A Patent System for the 21st Century
To meet the challenge of rapid technological and economic change, we must continue to study and refine the U.S. intellectual property regime.
The breakneck pace of innovation across many industries, the explosive developments in particular areas such as biotechnology and software, and the rapidly changing role of universities in the development and ownership of technology create challenges for the U.S. patent system. Fortunately, one of the system's strengths is its ability to adapt to the evolution of technology, and that strength has been particularly apparent in the past two decades. But to ensure that it continues to operate effectively, we need to evaluate the patent system from a broad perspective and continue to update it to meet changing conditions.
Since 1980, a series of judicial, legislative, and administrative actions have extended patenting to new technologies (biotechnology) and to technologies previously without or subject to other forms of intellectual property protection (software and business methods), encouraged the growth of new players (universities), strengthened the position of patent holders vis-à-vis infringers domestically and internationally, relaxed other restraints on the use of patents (antitrust enforcement), and extended its reach upstream from commercial products to scientific research tools and materials.
As a result, patents are being ever-more-zealously acquired, vigorously asserted, and aggressively enforced. There are many indications that firms in a variety of industries, as well as universities and public institutions, are attaching greater importance to patents and are willing to pay higher costs to acquire, exercise, and defend them. Meanwhile, the costs of acquiring patents, promoting or securing licenses to patented technology, and defending against infringement allegations in court are rising rapidly.
In spite of these diverse developments and the obvious importance of patents to the economy, there has been little broad-based study of the effectiveness of the patent system. But now the National Research Council (NRC) has assembled a committee that includes three corporate R&D managers; a university administrator; an inventor; and experts in biotechnology, bioengineering, chemicals, telecommunications, microelectronics, and software; as well as economists; legal scholars; and practicing attorneys. The committee's report, A Patent System for the 21st Century, provides a unique and timely perspective on how well the patent system is adapting to evolving conditions and focuses particularly on how patenting practices affect researchers and universities.
Until now, most study of the patent system has been conducted by practitioners. This has helped keep the system running smoothly and adjusting to new developments, but practitioners cannot be expected to assess the overall effect of the system on the economy or its specific effect on activities such as university research and private-sector R&D spending. This study takes a close look at these questions, makes recommendations in a few key areas, and highlights dimensions where more data is needed to inform policy decisions.
High rates of innovation that have continued, especially in the 1990s, since the patent system made its recent changes are evidence that the patent system is working well and does not require fundamental changes. Nevertheless, there is little evidence that the benefits of more and stronger patents extend very far beyond a few manufacturing industries such as pharmaceuticals, chemicals, and medical devices. It is not clear that patents induce additional R&D investment in the service industries and service functions of the manufacturing economy, although their roles in that diverse sector have not been studied systematically. One obvious conclusion of the committee's study is that we need a much more detailed understanding of how the patent system affects innovation in various economic and technological sectors. But even without additional study, the committee was able to identify areas within the current patent system where there are strains, inconsistencies, and inefficiencies that need to be addressed now.
Signs of stress
The NRC committee's first task was to identify areas where the patent system is under stress and where it might be in need of reform. In reviewing recent developments in the patent system, the committee discovered a number of areas that deserve special attention because changes in U.S. Patent and Trademark Office (USPTO) policy, the practices of institutions, or the technologies themselves have changed the ground rules. Biotechnology deserves particular scrutiny, because this remains a new domain for the USPTO, but all technologies need attention. In some cases, the committee was not able to find enough information to draw firm conclusions or make specific recommendations, but it discusses these areas to help set the stage for possible policy action in the future. The aspects of patenting that the committee addresses include:
Maintaining consistent patent quality is difficult in fast-moving fields. Over the past decade, the quality of issued patents has come under frequent sharp attack, as it sometimes has in the past. One can always find patents that appear dubious at best: a patent on a computer algorithm for searching a mathematics textbook table to determine the sine or cosine of an angle, a patent for cutting and styling hair using scissors or combs in both hands, a patent on storing music on a server and letting users access it by clicking on a list of the music available. To be fair, some errors are unavoidable in a system that issues more than 160,000 patents annually. Still, some critics have suggested that the standards of patentability--especially the nonobviousness standard--have become too lax as a result of court decisions. Other observers fault the USPTO's performance in examining patent applications, variously attributing the alleged deterioration to inadequate time for examiners to do their work, lack of access to prior art information, or the diminishing qualifications of the examiners themselves.
Because the claim that quality has deteriorated in a broad and systematic way has not been empirically tested, conclusions must remain tentative. There are nevertheless several reasons to suspect that more issued patents are substandard, particularly in technologies newly subject to patenting. One reason to believe that quality has suffered, even before taking examiner qualifications and experience into account, is that in recent years the number of patent examiners has not kept pace with the increase in workload represented by the escalating number and growing complexity of applications. Second, patent approval rates are higher than in some other major nations' patent offices. Third, changes in the treatment of genomic and business method applications, introduced as a result of criticisms of the quality of patents being issued, reduced or at least slowed down the number of patent grants in those fields. And fourth, there appears to have been some dilution of the application of the nonobviousness standard in biotechnology and some limitations on its proper application to business methods patent applications. Although quality appears to be more problematic in rapidly moving areas of technology newly subject to patenting and is perhaps corrected over time, the cost of waiting for an evolutionary process to run its course may be too high when new technologies attract the level of investment exhibited by the Internet and biotechnology.
What are the costs of uncertainty surrounding patent validity in areas of emerging technology? First, uncertainty may induce a considerable volume of costly litigation. Second, in the absence of litigation, the holders of dubious patents may be unjustly enriched, and the entry of competitive products and services that would enhance consumer welfare may be deterred. Third, uncertainty about what is patentable in an emerging technology may discourage investment in innovation and product development until the courts clarify the law, or inventors may choose to incur the cost of product development only to abandon the market years later when their technology is deemed to infringe. In sum, one suspects that a timelier and more efficient method of establishing ground rules for patent validity could benefit innovators, followers, and consumers alike.
The patent system needs to continue to accommodate new technologies. The incorporation of emerging technologies is not always seamless and rapid; indeed, it often generates considerable controversy. Moreover, case law recognizes limits to patenting, confining patents to inventions that can be expressed as products or methods and excluding patents on abstract ideas and phenomena of nature. A few committee members are concerned that recent fairly abstract patents cross this indistinct line and have unwisely limited public access to ideas and techniques that are important to basic scientific research. Recent examples include patents on the use of a specific genetic characteristic to infer a specific phenotypic characteristic and the use of specific protein coordinates in a computer program to search for protein complexes.
Differences among national patent systems continue to result in avoidable costs and delays. In spite of progress in harmonizing the U.S., European, and Japanese patent examination systems, important differences in standards and procedures remain, ensuring search and examination redundancy that imposes high costs on users and hampers market integration. It is estimated to cost as much $750,000 to $1 million to obtain comprehensive worldwide patent protection for an important invention, and that figure is increasing at a rate of 10 percent a year. Important differences include: Only the United States gives preference to the "first to invent" rather than the "first to file"; only the United States requires that a patent application disclose the "best mode" of implementing an invention; U.S. law allows a grace period of one year, during which an applicant can disclose or commercialize an invention before filing for a patent, whereas Japan offers a more limited grace period and Europe provides none.
Some U.S. practices seem to be slowing the dissemination of information. In the United States there are many channels of scientific interaction and technical communication, and the patent system contributes more to the flow of information than does the alternative of maintaining technical advances as trade secrets. There are nonetheless features peculiar to the U.S. patent system that inhibit information dissemination. One is the exclusion of a significant number of U.S. patent applications from publication after 18 months, an international norm since 1994. A second U.S. idiosyncrasy is the legal doctrine of willful infringement, which can require an infringer to pay triple damages if it can be demonstrated that the infringer was aware of the violated patent before the violation. Some observers believe that this deters an inventor from looking at the patents of possible competitors, because knowledge of the patent could later make the inventor subject to triple damages if there is an infringement case. This undermines one of the principal purposes of the patent system: to make others aware of innovations that could help stimulate further innovation.
Access to patented technologies is important in research and in the development of cumulative technologies, where one advance builds on one or several previous advances. Faced with anecdotes and conjectures about restrictions on researchers, particularly in biotechnology, the committee initiated a modest interview-based survey of diverse participants in the field to determine whether patent thickets were emerging or access to foundational discoveries was restricted. The results suggest that intellectual property in biotechnology is being managed relatively successfully. The associated costs are somewhat higher and research can sometimes be slowed, but research is rarely blocked.
Committee members involved with university research noted a recent court ruling that could limit the use of patented procedures in basic research. Universities have traditionally operated under an unwritten assumption that they would not be sued by a for-profit patent holder for violating a patent in the course of precommercial university research, but a 2002 federal court ruling made it clear that a university is not legally protected from patent infringement liability. It remains to be seen whether this will change the behavior of patent holders toward university research.
In some areas, the playing field needs to be leveled so that all intellectual property rights holders enjoy the same benefits while being subject to the same obligations. In 1999, the Supreme Court struck down a law that denied a state's ability under the Eleventh Amendment to the Constitution to claim immunity against charges of infringing a patent or other intellectual property. Thus, state institutions such as public universities can claim immunity against infringement suits. As a result, a public university that holds a patent could be in the position of asserting its patent rights against an infringer while successfully barring a patent holder from recovering damages for the university's infringement of a patent. A private university would not be protected from infringement suits, which could conceivably influence decisions on where research is done. It is too soon to know what the effects of the Supreme Court decision will be, but it bears watching.
Toward a better system
The NRC committee supports several steps to ensure the vitality and improve the functioning of the patent system:
Preserve an open-ended, unitary, flexible patent system. The system should remain open to new technologies, and the features that allow somewhat different treatment of different technologies should be preserved without formalizing different standards; for example, in statutes that would be exceedingly difficult to draft appropriately and equally difficult to change if found to be inappropriate. Among the tailoring mechanisms that should be exploited is the USPTO's development of examination guidelines for new or newly patented technologies. In developing such guidelines, the office should seek advice from a wide variety of sources and maintain a public record of the submissions. The results should then be part of the record of any appeal to a court, so that they can inform judicial decisions.
This information could be of particular value to the Court of Appeals for the Federal Circuit, which is in most instances the final arbiter of patent law. In order to keep this court well informed about relevant legal and economic scholarship, it should encourage the submission of amicus briefs and arrange for temporary exchanges of members with other courts. Appointments to the Federal Circuit should include people familiar with innovation from a variety of perspectives, including management, finance, and economic history, as well as nonpatent areas of law that could have an effect on innovation.
Reinvigorate the nonobviousness standard. The requirement that to qualify for a patent an invention cannot be obvious to a person of ordinary skill in the art should be assiduously observed. In an area such as business methods, where the common general knowledge of practitioners is not fully described in published literature likely to be consulted by patent examiners, another method of determining the state of knowledge needs to be employed. Given that patent applications are examined ex parte between the applicant and the examiner, it would be difficult to bring in other expert opinion at that stage. Nevertheless, the open review procedure described below provides a means of obtaining expert participation if a patent is challenged.
Gene sequence patents present a particular problem because of a Federal Circuit ruling that with this technology, obviousness is not relevant to patentability. This is unwise in its own right and is also inconsistent with patent practice in other countries.
Institute an "Open Review" procedure. Congress should pass legislation creating a procedure for third parties to challenge patents after their issuance in a proceeding before administrative patent judges of the USPTO. The grounds for a challenge could be any of the statutory standards--novelty, utility, nonobviousness, disclosure, or enablement--or the case law proscription on patenting abstract ideas and natural phenomena. The time, cost, and other characteristics of this proceeding should make it an attractive alternative to litigation to resolve questions of patent validity. For example, federal district courts could more productively focus their attention on patent infringement issues if they were able to refer validity questions to an Open Review proceeding, which is described in more detail in a chapter I coauthored in Patents in the Knowledge-Based Economy, the companion volume to the NRC committee report.
Strengthen USPTO resources. To improve its performance, the USPTO needs additional resources to hire and train additional examiners and implement a robust electronic processing capability. Further, the USPTO should create a strong multidisciplinary analytical capability to assess management practices and proposed changes, provide an early warning of new technologies being proposed for patenting, and conduct reliable, consistent, reputable quality reviews that address office-wide as well as individual examiner performance. The current USPTO budget is not adequate to accomplish these objectives, let alone to finance an efficient Open Review system.
Shield some research uses of patented inventions from liability for infringement. In light of the Federal Circuit's 2002 ruling that even noncommercial scientific research enjoys no protection from patent infringement liability, and in view of the degree to which the research community has relied on such an exemption, there should be limited protection for some research uses of patented inventions. Congress should consider appropriate targeted legislation, but reaching agreement on how this should be done will take time. In the meantime, the Office of Management and Budget and the federal government agencies sponsoring research should consider extending "authorization and consent" to those conducting federally supported research. This action would not limit the rights of the patent holder, but it would shift infringement liability to the government. It would have the additional benefit of putting federally sponsored research in state and private universities on the same legal footing.
Modify or remove the subjective elements of litigation. Among the factors that increase the cost and decrease the predictability of patent infringement litigation are issues unique to U.S. patent jurisprudence that depend on the assessment of a party's state of mind at the time of the alleged infringement or the time of patent application. These include whether someone "willfully" infringed a patent, whether a patent application included the "best mode" for implementing an invention, and whether a patent attorney engaged in "inequitable conduct" by intentionally failing to disclose all prior art when applying for a patent. Investigating these questions requires time-consuming, expensive, and ultimately subjective pretrial discovery. The committee believes that significantly modifying or eliminating these rules would increase the predictability of patent dispute outcomes without substantially affecting the principles that these aspects of the enforcement system were meant to promote.
Harmonize the U.S., European, and Japanese patent examination systems. The United States, Europe, and Japan should further harmonize patent examination procedures and standards to reduce redundancy in search and examination and eventually achieve mutual recognition of applications granted or denied. The committee recommends that the United States should conform to practice elsewhere by adopting the first-to-file system, dropping the "best mode" requirement, and eliminating the current exceptions to the rule of publication of an application after 18 months. The committee also recommends that other jurisdictions adopt the U.S. practice of a grace period for filing an application. These objectives should be pursued on a trilateral or even bilateral basis if multilateral negotiations do not progress.
In making these recommendations, the NRC committee was mindful that although the patent law is designed to be uniform across all applications, its practical effects vary across technologies, industries, and classes of inventors. There is a tendency in discourse on the patent system to identify problems and solutions to them from the perspective of one field, sector, or class. Although the committee did not attempt to deal with the specifics of every affected field, the diversity of the membership enabled it to consider each of the proposed changes from the perspective of very different sectors. Similarly, it examined very closely the claims made that one class of inventors--usually individuals and very small businesses--would be disadvantaged by some aspect of the patent system. Some of the committee's recommendations--universal publication of applications, Open Review, and shifting to a first-inventor-to-file system--have in the past been vigorously opposed on those grounds. The committee concluded that the evidence for such claims is wanting, and that its recommendations, on balance, would be as beneficial to small entities as to the economy at large.
Wesley M. Cohen and Stephen A. Merrill, eds., Patents in the Knowledge-Based Economy. Washington, D.C.: National Academy Press, 2003.
Committee on Intellectual Property Rights in the Knowledge-Based Economy of the National Research Council. A Patent System for the 21st Century. Washington, D.C.: National Academy Press, 2004.
Richard Levin, an economist and president of Yale University, cochaired the NRC's Committee on Intellectual Property Rights in the Knowledge-Based Economy.