts did not even gain their exclusive jurisdiction over federal patent cases until some time later, and uncertainty over state courts' jurisdiction in patent cases continued into modern times).
This leads to a related conundrum that bugs me about the public rights doctrine: the doctrine does not much care about what happens in state courts. As explained above, the purpose of Article III's public rights versus private rights distinction is to preserve the separation of powers as between Congress and the federal judiciary. But it is not a guarantee of due process, or a guarantee of federal process. This means Article III would not allow a vested property right, such as a piece of land, to be adjudicated in a non-Article III court, based on the concern that this would deprive litigants of a forum free of influence by the political branches. But at the same time, under Article III, Congress is not required to create lower federal courts and is free to authorize state courts to hear disputes arising under federal law. Indeed, most claims can brought in state or federal court. Most property rights could be invalidated in a state court and not get a true Article III court. This is the case regardless of whether state judges are elected or appointed, and regardless of how sloppy a state's rules of procedure are.
If Congress relaxed patents' exclusive jurisdiction, amended 28 U.S.C. § 1338, and declared tomorrow that federal patents can be litigated and potentially invalidated in state courts (beyond the confines of "backward" looking situations like Gunn v. Minton), this would actually be okay under the Article III public rights doctrine. When you consider state courts as a backdrop option, in a world where there was not exclusive federal jurisdiction in patent cases, the public rights doctrine seems a bit silly. It would be okay for patents to be litigated in state courts so long as other constitutional protections like due process were satisfied...but not in the PTAB.
---- In sum, Mossoff does a great service in calling out the oversimplification that creatures of statute are not necessarily "public rights" for purposes of Article III. I am not sure this leads to the conclusion that patents deserve the full panoply of protection given to private rights, now or historically.
In honor of the oral argument in Helsinn today, I thought I would blog about a study that questions its importance. For those unaware, the question the Supreme Court is considering is whether the AIA's new listing of prior art in 35 U.S.C. §102(a)(1): "the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public..." changed the law.
Since forever, on sale meant any offer or actual sale, regardless of who knew about it. Some have argued that the addition of "or otherwise available to the public" means that only offers that are publicly accessible count as prior art. I think this is wrong, and signed on to an amicus brief saying so. We'll see what the Court says.
But how big a deal is this case? How many offers for sale would be affected? Steve Yelderman (Notre Dame, and soon to be Gorsuch clerk) wanted to know as well, so he did the hard work of finding out. In a draft paper on SSRN that he blogged about at Patently-O, he looked at all invalidity decisions to see exactly where the prior art was coming from. Here is the abstract for Prior Art in the District Court:
This article is an empirical study of the evidence district courts rely upon when invalidating patents. To construct our dataset, we collected every district court ruling, verdict form, and opinion (whether reported or unreported) invalidating a patent claim over a six-and-a-half-year period. We then coded individual invalidation events based on the prior art supporting the court’s analysis. In the end, we observed 3,320 invalidation events based on 817 distinct prior art references.
The nature of the prior art relied upon to invalidate patents informs the value of district court litigation as an error correction tool. The public interest in revoking erroneous patent grants depends significantly on the reason those grants were undeserved. Distinguishing between revocations that incentivize future inventors and those that do not requires understanding the reason individual patents are invalidated. While prior studies have explored patent invalidity in general, no study has reported data at the level of detail necessary to address these questions.
The conclusions here are mixed. On one hand, invalidations for lack of novelty bear many indicia of publicly beneficial error correction. Anticipation based on obscure prior art appears to be quite rare. When it comes to obviousness, however, a significant number of invalidations rely on prior art that would have been difficult or impossible to find at the time of invention. This complicates — though does not necessarily refute — the traditional view that obviousness challenges ought to be proactively encouraged.
So, let's get right to the point. The data seem to show that "activity" type prior art (that is sale or use) is much more prevalent in anticipation than in obviousness. This is not surprising, given that this category is often the patentee's own activities.
With respect to non-public sales, they estimate that a maximum of 14% of anticipation and 2% of obviousness invalidations were based on plausibly non-public sales. Note that non-public does not mean "secret." True secret activity is often considered non-prior art, but the courts have defined "public" to mean "not-secret." The question is whether that should change to be "publicly accessible." Because there are many more obviousness cases than anticipation cases, this averages to 4.25% of all invalidations. They note that with a different rule, some of these might have been converted to "public" sales upon more attention paid to providing such evidence.
A related question is whether the inventor's actions can invalidate, or whether the AIA overruled Metallizing Engineering, which held that an inventor's secret use can invalidate, even if a third-party's secret use does not. The study found that the plaintiff's actions were relevant in 27% of anticipation invalidations and 13% of obviousness invalidations. Furthermore, they found that most of the secret activity was associated with either the plaintiff or defendant--this makes sense, as they have access to such secret information.
So, what's the takeaway from this? I suppose where you stand depends on where you sit. I think that wiping out 4% of the invalidations, especially when they are based on the actions of one of the two parties, is not a good thing. It's bad to allow the patentee to non-publicly sell and have the patent, and it's bad to hold the defendant liable even if it has been selling the patent in a non-public (though non-secret) way. We're talking about 20 claims per year that go the other way - too high for my taste, especially when it means we have to start defining new lines.
Furthermore, the stakes of reversing Metallizing are much higher. I freely admit that the "plaintiff's secret actions only" rule has a tenuous basis in the text of the statute, but it has been the law for a long time without being expressly overruled by two subsequent revisions. Given that more than 25% of the invalidations were based on the plaintiffs actions, I think it would be difficult to reverse course.
It's a bit weird to write a blog post about something posted at another blog in order to bring attention to it, when that blog has many more readers than this blog. Nonetheless, I thought that the short essay Decoding Patentable Subject Matter by Colleen Chien (Santa Clara) and her student Jiun Ying Wu, in the Patently-O Law Journal was worth a mention. The article is also on SSRN, and the abstract is here:
The Supreme Court’s patentable subject matter jurisprudence from 2011 to 2014 has raised significant policy concerns within the patent community. Prominent groups within the IP community and academia, and commentators to the 2017 USPTO Patentable Subject Matter report have called for an overhaul of the Supreme Court’s “two-step test.” Based on an analysis of 4.4 million office actions mailed from 2008 through mid-July 2017 covering 2.2 million unique patent applications, this article uses a novel technology identification strategy and a differences-in-differences approach to document a spike in 101 rejections among select medical diagnostics and software/business method applications following the Alice and Mayo decisions. Within impacted classes of TC3600 (“36BM”), the 101 rejection rate grew from 25% to 81% in the month after the Alice decision, and has remained above 75% almost every month through the last month of available data (2/2017); among abandoned applications, the prevalence of 101 rejection subject matter rejections in the last office action was around 85%. Among medical diagnostic (“MedDx”) applications, the 101 rejection rate grew from 7% to 32% in the month after the Mayo decision and continued to climb to a high of 64% and to 78% among final office actions just prior to abandonment. In the month of the last available data (from early 2017), the prevalence of subject matter 101 rejections among all office actions in applications in this field was 52% and among office actions before abandonment, was 62%. However outside of impacted areas, the footprint of 101 remained small, appearing in under 15% of all office actions. A subsequent piece will consider additional data and implications for policy.
This article is the first in a series of pieces appearing in Patently-O based on insights gleaned from the release of the treasure trove of open patent data starting the USPTO from 2012.
The essay is a short, easy read, and the graphs really tell you all you need to know from a differences-in-differences point of view - there was a huge spike in medical diagnostics rejections following Mayo and software & business patent rejections following Alice. We already knew this from the Bilski Blog, but this is comprehensive. Interesting to me from a legal history/political economy standpoint is the fact that software rejections were actually trending downward after Mayo but before Alice. I've always thought that was odd. The Mayo test, much as I dislike it, easily fits with abstract ideas in the same way it fits with natural phenomena. Why courts and the PTO simply did not make that leap until Alice has always been a great mystery to me.
Another important finding is that 101 apparently hasn't destroyed any other tech areas the way it has software and diagnostics. Even so, 10% to 15% rejections in other areas is a whole lot more than there used to be. Using WIPO technical classifications shows that most areas have been touched somehow.
Another takeaway is that the data used came from Google BigQuery, which is really great to see. I blogged about this some time ago and I'm glad to see it in use.
So, this was a good essay, and the authors note it is the first in a series. In that spirit, I have some comments for future expansion:
1. The authors mention the "two-step" test many times, but provide no data about the two steps. If the data is in the office action database, I'd love to see which step is the important one. My gut says we don't see a lot of step two determinations.
2. The authors address gaming the claims to avoid certain tech classes, but discount this by showing growth in the business methods class. However, the data they use is office action rejections, which is lagged--sometimes by years. I think an interesting analysis would be office action rejections by date of patent filing, both earliest priority and by the date the particular claim was added. This would show growth or decline in those classes, as well as whether the "101 problem" is limited to older patents.
3. All of the graphs start in the post-Bilski (Fed. Cir.) world. The office actions date back to 2008. I'd like to see what happened between 2008 and 2010.
4. I have no sense of scale. The essay discusses 2000 rejections per month, and it discusses in terms of rates, but I'd like to know, for example, a) what percentage of applications are in the troubled classes? b) how many applications are in the troubled classes (and others)? c) etc.? In other words, is this devastation of a few or of many?
5. Are there any subclasses in the troubled centers that have a better survival rate? The appendix shows the high rejection classes, what about the low rejection classes (if any)? I look forward to future work on this!
Kal Raustiala and Christopher Sprigman are well known as the authors of the book, The Knock-Off Economy: How Imitation Sparks Innovation (2012). In their new article, Rethinking Post-Sale Confusion, Raustiala and Sprigman level a critique at "post-sale confusion" theory that supports many of their book's conclusions about the virtues of so-called knock-offs. In post-sale confusion cases, courts find infringement even when it is abundantly clear that consumers of obvious knock-offs are not confused at the time of purchase.
Raustiala and Sprigman's critique of post-sale confusion theory adds to similarly critical scholarship by others such as Jeremy Sheff and Mark McKenna, whose articles Veblen Brands and A Consumer Decision-Making Theory of Trademark Law, respectively, provide the backbone for much of the discussion in this post. Professor Sheff also has a forthcoming book chapter in the Cambridge Handbook on Comparative and International Trademark Law, where he places American post-sale confusion doctrine in perspective by comparing it to the European approach.
This post attempts to synthesize this scholarship, though cannot hope to serve as a replacement for the much more comprehensive and eloquent original work by these experts. The post also draws attention to a growing refrain by trademark scholars such as Rebecca Tushnet, Mark McKenna, and Mark Lemley: that a possible response to trademark courts' embrace of alternative theories of confusion is to institute a materiality requirement, like courts use for false advertising claims.
What Is Post-Sale Confusion?
Post-sale confusion is a theory of trademark infringement in which consumer confusion occurs not when purchasers buy the defendant's product at the point of sale, but when third parties observe the product at a later time, and wrongly believe the trademark owner is the source. The alleged harm to the trademark owner is not that the third party observers will go on to wrongly buy defendant's product. That would be point-of-sale confusion. Rather, the harm is that the third party observers will not buy plaintiff's product due to misinformation they received upon viewing the defendant's fake, such as the notion that the real item is low quality.
Post-sale confusion theory is especially relevant for so-called counterfeit goods (same mark, same product), such as the remarkably cheap Gucci-ish bags sold on the Upper West Side of Manhattan or the "Rolex" watches sold in Chinatown. Buyers know full well what they are getting. The concern is that others who see the fakes, "observers" (sometimes called "bystanders"), do not know, and will be affected in their own purchasing decisions by the misinformation.
As Professor McKenna has explained, despite the fact that purchasers are not confused in these cases, courts "have not been content to let the copyists off the hook [.]" Rather, they have "managed to squeeze them into trademark law by focusing on observers of the goods rather than purchasers." (McKenna, 102). This district court's analysis, in a classic fake Rolex lawsuit, is representative of the standard understanding of post-sale confusion theory:
Individuals examining the counterfeits, believing them to be genuine Rolex watches, might find themselves unimpressed with the quality of the item and consequently be inhibited from purchasing the real time piece.
(McKenna, 104-105) (quoting Rolex Watch U.S.A. v. Canner, 645 F. Supp. 484, 493 (S.D. Fla. 1986)).
The ultimate harm, that observers will not buy plaintiff's real Rolex watches after being "unimpressed with the quality" of the fakes, is different, and arguably lesser, than if purchasers were confused at the point-of-sale and consequently chose to buy defendant's watch instead of plaintiff's. But the harm is still legally cognizable. As Professor Sheff puts it, this traditional understanding of post-sale confusion theory is "entirely consistent with broadly accepted policy justifications for trademark enforcement." The harm is not just that observers will one day become misinformed purchasers, but also that "honest producers of quality goods may lose sales as a result[.]" Both injuries, Sheff writes, are ones that conventional trademark law and policy seek to prevent. (Sheff, 779-780).
Sources of Law
According to the courts, post-sale confusion is actionable trademark infringement. However, post-sale confusion's statutory hook is less clear than traditional point-of-sale confusion's or even than dilution's. Whereas with dilution, Congress expressly amended the Lanham Act twice to address it (once in 1996 and once in 2006), post-sale confusion is present for the civil liability only by inference.
Section 32(a), states, with respect to registered marks, that
[a]ny person who shall, without the consent of the registrant...use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion ... [is liable to the owner of the mark.]
15 U.S.C. § 1114(1)(a)(1).
Section 43(a)(1)(A) states, with respect to unregistered marks, that
[a]ny person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which... is likely to cause confusion ... as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person ...[is liable to the owner of the mark.]
15 U.S.C.§ 1125(a)(1)(A).
If you are looking for details as to when confusion must occur, they are not there. Rather, we have to assume that when the Act says "likely to cause confusion," it includes confusion that occurs not at the primary point-of-sale.
Historically the statutory hook for post-sale confusion was actually clearer than it is today. As Sheff recounts in his forthcoming book chapter, under the 1905 Act, federal registrants had the right to prevent others from “reproduc[ing], counterfeit[ing], copy[ing], or colorably imitat[ing]” their registered mark on goods with “substantially the same descriptive properties” as the goods for which the mark was registered. This meant that even though the 1905 Act limited liability to the "double identity" category of misconduct, where both the mark and the goods were identical, courts did not have to address whether there was in fact a likelihood of confusion at the point of sale. (Sheff, book chapter draft, 4-7) (discussing 1905 Act and comparing the European approach).
Today, in contrast to the early twentieth century, the Lanham Act is not limited to infringements that meet the double-identity standard. Instead, Section 32(a) and 43(a)(1)(A) target a broader variety of conduct so long as it is "likely to cause confusion." This includes confusion regarding products sold in different markets, such as BORDEN ice cream vs. BORDEN milk, and confusion with respect to mere sponsorship or approval—where defendant's use of plaintiff's mark implies some form of endorsement by plaintiff, if not necessarily that plaintiff is the source. Professor McKenna, with Mark Lemley, give the excellent example of soccer fans wearing pants bearing their team's color scheme to a World Cup game, and removing their pants after being accused of misleading people into thinking the soccer team was a sponsor of their gambit.
Yet, despite targeting a wider variety of confusing conduct, modern confusion analysis is less explicit about what happens when the purchaser of a product that bears plaintiff's mark in precisely the same market (watches and watches) knows that they are purchasing a knock-off. Here, the question becomes whether, given that purchasers are fully aware of what they are getting, the Lanham Act's likelihood of confusion standard can extend to confusion of observers who have not actually (yet) purchased the product.
Professors Raustiala and Sprigman highlight the vagueness of the statutory text with respect to post-sale confusion, but nonetheless concede that the legislative history "does suggest that Congress intended to extend the Lanham Act's protections at least to those with an intent to purchase, not merely those who have purchased or are in the process of purchasing." (Raustiala and Sprigman, 7) (emphasis added). Professor Sheff reaches a similar conclusion about the legislative history, noting that "bystander confusion" (his term for post-sale confusion based on a false perception of poor quality) is consistent with "the Lanham Act’s stated purpose of extending infringement liability to confusion of potential purchasers." (Sheff, 777-778) (discussing a 1962 amendment that eliminated language limiting liability to conduct that confused "purchasers.") (quoting Act of Oct. 9, 1962).
McKenna, for his part, is not convinced, contending that it is illegitimate for trademark infringement law to "focus on the purchasing decisions of the plaintiff’s customers rather than the defendant’s..." (McKenna, 132, n. 198) (discussing the text of 15 U.S.C. § 1125(a)(1)(A) (2006)). In McKenna's view, infringement would have to result from confusion that results in erroneous purchases of defendant's products, not of plaintiff's.
I think McKenna's view is somewhat controversial given the legislative history and how courts have responded. Irrespective of statutory ambiguities, the courts have apparently been keen to embrace post-sale confusion. All of the authors collect numerous cases in which circuit courts have held post-sale confusion to be actionable, ranging from fake Hermes handbags to fake Rolexes and other luxury watches. (Raustiala and Sprigman, 16-17; Sheff, 5772 note 18; McKenna, 102-106).
On the criminal side, it appears somewhat clearer that post-sale confusion is actionable. In his article on the Trademark Counterfeiting Act (TCA), blogged on previously here, Professor McKenna concedes that Congress had post-sale confusion in mind when it passed the TCA in 1984. McKenna argues this extension is contrary to sound policy and not precisely authorized by the text of the TCA. (McKenna, 865-866). As said previously, I think this is a controversial stance.
The Changing Nature of Post-Sale Confusion Cases: from Poor Quality to Low Status Classically, the "confusion" that is said to taint observers in post-sale confusion cases has consisted of the false perception that the (admittedly not-confused) purchaser is in possession of a real brand name product, such as a Rolex watch or a Gucci bag, and the false perception that this product is poor quality. This false perception in turn leads observers to eschew the real thing, leading plaintiff to lose sales. (Rausitala and Sprigman, 13).
However, Raustiala and Sprigman, along with Sheff and McKenna, demonstrate that courts have increasingly accepted a new version of the post-sale confusion theory. Rather than receiving a false perception of poor quality, observers receive a sort-of false perception of lesser exclusivity, and therefore of lesser status, associated with luxury goods. As Rausitala and Sprigman put it, when observers see a knock-off like a fake Gucci bag, they believe the true luxury item on which the knock-off is based has become more "common," and therefore less desirable. (Rausitala and Sprigman, 18). Sheff's prior article, Veblen Brands, and McKenna's article, A Consumer Decision-Making Theory of Trademark Law, convincingly show that courts reasoning in post-sale confusion cases has come to reflect this new notion of harm, wherein a perception of lesser exclusivity rather than poor quality drives a loss in plaintiff's profits.
All of these authors draw on prior work by Barton Beebe, who argued in his masterful article, Intellectual Property and the Sumptuary Code, that the purpose of some intellectual property regimes has been to preserve the status of luxury goods. Identifying "the emerging phenomenon in which consumers display obvious fakes of high-status luxury goods as especially recherché signs of distinction," Beebe provocatively argued that trademark law plays a role in preserving the exclusive status of luxury goods. (Beebe, 823). "[I]if our goal were to perpetuate a system of consumption-based social distinction," he writes,
then we would offer exclusive rights in the intangible designs of distinctive goods or at least in some distinguishing characteristic of those designs (such as a word- or image-mark or other design feature) in order to prevent the unauthorized copying of them. This is, of course, what intellectual property law is already doing ... Our national trademark systems ... quite deliberately offer exclusive rights in status symbols ...
Beebe, 837-839) (emphasis added(.
Due to this shift in how post-sale confusion is theorized, Sheff, as well as Rausitala and Sprigman, divide the post-sale confusion cases into different categories. Sheff refers to the classic version, where the perception of poor quality drives observers decision to forego plaintiff's product, as “bystander confusion." Sheff coins the phrase “status confusion" to refer to the alternative form of post-sale confusion, wherein loss of exclusivity and status drives observers decisions to forego purchase. (Sheff, 774) ("Status confusion is the legal theory that most often serves to justify liability against the manufacturers of knockoff luxury branded goods, even though the purchasers of those goods know full well what they are buying.").
Despite the changed terminology, however, all of these cases share in common that the point of confusion is "post-sale," rather than point-of-sale. The risk is that observers, bystanders, third-parties, etc., are the people who are confused, not purchasers. The ultimate harm in all cases is theoretically the same: that plaintiff will lose sales, whether as a result of a perception of low quality or as a result of a perception of lesser exclusivity.
There is one point on which (I hope) we can all agree: if there is no confusion at all, whether at the point-of-sale or by observers post-sale, this should not be actionable trademark infringement. At most, this is potentially actionable dilution. This court's statement in Ferrari S.P.A. Esercizio v. Roberts, as described by Professor McKenna, would seem therefore seem to be error in a trademark infringement case:
[i]f the country is populated with hundreds, if not thousands, of replicas of rare, distinct, and unique vintage cars, obviously they are no longer unique. Even if a person seeing one of these replicas driving down the road is not confused, Ferrari’s exclusive association with this design has been diluted and eroded.
This statement, made before a federal cause of action for dilution went into effect in 1996, would presumably be error today. The case would instead be treated under the dilution framework in Section 43(c), which accepts that the viewers of the Ferrari might not be confused and instead asks whether the distinctiveness of Ferrari's mark would be impaired or its reputation tarnished. (The dissent made this point in the actual case, complaining that the majority had "misconstrue[d] the scope of protection afforded by the Lanham Act by misapplying the 'likelihood of confusion' test and reading an anti-dilution provision into the language of section 43(a)." 944 F.2d 1235, 1248 (6th Cir. 1991) (dissent).)
The more difficult case is where plaintiff is not bringing a dilution claim or conceding absence of confusion, but is instead trying to win on an exceptionally weak "post-sale confusion" case. Accordingly, it is immensely important to determine precisely what plaintiff must prove to demonstrate post-sale confusion. How much confusion, and much actual harm, is required? This is precisely what Raustiala and Sprigman seek to determine in their new piece.
The Critique: What's the Harm?
Raustiala and Sprigman's take, in short, is that while post-sale confusion may be real in some cases, it probably usually is not. In many instances, they write, "post-sale confusion is either unlikely to exist or, even if it does exist among some observers of the goods at issue, it is unlikely to harm either consumers or mark owners." (Raustiala and Sprigman, 3). To use the fake Ferrari case above, no one driving down the road seeing the Ferrari replicas is confused; and even if they are confused, they do not draw any negative perceptions that would lead them to buy fewer real Ferraris.
The problem is as follows. As said, post-sale confusion focuses on observers, rather than purchasers. The alleged harm is not that these third party observers will mistakenly buy defendant's product. If that were so, then this would just be a point-of-sale confusion theory. Rather, the alleged harm is that third party bystanders will not buy plaintiff's products. But for this harm to occur, a long chain of events is necessary. (Raustiala and Sprigman, 8).
Sheff's article provides a comprehensive list of the five (5) necessary steps, copied verbatim below:
The defendant sells its product—which incorporates some feature or combination of features that resembles a protectable mark of the plaintiff—to an admittedly non-confused consumer;
The consumer uses the product in view of a potential purchaser of the plaintiff’s product;
The potential purchaser is confused as to the source of the observed product, misidentifying it as having originated with the plaintiff;
The potential purchaser, observing the defendant’s product in use, makes some negative evaluation about the qualities of the observed product, mistakenly ascribing that evaluation to the plaintiff’s products;
Under this mistaken understanding of the qualities of the plaintiff’s products, the potential purchaser refrains from future purchases of the plaintiff’s products, and potentially recommends that others do likewise.
If steps 1-4 occur, then the third-party observer is almost in the position of the consumer in the point-of-sale situation. (e.g. observer has seen a fake Ferrari on the road and observed that it is slow and clunky). The observer is now in the marketplace with misinformation about the qualities of the plaintiff’s product, which might lead to the harm depicted in step 5, where the observer-come-potential-purchaser "refrains from future purchases of the plaintiff’s products, and potentially recommends that others do likewise." (e.g. "I saw a Ferrari on the road the other day, and it was crap. Don't buy it!")
It might theoretically be feasible for plaintiffs to prove this series of steps by at least a preponderance of the evidence. But courts in trademark infringement cases do not ask plaintiffs to do so. Instead, they typically make only one evidentiary finding: "likelihood of confusion." Regardless of whether plaintiff's case is based on point-of-sale confusion or post-sale confusion theory, courts consider a variety of factors to determine whether there is statutory likelihood of confusion, including similarity of the marks, similarity of the products on which they appear, and whether there is any evidence of actual confusion in the marketplace, such as surveys of consumers stating they are confused in real-world situations. Courts have accepted very low findings of actual confusion as being sufficient under the law. Quality Inns Intern., Inc. v. McDonald's Corp., 695 F. Supp. 198, 219 (D. Ct. D. Maryland 1988) ("Even the 16.3 percent is an appreciable number that cannot be dismissed.").
When the theory is point-of-sale confusion, even seemingly minimal findings of consumer confusion can be significant. If 16% of people think defendant's product originates from plaintiff, it is not too much of a leap to infer that a mistaken purchase will happen soon if it has not already. For post-sale confusion, however, even if plaintiff shows a likelihood of confusion on all the basic criteria, the alleged harm is not necessarily present or imminent in any single case. Steps 1-5, above, still have to occur.
For instance, if Ferrari submits a survey showing that 16% of drivers who see the fake Ferraris driving on the road believe they are the real thing, this still does not demonstrate that they have gleaned any false perception about Ferrari's quality. or even about Ferrari's exclusivity and status in the car marketplace...
Pierre Azoulay's recent Twitter thread on students from the MIT Sloan TIES PhD program who are currently on the market alerted me to Sam Zyontz's interesting work on the CRISPR genome editing tool. CRISPR has captivated the patent world due to the fight between the University of California and MIT's Broad Institute over key patent rights—Jake Sherkow summarized the dispute in May and reflected on the Federal Circuit's decision in September. But CRISPR is of course also interesting to innovation scholars due to the revolutionary nature of the technology itself (this is why the patent rights were worth fighting for), which has the potential to applied to a tremendous variety of applications. Using data on researchers who attempt to experiment with CRISPR and the smaller number who succeed in publishing new findings using the technology, Zyontz has produced some fascinating findings on hurdles to technological diffusion.
Zyontz's work was made possible because of the nonprofit global plasmid repository Addgene, which received the basic biological tools for CRISPR from researchers at the University of California and the Broad Institute in 2012 and 2013. Since then, researchers have had easy access to CRISPR tools for the low cost of $65 per plasmid.
For her 2016 Master's thesis, Technological Breakthroughs, Entry, and the Direction of Scientific Progress: Evidence from CRISPR/Cas9, Zyontz did not yet have information about the identities of the ordering labs, but she combined data about what kinds of plasmids were being ordered from Addgene (through 2014) with CRISPR-related publications in Elsevier's Scopus database (through 2015). Her main finding is that the increase in mammalian genetic engineering research was primarily due to new researchers attracted to the genetic engineering field rather than to increased productivity of researchers who had been working on mammalian models or a shift by researchers who had previously published on bacterial genetic engineering.
In a subsequent paper with Neil Thompson, Who Tries (and Who Succeeds) in Staying at the Forefront of Science: Evidence from the DNA-Editing Technology, CRISPR (posted in 2017), Zyontz was able to match individual labs that requested CRISPR plasmids with their subsequent publications, allowing a more direct examination of which researchers succeeded in adopting the technology (what Thompson and Zyontz call "conversion"). Overall, they find that of the 164,993 US authors who publish in genetic engineering, 1.81% ordered CRISPR tools in 2012-14, with an average success rate (subsequent CRISPR publication) of 11.30%. Interestingly, once they control for researcher quality, there is no location effect on experimenting with CRISPR—researchers in Cambridge and Berkeley were not more likely than similar researchers in other locations to order CRISPR tools. But location had a large effect on successful conversion into a publication: researchers were more successful with mammalian CRISPR use if they were located in Cambridge (where CRISPR was first successful with mammalian cells).
Zyontz's job talk paper, Running with (CRISPR) Scissors: Tool Adoption and Team Assembly, only has the abstract currently available online, though she quickly replied to my email asking about a draft. She digs deeper into these barriers to CRISPR adoption by quantifying the role of "external tool specialists" who aid in adopting and applying the technology. She takes advantage of natural differences in the difficulty of using CRISPR in the different areas. Here's how she summarized her results in an email:
In tool adoption cases, like CRISPR, where complementary know-how is needed, external tool specialists can provide that know-how across applications. External tool specialists are scientists that know CRISPR, but not necessarily the application area. But when such tool specialists are scarce and there is a rush to adopt the tool, teams have a choice of how to use external specialists. Either external specialists join teams that go after the easiest applications to get the tool to more areas faster (or just to publish more papers in general) or they join teams that go after the most complex problems where their human capital is more necessary. I find that external tool specialists contribute more to early adopter teams that provide innovations in difficult application areas, and not the low hanging fruit. In the easier applications, teams in the application area are more inclined to learn how to use CRISPR themselves for new innovations. Interestingly, this effect does not diminish right away. External tool specialists are still used for subsequent innovations in more difficult applications.
Legal scholars have discussed both barriers to accessing physical research tools and the importance of human capital in facilitating tacit knowledge transfer, but as with many issues of innovation law, there has been far too little evidence to inform these discussions. It is thus exciting to see this detailed exploration of knowledge diffusion in a particular technological field.