[*PG509]CONTROLLING OPPORTUNISTIC AND ANTI-COMPETITIVE INTELLECTUAL PROPERTY LITIGATION
Abstract: This Article analyzes two methods of controlling rent-seeking costs associated with opportunistic and anti-competitive intellectual property lawsuits. One method discourages rent-seeking costs by reducing the credibility of weak lawsuits. This can be accomplished by restricting preliminary injunctions, encouraging declaratory judgment suits, adjusting the substantive law to encourage summary judgment for defendants, and shifting attorney fees from rent-seeking plaintiffs to prevailing defendants. In addition, antitrust suits have a limited role in deterring the most egregious anti-competitive conduct. A more extreme method eliminates rent-seeking costs by restricting or eliminating certain intellectual property rights. Such an extreme measure is justified if a right generates relatively little direct social benefit, and pre- and post-trial control measures are not effective in containing rent-seeking costs.
Intellectual property (IP) law effectively stimulates the creation and distribution of information and information-rich products that are vital to economic growth and well-being.1 Unfortunately, it also promotes harmful rent-seeking by owners of IP rights who undertake opportunistic and anti-competitive lawsuits. Some IP owners value their property rights chiefly as “tickets” into court that give them a [*PG510]credible threat to sue vulnerable IP users.2 Socially harmful IP litigation is common because the rights are easy to get and potentially apply quite broadly, and the problem is growing worse because of the expansion of the scope and strength of IP law.3 This Article addresses rent-seeking that arises when a party seeks to enforce an IP right that is probably invalid or seeks to stretch a valid right to cover activities outside the proper scope of the right. Such rent-seeking costs can be controlled by (1) reducing the risk that parties will acquire invalid IP rights, (2) making the scope of rights clearer, or (3) using a mix of procedural and substantive measures that mitigate the harm caused by lawsuits based on vague or invalid rights.4
Courts and commentators have recognized a similar problem in the antitrust realm.5 Antitrust law is supposed to promote competition, but it can be used by a plaintiff to exclude competitors or to extract a wrongful settlement payment.6 Some antitrust plaintiffs bring suits hoping the courts will mistakenly block activities that increase the efficiency of the plaintiffs’ competitors.7 Antitrust law has re[*PG511]sponded8 by crafting standing rules that exclude plaintiffs who are unlikely to be good “private attorneys general,”9 clarifying vague antitrust criteria so defendants can avoid the risk of anti-competitive suits,10 and easing summary judgment requirements for antitrust defendants in certain circumstances to discourage opportunistic lawsuits.11
IP law probably needs to follow the same path as antitrust law by taking stronger substantive and procedural steps to mitigate the harm from rent-seeking through litigation. Section I of this Article defines opportunistic and anti-competitive IP lawsuits and explains when they are credible.12 Sections II and III show how certain pre-trial and post-trial measures help control socially harmful litigation by undercutting its credibility.13 Better control is possible if trial judges are more vigilant and use their discretion to restrict the availability of preliminary injunctions and to award attorney’s fees to defendants in opportunistic and anti-competitive cases. Control can be further enhanced by encouraging declaratory judgments and summary judgments in favor of defendants. There is also a limited role for antitrust judgments against anti-competitive plaintiffs.
Section IV explores the feasibility of ex ante filters that could reduce the prevalence of weak suits.14 The most encouraging developments on this front are efforts by the U.S. Supreme Court to restrict trade dress protection and by the U.S. Court of Appeals for the Federal Circuit to restrict the scope and increase the clarity of patent claims. Changes to patent and trademark examination are not likely to reduce rent-seeking costs significantly. But imposing stricter stan[*PG512]dards for certain IP rights might be an effective and socially desirable complement to ex post control measures that are never completely effective.15
A lawsuit is weak if the objective probability of successfully proving infringement is low at the time of filing. The probability of success is evaluated using the knowledge of a hypothetical plaintiff who files after conducting a reasonable investigation.16 The probability of success may be low because the right asserted likely does not cover the defendant’s behavior or because the right is unlikely to be valid. A weak lawsuit is anti-competitive17 if the defendant’s alleged infringing behavior occurs in a market the plaintiff participates in or intends to enter; otherwise, a weak lawsuit is opportunistic.
A plaintiff usually files an anti-competitive lawsuit seeking to impair the defendant’s performance in their shared market or even to exclude the defendant from the market completely;18 a plaintiff files an opportunistic lawsuit seeking a settlement payment.19 Opportunis[*PG513]tic and anti-competitive lawsuits are initially puzzling because it is hard to see why a defendant would yield to the threat of a weak suit. The puzzle can be solved by explaining why a defendant rationally believes a plaintiff with a weak lawsuit would actually prosecute the lawsuit through trial. There are three main reasons weak IP lawsuits are credible.20
First, the scope of IP rights is highly variable. Reasonable judges often disagree on the interpretation of a patent claim. The standard for trademark infringement, likelihood of consumer confusion, is inherently noisy. Copyright law asks the fact-finder to make a difficult subjective decision whether the defendant unlawfully appropriated the plaintiff’s expressive work. Besides vague standards for infringement, trials often feature conflicting expert testimony about matters relevant to the scope of an IP right. Compounding these problems is the risk of error by judges and juries. Trial errors are difficult to dispel in IP litigation21 because the complexity of the evidence can make it [*PG514]difficult for a deserving defendant to win summary judgment or even prevail at trial.22 High variance in the scope of rights makes it profitable for IP plaintiffs with apparently narrow rights to gamble that a court will grant them broad rights. A common strategy used in opportunistic e-commerce lawsuits is to dust off a pre-Internet patent and argue that the patent claims extend to the Internet.23
Second, a weak lawsuit may present a credible threat to a defendant who has trouble distinguishing weak lawsuits from strong ones.24 A plaintiff with a weak lawsuit can successfully bluff a defendant because in the early stages of IP litigation the plaintiff is likely to have better information about the scope and validity of the IP rights. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp. illustrates the role of asymmetric information in making weak lawsuits credible.25 Food Machinery obtained a patent on a sewage treatment process by fraudulently concealing information that the process had been used in public more than one year before the filing of a patent application.26 Food Machinery filed a patent infringement lawsuit when [*PG515]Walker entered the market.27 Walker uncovered evidence of the prior use and proved the patent was invalid; thus, Food Machinery failed in its attempt to bluff Walker out of the market.28 It seems likely, however, that many similar attempts succeed in deterring market entry or forcing a restrictive license onto an entrant, although we have no way to observe successful bluffs.29
Finally, a weak lawsuit may be credible because of the costs it may impose on the defendant. A defendant may settle an opportunistic lawsuit to avoid the nuisance of mounting a defense.30 A defendant may settle an anti-competitive suit because the cost of a defense threatens the defendant’s solvency.31 Alternatively, the threat of a weak lawsuit may deter entry into a market if the plaintiff establishes a reputation for prosecuting weak suits through to the end.32 A plaintiff with a predatory reputation rationally views losing a weak lawsuit as a profitable investment in that reputation.33
[*PG516] Predatory theories of monopolization have fallen out of favor in antitrust law; the Supreme Court skeptically stated that predatory pricing is nearly always irrational.34 Such skepticism is not warranted, though, because recent economic theory and evidence provides strong support for concerns about the danger that predatory pricing poses.35 Although predatory litigation has not been studied as closely as predatory pricing, it seems more likely to succeed.36 Predatory litigation has an advantage over predatory pricing because the cost to the predator declines after the first lawsuit—the plaintiff can use the work product from the first litigation in subsequent litigation.37 Predatory pricing does not offer a comparable advantage; the predator has to reduce its prices to combat every new entrant and thus incurs a relatively constant cost.38
Anecdotal evidence suggests that the problem of opportunistic IP litigation is serious and getting worse.39 Defendants fear the high cost of IP litigation40 and settle opportunistic claims to avoid that cost.41 I [*PG517]offer some examples from patent,42 trademark,43 and copyright law44 with a caveat: it is difficult to know whether a particular lawsuit is opportunistic and so it is more appropriate to present the following as possible examples of opportunistic suits.
The explosion of e-commerce patents has generated many complaints about opportunistic patent litigation.45 An alleged example relates to the company E-Data, which sent letters to 75,000 companies informing them that they were infringing an E-Data patent and asking them to pay royalties between $5,000 and $50,000.46 The company owns a patent which arguably covers financial transactions on the Internet.47 Several high-profile companies agreed to license the patent but most refused. E-Data sued forty-one of the companies for patent infringement.48 This case and other notorious e-commerce cases are criticized because the inventions appear to be obvious49 or the claims are not nearly as broad as purported by the plaintiffs.50
[*PG518] A string of opportunistic trademark suits was brought by a company called S Industries.51 “[T]he company filed at least 33 trademark infringement lawsuits in the district court between 1995 and 1997.”52 The plaintiff used the mark Sentra with over-the-counter, discount computer mouse pads.53 In one case it sued a company named Centra, which used the mark in association with expensive data management software bought by petrochemical, aerospace, and other manufacturing industries.54 The U.S. Court of Appeals for the Seventh Circuit found that the lawsuit lacked merit and was oppressive, and that “plaintiff’s conduct unreasonably increased the cost of defending against the suit.”55
Opportunistic copyright suits typically pit a minor author against a later, successful author.56 The plaintiff claims the defendant copied from the plaintiff’s earlier work. Some enterprising plaintiffs strength-en their claims by distributing their works to potential defendants; then they can credibly argue that the defendants had access to the works.57 Opportunistic copyright claims are also likely when both the plaintiff and the defendant base their work on something in the public domain.58 The chutzpah award in this field goes to Ashleigh Brilliant, who coined 7500 aphorisms and mounted more than a hundred successful copyright infringement suits.59
[*PG519] Opportunistic IP suits impose direct and indirect costs on defendants and society. Besides settlement payments,60 there are sizable direct legal costs61 and indirect costs borne by potential defendants who work to minimize their exposure to opportunistic litigation.62 Firms reduce the risk of copyright and trade secret litigation by returning unsolicited documents, making software in “clean rooms” that minimize the exposure of programmers to copyrighted code, and documenting independent creation.63 Opportunistic (and anti-competi-tive) patent and trade dress cases may deter firms from entering new markets or adopting new product features or designs.64
There are several reasons the incidence of opportunistic IP litigation is increasing. First, intellectual property has become more valuable,65 and the number of patents, copyrights, and trademarks has increased rapidly.66 The rate of IP litigation has grown comparably.67 [*PG520]Opportunistic suits are likely to increase as legitimate suits increase because it is easier to hide an opportunistic lawsuit and bluff your way to a settlement payment. Second, a growing market for the sale of IP rights makes it easier to “enter the market” for opportunistic IP litigation.68 Finally, in recent years patent plaintiffs have been effectively organized and financed by entrepreneurs specializing in patent litigation and licensing.69 Patent lawsuit investors avoid champerty70 laws by purchasing ownership or joint ownership of patents.71
Firms often use IP litigation to exclude their rivals from markets.72 Occasionally, firms with broad patents exclude their rivals from the markets protected by the patents. More commonly, firms use IP rights to exclude rivals from use of a product feature, variety, or design. Exclusionary litigation can be a socially desirable way to secure a reward to innovative firms;73 the term “anti-competitive” is reserved for lawsuits that seek socially undesirable exclusion.74 In an ideal IP system, it would be impossible to mount an anti-competitive IP lawsuit because such suits would not be credible. In reality, anti-competitive lawsuits are possible because undeserving claimants receive presumptively valid or at least colorable rights to intellectual property.
Anti-competitive suits achieve an exclusionary outcome through two different mechanisms. First, some defendants settle because they fear the plaintiff’s IP right will be construed too broadly, or because they lack information proving the plaintiff’s right is invalid. Second, other defendants may be confident the plaintiff will lose the lawsuit but still settle simply to avoid the costs of litigation. In addition to gaining a favorable settlement, the owner of a weak IP right may succeed in deterring competitors from using his intellectual property because of the threat of suit.75
Successful anti-competitive IP litigation does not leave much of a record, but there are many cases of failed exclusion.76 Handgards, Inc. v. Ethicon gives an example of a patent plaintiff that hoped to bluff its [*PG522]way to an anti-competitive settlement agreement.77 Ethicon controlled ninety percent of the market for heat-sealed plastic gloves.78 It tried to preserve its dominant position by suing an entrant for patent infringement. Ethicon knew the patent was invalid because there was a previous inventor and because of public use more than one year before the patent application.79 Handgards called the bluff, discovered evidence of the earlier inventor and the prior use, and invalidated the patent.
Besides patent litigation, trade dress claims related to product design and configuration pose the gravest threat of predation.80 Trade dress is defined to include packaging, as well as product design and configuration. Product design and configuration can be protected under trademark law because it is capable of indicating a source of origin; for example, the pink color of building insulation indicates that Owens Corning is the insulation manufacturer. Trade dress protection must not reach functional features of the trade dress because those features are exclusively protectable under patent law.
Ferraris Medical, Inc. v. Azimuth Corp.81 documents anti-competitive trade dress litigation motivated by the desire to impose litigation costs and discourage competition.82 Ferraris made a harness used to hold a facemask and other equipment on the heads of surgical patients.83 Azimuth and other companies bought these devices from Ferraris and resold them under their own brand names.84 Azimuth stopped buying its supplies from Ferraris and copied Ferraris’s unpatented design.85 [*PG523]Ferraris responded by suing Azimuth on a frivolous trade dress infringement theory86 and other frivolous trademark87 and copyright infringement theories.88
Lawsuits like Ferraris are troubling because they can be costly enough to create financial distress that could delay market entry or force a firm to completely abandon a product line already occupied by a dominant incumbent.89 Financial market predation is a serious problem for new firms,90 especially firms in high-technology indus[*PG524]tries.91 Investors with limited information often design financial arrangements that are contingent on easily observed performance measures—especially cash flow. A predator can sabotage its prey’s relationship with investors by causing cash-flow problems.92 Investors are not well enough informed about the prey’s actions and economic conditions to know whether financial problems result from predation, bad management, or some other cause.
Predatory litigation reduces cash flow because of the high cost of IP litigation and a variety of other indirect costs.93 Litigation can sour a defendant’s credit rating.94 A predatory plaintiff can divert customers from a defendant by threatening the defendant’s customers with a lawsuit.95 Furthermore, the plaintiff can use a preliminary injunction to block the defendant’s production and sales before trial.96
Costly predatory tactics are irrational unless the predator can recoup its litigation cost.97 A preliminary injunction and the deterrent [*PG525]effect of even a weak IP right give a valuable lead-time advantage.98 Ultimately, the predator hopes to more than recoup its cost of litigation by reducing competition and raising prices. This is most likely to occur when the plaintiff has greater financial resources than the defendant.99
There are countermeasures that help some small firms ward off IP litigation by large rivals. A small chip design company averted a patent infringement lawsuit from Intel by purchasing a patent from a bankrupt firm that potentially covered Intel chips.100 Another microelectronics firm was rescued from financial distress (caused by a patent infringement suit) through a friendly takeover by a white knight.101 Generally, such countermeasures are not available because transaction costs, private information, and free-rider problems discourage the formation of a coalition that might battle the predator.102
Despite the restrictive standard for granting preliminary injunctions,103 they are common in patent and copyright cases.104 To get a [*PG526]preliminary injunction a plaintiff must show (1) a reasonable likelihood of success on the merits, (2) that irreparable harm will result if preliminary relief is not granted, (3) that the balance of hardships favors the plaintiff, and (4) that granting the injunction will not disserve the public interest.105 Preliminary injunctions are common in patent and copyright cases because the courts find irreparable injury quite easily and are reluctant to invoke the public interest in avoiding opportunistic and anti-competitive suits.106
Preliminary injunctions promote opportunistic and anti-competi-tive suits by disrupting the defendant’s business, raising the total cost of litigation, and causing financial distress.107 Empirical evidence shows that preliminary injunctions tend to be used in patent cases mostly by large firms that seek to impose a financial burden on smaller rivals.108 The financial burden caused by a preliminary injunction is exacerbated by the “particular difficulty of raising external funds to finance litigation.”109 Therefore, preliminary injunctions may be especially harmful in innovative industries “driven by smaller, more vulnerable, venture-capital-based firms.”110
The harm from opportunistic and anti-competitive IP litigation can be alleviated by reducing the availability of preliminary injunctions.111 Ideally, judges would deny preliminary injunctions to plain[*PG527]tiffs with weak lawsuits because, by definition, such suits are not likely to succeed; but the facts that make weak lawsuits credible also create problems for judges. At an early stage of litigation, the judge, like the defendant, may have difficulty assessing the scope and validity of the IP right.112 A desirable reform would eliminate the presumption of patent validity in the context of a preliminary injunction, thereby increasing the burden on a plaintiff to show a likelihood of success.113 Some judges have shown sensitivity to the problems created by preliminary injunctions, and the law gives trial judges enough flexibility to accommodate a significant shift in practice.114 Judges should attend more closely to the financial distress imposed on defendants and show [*PG528]a greater inclination to refuse preliminary injunctions in cases in which the balance of hardships favors the defendants.115 Furthermore, judges should discourage opportunistic suits by denying preliminary injunctions to plaintiffs who are not likely to enter the defendant’s market.116 Denial is appropriate because irreparable harm is unlikely.117
Declaratory judgments are relatively difficult to get because courts will not issue advisory opinions. To establish an actual controversy that warrants a declaratory judgment, a party must show that it has taken actions in preparation for possible infringing conduct and that the IP owner has threatened the party with an infringement suit.118 The threat must create a reasonable apprehension of an infringement suit.119 Judges exercise substantial discretion regarding whether they will accept a declaratory judgment suit;120 that discretion [*PG529]is reflected in the variable and fact-intensive treatment of the reasonable apprehension requirement.121
Declaratory judgments of noninfringement or invalidity help mitigate the harm from opportunistic and anti-competitive IP litigation.122 If an IP owner threatens a supplier or its customers, then the supplier can respond quickly by filing a declaratory judgment suit instead of waiting to respond to an infringement suit that could be strategically delayed.123 Appropriately, the IP owner’s litigiousness is a factor favoring the apprehension of lawsuit and standing to file a declaratory judgment.124 Declaratory judgment also helps potential defendants to organize and share the cost of challenging the validity of a patent.125 Opportunistic patent plaintiffs may threaten weaker [*PG530]defendants first to get quick licenses that create the impression that they have a strong case.126 Finally, declaratory judgment gives an alleged infringer some leeway to choose the forum for a suit.127 Forum choice may reduce the credibility of a weak lawsuit; empirical evidence shows that the choice of forum has a significant impact on trial outcome.128
Summary judgment law and substantive IP law interact in ways that can promote or discourage socially harmful IP litigation.129 Summary judgment for the defendant is difficult to achieve when the substantive law sets standards for IP protection that are easy for a plaintiff to meet or that call for careful balancing of context-sensitive criteria. For example, the standard for trademark infringement asks whether the defendant’s behavior creates a likelihood of confusion in the minds of consumers. Courts have identified as many as nine factors that must be evaluated to determine confusion.130 With so many factors that must be balanced, it is easy for a plaintiff to present a case that gets past summary judgment.131 Furthermore, summary judgment on a fact-intensive question may be delayed until time-consuming and expensive discovery is completed. Avoidance of so[*PG531]cially harmful litigation requires quick and cheap summary judgment. Therefore, a fact-intensive standard for IP protection or infringement is a poor candidate for summary judgment.132
Recently, courts have shown greater sensitivity to the desirability of giving defendants a chance to extricate themselves from opportunistic or anti-competitive litigation through summary judgment.133 The Supreme Court took an important step to mitigate harm caused by trade dress infringement suits in Wal-Mart Stores, Inc. v. Samara Brothers, Inc.134 The plaintiff, Samara, claimed trademark protection based on its design of a line of children’s clothing.135 Trade dress (or any other mark) must be distinctive to qualify for trademark protection.136 A plaintiff can show that a word or product packaging is either inherently distinctive or has acquired distinctiveness through usage (“secondary meaning” in trademark jargon).137 The Supreme Court rejected Samara’s argument that its clothing was inherently distinc-tive.138 The Court insisted that a putative owner of a trademark in the design or configuration of a product show that the trade dress has acquired secondary meaning.139 The Court explained the requirement of secondary meaning with the observation: “Competition is deterred . . . not merely by successful suit but by the plausible threat [*PG532]of successful suit, and given the unlikelihood of inherently source-identifying design, the game of allowing suit based upon alleged inherent distinctiveness seems to us not worth the candle.”140
Recent cases demonstrate the impact of Wal-Mart on summary judgment for defendants in trade dress infringement cases. In Yankee Candle Co. v. Bridgewater Candle Co.,141 the defendant won on summary judgment despite copying142 elements of the plaintiff’s design because the plaintiff made no showing of secondary meaning.143 The plaintiff, Yankee, claimed trade dress protection in a combination of candle shapes and sizes, labels, display method, catalog layout, and the quantities of candles sold as a unit.144 The Court of Appeals for the First Circuit placed this trade dress in the product design/configuration category and not the packaging category; thus, Wal-Mart applied and secondary meaning was required.145
Yankee also claimed infringement of its copyright on the labels of nine scented candles.146 The court granted summary judgment for the defendant after applying the merger doctrine because no reasonable juror could find substantial similarity.147 The Yankee Candle decision is representative of the greater receptiveness courts now show to summary judgment in favor of defendants in copyright cases.148 Stricter application of the requirement of originality and more careful filtration of unprotectable subject matter have modestly increased the burden on copyright plaintiffs and made summary judgment for defendants more likely. Nevertheless, defendants still have a hard time getting a summary judgment victory because plaintiffs can easily make a prima facie case of copying.
[*PG533] Infringement of the reproduction right requires proof of copying, as opposed to independent creation. Copying can be proved directly but is usually proved using circumstantial evidence. Circumstantial proof of copying requires a showing of access and similarity. The Second Circuit in Arnstein v. Porter149 set up a sliding scale for evaluating these factors: if there is no similarity, then access is irrelevant; if there is no access shown, then the similarity must be so striking to preclude the possibility of independent creation;150 if there is evidence of access and similarity, then the trier of fact decides whether copying occurred.151 When the court must balance factors like access and similarity, it is hard for a defendant to win summary judgment even though she knows she created the work independently.152 In Arnstein, the plaintiff claimed that various musical compositions were copied by the defendant, Cole Porter.153 Although one song sold over a million copies, the second sold only about 2000 copies and the third was not published but had been performed over the radio.154 The plaintiff also claimed that someone stole a copy of the compositions from his room.155 The trial court decided for the defendant on summary judgment.156 The Second Circuit reversed.157 The court found enough similarity and access to raise a factual question.158 The court emphasized that issues of credibility created by the plaintiff’s allegations must be evaluated by the jury.159
Defendants cannot be certain to escape trial and ultimate liability even when they have documented their independent creation. Proof of widespread dissemination coupled with a theory of subconscious [*PG534]copying is enough to win a music copyright infringement claim.160 Defendants are vulnerable to copyright infringement suits even though their connection to the plaintiff is tenuous and their access to the plaintiff’s work is entirely conjectural.161
Defendants have had some success winning summary judgment in cases involving art reproductions. In these cases, the plaintiff makes a derivative work and the defendant makes a similar work based either on the plaintiff’s work or on the original that inspired the plaintiff. Rather than pressing the argument for independent creation, defendants have succeeded at summary judgment by arguing the plaintiff’s work is not copyrightable because it lacks originality. For example, in L. Batlin & Son v. Snyder, the plaintiff made a plastic Uncle Sam bank based on a cast iron bank in the public domain.162 The plaintiff used the metal bank for a sketch and a clay model.163 The plastic version had small differences from the original.164 Because the differences were dictated by functional considerations or did not amount to significant alterations, the originality requirement was not satisfied.165
In patent law, the Federal Circuit has pushed two doctrinal positions that make summary judgment easier for defendants. First, the court has characterized patent claim construction as a question of law and encouraged pre-trial “Markman hearings” to construe the scope [*PG535]of patent claims.166 Defendants have an opportunity to win summary judgment on infringement if they succeed in persuading the court to adopt a narrow claim construction.167 Second, the court has reduced the role of the doctrine of equivalents.168 Even though it has an equitable origin, this doctrine allows a fact-finder to expand the literal scope of a patent claim to encompass accused processes and devices that depart from the claimed invention by making small changes from the claimed invention. In Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., the Federal Circuit fashioned an absolute bar against use of the doctrine of equivalents to expand claim limitations that were the subject of narrowing amendments during prosecution history.169 That decision pleased big patent owners like IBM, which filed an amicus brief asking the Supreme Court to uphold the Federal Circuit decision.170 The industry amici believed that restricting the scope of the doctrine of equivalents would help control opportunistic patent suits.171 The Supreme Court rejected the absolute bar but certainly expressed sympathy for the Federal Circuit’s goal of increasing the clarity of the property rights defined by patent claims.172
The copyright, trademark, and patent statutes all have provisions that authorize fee shifting, which allows judges to punish plaintiffs for conducting opportunistic or anti-competitive litigation.173 The Lanham Act provides that “in exceptional cases” a district “court may [*PG536]award reasonable attorney’s fees to the prevailing party.”174 Similarly, the Patent Act allows fee shifting in exceptional cases. Exceptional cases include those involving frivolous suits, inequitable conduct before the Patent and Trademark Office, and misconduct during litigation.175 The copyright standard is more flexible: a district “court in its discretion may allow the recovery of full costs by or against any party . . . . [T]he court may also award a reasonable attorney’s fee to the prevailing party as part of the costs.”176 Fee shifting usually benefits plaintiffs in IP cases, especially when defendants are willful infringers, but defendants may also win fees from plaintiffs.177 A defendant can win fees in a copyright case when a plaintiff brings “a weak, if nonfrivolous, case and . . . argue[s] for an unreasonable extension of copyright protection.”178 The goal of fee shifting is both compensation to the prevailing party and deterrence of opportunistic and anti-competitive suits.179
[*PG537] Fee shifting deters opportunistic suits by raising the expected cost of weak lawsuits and undermining the credibility of the plaintiff’s threat to go to trial.180 One type of opportunistic lawsuit is credible because the plaintiff fails to investigate. Sensibly, failure to investigate triggers fee shifting and attorney sanctions; thus, deterrence of such behavior is likely to be effective.181 A second type of opportunistic lawsuit is credible because of the risk of judicial error.182 Assuming even the most error-prone court gets the decision right most of the time, fee shifting raises expected legal costs to an opportunistic plaintiff and makes an opportunistic lawsuit less credible.183
Fee shifting is probably less effective in controlling anti-competitive litigation. The most aggressive predatory litigation strives to choke off financial resources from the defendant.184 The prospect of recovering attorney’s fees after trial has no value to a defendant who goes bankrupt before trial, and perhaps little value to a defen[*PG538]dant who suffers financial distress because of trial cost and delay. It could be a more effective deterrent to anti-competitive litigation that attempts to discourage a defendant from making a certain product variety. The possibility of recovering attorney’s fees would encourage some marginal defendants to fight the predator and reduce the credibility of predatory litigation.185
Antitrust law provides a potentially powerful means of controlling socially harmful IP litigation.186 Certain anti-competitive litigation violates Section 2 of the Sherman Act187 under two related theories.188 One theory originated in Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp.189 and applies only to patent infringement suits. The antitrust claimant must show that the patentee got its patent by committing common law fraud on the PTO, and that the patent would not have issued but for the fraud.190 The other theory applies to sham litigation, including sham IP litigation,191 and is based on a [*PG539]showing that the antitrust defendant (IP plaintiff) knew that objectively there was no basis for the infringement claim.192 Under either theory, the antitrust plaintiff must prove it suffered an antitrust injury, and must also show that the IP litigation created or sustained a monopoly in the relevant market.193
Trebled antitrust damages are a potent deterrent of anti-competitive activity, but in practice antitrust does little to control socially harmful IP litigation because its reach is very limited; it does not apply to opportunistic litigation and applies only to a subset of anti-competitive litigation. Antitrust law does not reach opportunistic litigation because the purpose of such litigation is to extract a settlement payment, not to exclude a rival. In antitrust parlance, there is no antitrust injury and no attempt to monopolize a market. The sham litigation theory applies to lawsuits that have an anti-competitive effect because of the cost and delay created by the litigation; it does not apply to lawsuits that have an anti-competitive effect because a plaintiff succeeds in enforcing a weak IP right.194 The Walker Process theory has limited utility because it is difficult to prove fraudulent patent pro[*PG540]curement.195 Where Section 2 applies, it probably deters the most egregious lawsuits in which a monopolist gets a flimsy patent and litigates an entrant out of existence, but it does not have much effect otherwise. Section 2 claims based on sham litigation are very common196 but almost never successful.197
Better screening of putative IP rights at an early stage would certainly help mitigate the problems of opportunistic and anti-competitive lawsuits, but there is little hope for this method of control. Copyright and trade secret rights are not subjected to any examination; copyright has a minimal registration procedure. Thus, there is no opportunity to use agency resources to screen out weak copyright and trade secret claims. The PTO examines patents and trademarks, and could do a better job of screening out weak claims, but various factors limit the performance of the agency.198 A fundamental limitation on trademark examination is that plaintiffs can protect even unregistered marks under federal law.199
The ex parte nature of examination restricts the information available to examiners and poses the chief obstacle to high quality ex[*PG541]amination at the PTO.200 Patent applicants and their attorneys have a duty to disclose information relevant to patentability. A patent owner risks facing a defense of inequitable conduct, which leaves a patent unenforceable if the owner was not candid with the PTO. Despite these incentives, critics charge that many patents are granted that would not have been granted if the PTO had better information.201
Examination also suffers from three other problems. First, examiners have a financial incentive to process applications quickly.202 The patent prosecution process moves so quickly that the average patent gets only eighteen hours of review.203 Second, opening new fields to patentable subject matter has resulted in low patent quality because the prior art needed to examine an application is not available, and third, finding trained examiners in a new field is difficult. These problems are acute in the fields of software and business methods.204 Some of these problems could be cured by increasing the resources available to the PTO,205 but there is a strong argument to limit the resources spent on examination: most patents and many registered trademarks have little or no value, and therefore a thorough examination of every application would be wasteful.206
Examination and pre- and post-trial control measures are not always sufficient to control opportunistic and anti-competitive litigation [*PG542]effectively. It may be appropriate to complement these control measures by restricting certain IP rights.207 Many of the cases reporting instances of possible opportunistic or anti-competitive litigation come from specific kinds of subject matter that could be targeted for special treatment: business method patents, trade dress protection of product design, and copyrights on art reproductions.
The existence of business method patents generates a substantial hazard of opportunistic lawsuits because of the rapid pace of invention and the heterogeneous character of the inventors in this field. Business method users inadvertently expose themselves to opportunistic suits because independent invention is likely and surveillance of research activity by other potential inventors is difficult. Consequently, many business method users make a commitment to a business method before they learn that the method might be covered by a patent or patent application. Congress responded to this problem by creating a first inventor defense, but the scope of this defense is too narrow to be very helpful.208 Several commentators have called for the reversal of State Street Bank & Trust Co. v. Signature Financial Group, Inc.,209 the recent case that allowed business method patents,210 as well as less drastic reforms including a patent opposition procedure211 and a stricter nonobviousness standard for business method inventions.212
Anti-competitive trade dress litigation based on product design is especially worrisome. Manufacturers expose themselves to trade dress liability because it is hard to identify unregistered trade dress and it is hard to decide whether trade dress is distinctive and non-func-tional.213 Mindful of the danger of anti-competitive lawsuits, the courts have recently reversed the long-running expansion of trade dress protection under Section 43(a) of the Lanham Act.214 Critics of trade [*PG543]dress protection of product design have called for its abolition.215 A more moderate proposal limits relief for infringement to an informational labeling requirement.216
Copyright infringement suits based on art reproductions also pose a significant anti-competitive risk. The first party to make an art reproduction like the plastic bank featured in L. Batlin & Son v. Snyder might deter imitators because of the uncertainty inherent in a weak originality requirement217 and the cost of copyright litigation.218 To reduce this risk, courts and commentators insist on a rigorous application of originality that would leave some art reproductions unprotected by copyright.219
It is useful to think of IP law both as a system of property rights that promotes the production of valuable information and as a system of government regulation that unintentionally promotes socially harmful rent-seeking. This Article analyzes methods of controlling rent-seeking costs associated with opportunistic and anti-competitive IP lawsuits. My thinking is guided to some extent by the analysis of procedural measures for controlling frivolous litigation and the analysis of antitrust reforms designed to control strategic abuse of antitrust law. These analogies lead me to focus on pre- and post-trial control measures that reduce the credibility of weak IP lawsuits. I conclude that IP courts show some awareness of the value of fee shifting and summary judgment as tools for controlling opportunistic and anti-competitive lawsuits. Yet, courts display less awareness of the need to restrict preliminary injunctions or encourage declaratory judgments [*PG544]as control measures. Antitrust suits have only a limited role in deterring the most egregious anti-competitive conduct. Besides attacking the credibility of weak lawsuits, it is probably desirable to eliminate the threat of some kinds of IP lawsuits entirely. This could be accomplished by eliminating or restricting IP rights such as business method patents, trade dress protection of product configuration and design, and copyright protection of art reproductions. In other words, it may be desirable to curtail the “standing” of parties who own IP rights that generate a substantial threat of opportunistic or anti-competitive litigation with little corresponding benefit in terms of productive incentives.220