Patent Reform Efforts Opposed by Small Business Group

    By Kevin E. Noonan --

Until now, the major bones of contention over the Senate's patent "reform" bill (S. 515) have centered around two provisions:  putting in place statutory language governing how damages are to be assessed, and instituting a post-grant review system modeled on the European opposition, and that will be more extensive than current re-examinations.  These provisions have been the motivating force for a variety of "high-tech" companies (predominantly information technology companies like Cisco and Intel) and their lobbying arms (such as the Coalition for Patent Fairness (sic)), aimed at addressing "unconscionable" damages verdicts (typically but not always by juries) and the purportedly "low quality" of patents being granted by the U.S. Patent and Trademark Office.  A major breakthrough in passing the bill from the Senate Judiciary Committee was a "compromise" worked out by Chairman Leahy (D-VT), Senator Feinstein (D-CA), and then ranking Republican member Specter (R-PA) (see "Senate 'Patent Reform' Bill (S. 515) Voted out of Judiciary Committee").  In that compromise, the judge in a patent infringement case would assume a "gatekeeper" role, purportedly to stem the worst excesses of easily-swayed juries.

The resulting bill enjoyed bipartisan but not universal support, with notable dissenting views voiced by Senators Hatch (R-UT) and Kyl (R-AZ); indeed, Senator Hatch stormed from the hearing room oblivious to Senator Leahy's entreaties not to go.  Senator Kyl, as he has with regard to prior versions of the bill, objected that Patent Office representatives had not been consulted regarding whether the post-grant review provisions were realistic in terms of personnel and the Office's budget.

Missing from the fray has been any objection to some of the other aspects of the bill, specifically the change from a "first-to-invent" to a "first-to-file" (FTF) system, which reflects a major change in U.S. law.  Another provision (not contained in S. 515 but contained in other versions) is the grant of substantive rulemaking authority to the Patent Office.  Such provisions are a major goal of the new Commerce Secretary Gary Locke and (presumably) new USPTO Director David Kappos.

This situation changed this week, with the delivery of a letter and supporting materials to Karen G. Mills, administrator of the Small Business Administration, by the Small Business Coalition on Patent Legislation, a coalition of "early-stage start-up companies, small businesses, individuals, academic inventors, researchers and new innovative market entrants" (including the National Small Business Association, the National Association of Patent Practitioners, the Professional Inventors Alliance, the United Inventors Association, CONNECT, and IP Advocate.  In their letter (copied to Penny Pickett and Susan Walthall of the SBA, as well as Secretary Locke, Director Kappos, and Rep. Nydia M. Velazquez (D-NY), Chairwoman of the House Small Business Committee, and Senator Mary L. Landrieu (D-LA), Chair of the Senate Committee on Small Business and Entrepreneurship), the group expresses their "concerns" about the bill, focusing primarily on the first-to-file and post-grant review provisions (although they also express reservations about the PTO rulemaking portions of the bill in supporting materials appended to the letter).  The letter references Secretary Locke's earlier letter to the Judiciary Committee, where the Secretary expressed the support of the Obama Administration for these provisions, which this group's letter contends "will inflict unprecedented harm on small firms that rely on patented innovations," the "very segment of the economy that is responsible for most of America's new jobs."  The group characterizes the Secretary's position as a departure from "a decades-long, bipartisan foreign intellectual property policy position," something that is accomplished, according to the group, not by addressing the "very small number of priority contests" (interferences), but that "rewrite[s] Section 102 in its entirety, redefining the prior art . . . and weakening the grace period."  These changes have been proposed, they allege, without any study or evaluation of the expected effects of the change on U.S. patent practice, nor the effects (adverse, they claim) on patent quality of increased PTO workload.  They cite a study from McGill University (Lo and Sutthiphisal, "Does It Matter Who Has the Right to Patent: First-to-Invent or First-to-File? Lessons from Canada," NBER Working Papers, No. W14926 (April 2009)) showing "adverse" effects on small businesses in Canada and "generally negative effects on patent quality" as a consequence of Canada's adoption of a first-to-file system in 1989.

The letter also refers to comments made by Director Kappos at the Independent Inventors' Conference (on November 5, 2009) purporting to base the Office's support for the change on the burden of interference practice.  The group contests whether the "miniscule number of interference proceedings" have much to do with the harm they contend would follow from the change, from both harm to small businesses and decline in patent quality.  They catalog these adverse consequences as follows (emphasis in original):

Focusing on applications that reach the USPTO misses the point.  The harmful effects of FTF for small startups and early-stage patenting firms will be in losing patent protection on inventions for which applications will not, or could not, reach the USPTO.  Harm will arise due to the "race to the patent office" whether or not an interference occurs with a competing application.  Harm will be inflicted when inventors race to the patent office with the wrong application, for the wrong invention, and for the wrong reasons, exhausting precious resources in the process.

The letter also contests the argument that a first-to-file system would provide administrative convenience and increased certainty, contending instead that such a system would shift uncertainty onto small business to the advantage of "large patenting firms."  The letter cites the lack of in-house patent prosecution resources, less or more inconsistent funding and the need to disclose technology to investors as putting small businesses at a disadvantage to such "large patenting firms."  The letter references its supporting materials, particularly an "actual profile of a five-year R&D and invention effort of one startup member of [the] Coalition" in support of its contentions of differential harm to small businesses (slide 12):

The letter characterizes this slide as showing fifty important inventive ideas "conceived, evaluated and tested" over months or years, and that the majority of these inventions turned out to be "useless."  Accordingly, during this time, the letter says that only six patent applications were filed.  Under a first-to-file system, the letter contends that this company would have faced the "painful dilemma as to which of these inventions should be written up and filed," presumably without the benefit of the time to establish which of the fifty inventions were appropriate for filing.  These "premature guesses" would in the main have been wrong, i.e., directed to inventions later shown to be "useless," resulting in patent protection being obtained (or at least applied for) for such inventions and other, ultimately more appropriate inventions failing to obtain patent protection.

The consequence of changing to a first-to-file system would be "great risks, costs, dilemmas and increased patent prosecution uncertainties" for small businesses, the letter contends.  This will "undermine early-stage startups' ability to attract investment capital, an assertion supported by additional information in the supporting materials (see Slide 6).  The letter makes the following argument regarding whether anyone has considered the consequences of the FTF change (emphasis in original):

A related practical problem with FTF is shown in Slide 23 [of the supporting materials], which shows that prior art published less than one year before the filing date is the most frequent source for invalidating patent applications in the European Patent Office (EPO), which operates under FTF law.  This category of prior art currently cannot be used to block or invalidate patents, because the U.S. has a one-year "grace period."  Yet, no one had studied the number of U.S. patents that will be invalidated by such prior art published after the invention date if FTF were adopted, or the chilling effect that this loss of U.S. patent protection would have on innovation.  Initial detailed legal analysis of the proposed change in S. 515 reveals several of its flaws.  The analysis shows that it creates strong incentives for making early nonenabling "springing public disclosures" in order to pre-empt later filed patent applications that are enabling from being granted as patents.  Such "springing public disclosures" will also allow second inventors who file second to obtain the patent (citing B. Pedersen and J. Woo, "The 'Matrix' for First-Inventor-To-File: An Experimental Investigation into Proposed Changes in U.S. Patent Law", (December 4, 2009).

The letter characterizes as "a troubling aspect" of the Patent Office's "advocacy of the transition to FTF" the "apparent lack of data and models within its field of expertise" with regard to the "inevitable increase" of patent application filings that would result.  The letter cites statistics from the European Patent Office that almost 60% of the applications filed in the EPO are abandoned prior to examination, in contrast to a 16% abandonment rate of U.S. patent applications prior to examination.  The letter attributes this difference to the pressures accompanying the first-to-file regime, and concludes that under such a system "it takes more than two times the number of applications . . . in order to obtain one surviving application worthy of examination for patent protection" (emphasis in original).  The USPTO has "totally ignored these costly inefficiencies," the letter contends.

The letter also predicts "dire financial collateral consequences" of a change to a first-to-file system.  In contrast to the European system, where a search report is generated prior to examination on the merits (after which about one third of the applications are abandoned), in the U.S. a search is provided only after a first action on the merits.  Thus, in the U.S., the PTO would be expending "search and examination resources on applications that would otherwise" never be examined.  This would result in a "substantial increase" in the Office's upfront expenses without a concomitant increase in grant and maintenance fees, requiring "inevitable" increases in filing fees to account for these increased costs.  The letter contrasts the percentage of total patent fees garnered at the initial phases of the patenting process in the U.S. (27%) and Canada (60%), contending that this increase in initial fees would disproportionally impact small businesses and startups which would otherwise be able to defer these costs until later in the commercial development cycle.

This portion of the letter concludes by disputing the assertions in Secretary Locke's letter suggesting that changing to a first-to-file system would "'simplify the patent system, reduce legal costs [and] improve fairness,'" and that the "'complex, time-consuming and resource intensive' costs of global patent procurement are the supposed target of this 'reform.'"  There is simply no evidence for any of this, the letter asserts, and in fact there is "ample evidence" to the contrary.  The letter also notes that this change merely "give[s] away one of the few 'negotiating chips' the U.S. retains to encourage foreign patenting authorities to move in directions helpful for U.S. small business."

With regard to post-grant review, the letter voices agreement with the concerns raised in the letter sent to Secretary Locke by 56 companies on September 14, 2009 (see "Tech Companies Send Letter on Patent Reform to Secretary Locke").  The letter particularly mentions the risks to small business of "infringers who make repeated challenges to patents after they issue," particularly with provisions that permit "serial" challenges by providing an "extremely low threshold" for obtaining post-grant review, citing Scott Shane, "Problems To Be Expected From Expanded Administrative Challenges To U.S. Patents," (July 20, 2009).

Patent reform has generally taken a back-burner to health care reform and follow-on biologics legislation since the bill was voted out of committee in the spring.  In addition to these concerns, Congress has financial reform and global warming bills to contend with in its next session.  But there is a real risk that this bill will eventually come to the floor for a vote, and in view of the political constitution of the Congress, it is also likely that the bill, or something very like it, will land on the President's desk before the 111th Congress ends.  Insofar as the concerns voiced by the small business coalition resonate, it is once again incumbent that our representatives be made aware of the many flaws of S. 515.

Comments

[patent prosecutor]

In my opinion, patent legislation should be postponed a couple of years until the full effect of recent (and upcoming) Supreme Court decisions is known and new PTO management has had a chance to improve operation of the Patent Office.

However, if an increase in PTO fees is absolutely required then I recommend a flat 8% across the board increase, without tinkering with individual fees.

[Kevin E. Noonan]

Fair enough, PP. Let's hope Congress is listening to ideas like yours.

Thanks for the comment.

[Gena777]

What about the argument -- which I have heard from Kappos and others -- that, functionally, we have a first-to-file system already? Some claim that moving officially to FTF in patent law would impact so few people that the consequences would be negligible. Any input on this position?
http://www.GeneralPatent.com

[breadcrumbs]

Gena777,

I would like to introduce you to Dr. Ron Katznelson and David Boundy. Their work which explores the position you mention can be found through multiple links, most easily accessed at the Patently-O blog site.

[kiramatalishah]

Often we forget the little guy, the SMB, in our discussions of the comings and goings of the Internet marketing industry. Sure there are times like this when a report surfaces talking about their issues and concerns but, for the most part, we like to talk about big brands and how they do the Internet marketing thing well or not so well.

www.onlineuniversalwork.com