Bring Appellate Competition Back to Patent Law

July 28, 2008 • TechKnowledge No. 118

Pity the United States Court of Appeals for the Federal Circuit. Last month, the Supreme Court overruled its decision in the case of Quanta v. LG-the fourth successive time in three terms that the Supreme Court has overturned its patent rulings. Congress created the Federal Circuit as a specialized patent court in 1982, and for the first two decades of its existence the Supreme Court largely gave it a free hand to shape patent law. Under new chief justice John Roberts, the Court has begun scrutinizing the body of law the Federal Circuit crafted over the last quarter‐​century, and the justices don’t like what they see.

The Supreme Court is hardly the Federal Circuit’s only critic. Commentators across the political spectrum have criticized the recent evolution of patent law, which has proliferated low‐​quality patents and caused a surge in patent litigation. Although there is plenty of disagreement about the best substantive reforms, nearly everyone seems to agree that the Federal Circuit deserves some of the blame for the sorry state of today’s patent system.

In a recent paper, law professors Craig Allen Nard and John F. Duffy trace the Federal Circuit’s poor patent jurisprudence to the institutional design of the Federal Circuit itself. Its creation was motivated by concerns that the previous system, spreading patent jurisdiction among the federal appeals courts, produced a fragmented body of patent law. It was hoped that giving a single court jurisdiction over patent appeals would bring uniformity to the nation’s patent laws. But the cure has turned out to be worse than the disease. While the problems of too little uniformity in patent law were obvious in 1982, the policymakers who created the Federal Circuit failed to appreciate that excessive uniformity could be even worse.

Decentralization is at the heart of many successful economic, social, and political systems: markets, federalism, and the academic process of peer review are examples. There are good reasons to think that competition is beneficial in the judicial system as well. In most areas of U.S. federal law, each of the nation’s geographically based appeals courts develops its own interpretations of federal statutes. The circuit courts look to each others’ precedents for guidance, but they are ultimately free to disregard their peers if they think a different interpretation is more consistent with statute, the Constitution, and Supreme Court precedent. The accumulation of precedents in this decentralized system closely parallels the common law system imported to the colonies from England, which is responsible for some of the most fundamental parts of the American legal system, including property, contract, and tort law.

Decentralization at the federal appellate level has three important benefits. First, competition mitigates “path dependence,” the danger that a single poorly argued case will lead to the establishment of a bad decision as binding precedent. When a single court hears all appeals on a given subject, the first case can have an outsized influence on subsequent decisions, even if that case is atypical in important respects. In contrast, when several independent courts hear appeals of one legal issue in parallel cases, more dimensions of the legal issues are revealed, and the majority of them working in parallel are more likely to reach the right result.

That brings us to the second benefit of jurisdictional competition: the role of “circuit splits” in signaling a need for the Supreme Court’s attention. Because the Federal Circuit hears all patent appeals, it has no sister institutions to voice contrary opinions. This forces the Supreme Court to “fly blind,” using other, less reliable indicators to decide which cases to hear. Duffy and Nard note one sign of the problem: between 2000 and 2005, the Supreme Court requested the input of the Patent Office on certiorari petitions (petitions to review cases) 15 times and almost always complied when the Patent Office recommended taking a case. Considering that the Supreme Court requested only 91 such opinions from the entire executive branch during that period, the Supreme Court appears to be relying heavily on the Patent Office to discover problems with the patent law‐​a role that would be performed better by multiple appellate courts.

The final advantage of jurisdictional competition is that it provides the Supreme Court with several well‐​developed bodies of law to choose from in crafting new precedents. The Patent Office may be able to provide the Supreme Court with some advice about which cases to take, but it is not a good substitute for competing courts. Ordinarily, if the high court is dissatisfied with one circuit’s precedents, it can look to the other circuits for alternative approaches. Each circuit will boast a well‐​developed body of case law, and the high court (perhaps aided by legal scholars) can compare the performance of different legal regimes and determine which has proven most successful. The Federal Circuit’s monopoly over patent appeals means that the Supreme Court must do much of the heavy lifting itself.

A good example of these principles is the development of the patent doctrine of obviousness over the last quarter‐​century. Congress has said that only inventions that are not obvious to someone of “ordinary skill in the art” are eligible for patent protection, but the exact meaning of this requirement has been a source of significant controversy. Duffy and Nard argue that soon after its creation, the Federal Circuit “departed from the Supreme Court’s precedents on obviousness,” developing a “teaching‐​suggestion‐​motivation” (TSM) test that had the effect of dramatically lowering the obviousness bar for patent applicants. Yet the Supreme Court declined to review these precedents from the early 1980s, resulting in an explosion of low‐​quality patents. Finally, in 2007, the Supreme Court handed down the case of KSR v. Teleflex, which formally rejected the TSM test.

Had Congress not consolidated patent jurisdiction in one place, it is likely that one of the Federal Circuit’s sister circuits would have articulated an obviousness test more consistent with the Supreme Court’s precedents. The resulting circuit split would have prompted the Supreme Court to consider the issue, and it most likely would have overruled the Federal Circuit’s test and endorsed one of the alternatives articulated by other courts. The lack of competing jurisdictions made the problem harder for the Supreme Court to identify, easier to ignore, and harder to remedy. As a result, obviousness problems festered for almost a quarter century.

Extending patent jurisdiction to other appeals courts would ameliorate this kind of problem and improve the law. Duffy and Nard modestly propose that patent jurisdiction be extended only to a couple of additional appellate courts. That would certainly be an improvement, but policymakers should also consider a remedy that is at once more radical and more conservative: returning to the pre‐​1982 status quo, in which patent appeals are shared among all circuits. That system certainly had its flaws, but it worked significantly better than today’s monolithic appeals process. It also has the advantage that it requires no new institutional innovations‐​almost all of the federal courts’ jurisdiction is already organized in this fashion. Given the disastrous results of our last institutional innovation in patent law, it may be wise to return to the last institutional design that we know worked reasonably well.

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