By Kevin E. Noonan --
One of the hopes of the members of the patent community who have been paying attention is that the passing of the current administration may result in better times for the U.S. patent system. Political appointees like Secretary of Commerce Guttierrez, USPTO Director Jon Dudas, and Undersecretary of Commerce Margaret Peterlin will certainly be packing up their desks next January. However, we can expect that the Congress will be similarly constituted as it is now, and that could result in efforts for even more dubious patent reform schemes.
This message is delivered by Professor Harold Wegner (at right) in a cover story article published in ipFrontline (see "Keys to 111th Congress Patent Reform"). The source of his concern is the patent economics tome Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk by James Bessen and Michael J. Meuer. The work has been lauded by patent academia: Professor Dennis Crouch excerpted it extensively on his Patently-O blog prior to publication, and the published work carries glowing accolades from the darling of patent academia, Professor Mark Lemley of Stanford University. While the approval of the academic patent intelligentsia is one thing, more worrisome is that Patent Failure thesis, the familiar "the patent system is broken," is gaining traction among policymakers.
The basis for this influence can be summarized in this graph (from Professor Wegner's article):
The graph purports to show not just that the patent system is broken, but calls into question the system's value to innovation and the U.S. economy. The graph is based on two statistics: the positive value of patent protection versus the negative effects of patent litigation. The message of the graph - that patents cost more than they are worth - seems simple and empirical. While acknowledging that patents seem to benefit certain industries, like biotechnology and pharmaceutical companies, the message of this analysis is that the majority of American "mainstream" industries suffer more harm than benefit from the patent system.
But as Professor Wegner notes, there are some indications that the data don't completely support the message. For example, the profits ascribed to the pharmaceutical industry are only $15 billion, citing his analysis of the data from his review of Patent Failure in The Financial Times:
The fraction of patents in the biotech/pharma and chemistry sectors may be small in terms of numbers of patents but that is where patent exclusivity is most vigorously enforced and where the bulk of all patent rent value lies. The authors estimate the global patent value for US companies in the chemicals (including pharmaceuticals) sector in 1999 was $[15 billion] compared with only $3.2 [billion] for all other sectors. In fact, the $[15 billion] figure is ridiculously low: sales of the top 10 drugs account for roughly $40 [billion] in domestic sales alone – with no patent protection, that $40[billion] would vanish.
("The right medicine for a flawed system," May 8, 2008).
Further, Professor Wegner notes that when Eli Lilly and Company lost its patent on Prozac® in 2001, "its market cap dropped $36 billion in one day, roughly triple what the authors say is the annual profit for the entire pharmaceutical and chemistry industries in one year." He also identifies the reason for this discrepancy: "the auhors have explained the seemingly low figure of $15 billion in annual patent profits in pharmaceuticals and chemicals by stating that their figures are calculated based upon "patent 'rents' not sales and not patent value. . . . In economic theory it is the rents from patents, not the associated sales, that provide the reward to inventors." One way of looking at this analysis is to say that patent rents are the measure of the difference between the profits that are made with patent protection and the profits that would be made in the absence of patents. Another way is to recognize that it assumes that there would be profits for pharmaceuticals in the absence of patents, an analysis that ignores the reality that pharmaceutical companies (and their investors) need patents to ensure sufficient return on investment (ROI) necessary to justify the risk created by the supranormal costs of bringing a drug to market.
As noted in an earlier Patent Docs post, the Bessen-Meurer analysis is at odds with the results of a study by the European Commission reported in 2005 and directed to the very question of the economic value of patents in Europe (the study was entitled "Study on Evaluation the Knowledge Economy - What are Patents Actually Worth?"). The study was comprehensive, surveying 9,000 patent owners who had used the European Patent Office to obtain patents between 1993 and 1997. The study showed that the median value (half the respondents reporting more and half less) of the patents produced was €300,000, and 10% of the respondent patent owners reported values of €10 million or more.
As an antidote - or perhaps a prophylactic - to "reforms" driven by the Bessen-Meuer analysis, Professor Wegner proposes the following changes in U.S. patent law that might be sufficient to appease the patent "reformers" while not wreaking extensive havoc on innovation:
• Establish a patent maintenance fee system along the lines of the ones in most European countries, where patents are subject to an increasing annuity for each year of patent life; this would impose a much higher cost on patent "trolls" and discourage acquisition of patents merely to assert them against mainstream industries.
• Permit delayed examination (up to seven years) to let commercial activities weed out those applications that are not necessary to protect a product or provide a competitive advantage. Professor Wegner opines that the failure to enforce most patents indicates substantive examination is an "extreme waste of money" for most patents. He even proposes a "spoonful of sugar" for the USPTO, where the examination fees would still be collected and subject to only an 80% refund if an applicant decides not to pursue examination.
• In an effort to balance the interests of patent-dependent industries like biotech/pharma with those industries that may suffer more of a burden than a benefit, Professor Wegner proposes giving intervening rights to anyone who commercializes an invention more than 30 months after an application filing date (i.e., one year after the application publishes), while permitting applicants to obtain an "unlimited" extension of prosecution of a pending application. The latter would purportedly be beneficial to biotech and pharma companies, by giving them time to collect clinical trial results. An additional benefit, according to Professor Wegner, would be that "the majority" of patent applications would be abandoned prior to prosecution.
• In the event these reforms are implemented, Professor Wegner proposes that all continuation applications (excluding divisional applications) be prohibited at any time after 18 months from filing.
• He would also bolster inter partes reexamination, which has not been particularly successful. The Professor blames the PTO for the "bottleneck"; the estoppel provisions in the 1999 law provide an equally likely explanation not mentioned by Professor Wegner. His proposal would put all inter partes reexaminations under a single administrative patent judge and have all proceedings take place before the Board, with the examining corps providing "designated examiners" to assist in the initial reexamination. As part of this reform (but justified in its own right) there would be a substantial increase in the number of APJ's.
The viability of these ideas, as well as the veracity of Bessen-Meuer's analysis, will be the subject of future posts (and Patent Docs has, in fact, already discussed several of these ideas). For now, Professor Wegner's article merely reinforces the message that we all need to remain vigilant in protecting the integrity of U.S. patent system. Or maybe to put it more bluntly: it's not over.
Kevin,
The problem with Hal's suggestion is that it locks out smaller inventors who cannot pay large maintainance fees - this ensures that patents will remain the "sport of kings." This may allow BigPharm to come to a compromise with BigTech, but I am not sure that this supports "innovation."
I have many clients who file in the USPTO and not in the EPO because they cannot afford EPO maintaince fees (especially at $1.6 to the Euro). As someone "in the field" (in physics/electronics/medical devices/software), as someone who has drafted patent appliactions BOTH for CPF giants as well as small inventors/startups, I can say that the "true innovation" comes from the latter (they are often a pain to serve, but that's another discussion).
We tend to forget that SMALL BUSINESS is what drives the US economy - we do NOT want the entire US economy to become like Detroit's Big 3 (what's good for GM, ehr Microsoft, is good for America). We do NOT want a patent system that is only good for the "boys club" of the CPF giants and 10 pharma companies.
Also, Wintel/IBM will NEVER accept Hal's suggestion of high maintaince fees as a substitute for the "damages provision/license to steal", because they want to gut the value of patents that were already issued. They want the damages provision, because their goal is raw, cold power and NOT patent quality (and CERTAINLY not the 'streamlining' you read about in the press - Judge Michel has indicated that the 'damages provision' will make patent litigation MORE burdensome). CPF want to devalue patents PERIOD (or at least patents that are not back by billions of $$$). If their goal was the patent quality you read about in the press, they would do better searching for their own patents, and Greg Ahronian would not be able to invalidate one of their patents in 10 minutes.
As for delayed examination, my hunch is that Wintel/IBM would be AGAINST this proposal because it would allow poorly-funded innovative players to get their filing date without spending money up-front on prosecution - we wouldn't want that, now, would we ????
As for the "Continuation" proposal, what about cases where I have 40 claims pending, and the Examiner wants to allow 15 of the claims and is rejecting the other 25 claims (maybe even with a bad rejection). Why shouldn't I be able to take what the Examiner is offering, and then re-file a continuation with the 25 'argued' claims??
I have a better title for a book: "Patent Failure: How Academics, Journalists and BigCorp Put Innovators at Risk."
Posted by: anonymousAgent | May 22, 2008 at 05:40 AM
Hear, hear--Kevin, please consider writing the book suggested by anonymousAgent. Or, if any public policy students are paying attention, I think this would make a great thesis topic--even just the impact of the Lemley/Moore article on "bad patents" on the Rules debate and the viral citation phenomenon would be interesting.
Posted by: Inquiring Mind | May 22, 2008 at 07:30 AM
Dear Anon:
I agree that Professor Wegner's proposals deserve serious discussion along the lines of the issues in your comment, particularly with regard to small startups. Anyone who remembers the history of the past 30 years will recognize that America's big players (US Steel, the Detroit auto firms, and a host of electronics firms) went into serious decline by the end of the 1970's. It was the high tech players (computers and biotech) that provided the innovation and reversed the trend in the 1980's of America being outcompeted. Bayh-Dole, the CAFC and a greater recognition of the power of patents contributed, and all promoted patent protection for startup companies. Many of the proposals for "solving" America's patent problems by emulating Europe ignore the historical differences in philosophies between our patent system and theirs, which would act to the detriment of small inventors in the US.
Thanks for the comment. We will be getting to some of these topics over the next several weeks.
Posted by: Kevin E. Noonan | May 22, 2008 at 11:33 AM
One the one hand Professor Wegner wants the public to have an early idea of the scope of patent coverage which will issue by proposing limitations on the filing of continuations; On the other hand he wants to postpone the date on which the public knows the scope by proposing delayed examination. Seems to be a contradiction here or am I missing something, Kevin?
Posted by: Missing something? | May 22, 2008 at 08:31 PM
Dear Missing:
No, you are not missing anything. I suspect that the continuation proposal is as you surmise, a way to prevent "submarine" patenting. The delayed examination seems to ebe tied to the intervening rights idea (which could provide a large disincentive to delaying examination).
Thanks for the comment (more to come).
Posted by: Kevin E. Noonan | May 22, 2008 at 10:01 PM
Thank you, Kevin. I am opposed to delayed examination. Delayed examination delays the issuance of Office Actions for many years and thereby prevents competitors from obtaining a good idea of the scope of patent protection which may or will issue for many years. The application is a ticking time bomb which may go off soon or never and with an unknown blast strength.
Posted by: Missing something? | May 22, 2008 at 10:13 PM
I'll be honest missing I would say you're right about delayed prosecution except that if it were only, 4 years perhaps then it should be fine. And as long as the application publishes then the public is on notice of what is in the patent. It can be up to the public to determine what they feel is going to get issued, and they could perhaps be allowed to "attach" prior art they would like to bring to the office's attention to assure themselves that the protection that would be validly issued would be of a certain scope. It's a win/win. 7 years is quite awhile, but still the same principle applies.
Also though, everyone needs to take issue with refunding 80% of fees. Why? Because that will simply prompt a flood of crp applications that never get examined and are just junking up the classification (which I presume they will still be classfied so they can publish) with pure sht. Now, if we were to get our classification system back up and running at full speed this might not be such a big problem, but until then it's a doosey.
Posted by: e6k | May 28, 2008 at 07:33 PM