Guest Columns

“Patent Failure” Fails to Recognize Danger of Too Much Repair

A Reply to Professors Bessen and Meurer’s Book About the Difficulty of Perfecting the Patent System

By Roya Ghafele and Benjamin Gibert

The publication of Patent Failure: How Judges, Bureaucrats and Lawyers Put Innovators at Risk (Princeton University Press, 2008) by James Bessen and Michael Meurer challenged the conventional wisdom on the relationship between patents and innovation.

The authors basically posit that the poor boundary definitions of patents result in over-litigation. Arguing that the costs of litigation create disincentives for innovators, Bessen and Meurer suggest that the IP system has fundamentally failed as a system of property rights for public firms in the USA. Industry analysts and public commentators have jumped on the findings to justify various positions in patent reform debates. Patrick Anderson and Joff Wild have already responded to some of the shortcomings in the Patent Failure study, particularly with regard to the interplay between infringement suits, stock prices and NPEs.

Accessing the Damage

Bessen and Meurer have clearly taken a leaf from their own book. The conclusion that badly defined patent scope results in costly litigation is based on narrow definitions of patent trolls, public firms, high-technology industries and litigation costs. While this narrow scope is necessary to make their analysis feasible, the accompanying qualifications to their conclusions seem to have been lost in the ensuing storm. Patents do still provide incentives to individual inventors and to the chemical and pharmaceutical industries. They are also likely to provide positive incentives for private firms operating in multiple sectors. Yet, round after round of Chinese whispers has morphed the study into a declaration that the patent system is fundamentally broken, rather than an exploration of where it is challenged, why it faces problems and how we can solve them.

That major high-technology firms supported the study, which concluded that patents on software are too abstract and ill-defined, naturally raises some questions. It is not surprising that major software patent infringers would welcome a declaration of a broken patent system. However, regardless of funding, these types of studies still fulfill important roles: 1) they encourage debate on the efficacy of the current IP system; 2) they identify avenues for possible reform. Perhaps it is here that Bessen and Meurer have the most to offer.

Specialized courts such as the Federal Circuit have expanded their influence over patent law in the past twenty years. Whether or not this means patents no longer work, it is important to recognize this development and understand its impact in the USA. Identifying detailed mechanisms to render patent claims more transparent and improve patent search is another welcome contribution. Yet the suggestion that increased patent fees can reduce the number of patent applications may come at the cost of locking out smaller innovators and gearing the patent system towards large corporate actors.

No Easy Solutions

While the economic and philosophic underpinnings of Patent Failure are easy to follow and coherent, there seems to be less reflection about the possible consequences of their recommendations. Other suggestions, such as exemptions from infringement repayments when technology is invented independently from the patent owner, seem useful on the surface but may prove extremely difficult to implement in practice.

Perhaps Bessen and Meurer’s most important contribution is simply the idea that the patent system must recognize the limits of its grasp, regardless of whether we currently know how to set those limits. By recognizing these limits we can start to understand how national institutions can support patent law to fuel innovation in an era of new challenges and opportunities.

____________________________________________________________________

Dr. Roya Ghafele is the Director of Oxfirst Limited, a boutique consulting firm focusing on the economics of innovation and IP. Within the University of Oxford, she holds Fellowships at the Said Business School, the Oxford Intellectual Property Research Centre and St. Cross College. Dr. Ghafele worked as an Economist with the U.N.’s World Intellectual Property Organization (WIPO) and the Organization for Economic Cooperation and Development (OECD).  After having toured for five years as a ballet dancer she began her career in 2000 with McKinsey & Company. Dr. Ghafele is a consultant to Brody Berman Associates. roya.ghafele@oxfirst.com

Benjamin Gibert is a Research Associate with Oxfirst Ltd. Prior to joining the firm he was a research Associate in the University of Oxford where he graduated with distinction from Oxford and from Warwick University.
benjamin.gibert@oxfirst.com

Patent Reform Effectively Ends Multi-Party Suits, Says Expert

Filing Costs Will Rise; Post-Grant Reviews Will Impede

Dear Bruce,

A new provision I just became aware of in an article by Morrison & Foerster regarding the Joinder and Consolidation provisions of the new American Invents Act absolutely kills a patent owner’s right to sue multiple defendants in a single suit. (AIPLA Lexology Sept. 15, 2011).

In addition, there are ambiguities making it unclear whether a patent owner can sue an infringer and component suppliers of that infringer in a single suit.  Even if you file 20 separate suits in the same court, the court is likely to transfer most of the cases out to defendants’ home jurisdictions based on forum non conveniens.

Sorting it Out

This new patent law is a total disaster on almost all provisions and will take years to sort out.  It is perfect for the big-company infringers who do not want to pay others for infringing upon their patents.  They can throw their patent worries out the window. 

When a client asks a patent attorney how much it will cost to obtain my patent, they have no idea how to answer.  It could run in the hundreds of thousands of dollars just to get past the Post Grant Reviews.  For example, a patent issues and 20 companies each file separate Post Grant Review Petitions, each citing different prior art.  It will be a nightmare for the PTO and cost the patent applicant a fortune in fees.

More Obstacles; Dangerous Consequences

I believe that the number of patents that get through all the obstacles now in place at the PTO and the rising backlog of applications requiring examination will dramatically decrease the number of actual patents sought and enforced by applicants.  Both big and small companies alike may decide it no longer makes economic sense to pursue patents.  That result insures that U.S. companies and other infringers from all over the world will have a free ticket to flood theU.S.with cheap infringing products to further emasculate the U.S .economy.  The supporters of this new law may wish they had never sought it.  The potential unintended consequences have been ignored in the rush to satisfy the special interests currently running the U.S.

This new law throws the USPTO under a train, burdening it with enormous new tasks and no additional funds to run an already overburdened and overworked entity charged with managing the flow of patentable innovation into our economy. According to former Chief Judge of the CAFC, Paul Michel, the PTO has been shown to have the worst IT system of any federal agency.  Worse, this new law assures that jobs in this country will continue to be destroyed and investment in innovation decreased.

Economic Impact

We are back to the days of Standard Oil in the early 1900s, when Teddy Roosevelt took on the trusts and busted some of them.  Who will now step up to do that job again?  In the last 100 years those old trusts have been replicated in the current IT, financial and other oligopolistic industries that are crushing our economy and destroying the U.S. middle class.

A suggested motto for the new patent law: “Bottle Up Patents in the PTO and If They Ever Get Past the PTO, Patent Owners Can Only Sue a Single Infringer in an Infringement Suit.”

Irving S. Rappaport, Esq., CLP
Palo Alto,CA

Image source: urbanchristiannews.com

VIDEO:

Judge Paul Michel, Chief Judge, United States Court of Appeals for the Federal Circuit, 1988-2010 analyzes the Patent Reform Bill at the USBIC (U.S. Business & Industry Council) Senate briefing, September 6, 2011


Pat Choate, economist and author of Hot Property, comments as a member of the USBIC panel before the Senate briefing.

Testimony of Hon. Bruce A. Lehman

Public Hearing Held by ITC, June 15, 16

FULL TEXT:

Statement of Bruce A. Lehman

President, International Intellectual Property Institute

(Former Assistant Secretary of Commerce & Commissioner of Patents & Trademarks

Madam Chair, Members and staff of the Commission, thank you for the invitation to present testimony at this hearing.

At the outset I would like to explain my background and interest in this issue. From August 1993 through December 1998 I served as Assistant Secretary of Commerce and Commissioner of Patents and Trademarks.[1] In this capacity I was the Clinton Administration official primarily responsible for intellectual property policy.

This was a period of intense activity in trade and intellectual property diplomacy. The WTO treaty and its TRIPS annex were negotiated and signed by the United States and the implementing legislation was enacted by Congress. Also, the WIPO Copyright and Phonograms Treaties were negotiated and implemented in U.S. law in the form of the Digital Millennium Copyright Act (DMCA.) These treaties updated international copyright law to encompass the Internet and digital environments and the DMCA amended U.S. copyright law accordingly. Further, during this period bi-lateral negotiations between the United States and China enabled China to become a member of the WTO.

After my departure from government service I founded and continue to direct the activities of the International Intellectual Property Institute, a non partisan, nonprofit think tank and development organization dedicated to helping developing countries more effectively use intellectual property rights as a tool of economic growth and wealth creation.

It is my understanding that this hearing is being held for the purpose of examining the impact of Chinese IP policy on the bi-lateral trade relationship of the two countries and the effect that policy is having on the U.S. economy.

I believe that the current U.S. China relationship does not meet the expectations we had at the time the Clinton Administration fashioned the ground rules for that relationship.

The underlying assumption was that the United States would permit China and other developing countries to benefit from their comparative advantage in labor costs while we would benefit from our comparative advantage in technology. Ideally, this would work to the benefit of all parties.

However, for this trade-off to work it is necessary for our trading partners to give full recognition to the intangible value of U.S. exports. And, intangible value cannot be fully realized unless the patents, trademarks and copyrights that protect that value are recognized and enforced.

I expect that other witnesses will present statistical data on copyright piracy, product counterfeiting and other forms of IPR infringement. In general, this data will show that infringing products constitute a large share of the Chinese market.

In some industries – such as PC software or sound recordings – infringement of copyright virtually equals theft of the product itself. However, for many more products and services the intellectual property component does not encompass the full value of the offering, but is the component that guarantees the seller full value and a fair share of the market. This is particularly true of products embodying inventions where the patentable elements of the product may not encompass the entire product, but make it more attractive to purchasers and able to command a premium price.

Between 1998 and 2008 the U.S. trade deficit with China grew from $81.8 billion to more than $268 billion.[2]

While there are explanations for this unacceptably large imbalance, such as currency valuation, that have nothing to do with intellectual property rights, the failure of China to give full value to U.S. intangible exports – as envision in the original architecture of our bi-lateral relationship – is clearly responsible to a significant degree for the failure of U.S. exports to China to narrow this gap.

I have visited China a number of times since our 1999 bi-lateral agreement and have followed closely the development of the Chinese IP system during that period. And, I acknowledge that China has made progress in developing a modern intellectual property law regime, an increasingly credible system of judicial dispute resolution and administrative IPR enforcement mechanisms. Certainly, its IPR statutes for the most part meet TRIPS standards. And, the State Intellectual Property Office (SIPO) which is the equivalent of our USPTO has evolved into one of the largest patent offices in the world, with a corps of examiners operating at a level of sophistication approaching the patent offices of historically developed countries. However, for all of these advancements the reality remains that the Chinese market is not providing the export opportunities for intangible exports of U.S. products and services that we expected when the bi-lateral relationship was designed.

Copyright piracy and product counterfeiting continue at levels that are totally unacceptable. And, Chinese policy makers seem intent on fashioning a domestic market that does not give U.S. high tech and information exports a level playing field. This is reflected not simply in weak IPR enforcement, but also in attempts to fashion idiosyncratic technology standards and/or government procurement requirements that prejudice globally establish U.S. exports. Further, censorship of the Internet denies America’s most innovative companies the opportunity to establish a significant market share. One has to look no further than the withdrawal of Google from mainland China to Hong Kong to see the impact of these non tariff barriers to effective participation of globally competitive U.S. companies in the Chinese market.

With regard to its patent system, the number of domestic applicants for patents in China exceeds that of domestic applications in any national patent office except the United States and Japan. However, the vast majority of these applications are for a form of patent protection not found in U.S. law – utility models. This form of patent protection does not require the examination of prior art that is the basis for obtaining internationally recognized patents. And, while other countries have long provided for utility models, it is my understanding that U.S. applicants are increasingly finding that SIPO has previously issued utility model patents to inventions where the U.S. applicant is seeking full patent protection.

Taken all together the various aspects of the emerging Chinese intellectual property system combine to disadvantage IPR based imports, sheltering domestic technology and information-based industries from effective foreign competition, while the Chinese create their own export-competitive industries.

China is emerging as a technological power, graduating significantly more scientists and engineers than the United States. Its population of Internet users has become the largest in the world. I expect that in coming decades China will have a robust system of intellectual property rights protection and enforcement appropriate to a tech-based economy. Unfortunately, that may come too late for U.S. industry. Having sheltered its own market while developing competitive IP based products and services, China will then be in a position to assert a comparative advantage, based not only on cheap labor and currency manipulation, but in the very areas of comparative market advantage that we in the U.S. had envisioned in the 1990s when we negotiated what we thought would be a fair and balanced trading relationship.


[1]As a result of statutory change this position if now known as Undersecretary of Commerce and Director of the United States Patent & Trademark Office, its responsibilities and placement in the Presidential chain of command remains the same.

[2] U.S. Census Bureau, Foreign Trade Statistics: http://www.census.gov/foreign-trade/balance/c5700.html

Patents: Use Them or Lose Them

March 5, 2010 by ipinsider1 | Edit

Russell L. Parr, President of Intellectual Property Research Associates, Inc. (IPRA), is at the top tier of the IP valuation field. In addition to English, his eight books are published in Japanese, Korean, Italian, Chinese, Romanian and Russian. They are a pleasure to read for their insight and clarity. Russell has served and as an expert witness on more than 50 occasions, opining on everything from patents to content. IP INSIDER is honored to have Russell contribute its first Outside Perspective piece, “Patents: Use Them or Lose Them.”

Patent infringement damages just got much more interesting. It turns out that if you don’t optimize the implementation of your intellectual property you might just lose it. A recent decision in Arizona District Court regarding Bard Peripheral Vascular, Inc. v. W. L. Gore Inc. (No. CV-03-0597-PHX-MHM) denied Bard a permanent injunction because Gore made a better product using Bard’s patented technology than Bard.

Bard argued that Gore sells two types of infringing products. The first group are products for which Bard sells an alternative, nearly identical counterpart. These products are referred to as “Counterpart Products.” The Counterpart Products include PROPATEN grafts, INTERING grafts, cardiovascular patches, and other variations of those grafts and patches. The second group of products is made up of items for which Bard does not currently offer an alternative in the marketplace. These are referred to as “Non-Counterpart Products.” The Non-Counterpart Products include Gore’s VIABAHN stent-grafts, EXCLUDER stent-grafts, TAG stent-grafts, VIATORR stent-grafts, ACUSEAL patches, as well as other products.

Bard asked the Court to permanently enjoin Gore from making and selling the Counterpart Products, the Non-Counterpart Products, and from any further development of infringing products, including products for which it lacks or is presently seeking FDA approval. The Court heard testimony from surgeons telling about the superiority of Gore’s implementation of Bard’s patented technology. As a result, the Court decided not to enjoin Gore.

Bard was awarded lost profits for the Counterpart Products made and sold by Gore and also received a royalty on sales of the Non-Counterpart Products. What now remains to be decided is how Gore will compensate Bard for future use of Bard’s no longer exclusive patent rights. The parties will likely reach some agreement on the future royalties Gore will pay Bard for Non-Counterpart Products. The difficult question will be how to compensation Bard for Gore’s future sales of Counterpart Products, where Bard will directly compete. Bard will lose future sales and future incremental profits. A typical royalty rate will not be sufficient to compensate Bard for future lost incremental profits. Currently, a Plaintiff may win a patent infringement case but lose exclusive use of its own patented technology.

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  1. Rampant IP Piracy is Hurting U.S. « IP Insider - September 8, 2010

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