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The USPTO and Tomorrow

The Committee print includes other proposals, from many sources, focusing on ways in which to improve the patent system.

As noted above, we believe that some type of post-grant review will improve the overall character of our patent regime. It is also important to underscore that many of the specific reform proposals addressed by the Committee print are not new. In fact, several of the proposals suggested reflect ideas that have been previously identified and considered by the USPTO.

At the USPTO, we have had experts working on patent-reform issues for decades. We welcome the discussion of many of these initiatives as part of a legislative package that you may introduce later this year.


Let me reiterate to you, the Members of the Subcommittee, that we share your commitment to ensure that our practices and policies promote invention and dissemination of new technologies. While we work to improve our system by internal reform of USPTO operations, we realize that additional measures within the domain of Congress can also make invaluable contributions.

The overwhelming evidence of the history of the U.S. patent system suggests that strong intellectual property protection supports, rather than impedes, innovation. Indeed, for more than 200 years, our patent system has helped American industry flourish, creating countless jobs for our citizens. Advanced technologies have been - and continue to be nurtured and developed in our Nation to a degree that is unmatched in the rest of the world. In many instances, the availability of patent protection has been integral to these advancements.


In this regard, the USPTO and the Administration look forward to continuing to work with you and the Members of the Subcommittee as you develop reform legislation to ensure that the U.S. patent system remains the world leader.

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Mr. SMITH. Thank you, Director Dudas.



Mr. LEVIN. Chairman Smith, Congressman Berman, Members of the Subcommittee, thank you for offering me the opportunity to discuss the National Research Council's recommendations for improving the patent system in the United States. Patents play a crucial role in promoting technological innovation, which is the most important underpinning of economic growth. I'm delighted that the Subcommittee on Intellectual Property is developing legislation to ensure that the patent system continues to serve the Nation well.

The project undertaken by the National Research Council, which I co-chaired with Mark Myers, a retired vice president of the Xerox Corporation, was the most comprehensive review of the patent system in decades. Our committee was perhaps the first to bring together practicing patent lawyers, academic lawyers and economists, business leaders, technologists, and inventors. We started with highly divergent views, but over the course of our deliberations our views converged and we reached consensus on several important recommendations that are reflected in the Committee Print.

We concluded that, on the whole, the patent system is working well and does not need fundamental revision. Yet we did note some causes for concern. The sheer volume of patent applications, especially those involving new areas of technology-the Ranking Member referred to business methods as an example overwhelmthese new areas overwhelm the patent examination corps in ways that affect the quality and timeliness of decisions. In addition, it's become more expensive to acquire patents, to obtain licenses to patented technologies, and especially to enforce and challenge patents through litigation.

Our recommendations are set forth in greater detail in an accompanying written statement, but here I'd like to emphasize three main themes.

First, Congress and the PTO should take steps to ensure the quality of patents issued. The single most important step would be the establishment of a simple administrative procedure for opposing a patent after it has been granted. The process should be timely and efficient so that uncertainty can be resolved quickly without either inhibiting socially productive investment by competitors in situations where the patent proves to be invalid or by encouraging wasteful investment when the patent proves to be valid.

A new opposition process is needed because the existing inter partes reexamination procedure only permits challenges to be lodged on narrow grounds. It's rarely used and has not proven to be effective. The only way to challenge a patent through the courts is to infringe it and draw either an infringement suit or a demand to take a license. This is an unnecessarily expensive way to resolve doubts about a patent's validity, and disputes take many years to resolve while technology, as we know, changes rapidly.

Patent quality can be improved also by the assiduous application of the nonobviousness standard by the Patent and Trademark Office. The PTO should develop new approaches to gathering informalast year.

tion about the state of the art in emerging areas of technology re lying on outside experts when patent examiners lack expertise. Th committee commended the PTO for the development of guideline in emerging technology areas, such as genomics and busines2 methods. It's important to offer such guidance promptly as nev technologies emerge. The committee also recommended that Con gress provide more resources for the PTO to hire needed examiners, to improve its information systems, and to fund a post-grant opposition procedure. Fortunately, the PTO will receive additional funding through the fee increase that was approved by Congress

A second theme, beyond validity, is the harmonization of the United States patent system with the European and Japanese patent systems. Differences among the world's major patent regimes entail wasteful duplication of effort by both inventors and by governments. The committee believes that gains in efficiency from harmonizations would be considerable. The United States is the only country that gives priority to the first person to reduce an invention to practice. Elsewhere, the first inventor to file is given priority. The latter test is objective; the former requires years of discovery, reams of depositions, and hours of trial testimony. Moreover, the U.S. is the only country in the world that requires a patent holder to hold that he has disclosed the best mode of practicing a patent. This, too, is costly and time-consuming to prove. Harmonization with global practice makes sense.

Finally, the committee recommended that Congress mitigate other subjective elements of law that contribute to the extraordinary expense of patent litigation. For example, Congress would be well advised to eliminate or modify the standards governing inequitable conduct. The bill addresses that. There should be penalties for misconduct by patent applicants, but misconduct should not automatically invalidate the patent. Similarly, the doctrine of willful infringement should be modified, because willfulness is subjective and costly to prove, and the doctrine creates the perverse incentive for inventors to avoid the study of prior art lest they fail to cite a patent that turns out to be relevant.

I'm pleased that the legislation developed by the Subcommittee is consistent with the recommendations of our NRC committee. I would suggest, however, that the Subcommittee reconsider the provision allowing the settlement of invalidity claims during the postgrant review process. Settlement would undermine a major objective of instituting a post-grant review, and that is to clarify the grounds on which patents should be granted in emerging areas of technologies. The parties settled may resolve their disputes with one another, but it wont clarify the law or the practice of the Patent Office for future innovations.

Our committee also recommended that Federal judges faced with resolving validity disputes in infringement cases should have the option of referring the issues concerning validity to the PTO administrative judges, who have expertise in post-grant review.

I would be pleased to answer your questions.
[The prepared statement of Mr. Levin follows:]

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PREPARED STATEMENT OF RICHARD C. LEVIN, PH.D. Good afternoon, Mr. Chairman, Congressman Berman, and members of the subcommittee. I am Richard Levin, President of Yale University and co-chair of the Committee on Intellectual Property Rights in the Knowledge-Based Economy of the National Research Council. The Research Council is the operating arm of the National Academy of Sciences, National Academy of Engineering, and the Institute of Medicine of the National Academies, chartered by Congress in 1863 to advise the government on matters of science and technology.

Although most Academy studies are conducted in response to an agency's or a congressional request, the study we will describe was initiated by the Council's Board on Science, Technology, and Economic Policy (STEP) because it recognized that the breakneck pace of technological change across many industries was creating stresses in the patent system that needed to be examined to ensure that it continues to be a stimulus to innovation and does not become an impediment to it.

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 emergence 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 their reach upstream from commercial products to scientific research tools and materials.

As a result, patents are being more zealously sought, vigorously asserted, and aggressively enforced than ever before. 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. The workload of the Ŭ.S. Patent and Trademark Office has increased several-fold in the last few decades, to the point that it is issuing nearly 100 patents every working hour. Meanwhile, the costs of acquiring patents, promoting or securing licenses to patented technology, and prosecuting and defending against infringement allegations in the increasing number of patent suits are rising rapidly.

In spite of these changes and the obvious importance of patents to the economy, there had not been a broad-based study of the patent system's performance since the Depression. Accordingly, the National Research Council (NRC) assembled a committee that includes three corporate R&D managers, a university administrator, three patent holders, and experts in biotechnology, bioengineering, chemicals, telecommunications, microelectronics, and software, as well as economists, legal scholars, and practicing attorneys. This diversity of experience and expertise distinguishes our panel from nearly all previous commissions on the subject, as does our study process. We held conferences and public hearings and we commissioned our own empirical research. The committee's report, A Patent System for the 21st Century, released a year ago, provides a thoroughly researched, timely perspective on how well the system is working.

High rates of technological innovation, especially in the 1990s but continuing to this day, suggest that the patent system is working well and does not require fundamental changes. Nevertheless, the committee was able to identify five issues that should and can be addressed now.

First, maintaining consistent patent quality is difficult but increasingly important 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 and some that are even laughable—the patent for cutting and styling hair using scissors or combs in both hands. Some errors are unavoidable in a system that issues more than 187,000 patents annually, and many of those errors will have no economic consequence because the patents will not be enforced. Still, some critics have suggested that the standards of patentability have been lowered by 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, perverse incentives to grant rather than reject patents, and inadequate examiners' qualifications.

Because the claim that quality has deteriorated in a broad and systematic way has not been empirically tested, conclusions must remain tentative. But there are 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 compl of applications. Second, USPTO patent approval rates are higher than in some a major nations' patent offices. Third, changes in the treatment of genomic and ness method applications, introduced as a result of criticisms of the quality of ents being issued, reduced or at least slowed down the number of patent grant those fields. And fourth, there does appear to have been some dilution of the ap cation of the nonobviousness standard in biotechnology and some limitations on proper application to business methods patent applications. Although quality pears to be more problematic in rapidly moving areas of technology newly subj to patenting and perhaps is corrected over time, the cost of waiting for an evoluti ary process to run its course may be too high when new technologies attract € level of investment exhibited by the Internet, biotechnologyand nanotechnology.

What are the costs of uncertainty surrounding patent validity in areas of emer ing technology? First, uncertainty may induce a considerable volume of costly litig tion. Second, in the absence of litigation, the holders of dubious patents may be ur justly enriched, and the entry of competitive products and services that would en hance consumer welfare may be deterred. Third, uncertainty about what is patent able in an emerging technology may discourage investment in innovation and prod uct 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, greater certainty about patent validity would benefit innovators, technological followers, and consumers alike.

Second, 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 the following: 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.

Third, 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 nontrivial 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 up to 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 subject the inventor to enhanced 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.

Fourth, litigation costs are escalating rapidly and proceedings are protracted. Surveys conducted periodically by the American Intellectual Property Law Association indicate that litigation costs, millions of dollars for each party in a case where the stakes are substantial, are increasing at double digit rates. At the same time the number of lawsuits in District Courts is increasing

Fifth, 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 research scientists, particularly in biotechnology, we conducted a modest survey of diverse participants in the field to determine whether patent thickets are emerging or access to foundational discoveries is restricted. We found very few cases although some evidence of increased research costs and delays and much evidence that research scientists are largely unaware of whether they are using patented technology. During our study, the Court of Appeals for the Federal Circuit ruled that university researchers are not shielded by the common law research exception against infringement liability. This combination of circumstances-ignorance of intellectual property on the one hand and full legal liability on the other-represents an exposure that

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