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Patents Pending

From the January/February 2008 Issue

The U.S. patent system is more important than ever. It’s also a mess. But help may finally be on the way.

Patents PendingQ. Are patents important?
A. More than ever. The Founders did the right thing when they inserted patent protection directly into the Constitution (Article I, Section 8). A substantial fraction of the value of U.S. firms—on the order of 30 percent—consists of so-called intangible property, much rights and trademarks. Patents are particularly important in the pharmaceutical and biotech industries. A small number of patents—sometimes, just one—can provide the foundation for years of research and development before a drug is ready for Food & Drug Administration approval and public use. For the most part, the FDA requirements make it impossible to keep these inventions secret; patents protect drug developers from having their inventions poached by competitors. If pharmaceutical patents didn’t exist, most of the best drugs of the past half-century or so might never have been developed. 

Q. Is the patent system in a mess?
A. Yes, but there are encouraging signs of improvement. Five or ten years ago, the situation was bleak. Patent and Trademark Office (PTO) examiners faced incentives to grant all sorts of questionable patents, were overworked in the face of sweeping new technologies, were losing much of their user-fee revenues to other government operations, and sometimes found the courts opposed to common-sense limits on patents. There was talk of impending disaster. 

Patent Applications Filed 1986-2006.jpgQ. So what happened?
A. Self-correcting forces prevailed. Users of high-tech patents have formed com­plex but nonetheless workable licensing pools. The PTO has reined in some of the stranger patenting offshoots such as business-methods patents (the notion of patenting a way of doing something, like recording an online sales transaction) and excessively broad patents for stem cells and other innovations. The Court of Appeals for the Federal Circuit, which han­dles all the patent cases that are appealed from District Court opinions, has been favoring plain­tiffs in infringement suits only 40 percent of the time, compared with 60 percent earlier. The Court of Appeals has also been beefing up the traditional “written description” requirement (the notion that the inventor has to describe the invention clearly) in order to overturn especially far-reaching patents held by the University of California and the University of Rochester. And in its KSR International v. Teleflex decision, the Supreme Court made clear that it will demand more in the way of novelty for some patented inventions. In the meantime, research institu­tions in academia have found ways to deal with a vast array of other people’s science-based pat­ents while still getting research done.  

Q. What were those academics worried about?
A. Universities are doing a lot of patenting. The University of California alone has pulled in $500 million in license fees in the past five years while vigorously defending its patent portfolio. But many academics and peo­ple in high-tech industries have worried about “patent thickets” that would make a lot of clever research impossible unless researchers man­aged to track down scores of patent holders to negotiate licensing deals. The result would be an “anticommons,” in which too much diversi­fied ownership of intellectual property would impede R&D investment—just the opposite of the “tragedy of the commons,” in which nobody invests in a commons area because no one owns it. Fortunately, that hasn’t happened. Academic research continues to flourish even as patents multiply like biotech mice, and the patent system does not seem to get very much in the way. 

The rules for determining damages for infringement are so flexible that it can be hard to predict the orders of magnitude—a million dollars or a billion?—that will emerge from jury deliberations.

Q. So what problems remain?
A. For one thing, many patents are still in force that should not have been granted in the first place. But there are also some serious problems in how the patent system works, both before and after patents are granted. Here’s a short list: (a) The “first-to-invent” rule for grant­ing patents generates an immense amount of litigation and uncertainty over whose notarized lab notebooks really described an invention. (b) The rules for determining damages for infringe­ment are so flexible that it is sometimes hard to predict even the orders of magnitude—a million dollars or a billion?—that will emerge from jury deliberations. (c) On the one hand, the way in which the PTO grants patents tends to foreclose even the most reasonable and fact-based oppo­sition except through expensive and protracted litigation after the patent is granted. This can escalate the cost of dismantling bad patents beyond reasonable bounds. (d) On the other hand, the approval process also encour­ages obscure patent holders to launch attacks on patents after essential R&D on those inventions is done, as can happen to pharmaceuticals and especially to biotech-based drugs (which are typically based on very different kinds of patents than the ones used for traditional pharmaceuticals and where the law and the underlying science are a good deal more fluid). (e) Depending on how it is interpreted by the lower courts, the Supreme Court’s recent KSR decision on the “non-obviousness” standard could render unpatentable some of the drug dis­coveries uncovered through such standard tools as computerized screening of librar­ies of untested molecules. 

Q. What else?
A (f) There is consternation over the rules for when the courts will issue a prelim­inary injunction against alleged patent infringement, which can threaten to bring an entire business down. That happened recently with litigation against patents undergirding Research In Motion’s Blackberry devices. (g) The PTO itself lacks funding for sufficient trained per­sonnel to review patent applications promptly (see the rising number of applications, Figure 1). In fact, the PTO is trying to save money by adopt­ing administrative shortcuts that do more harm than good. A recent, worrisome example is the imposition of stark limits on so-called patent con­tinuations, which research firms use to flesh out patents whose significance was unclear when the patent was first sent to the PTO. Patent contin­uations are sometimes essential in biotech and pharmaceutical research. GlaxoSmithKline recently obtained a court order to halt this change in PTO policy, but the future is unclear. 

Patent Cases in U.S.jpgQ. What’s happening to address the problems?
A. On September 7, the House passed H.R. 1908, which includes a raft of patent-reform provisions. There’s a Senate bill, too, S. 1145, but as of early December 2007, it had yet to reach the floor. The two bills differ in impor­tant ways, so it will probably take a while to get a consensus on a single bill to send to the President. 

Q. What about trolls?
A. Patent trolls are companies or individu­als who buy up patents and then wait for a long period before surfacing to chal­lenge other patents or patent applications. Most think that this issue will largely be put to rest by a section of the current legislation that mandates publication of details of all patent applications within 18 months. 

Q. What should Congress do?
A. A few relatively simple and reasonable changes are supported by almost all the major actors. One is the move from “first-to-invent” to “first-to-file” for deciding who can claim a patent. Essentially all developed nations have done that, and it’s working well. Another widely supported reform is to create a new “post-grant opposition proceeding” in which opponents would have a limited window of opportunity in which to challenge a new patent without costly and time-consuming litigation (Figure 2). But that window of time should extend no more 18 months, and strict procedural rules would be necessary to foreclose deliberate filibuster­ing and intentional harassment of the patent holder. Congress should also require publica­tions of new patents within 18 months (as other advanced nations do), permit assignment of pat­ents to entities other than individual persons, and provide a one-year grace period in which inven­tors can decide which results of speculative and curiosity-driven research (typically pursued by universities) are sufficiently useful and unique to merit patenting. 

When it comes to preliminary injunctions, the courts can go too far, as when Research in Motion had to choose between settling a questionable patent infringement lawsuit or shutting down its Blackberry system before the case went to trial.

Q. Anything else?
A. An underfunded patent system can cause a great deal of harm, including the suppression of R&D that brings new products and eventually new tax receipts. In the early 1990s, Congress created a system by which fees supplied to the PTO through patent applicants replaced annual appropria­tions. That scheme has not worked well, partly because Congress routinely diverts a chunk of the fees to other agencies. Congress should get rid of the user-fee system. Let’s decide how much the PTO needs and then appropriate the funds accordingly. 

Q. And there are things that Congress should not do, right?
A. Yes. The user-fee system is not the only example of a reform gone amiss. In 1982, Congress created an entirely new appeals court for patent cases. The idea was to get this litigation before judges with specialized knowledge instead of leaving it up to the gener­alists who populate the typical federal appeals court bench. But the result was a pro-patent court that, for example, boosted business pat­ents the PTO itself did not want, and tended to unduly favor patent holders versus infringers. So when Congress thinks about patent reform, the rule should be, “First, do no harm.” 

Q. What is it you fear that Congress might do?
A. For one thing, Congress might try to codify the standards for damages in infringement cases. The courts have given us some pretty weird results on dam­ages—for example, a $1.5 billion judgment against Microsoft when the actual damages appeared to be nowhere near that much. Still, we’re better off letting the courts use a rule of reason for damages than having Congress dictate a rule that is bound to favor whichever side fields the stronger lobbying team. A sim­ilar issue involves preliminary injunctions. The courts can go too far, as when Research In Motion had to choose between settling a questionable patent infringement lawsuit or shutting down its Blackberry system before the case even went to trial. But preliminary injunctions can be absolutely necessary, as in many drug cases. If a generic drug producer goes to market while the pioneer drug patent is still in litigation, prices will go down and the generic firm may not bank sufficient profits to compensate the pioneer firm for lost profits if the pioneer wins in court. That can be forestalled by an injunction. So again, let the courts patch up their rule-of-rea­son approach instead of forcing them to take sides on an issue in which fixed rules cannot work well. 

Q. Anything else?
A. Just this: The patent system, with all its flaws, has provided the essential basis for untold benefits. It is highly complex and stands at the center of a far-ranging mix of mar­ket dynamics. The costs of screwing it up would be immense. Let’s avoid massive mistakes while performing needed basic maintenance. 

Claude Barfield and John E. Calfee are resident scholars at the American Enterprise Institute. Their book, Biotechnology and the Patent System: Balancing Innovation and Property Rights, was published last September by AEI Press.

Image captions: Figure 1: The number of patent applications keeps growing, taxing an already overburdened Patent and Trademark Office. Source: U.S. Patent and Trademark Office. Figure 2: The number of patent cases in court has almost doubled since the early 1990s. Congress can take steps to ease the burden on the court system. Source: Administrative Office of the United States Courts.

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