[Ecommerce] CPTech views on US Patent Reform Legislation

[James Love]

CPTech views on US Patent Reform Legislation
29 April 2005

=09Introduction

CPTech welcomes the  proposals recently tabled in the Congress to reform
the US patent system.  These comments present our views on the draft
Patent Act of 2005, which we view as helpful but limited.  We also
discuss additional areas where US policy makers can fruitfully improve
the system for supporting innovation in the United States.

Our basic concerns about the US patent system are as follows:

1.The system is extremely expensive to administer.  The pre-grant
evaluation of patent claims is expensive, and despite the high cost, not
very good.  The private costs of litigating patent disputes are far
higher, for both small inventors who seek to enforce valid patents, and
anyone who is faced with resolving disputes about validity or remedies,
including damages.  A system with low patent quality and high litigation
expenses imposes huge costs on society.

2.The low standards for inventive step used by the USPTO guarantee that
very minor modifications of well known products or practices will be
granted patents, increasingly turning the examination into a simple
review of novelty.  The patent office acts as if patent owners are its
=93customers=94 and the its job is to provide as much patent protection as
is legally possible to a community of rent seeking claimants.  There is
no serious debate about regulatory capture at USPTO --  only a lack of
will and insight into how to reform the system.

3.The use of the patent system for anticompetitive purposes is largely
unchecked in the US.  We lack the compulsory licensing statutes, even
for follow-on inventions, that virtually every other industrial power
has incorporated in its patent laws.

4.The failure to address poor patent quality has led to billions of
dollars in higher prices for pharmaceutical drugs, as big pharma
companies substitute evergreening of old drugs for development of new
products that provide incremental health benefits.

5.In part because of the lowering of patent standards and the
proliferation of minor patents, standards organizations face increasing
difficulties in identifying relevant patents, and in obtaining licenses
on patents essential to the implementation of the standards.

6.There is increasing recognition that the extension of the patent
system into new areas, such as software, art, life forms, methods of
business, finance or teaching is problematic for both practical and
ethical reasons.

7.Unlike virtually every other area of government regulation, the patent
system is not subject to cost benefit analysis.  Cost benefit analysis
is sorely lacking when looking at issues such as appropriate patentable
subject matter, patent scope, and patent rights and exceptions and
limitations to rights.

8.The system of strong exclusive rights is wrong for many situations,
particularly where products involve many different patented inventions,
and innovation can be blocked by a single patent.   A system of strong
exclusive rights increases the incentives to litigate disputes, and
leads to overreaching in licensing negotiations.  Systems of
compensatory liability, such as are used in the European Biotechnology
Directive, are more appropriate where follow-on innovation is important,
and/or where bargaining and transaction costs are high.

9.The lack of a robust research exception for research on patented
inventions, and a system of compulsory licensing to protect access to
essential research tools harms innovation.

=09Views on the Patent Act of 2005

The draft Patent Act of 2005 includes a number of changes to current
patent law that have the effect of positioning of moving the US closer
to international norms on patent protection, improving somewhat the
tools to eliminate patents that are not truly novel or inventive, and
moving the United States away from a system of unlimited exclusive
rights for patent owners.  These measures have benefits, but also
deserve some comment.

First to file.  The US system of first to invent is appealing in terms
of our notions of rewarding the true inventor.   There are also costs
associating with resolving disputes over first to invent, and
maintaining a system that is different from the rest of the world.  The
change to first to file is primarily driven by the need to make the
system work better for the larger companies that do business worldwide.
  While the benefits of harmonization and efficiency are important, they
remind us of whose interests are given priority in the designing the
patent system.

Allowing assignee to file patent application.  This provision also
reminds us that patent system is being fashioned to serve the needs and
interests of the companies and institutions that own patents, rather
than inventors.  The change would enable employers to file patents
against the wishes of the inventor.  We oppose this provision.

Post-grant opposition.  We are pleased to see more emphasis on expanded
post grant opposition mechanisms, and would like to see even more done
in this area.  To expand further the tools and opportunities to
eliminate patents that represent unwarranted encroachment of the public
domain, the USPTO should consider the following:

Allow the public to submit evidence of prior art to the USPTO for any
patent, and to make such submissions publicly available through the
Internet.

Provide economic incentives to improve the participation in the
post-grant process. For example, a portion of the patent fees could
provide rewards or reasonable reimbursements of costs associated
successful challenges patents.  The USPTO might also allow the public to
supplement the rewards for channeling specific patents.

Require greater disclosure regarding challenges to patent validity, not
only in the United States, but worldwide.  This could be done also as
part of the Patent Cooperation Treaty (PCT), which is managed by WIPO.

Changes in Injunctive Relief.  The proposals to make it more difficult
to obtain injunctive relief when royalties can protect the legitimate
interests of the patent owner is a welcome step toward a system of
liability rules for certain patents.   This will be particularly useful
in cases where the patented invention is only part of a larger product
or process, and a failure to license on reasonable terms will block
other valuable inventions from being utilized.  We support to the
proposed change, but encourage policy makers to consider additional and
more explicit measures to addresses refusals to license, and in
particular, the typical compulsory licensing provisions that virtually
all industrialized countries have adopted.

Damages for infringement.  We support the narrowing of circumstances
under which a patent owner can obtain treble damages, which we believe
is particularly important because the poor pre-grant procedures at the
USPTO create many legitimate disputes over patent validity.  We also
support the proposal to limit the calculation of  royalties or damages
to the proportion of the method or apparatus that is attributable to a
patented invention.   We suggest US policy makers look at the 1998
Japanese Patent Office (JPO) guidelines for royalties on government
owned inventions as a model for this.  The 1998/JPO guidelines assigned
each patent a =93utilization factor=94 which reflected the appropriate
contribution of the patented invention to the product or process.  These
factors were from 0 to 100 percent, and in cases of multiple patented
inventions in the same product or process, the sum of all utilization
factors for all patented inventions could not exceed 100 percent.

=09Additional Areas for Patent Reform

While the proposed Patent Act of 2005 contains many important proposals
for modifying the US patent law, it is quite timid in addressing the
most important problems.  It does not contain proposals to meaningfully
raise the standards for inventive step, it does not change the internal
procedures and incentives at the USPTO to issue poor quality patents, it
only takes half steps to address the looming problems of evergreening of
medicines, lack of transparency of patents that will block
implementation of standards, or refusals to license patents on
reasonable terms, and it fails to allow the USPTO to set limits on
patentable subject matter for those areas where the costs of the patent
system outweigh the benefits.

Evergreening patent protection for medicines.  The special problem of
patents for medicines is particularly costly to the public.  US
consumers pay billions of dollars in a single year for just one
inappropriate patent on a single prescription drug, and the total cost
of low standards and poor patent quality is much higher.   The USPTO, in
cooperation with the DHHS should review of the practice of issuing
patents on doses, minor and predictable changes in formulations, methods
of delivery and combinations of known products and other areas of
controversy, and issue guidelines to patent examiners to avoid granting
of unnecessary patents.

Standards Development Organizations

*  Addressing problems of patent transparency.  Current procedures for
disclosures of patents relating to proposed standards are clearly
inadequate.   The failure to manage the transparency issue better
imposes costs on society, including delays and risks of the development
of products and processes that rely upon standards. Standards and
products are increasingly global.  We recommend new procedures be
adopted to require global disclosure of patents relevant to the
implementation of proposed standards, tied to tough policies of estoppal
for non-disclosure.  This could be done through the Patent Cooperation
Treaty (PCT) or another global instrument administered by WIPO.

*  Access to Essential Interfaces.  We live in a networked world, and
competition and innovation depend upon openness regarding interfaces
that are critical to interoperability.  Policy makers have to think
seriously about the problem of patent thickets, particularly for
essential interfaces.  Some problems would be solved by higher standards
for inventive step, but increasingly, governments will have to find
other solutions, including requirements for open licensing of patents on
essential interfaces, backed either by government procurement policies,
compulsory licensing, or other exceptions and limitations to patent rights.

Setting Limits on Patentable Subject Matter.  The patent system should
not be treated as a belief system.  It is a regulatory tool to enhance
social welfare, and it works better in some areas than in others.  The
government needs to set meaningful limits as to where it will be used.
  There are arguments to limit the use of patents in areas such as
software, art, life forms, methods of business, finance or teaching, for
both practical and ethical reasons.  The resolution of these disputes
should not be decided on the basis of an ideological commitment to the
patent system as a natural right, or untested and untrue assertions that
it always enhances social welfare.  Like virtually every other area of
government regulation, the patent system should be subject to periodic
evaluation and cost benefit analysis to determine if it is needed, or if
the costs outweigh the benefits, in particular areas of social and
economic activity.

Open Public Databases.  The US government needs to create a mechanism to
ensure that certain open public databases, like the SNPs consortium, the
Human Genome Project or the HapMap Project can be created with assurance
that patents will not be obtained on the core data.   The contractual
restrictions on the use of the HapMap project were a temporary but
inadequate attempt to ensure that private parties did not misappropriate
this public resource.   This problem can and should be addressed in a
more systematic fashion, within the formal patent system.  Solutions
this problem can be implemented globally through modifications to the
PCT or other instruments administered by WIPO or the WHO.


Social Patents.   Many important free software products are protected
from misappropriation by the GNU Public License, or by similar license
such as the Creative Commons share and share alike license.   IBM and
other companies maintain a number of patents which are licensed for
free, but serve as a defensive measure to protect against other patents.
   Unfortunately, it is costly to maintain patent status. Many countries
provide step discounts in patent fees for voluntary licenses of right
that are available for mandatory non-discriminatory licensing.  CPTech
has proposed even deeper discounts for patents that are available for a
license of right at a zero royalty for implementation of an open
standard.  Other proposals are to provide discounts of fees on patent
that are licensed on socially beneficial terms, such as reasonable
prices for medicines, or more liberal licensing terms for developing
countries. This also could be implemented in a global framework through
the PCT or another WIPO administered instrument.

Research Exception.  Any comprehensive legislation to reform the patent
system should provide a appropriate exception to protect both commercial
and non-commercial research on a patented invention, such is widely
available outside of the US.  Problems concerning access to research
tools (research with an invention), should be addressed in part with
compulsory licensing.

Compulsory Licensing.  All other major industrialized countries have
broad authority to issue compulsory licenses to patents, on grounds such
as to protect public health or the public interest, failure to license
patents on reasonable terms, or to enable follow-on inventions.  In most
cases the authority to issue a compulsory license is discretionary, but
in some cases, such as for the EU Biotechnology Directive, the grant is
mandatory if certain conditions are met.  The US has a patchwork of
special areas for compulsory licenses on patents (clean air, civilian
nuclear energy, black lung disease, government funded inventions, remedy
to anticompetitive practices, and government use), but it lacks the more
general framework that exists elsewhere.  This should be changed.  Even
where a compulsory licensing authority is not explicitly used, it
changes outcomes, as private parties are more likely to moderate
licensing demands or pricing practices if it is understood that
governments can step in to address abuses of rights.  Compulsory
licensing should also be implemented to address the special problems of
access to biomedical research tools.

Alternative mechanisms to support innovation.  The patent system is a
particular mechanism to support innovation.  It is not the only system,
and it makes sense to consider new methods, particularly for special
problems.  One such example is the proposed Medical Innovation Prize
Fund (HR 417), which creates a $60 billion per year (50 basis points of
GDP) reward for development of new medicines.  The Medical Innovation
Prize Fund separates the market for the product from the market for
innovation.   New products are immediately placed in the public domain
and are available as generics, priced at marginal cost.  But for 10
years, innovators benefit from remuneration based upon the incremental
health care benefits the new technologies provide.  New systems of
rewarding open source medical projects, developers of distance education
tools, or free software, such a mandated contributions to a system of
competitive intermediaries that finance such innovation, provide
alternative mechanisms to stimulate and reward innovation, that are
consistent with greater access to these important knowledge goods.  The
patent system should compete against other mechanisms, and be used when
it is the most useful mechanism, rather than the only conceivable mechanism=
.



--
James Love, Consumer Project on Technology, http://www.cptech.org,
mailto:love@cptech.org

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