EVENTS

Date:	Thursday, March 10, 2005
Time:	10:00 AM -- 12:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

March 2005

The Patent System and the New Economy

Patents and other forms of intellectual property aim "to promote the progress of science and useful arts." Achieving this purpose depends on policies that concern the nature of patentable discoveries, the scope and duration of patent rights, and the methods for acquiring and enforcing those rights. Though such policies have changed over time in response to changes in science, technology, and economic organization, there is growing concern that the U.S. patent system is nonetheless failing to keep pace with rapid advances in information technology and biotechnology. At the same time, our patent regime is also facing a separate set of challenges that arise from the growth of litigation in the United States and abroad, the globalization of commerce, and multiplying conflicts among nations’ patent policies. At a March 10 AEI conference, participants explored the problems of the patent system and proposals for improving it.

Christopher DeMuth
AEI

More than most areas of law and policy, the architecture of the patent system depends upon changes in economic organization and technology. It has always been a challenge to keep the patent system current, but the rapid growth of information technology and biotechnology have made the past two decades the most challenging for patent law.

In all areas of intellectual property, one needs to strike a balance between ownership and use, between incentives for invention and the availability of the fruits of invention to other inventors and consumers.

Bradford L. Smith
Microsoft

Patent reform is today a top priority for the American technology community and for American businesses. Microsoft has benefited substantially from patent protection, but technological change in the era of globalization is creating new challenges for the U.S. patent system, which is being flooded with new patent applications and a litigation explosion. The roots of the system are strong, but its long-term health will be threatened if we do not take this opportunity for reform.

Good patent reform will address four areas: it will ensure that patent quality keeps pace with the increase in patent quantity, curb excessive and abusive litigation, promote international patent harmonization, and increase accessibility for individual inventors in small companies worldwide. Reform in these areas will build on the strengths of two centuries of U.S. patent law while ensuring that the system will remain healthy in the future.

Microsoft’s experience with patent law and intellectual property has forced us to look at literally every issue from both sides of the fence. We are one of the country’s largest investors in research and development, spending $7 billion per year, so it is not surprising that we are among the largest users of the patent system as well. This year, we will file over 3,000 patent applications with the Patent and Trademark Office (PTO), which means that on a typical week we are number four or five on the list of newly-published patent applications.

While we have a strong interest in ensuring that we have good patent protection, we also sit on the other side of the fence. Over the past three years, we have grown accustomed to confronting thirty-five to forty lawsuits simultaneously, at a cost of approximately $100 million per year. I am not aware of another company that faces more patent lawsuits.

As we look toward patent reform, our unique viewpoint allows us to consider the true strengths and weakness of the current system: what elements we must retain, and those areas that require change. And we begin with two chief tenets. The first is that the patent system, born of our Constitution, has worked extremely well. The first three patents, filed in 1790, included one for the manufacturing of candles. Since then, 6 million patent applications have followed, moving the United States from an agrarian economy to the world’s biggest economy.

The second tenet is that the periodic reforms that have been made in the patent system have helped to keep the system strong for over two centuries. In the nineteenth century Congress decided that the wave of new technology was creating new challenges and demands on the Patent Office. They increased the number of patent examiners and in some cases found that adjustments to the legal standards themselves were necessary in light of new technologies.

People often think that patent reform is a novel concept, yet there are many parallels between the issues we face today and those of the past. And again the time has come for a broader discussion about patent reform. We need to focus political attention on reforming the system. Reform should be simple and have clear goals: we should aim to maintain high quality standards, eliminate litigation abuse, reduce barriers for small businesses, and promote greater international harmonization. 

It is difficult to maintain the quality standard when quantity is growing rapidly, but it is also vitally important. The PTO has seen a tripling of patent applications in the past two decades, with 350,000 new applications now filed each year.

There are steps that we can take to maintain the quality standard. Late last year, Congress addressed fee diversion--a very important step, since the PTO cannot do its job without the proper resources. Yet additional work needs to be done to ensure that resources are not diverted in the future. Another step would be to allow people in the private sector the opportunity to submit prior art to the PTO during the examination process. This would harness private sector resources to support the public interest in high-quality patent review. The third key step, which is reflected in the Berman-Boucher bill, is the creation of a post-grant patent opposition procedure. This would give people the opportunity to file an opposition to the patent for a set period of time after the patent is issued. These steps would improve public confidence about patent quality.

There is also a need to address the potential for abuse in patent litigation. It is too easy to manipulate the system, turning a patent lawsuit into the ultimate lottery ticket. A federal district court devoted exclusively to patent cases would greatly curb abusive litigation. It would eliminate the forum-shopping taking place today and would bring uniformity to the application of patent law.

Patent plaintiffs often use the willfulness and injunctive relief standards to increase their demands for royalties, regardless of the validity or strength of the patents they possess. Willfulness should be found only in egregious cases--not every time someone infringes a patent. Similarly, injunctive relief should be granted only when monetary relief is insufficient. Addressing these two standards would bring more balance to patent litigation.

In the 1870s, rapid advances in technology necessitated the reform of patent laws. Today, the global economy makes calls for reform impossible to ignore. No nation can look at its patent laws in a vacuum, separate from the rest of the world. The world relies on the U.S. patent system--in 2004, six of the top ten applicants before the PTO were from outside the United States. Inventors worldwide recognize the importance of patents and the protection of U.S. patent law, but it is time to consider ways to achieve a degree of harmonization across national boundaries. The PTO has been addressing this issue, and it is vital that their work continue.

Legal reform is essential if we are to achieve greater harmonization. In the United States, that means that we must reconsider the “first to invent” standard. If we were to move to a “first to file” system, it would bring U.S. patent law into greater synchronization with the rest of the world. We should also move to eliminate another outlier issue--the remaining loophole that enables ten percent of patent applicants to avoid publishing their applications after eighteen months.

Finally, we need to ensure that the system meets the needs of small businesses and individual investors. Microsoft knows about being a small inventor--we started out as one. We are fortunate that the people running the company were small inventors early in their careers. We know that the system will work and maintain public confidence only if it strikes a balance among the needs of everyone who participates in it.

Patent laws vary and multiple applications are often required, making the process both daunting and expensive. Large companies like General Electric, IBM, and Microsoft can afford large armies of lawyers to undertake the task, but small companies cannot surmount those obstacles today. We should make the system more accessible through greater harmonization and reduced or eliminated filing fees for small investors who qualify.

As we consider options for reform, we need to remember that the patent system is at the heart of innovation in this country. We need to retain the strengths of the patent system while addressing the areas that need change. The U.S. patent system has contributed more to technological innovation than any other system in the world. But the world has changed, and the system must change with it. We need a system that will adapt to the twenty-first century in a way that is right for the information age and for our expanding global economy.

Q. Todd Dickinson
General Electric

This is the right time to talk about patent reform. Over the past year and a half, organizations like the National Academy of Sciences and the Federal Trade Commission have done a huge amount of work these issues, which I believe will be instrumental in reform.

The patent system works well, and one reason for that is that is has not changed much in over two hundred years. In the independent inventor community in this country there is a long tradition of resistance to change in the patent system. They believe that the system works well for them and that all efforts at change are driven by large corporations who are trying to get some advantage over them. While that is by and large untrue, it is a key part of the political rhetoric that will evolve when we start to talk about reform. Many people will resist the reforms, some for good reasons, and others for reasons that are not valid.

When the last major revision to the Patent Act was passed six years ago, it took three sessions of Congress to get the legislation through. Yet it was not a partisan issue--the principal opponents were among the more conservative members of Congress.

One provision of the act was to prohibit the submission of any kind of adversarial or opposition materials to the PTO, such as the pre-grant submission of prior art that Brad Smith discussed. Reversing that provision will be a matter of politics.

I agree with what Smith said about the willfulness standard. I think that the Court of Appeals in the Knorr-Bremse case went a long way toward addressing the most egregious concerns and problems there. Yet I do not believe that treble damages should be a matter of much concern: they are awarded in a small minority of cases, and although they are significant when awarded, they are not a major problem for the patent system.

One good thing about the case was that the Court left the “duty of care” standard in place. Those who put products in the marketplace have an obligation to make sure they are not infringing on other people’s patents, which I think is inherent in the system. There are some industries where, for many reasons, there is no regular attempt to search for new products. At GE, we make every effort to ensure that we do a pre-new-product-introduction clearance of all products.

Harmonization is another critical issue, and we have made some progress. In the 1990s, six treaties were signed that harmonize a number of intellectual property systems. Yet substantive patent harmonization is still a major challenge, and it seems that we are losing that battle.

The primary forum for harmonization is the World Intellectual Property Organization (WIPO). The European Patent Office, the U.S. PTO, and the Japan Patent Office have recently begun working together to achieve greater harmonization. Since 80 or 90 percent of the world’s patents go through those three bodies, I think this is a positive development.

When I was commissioner of the PTO, I saw that small inventors were in many ways the backbone of our system. Yet I believe that small inventors are misguided in their faith in the “first to invent” system. The promise of the system is a false one, because the legal battles over any disputes that arise usually cost small inventors more than they can afford--and most often, it is a battle that they will not win. Moving to a “first to file” system, as Smith suggested, would be beneficial to all inventors.

In the past decade, we have made a number of changes that have helped small inventors. The Internet is allowing small inventors greater access to resources. The PTO now allows provisional applications, which require less disclosure, and it is even possible to file without a patent lawyer or agent. There is more to be done, of course. Smith mentioned reducing the filing fee for individual inventors, which I think is a great idea.

John F. Duffy
George Washington University Law School

Most of the reforms that have been proposed today are procedural ones--prior art, post-grant opposition, reducing abusive litigation--but it is also important to consider the standards themselves, rather than simply the procedures by which the standards are enforced.

To get a patent, you need to do something new, useful, and non-obvious. The requirement that something be new is not terribly important--new things are created all the time. The usefulness requirement is also unimportant, because the market will ultimately determine the utility of an item.

Historically, the heart of the patent system has been the obviousness doctrine. This doctrine says that in order to get a patent, a product must be non-obvious to people who are skilled in the art. It has always been the most difficult standard to nail down, but it is also among the most important for the proper functioning of the system.

One example of an obvious patent was the Selden patent, which was written very broadly as a combination of an internal combustion engine, gears, a steering wheel, and a carriage--a patent on the automobile. The patent was filed by a patent attorney who had made no advance in the creation of gears, carriages, steering wheels, or internal combustion engines. He may have been the first person to put these elements together, although it is impossible to know that with any certainty. But what we can say with confidence is that it was obvious to substitute a lightweight internal combustion engine, measured in horsepower, for a horse. After years of litigation by Henry Ford, the courts came to the same conclusion, and the PTO began to rethink the patent system.

The theory of obviousness tells us that we should be skeptical when an inventor combines existing products to create something “new.” This happens today with software patents and patents on the Internet. For example, Amazon’s “one-click” patent is for ordering products on the Internet with one click of the mouse. In the mid-1990s, when it was filed, it was new. Now, was this streamlining due to the brilliance of the inventor? Of course not. It was novel, but it was also obvious.

The problem with the current standard is that the federal circuit has enforced it by requiring evidence in prior art that actually suggests the combination of elements. That is an extraordinarily forgiving standard for allowing patents, and a relatively new development in the law. Every commentator who has looked at this standard has recognized that it is inconsistent with the historical standard that the Supreme Court has applied. This is a matter of the substance of the patent system, and we should act upon it now. If we allow obvious patents, we are allowing monopoly restrictions which will reduce competitiveness in the economy with no corresponding benefit in encouraging innovation.

I believe that in addition to the procedural reforms, which I support, we should also talk about the substance of patent law and the standards by which patents are granted.

James V. DeLong
Progress and Freedom Foundation

My organization is involved in property rights and markets, and we are somewhat religious in our belief that these elements are essential in organizing the economic dimensions of society.

Intellectual property is not much different than physical property. Yet there is a movement now, largely academic, that is advocating the abolition of the patent system in favor of “the commons.” They cite some of the more ridiculous patents to argue that the entire system should be destroyed. The general idea is that the Internet has somehow changed things, and that we can now move past quaint notions of property. And while the Internet does have a profound effect on things, the nature of property rights and our thinking about them has not changed.

People historically worry about patents as a monopoly, but this is overdone. Patents rarely produce monopoly power in a real market power sense, as Edmund Kitch discussed in his article, “Elementary and Persistent Errors in the Economic Analysis of Intellectual Property.” Nonetheless, the monopoly point is of some concern, especially to intermediate producers. Many fear that, for example, developing a new software application that depends on Microsoft’s operating system will allow Microsoft to take advantage of the inventor through heavy licensing fees that leave Microsoft with the profits and the inventor with a subsistence wage. Yet often terms in the contract prohibit invidious discrimination and thus avoid the problem of monopoly pricing.

It is precisely because of our great dedication to property and markets as the defining institutions that we are strongly in favor of patent reform. It is especially important because the problems are used as a basis for attacking the very concept of intellectual property. Industrial giants like Microsoft and GE have strong incentives to push for sound patent reform, because they truly are on both sides of the issue.

In Tom Schelling’s writings on game theory, he pointed out that the ability to commit yourself, to guarantee that you will not double-cross your partner or opponent is absolutely crucial. And this is one of those situations. Companies like GE and Microsoft rely on small inventors, and it is important that inventors have the confidence that their intellectual property will be protected if they bring it to a large firm. If inventors have that confidence, then corporations can rely on the world at large to come in and deal with them. So I think that Smith and Dickinson are very credible in this regard.

André Carter
Irimi Incorporated

My company is called Irimi, a name whose root is from the Japanese meaning “to enter.” Every firm we deal with is either entering a new market or entering the world as a new non-real entity. We provide strategic business consulting and deal with intellectual property, patents, copyrights, trademarks, and trade secrets. The people we work with are not focused on “intellectual property” per se; they are focused on an idea that they believe can make money.

It is good to hear Brad Smith and Todd Dickinson discuss small business, and I think that most of the things they said are correct. Yet the idea of reform is always a scary one for small businesses because they cannot afford to make mistakes. And a reform that no one thinks will hurt small companies could leave 10,000 of them dead.

I see intellectual property as a kind of equalizer for small firms. It gives them the ability to walk into Microsoft, IBM, or Oracle and present their ideas. Intellectual property allows small businesses to go where bigger companies have not and become competitors. Patents provide incremental revenue for small companies in case of missteps. Even a patent that is not terribly useful can be of great value to a company because it can discourage other inventors from picking up on the idea.

When we started, we were an agrarian society, and land was a measure of how you built wealth. In the Industrial Age, if you had the means of production, which either means money or inherited factories, you could be wealthy. Today if you have developed your mind in any area, and you are truly human capital, you can come up with ideas that can give you the ability to be wealthy.

There are thousands of people who are going to start companies this week, who will try to invent something, and they will apply for patents. Yet patents are a huge expense for small companies, so they can only try to get them for things that they believe are really important. And when they have a patent, it is of huge value to them.

We must be very careful in talking about reforms. Many people from abroad wish that they had a patent system more like ours. We must be very careful to protect small businesses, because in many ways the economy relies on them. The Small Business Administration reports that small businesses are more likely to come up with cutting edge innovations, that the patents they come up with are more highly cited than those of larger companies, and that they work in areas where large companies will not. We must remember the practical implications of the policies that we are discussing--where large companies like GE and Microsoft might be hurt by bad policy, many smaller companies will be entirely wiped out.

AEI research assistant Courtney Richard prepared this summary.