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Tax Bills, Certainty of Title, and Patent Trolls

This recent story about how an elderly couple nearly lost their home over a $1.63 tax bill and then had to fight for seven years to keep their home is typical of many stories where a seemingly minor legal irritant mushrooms into a major nightmare. Certainty of title is the one thing that many Americans (and Canadians) count on when they buy a home or any property. No wonder decisions like Kelo generated such a backlash.

Certainty of title is what Hernando de Soto identified as the key impediment to economic growth in many developing countries. In the Mystery of Capital, de Soto documented how in seemingly poor countries, ordinary citizens were sitting on trillions of dollars in assets. The problem is that there was no way to tap into these assets due to uncertainty of title. No credit could be had or exchange be conducted for those assets if no one was clear on who owned them. Even in our developed system (unless your land title system follows the Torrens system), many homeowners will still purchase title insurance.

In the realm of real property, the idea of delimiting the metes and bounds of property seems like a straightforward task. You have only three dimensions to work in. In the realm of Intellectual Property, however, ascertaining the metes and bounds is no easy task. The analogy between real property and IP breaks down completely. For one, IP is not excludable, so my use of an idea does not preclude others from using it too. This is the subject of a large ongoing debate that I am not interested in (in this post).

Rather, my concern is more to do with uncertainty in title. The recent Blackberry saga and other examples of so called �Patent Trolls� have raised many concerns about the cost of litigation in the IP sector.

One of the reasons that so much uncertainty exists is that the IP is the subject of federal law. This makes sense, as the power to grant patents for "limited times" is one of the expressly enumerated powers granted to Congress. The law of property, in general however, is usually state law. This means that in so far as the law of property has developed over the centuries (in the States and before that in England/UK) and come to handle the various questions of title certainty, Federal intellectual property has not much opportunity to evolve. The recent obviousness case of KSR represents one of the steps in the direction of trying to limit who can claim what from their patent, but it took decades before the Supreme Court was able to address this question. In the state system, between the 50 states, at least one State Supreme Court would have addressed a novel or nagging question of title. This would allow other state courts to decide whether this is the correct approach or another approach is needed.

What makes the situation worse is that the law of patents is adjudicated in one specialized federal court of appeal. This means that there is a monopoly on the jurisprudence of IP. Unlike other areas of law where the various federal circuits can develop their competitive jurisprudence and shape an optimal body of law, we have one specialized circuit generating the law with the Supreme Court taking a peek over their shoulder every few years. This will undoubtedly generate a body of law that will encourage more uncertainty and not less. Why? Because a specialized court gets used to seeing the same type of legal arguments (and lawyers?) thereby making the Federal circuit captured in George Stigler's sense of regulatory capture (Regulation is for the benefit of the regulated). A specialized court will also generate a set of rules that are more specific in nature and not general. General courts, on the other hand, will not try fashion rules and laws that are so specific that only a specialist can understand them. So at the end of the day, only those lawyers and judges who are �in the know� see their arguments and rulings upheld, while the generalists lose. This situation generates the sort of �bright line rules versus case by case analysis� discussion.

So what to do? For one, more and more IP cases should be returned to the regional circuits. This proposal is not novel as many have made this argument before.

Another proposal (which is the subject of a paper I am co-authoring with my colleague Cameron Hutchison) is to take the property analogy seriously. The common law has developed several methods of quieting title, one of which being �adverse possession.� In our paper we develop some simple rules for how a commercial developer of a product should be able to extinguish all prior claims against his product. If another patent holder claims that their patent covers his invention but they had taken no steps to commercialize their product within a certain period of time (in the paper we argue 2 years from validity of their patent or when they become aware of the party�s commercialization efforts), then they lose their claim. There have been some other articles to this effect, but we try to come up with a limitations period mathematically and develop some more concrete working rules. We argue that the focus of patent law should move away from the protection of idea generation to the protection of commercialization of ideas. Giving incentives to commercialize ideas will allow those who can make the money decide how best to create incentives to generate ideas.

The paper is still work in progress, but I thought I would throw out the idea in case someone has comments.



Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.