More on KSR: Uncertainty, PHOSITA, and Market Dynamics

The following is commentary by Brian Kahin, a Senior Fellow at the Computer & Communications Industry Association in Washington, DC. He is also Research Investigator and Adjunct Professor at the University of Michigan School of Information.

As the recent discussion on asset valuation shows, much reporting on KSR has looked at the problem of uncertainty from the perspective of patent holders rather than potential defendants. But low-quality patents create uncertainty by virtue of their overwhelming numbers, questionable validity, and the difficulty, cost, and practical uncertainty of managing knowledge about patents

As lawyers know, patents are rights to exclude, not rights to exploit. Patents can protect assets but they also can impair assets. In fact, patents can impair the value of other patents, so it risky to concrete the asset value of patents without considering the possibility of blocking patents, undiscovered prior art, or other deficiencies. This is especially important in IT, given the cumulative and interdependent nature of the technology, and in the opaque patent environment that we find in IT today, it is very difficult and costly to ascertain and measure what the impairment might be. Although a cottage industry has spring up around idea of being able to value patents and other intangible assets, few companies want to look closely at the liability side, for fear that they might discover something that is all too real and requires reporting or further investigation. Thanks to Sarbanes-Oxley, we have at least a theoretical need for looking at the liability side of patents.

Any reduction of impairment as a result of KSR can lead to a net increase in asset value. If the patent that reads on an industry standard adopted 10 years ago is asserted by a troll that may a huge asset in the hands of the troll. Conversely, it may represent a huge liability for all of the many companies who have implemented the standard for years. If this particular patent is invalidated by KSR, that could represent a huge net asset gain multiplied by many companies.

In the short run, there may well be increased litigation over existing patents. In the medium term, this may be balanced by the silencing of a lot of questionable patents. In the long run, of course, it means fewer but more valuable and more meaningful patents. Hopefully, it will improve the value of the patent database, which may convince IT professionals that it cost-effective to read patents (at least if the willful infringement problem gets fixed). And if IT patents were sufficiently high quality and actually read as a source of useful knowledge about the state of the art, that could go a long toward fixing the disconnect between IT and pharma/biotech.

An Economic Framework?

By de-emphasizing the patentee’s perspective and by emphasizing market pull, the Court does two things:

First, it explicitly puts new emphasis on the PHOSITA’s perspective, commanding attention to the statutory language, but now more nuanced and demanding a broader investigation. By rejecting T-S-M as a prerequisite for finding obviousness in a new combination of known elements, the Court turns T-S-M into a useful but incomplete set of factors tending to show obviousness. For combinations, it now serves to complement the secondary considerations, which in the Federal Circuit’s view, all work to favor a finding of nonobviousness. In so doing, the Court notes that PHOSITA is “a person of ordinary creativity, not an automaton.” Compare Judge Rich’s characterization of PHOSITA in Standard Oil Co. v. American Cyanamid Co.: “one who thinks along the line of conventional wisdom in the art and is not one who undertakes to innovate, whether by patient, and often expensive, systematic research or by extraordinary insights, it makes no difference which.” 774 F.2d 448, 454 (Fed. Cir. 1985)

The problem is, PHOSITA is a black hole. Section 103 deals with the unavoidable subjectivity of the inventive step standard by obscuring the line-drawing exercise. Assigning it to a hypothetical “person having ordinary skill in the art” does not make it any less subjective through wrapping it a superficially objective framework. And under the old interpretation you get someone who is characterized by their lack of insight. As the Chief Justice commented in the KSR oral argument:

CHIEF JUSTICE ROBERTS: Who do you get to be an expert to tell you something’s not obvious.
MR. GOLDSTEIN: You get –
CHIEF JUSTICE ROBERTS: I mean, the least insightful person you can find?

Prof. Jay Thomas observes in his treatise: “In practice, the concept of “a person of ordinary skill in the art” seems more designed to remind judges to themselves in the shoes of a skilled artisan, rather than to compel a specific factual finding.” This may be a practical alternative to investing scarce legal resources in identifying the appropriate level of ordinariness and imagining what a person possessing it might think, but it does not seem to offer much legal certainty. The Federal Circuit’s rigid application of the T-S-M test was an answer to this problem — but manifestly a wrong answer that served in practice to “help customers get patents” and to overburden the system with questionable patents.

To the extent that KSR succeeds in focusing additional scrutiny on PHOSITA, it begs the question how it should be applied in what is no longer an artisan economy or whether the test as formulated makes in a world economy where artisans of ordinary skill are irrelevant. This basic formula was expressed in 1850 and restated in the Patent Act of 1952. Even since 1952, there has a revolution in thinking in favor of establishing expert credentials and implementing peer review in both public policy and program management.

Which brings up the second item, KSR’s emphasis on market pull. The opinion legitimizes this as a factor that may affect some fields significantly more than others: “In many fields there may be little discussion of obvious techniques or combinations, and market demand, rather than scientific literature, may often drive design trends.” It then observes: “Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, for patents combining previously known elements, deprive prior inventions of their value or utility….” This echoes concerns that economists have expressed about patents where innovation is sequential or cumulative, as is the case for information technology.

In other words, we are back to the problem of patents diluting or impairing the value of other patents. While the Court forces the Federal Circuit to deal anew with the old standard of mythical mediocrity, it also points beyond the statute to the constitutional need to promote progress. This must be answered for an brutally competitive international economy that has high expectations of innovation – and answered in a policy environment that favors the accountability of genuine peer review.