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Introduction

Should we revise intellectual property policies and statutes? The best answers will arise when the legal issue is focused by previous conversations among science, business, economics and law. Neither courts nor legislatures may find wise answers in the absence of such interaction.

The Honorable Stephen Breyer, Associate Justice, Supreme Court of the United States1

Over a 10-year period the National Academies’ Board on Science, Technology, and Economic Policy (STEP) has investigated a wide range of macro- and microeconomic policies, their impact on investment in research and innovation, and the contribution of research and technology, in turn, to economic performance. In 1999 the board completed a study of the competitive performance of 11 U.S. industrial sectors, in both manufacturing and services. It found that much of the improvement from the 1980s to the 1990s derived from a combination of corporate strategies and public policies supportive of innovation, including steady and conservative fiscal policy, economic deregulation, trade liberalization, lenient antitrust enforcement, and the research investments of previous decades. On the other hand, the board found little evidence, one way or the other, of the economic effects of the many steps taken during the 1980s and 1990s to extend and strengthen intellectual property rights (IPRs). Described in more detail in Chapter 2, these include legislation, court decisions, administrative actions, and international agreements that have resulted in

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Speech at the Whitehead Institute, MIT, Cambridge Massachusetts, March 2000, “Genetic Advances and Legal Institutions.”



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A Patent System for the 21st Century 1 Introduction Should we revise intellectual property policies and statutes? The best answers will arise when the legal issue is focused by previous conversations among science, business, economics and law. Neither courts nor legislatures may find wise answers in the absence of such interaction. The Honorable Stephen Breyer, Associate Justice, Supreme Court of the United States1 Over a 10-year period the National Academies’ Board on Science, Technology, and Economic Policy (STEP) has investigated a wide range of macro- and microeconomic policies, their impact on investment in research and innovation, and the contribution of research and technology, in turn, to economic performance. In 1999 the board completed a study of the competitive performance of 11 U.S. industrial sectors, in both manufacturing and services. It found that much of the improvement from the 1980s to the 1990s derived from a combination of corporate strategies and public policies supportive of innovation, including steady and conservative fiscal policy, economic deregulation, trade liberalization, lenient antitrust enforcement, and the research investments of previous decades. On the other hand, the board found little evidence, one way or the other, of the economic effects of the many steps taken during the 1980s and 1990s to extend and strengthen intellectual property rights (IPRs). Described in more detail in Chapter 2, these include legislation, court decisions, administrative actions, and international agreements that have resulted in 1   Speech at the Whitehead Institute, MIT, Cambridge Massachusetts, March 2000, “Genetic Advances and Legal Institutions.”

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A Patent System for the 21st Century extending patenting to computer software, genetically modified organisms, nucleic acid molecules, and methods of performing business functions; lengthening the duration of copyright protection and extending the term of some patents; encouraging universities and nonprofit research institutions to acquire and exercise patent rights; strengthening the position of rights holders versus alleged infringers; giving federal protection to trade secrets; and relaxing antitrust scrutiny of patent use and arrangements. Curiosity about the effects of these actions led the STEP Board to organize a series of meetings with legal scholars, economists, practitioners, technologists, and corporate managers. In 1999 the board held roundtable discussions in New Haven, Connecticut, hosted by Yale University, and in Berkeley, California, hosted by the Berkeley Center for Law and Technology at Boalt Hall. In February 2000 a two-day STEP conference at the National Academies’ headquarters in Washington drew more than 400 participants to discuss Intellectual Property Rights: How Far Should They Be Extended? It was apparent from these discussions that whatever their long-term economic effect, the patent policy changes instituted in the 1980s and 1990s were associated with much more vigorous acquisition, assertion, and enforcement of intellectual property rights than occurred before 1980. Several participants in the meetings, primarily representatives and observers of the information technology and telecommunications sectors, expressed concern about the high costs associated with the acquisition and exercise of IPRs and with the need to develop stronger defensive intellectual property (IP) positions in a litigious environment. Others, primarily academics and representatives of the pharmaceutical industry, voiced concerns about the extension of IP rights to tools and materials of biomedical research, possibly inhibiting the conduct of research and commercial application of its results. A common theme was that the escalation in the number of patents, possibly encouraged by a lowering of the threshold to their acquisition, was creating thickets of rights that could impede innovation by making it difficult or impossible to negotiate access on affordable terms to all of the IP necessary to commercialize a new product or service. The board concluded that intellectual property policy should be an important part of its agenda and that it should focus initially on the operation of the patent system. The need for specialized legal and technical expertise to carry out a study leading to policy recommendations in these areas led the board to propose to the National Academies the creation of the Committee on Intellectual Property Rights in the Knowledge-Based Economy, composed of economists specializing in intellectual property and technological change, legal scholars, practitioners from corporations and private law practice, biomedical scientists, managers of research and business development in the information technology (IT) sector, a former

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A Patent System for the 21st Century federal judge, and a former commissioner of the U.S. Patent and Trademark Office (USPTO).2 The STEP Board and the National Academies’ Governing Board charged the committee to consider how the resources devoted to patent application review, the standards of patenting, and the patents issued have changed and how these affect incentives to undertake and communicate research and to commercialize new technology. The project will examine how post-patenting patterns of technology licensing and patent infringement litigation affect innovation and diffusion of technology. The study will use evidence from software technology, especially involving Internet business methods, and biotechnology, in particular, genetic sequences. To the extent that current policies and practices serve as a disincentive to research and development and diffusion of new technologies, the study will consider changes in patent administration and dispute resolution processes. The composition of our study committee is unusual, especially in the recent history of commissions and advisory committees on U.S. patent policy, in the diversity of experience and expertise engaged in evaluating the patent system. Beginning in World War I, the National Research Council (NRC) had a standing Patent Committee composed largely of industrial and academic engineers. Concerned mainly with the role of patents in university and other nonprofit research, it produced one generic report on the functioning of the patent system, issued in 1919 under the acting chairmanship of L. H. Baekeland, inventor and founder of General Bakelite Corporation. A second NRC report, responding to a Department of Commerce request for guidance on how the patent system could more effectively stimulate the growth of new industries, was issued in 1936 by a panel chaired by Vannevar Bush, then vice president and dean of engineering at the Massachusetts Institute of Technology (MIT). The National Patent Planning Commission created by President Franklin D. Roosevelt in 1941 included the inventor of the automobile self-starter, a corporate chief executive officer, a regional Federal Reserve Board official, a labor representative, and a university president. Three more recent publicly appointed panels were narrower in composition, primarily senior managers of Fortune 100 companies, their in-house legal counsel, and members of their outside law firms. These included a presidentially appointed Commission on the Patent System, reporting to Lyndon Johnson in 1966, the 1978 patent policy subcommittee of the Advisory Committee on Industrial 2   Three members of the committee are patent holders, one of them recognized by the Intellectual Property Owners organization as Inventor of the Year 2000. Three members are currently or have recently been involved in the management of entrepreneurial start-up companies, while others have served as directors of such firms. The committee’s technical expertise spans a wide spectrum—biotechnology and pharmaceuticals, chemicals, bioengineering, software, microelectronics, and telecommunications.

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A Patent System for the 21st Century Innovation at the end of the Carter administration, and the 1992 Advisory Commission on Patent Law Reform, appointed by Commerce Secretary Robert Mosbacher in the first Bush administration. In the mid-1950s the Senate Judiciary Subcommittee on Patents, Trademarks, and Copyrights under Senator Joseph C. O’Mahoney (D-WY) conducted an investigation that drew upon a somewhat more diverse group of experts, including Vannevar Bush and Raymond Vernon, a Harvard international economist. The 2003 report of the Federal Trade Commission (FTC), To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, relied heavily on the testimony of economists and legal scholars as well as practitioners. The principal recommendations of these study panels are listed in Table 1-1. At the same time that the committee was being assembled, the need for additional analysis and data to inform eventual recommendations led the STEP Board to support nine modest policy-related empirical studies selected from more than 80 proposals submitted in response to a request that was widely circulated in the academic and consulting communities. This research addressed four areas—the functioning of the patent examination process, litigation, and patent acquisition and use in biotechnology and software development. Preliminary results were presented at a Washington, D.C., conference in October 2001, where attorneys, judges, former USPTO officials, and corporate managers commented on the findings. Reviewed and revised papers are included in a companion volume to this report, Patents in the Knowledge-Based Economy, edited by Wesley Cohen, a member of the panel, and Stephen Merrill, director of both phases of the project. The study committee continued the STEP Board’s practice of soliciting a wide variety of opinions and airing them in public forums. It met eight times in Washington, D.C.; Woods Hole, Massachusetts; and Palo Alto, California. Apart from the Woods Hole meeting, each event included a public session with testimony from invited speakers and opportunity for observers to comment and raise questions. In April 2001 the committee held a workshop in Washington, D.C., Academic IP: Effects of University Patenting and Licensing on Commercialization and Research, examining both the external and the internal effects of the surge in university activity since 1980. In August 2002 the committee conducted a public forum to review the USPTO’s 21st Century Strategic Plan, which proposed major changes in patent administration to cope with the lengthening pendency of patent applications and public concerns about examination quality. Speakers at these committee meetings and conferences are listed in Appendix B along with other generous contributors to the committee’s deliberations. Audio tracks, slide presentations, and transcripts from the February 2000 and April and October 2001 conferences are available on a CD-ROM, Patents in the 21st Century, accompanying this report. A major challenge in evaluating the patent system is that the effects are specific but the law is general. In some fields, products are protected by a single patent; in others, a number of patents must be acquired or licensed prior to pro-

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A Patent System for the 21st Century ducing and marketing a product to avoid subsequent patent infringement charges that could jeopardize the investment in product development and production facilities. In still other fields, research can be conducted without regard to patents. In some circumstances, brand loyalty, lock-in, and lead time enable producers to recoup costs and make profits; in other cases, these advantages are small, and producers must rely on some other means of protecting investments. There is a tendency to identify problems in the patent system and solutions to them from the perspective of one technology or industry. We try to strike a balance between the specific circumstances and the general patent law. Not everything we say applies to every field, but sensible recommendations depend on taking diverse fields into consideration. Finally, a word about the title of this report: It is being released soon after the 200th anniversary of the U.S. Patent and Trademark Office and the 50th anniversary of the Patent Act of 1952, but we have no illusion that our recommendations, if adopted, would result in an ideal patent system serving the interests of the American people for 100 years without continuing change. For example, there are important features of the patent system that we did not examine in depth. First, patents exist in most countries, and the degree to which countries at different stages of economic development should adhere to the same standards of patentability, conform to the same rules, and follow the same administrative procedures is an enormously complex although extremely important set of issues. We have confined ourselves to considering the relationships among the U.S., European, and Japanese patent systems not only because they affect the majority of world commerce but also because through diplomacy and by example they influence how other countries’ systems are designed. Nevertheless, readers should not infer that what we recommend for the United States we believe less-developed countries should adopt. Second, the training, recruitment, and retention of the examiner corps are obviously relevant to the quality of examination; but the subject exceeded our resources. Third, the fees paid by applicants and patent holders, a subject of intense debate in the context of the proposed Strategic Plan and pending legislation, are a factor in both the transactions costs borne by private parties and the resources available to the government to administer the system. We address the fee structure only in general terms. Fourth, knowing that it was the subject of studies being conducted simultaneously by antitrust experts in the Federal Trade Commission and the Justice Department’s Antitrust Division, we decided not to consider in any depth the relationship between competition policy and patent policy. Nevertheless there is a high degree of consistency between the FTC’s recommendations and our own. Fifth, although we observe that high damage awards and injunctions in several well-publicized lawsuits since the early 1980s have contributed to the higher importance that firms generally attach to patents, we have not examined the terms of judicial remedies for patent infringement nor the basis on which courts make awards and issue injunctions, nor the role of judges versus juries in patent cases. Although we are aware of much

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A Patent System for the 21st Century TABLE 1-1 Principal Recommendations of Panels and Institutions Studying the Patent System   1919 NRC Patent Committee 1936 NRC Committee on Patents and New Industries 1943 National Patent Planning Committee USPTO/Examination Status Independent agency     Fees, resources, and personnel Increase number of examiners and salaries Increase number of examiners; annual tax to maintain patents, rising over time   Evaluation       Subject matter       Priority       Application publication   Publish applications; encourage prior art submissions   Prior art       Standards       Opposition     Considered and rejected Patent Term     20-year term

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A Patent System for the 21st Century 1966 Commission on the Patent System 1978 Advisory Committee on Industrial Innovation 1992 Advisory Committee on Patent Law Reform 2003 Federal Trade Commission Budget adequate for first-class staffing and equipment Revised fees to support USPTO; maintenance fees Budget sufficient to achieve 18-month average pendency Adequate (more) funding Improved evaluation process and annual quality ratings       Computer programs not patentable   Computer programs patentable Consider all costs and benefits in extending to new subject matter First-to-file with preliminary applications   First-to-file with provisional applications   Publish applications   Publish applications Eliminate exception so all applications are published Recognize foreign art; revise criteria for prior art     Applicant to state relevance of prior art Applicant to have burden of persuading USPTO     Tighten non-obviousness standard; second review in selected areas Ex parte pre- and postgrant Institute a re-examination procedure Revise re-examination to encourage third party participation Postgrant opposition 20-year term   20-year term  

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A Patent System for the 21st Century   1919 NRC Patent Committee 1936 NRC Committee on Patents and New Industries 1943 National Patent Planning Committee Courts/litigation Trial   Use technical advisors or juries   Appellate Establish court of patent appeals Establish court of patent appeals Establish court of patent appeals Validity       Infringement/ remedies Money damages and injunctions     Licensing   Compulsory licensing rejected Considered compulsory licensing without recommendation scholarly discussion of these subjects and some criticism of current practices, they were not raised as problematic in our preliminary conference and roundtable meetings nor in later testimony to the committee. Finally, except as examples of recent legislative changes, we do not consider special purpose statutes such as the Hatch-Waxman Act with patent provisions applying to a single industry. Here there is much controversy about the patenting and patent litigation behavior of both pharma and generic drug companies; but the issues are complex, largely distinguishable from the general working of the patent system, and in any case the statute has recently been modified to address some of the concerns.

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A Patent System for the 21st Century 1966 Commission on the Patent System 1978 Advisory Committee on Industrial Innovation 1992 Advisory Committee on Patent Law Reform 2003 Federal Trade Commission Use civil commissioners   Use experts apart from advocates and reconsider jury trials     Establish court of patent appeals     Presume examiner claims rejections are correct   Eliminate best mode; more objective standard of inequitable conduct Challenge to validity on basis of preponderance of, not clear and convincing, evidence       Tighten standard of willful infringement Another reason not to consider our report definitive is that technology and the economy change rapidly, and the patent system needs to adapt, albeit more slowly and gradually. As we assert in Chapter 2, the patent system, along with other policy influences on innovation, should be reviewed periodically to see what adjustments are needed. Our report supports Justice Breyer’s belief that this evaluation, although it must rely heavily on the patent bar and other direct stakeholders, should not be confined to them but should include economists, scientists, technologists, and managers making investment decisions. The stakes have grown too high to exclude any relevant expertise.