IP Metalworks!A Cautionary Tale:

Nov 10 2005 - The round of patent reform may create unexpected problems for biotechnology, and is a lost opportunity to solve problems facing the industry.  Senate consideration remains in the drafting stage, where some meaningful input may still be possible.

 

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White Paper: Patent Reform and its Implications for the Biotechnology Industry.

prepared by K Karel Lambert, of Lambert & Associates

 

Abstract:  A comprehensive patent reform bill pending in the House of Representatives amends, deletes or creates more than 80 sections of our patent laws in fundamental ways.  This paper describes those changes and some of their implications for the biotechnology industry.

 HR 2795, “The Patent Reform Act of 2005” contains perhaps the most far-reaching changes to the US Patent System since 1952.  Since its introduction in June, the Bill continues to evolve and gain momentum.  Rep. Lamar Smith[1], author of the bill, is now leveraging support from a broad coalition of industrial and professional groups, including the ABA, AIPLA, BSA, ITIC, IPOA, and some members of PhRMA[2].

 Senator Orrin Hatch[3] recently expressed doubt that a Senate version of the Bill will clear committee this year, but unquestionably this legislative effort will resume in 2006.  At stake is a simple proposition, “Fundamental change has fundamental consequences, often not predictable:  Is the current patent system’s stimulus to innovation at risk under this intense pressure for sweeping change?

The biotech industry has a large stake in a fully incentivized patent system.  Biotech entrepreneurs rely on patented technology to secure investment from venture capitalists and corporate partners. Without the certainty of a patent to protect a product’s market, the risk in funding biotechnology investments over a typical decade-long product development cycle is prohibitively large.  For this reason, the biotechnology industry is acutely sensitive to changes in patent laws.

The Bill as it stands today amends, deletes or creates over 80 sections of the patent statute (USC Title 35 — Patents).  The key changes fall into three important categories:

u    Tort Reform: Lessening of economic damages for patent infringement; limitations on punitive damages for willful infringement, a “secret use” defense against infringement, and streamlining of patent infringement litigation by eliminating the patent applicant’s intent, candor and disclosure of best mode as potential issues at trial.

u    Inventorship: Implementation of a “first-to-file” system in harmonization with international practice, redefinition of novelty and non-obviousness standards for patentability, and changes in the rights of assignees.

u    Patent Quality: Adoptation of a european-style post-grant patent opposition proceeding and other changes to facilitate third party patent challenges.

The devil is in the details.  Patent reform measures under consideration but not in the bill are also reviewed here.

 

I.  Patent Tort Reform: An Attack on Patent Owner’s Rights

Under the Tort Reform banner, a variety of measures were introduced into HR 2795.  Because these issues affect patent owner’s rights, it is perhaps not surprising that they have provoked the most intense debate on the bill.

The Federal Trade Commission (FTC) has argued that the patent right is too strong, and has become anti-competitive[4].  Others have been more blunt.  Industry trade groups representing the digital economy, the Business Software Alliance (BSA) and the Information Technology Industry Council (ITIC) have been major proponents of patent reform.   ITIC Vice President Ralph Hellmann is reported to have said, "For us, class-action reform was big, but the next step is to take on patent reform.  Patent litigation is beginning to strangle innovation."  According to BSA President and CEO Robert Holleyman[5], "What we're saying now is that the equation and balance is not correct, that  litigation has thwarted innovation—and that has harmed our members."

The legislation has provoked a sometimes bitter digital divide, pitting biotech and high tech industries against each other.  Chairman Smith is reported to have remarked, "Biotech and brand drug companies ... operate under very different business models that rely on a legal system that vigorously protects patent rights.  Their concerns about profit margins, lawsuits and productivity are no less sincere than those of the high-tech community.” [6]

Tort reform proposals include the following measures:

u    Limits on damages a court can award to the patent holder, the calculation to be apportioned for the fractional profit or value of the infringed invention as a part of the infringing entities net profit on the infringing product as a whole; adjustments are to be made for any improvements, business risk taken, marketing, research expenditures, etc. made by the infringer.  Since all patent infringement is enforced by the power of the courts to award economic damages, this measure may reduce potential damages accruing to the patentee to a level below the current  “reasonable royalty” standard, making it difficult to bring suit against a stronger infringer.

u    Limits on the courts ability to find willful infringement.  An overturning of the “doctrine of due care” whereby a court may draw adverse inferences if infringer failed to obtain favorable advice of counsel and continued to infringe.  Barriers to a finding of willful infringement.  Limitation on the role of juries.  This measure reduces the incentive of infringers to acknowledge and enter negotiations with patentees.

u    Possible limits on the court’s power to order injunctive relief to the patent holder (a court order halting the infringment) if the defendant (alleged infringer) pleads irreparable harm and requests a stay.  This measure would strongly reduce the incentive of infringers to acknowledge and enter negotiations with patentees.

u    Possible limits on the patent holder’s options in choosing a venue for trial.  Empowers the infringer to select a more favorable trial court. 

u    All investigation of inequitable conduct (fraud on the patent office) to be conducted by US PTO panels with limited discovery powers.  Unless a patent claim is found invalid, a defense based on the patentee’s alleged inequitable conduct of the patentee may not be raised by a defendant in infringement lawsuit.

u    “Secret use” or “prior use” defense against infringement expanded.  Substantial preparations for commercialization constitute prior use, carving out a major exception to the patent bargain which guarantees an exclusive right to the patentee in exchange for early disclosure.

u    Possible repeal of Section 271(f):  Section 271(f) was enacted in 1985 to protect american jobs from overseas imports of patent-busting goods.  The high tech community, stung by infringement verdicts in ATT v Microsoft and Eolas v Microsoft, has requested the act be repealed. 

 

III. Inventorship and Rights of Assignee 

Like the FTC, a 2004 report by the National Academies of Sciences (NAS) also favored patent reform, but took a more favorable view of the existing patent system, stating: “There are many indications that firms of all sizes as well as universities and public institutions are ascribing greater value to patents and are willing to pay higher costs to acquire, exercise, and defend them. … Continuing high rates of innovation suggest that the patent system is working well and does not require fundamental changes.”[7]

NAS nonetheless recommended a comprehensive package of reform measures, including: 

u    US to adopt a “first-to-file” patent system, wherein the patent for an invention is granted to the first inventor to file, not the first inventor to invent, as is currently the law.  Only in the US and the Philippines have a “first-to-invent” system.  The primary benefit of this change is international patent law harmonization. 

u    Reinvigoration of the non-obviousness statute (§103).  This has not happened in HR 2795, but instead a back-and-forth rewrite of the novelty and non-obviousness patent bars has been undertaken.  The result remains chaotic and will likely require judicial interpretation.  For example, the proposed language creates a new legal test for prior art, whether it is “reasonably and effectively accessible”, but no legislative clarification of simple obviousness or the motivation to combine.  Provisions in existing law are preserved that exempt commonly owned prior art and prior art created under a joint research agreement.[8] 

More detail and an alternative proposal that simplifies and clarifies the definitions of prior art, novelty and non-obviousness is offered in the Appendix to this paper.9 

u    Repeal of the “without deceptive intent” provision of current law.  Under current law, failure to exercise candor in prosecution of a patent application may invalidate the patent.  A charge of “fraud on the patent office” is a favorite defense of infringers because it redirects the inquiry to the state of mind and intent of the inventor, not the defendant.  HR 2795 removes all such defenses from the legal system, transferring them to inquiry boards within the US PTO with limited powers of discovery. 

u    Repeal of the “best mode” provision.  Under current law, inventors are required to disclose the best known method or form of the invention at the time of filing; failure to do so invalidates the patent.  HR 2795 repeals this requirement.

Removal of the best mode requirement simplifies litigation, but it also permits the inventor to withhold valuable trade secrets while disclosing only such lesser technology as may be sufficient to broadly patent an invention.  When taken with “first-to-file”,  the combination may be a system in which the most successful strategy is to hastily file broad patent applications containing minimal technical information.  An alternative proposal that repeals best mode but preserves an incentive for full and enabling disclosure is offered in the Appendix to this paper.

u    Automatic publication of all patent applications within 18 months of filing.  Under current law, those applicants restricting their patent application only to the United States may waive pre-grant publication.  This change closes a loophole to the once pervasive use of “submarine patent applications” which plagued the system prior to AIPA of 1999. 

u    Granting to the Assignee the right to file for a patent application in the inventor’s place after making a showing that the inventor is not available or refuses to cooperate.  Limited liability to the assignee for lapses of the duty of candor.

  

III. Patent Quality: the Rationale for Post-Grant Patent Opposition Proceedings

According to the FTC4 and NAS7 reports, the principal challenge facing the US Patent and Trademark Office (US PTO) is ‘patent quality.’  The US PTO, by its own estimates, has consistently reported a patent error rate of 5% (an error is defined as at least one claim within the patent that would be held invalid in a court of law).  In short, about 5% of issued US patents have flaws sufficient to render at least one patent claim unenforceable.  In addition, all industries have complained of “bad” patents, those that are excessively broad, overreaching, weakly supported, inoperable, or obvious and unpatentable on the face.  The number of “bad” patents has not been accurately estimated because no mechanism short of litigation exists to correct them and most simply are ignored, unenforced, or are licensed without protest. 

u    HR 2795 proposes: Adopt a “Post-Grant Opposition” procedure whereby 3d parties may challenge the validity of a newly issued patent during a 9 month window following issuance.  The opposition proceedings are to be conducted by the US PTO and decided within 12 months.  Evidence presented may include documents relevant to novelty, non-obviousness, written description, enablement, or double patenting.  Declarations of expert witnesses may also be presented, and access to the courts for fuller discovery is provided.  Parties bringing a challenge may request anonymity but lose that right if they call witnesses.  Unsatisfied parties may appeal to the courts.  A patentee receiving a challenge may request a stay if concurrently pursuing an infringement suit against the challenger.

Post-grant opposition is a stand-alone change to the patent system.  Implementation of a post-grant opposition system in the US requires only enactment of Chapter 32 (in section 7) of HR 2795.

The European Patent Office (EPO) has been handling over 2,000 oppositions per year for many years, a good prognostication for of success of a US program built on its model.  In Europe, about 7% of all patents undergo adversarial challenge in the 9 month window following issue, and of these, about 70% undergo substantial correction or are declared unenforceable (ie. about 5% of all issued patents).  Those that are not corrected, invalidated, or challenged gain a meaningful presumption of validity after the 9 month post-grant opposition window expires.

There are reservations.  Most importantly, debate continues in the US as to whether the proper level of proof required to overcome the presumption of patent validity accorded an issued patent (§282 of current law) is “a clear and convincing showing of evidence,” a “prima facie case for unpatentability,” or “a preponderance of the evidence” as proposed in the latest amendments of HR 2795. Does a threshold of a substantial grounds for unpatentability based on a preponderance of the evidence become a “slippery slope” that undermines the presumption of patent validity on which patent owners currently rely?  It may be left to the courts to reconcile the two conflicting statutes.   

 Nonetheless, post-grant opposition seems one of the most promising and reliable proposals in the legislative package.  Unfortunately, the legislation sets no date for implementation.  Resources to handle the workload are not identified and no new money is allocated.  Projected from EPO statistics, the number of potential cases annually is likely to rise to greater than 5000/yr in the US, approximately 100 times the capacity of the current US Board of Patent Appeals and Interferences (BPAI).  Given the US PTO’s history of difficulties in hiring and retention of skilled personnel, it seems unlikely that a program can be launched any time soon.  Parenthetically, post-grant opposition has the potential to be a near billion dollar industry for patent attorneys.

 Inter partes re-examination is also amended by HR 2795 in an effort to increase its use, which has been negligible.  Only 53 cases were filed in the first 4 years of its availability.  However, the proposed amendment is controversial.   

u    As an amendment to inter partes reexamination, HR 2795 strikes the phrase, “or could have raised” from an estoppel provision in the statute, effectively removing a bar that prevented a 3d party challenger from raising first one objection, then another, and so forth. 

As a matter of convention, litigants are estopped from raising serial challenges, the idea of litigation having been to settle all matters of dispute between the parties with finality, not just one at a time.  As with post-grant oppositions, the dissatisfied party in a re-examination proceeding is also permitted to appeal to a court, raising the question as to why not begin in court, where the issues can be more thoroughly heard.  It is thus uncertain whether amendments to inter partes reexamination will actually increase its use, except as a thorn in the patentee’s side, or to establish intervening rights.  Mere multiplication of inconclusive adversarial fora for resolution of disputes has the potential to entrap patentees in an endless circle of challenges, unwisely diverting entrepreneurs from growing their business.

 

IV. Issues Not Addressed

The biotechnology industry recognizes that no legislation can solve all woes.  Any legislative process is necessarily a compromise between competing and sometime conflicting interests.  However, the legislation offered to date has not addressed several elements of importance to the biotech and academic communities, but has instead focussed principally on elements of “tort reform” of interest to other, less patent-dependent industries, that may have unanticipated and unsettling outcomes for biotechnology.  It is the tort reform proposals that will take effect first upon the bill’s passage.  In this vein, the bill has drifted away from some of the key recommendations of the NAS report of 20047.

NAS, which looked closely at the impact of the patent system on biotechnology, strongly recommended an effort to revitalize the non-obviousness standard (§103 of USC Title 35).  The need to prevent misuse of copy claim practice, the corrosive effect of excessive pendency times in the US PTO (now over 42 months for certain high-tech digital inventions), and the need for a legislative solution for the “experimental use” problem were among those issues featured prominently in the NAS report.7

Other untouched issues in patent office practices have an adverse effect on the biotech community, for example the practice of excessive division (restriction) of biotechnological inventions, and the practice of cycling continuation applications to the bottom of the in-basket.  The courts have compounded litigation of legitimate differences over patents by refusing to exercise interlocutory jurisdiction over the de novo reading of claims at multiple judicial levels and have at times issued conflicting or indeterminate precedent on the key issues of the day.   Congress has the opportunity to step up and provide guidance for the courts where current statute is deficient.

The “copy claim” issue is problematic because it threatens innovation driven by the risk-taking of smaller business entities.  Efforts to address copy claim abuse in HR 2795 by limiting continuation applications were abandoned in the face of stiff opposition.  The biotechnology industry must have the right to modify or broaden a patent application, and to amend the claims, as the research into a new technology progresses.  However, there is a perceptible line between claiming what the inventor had possession of at the time of filing, and claiming new material invented by another.   Efforts to find a solution to this problem should not be abandoned.

In an Appendix[9] to this paper, new proposals are made which address this.  Section 112 of Title 35 (written description and enablement) has been wrung dry by the courts.  The problem of overreaching and overly broad patents, including those on research tools with downstream potential, is now a legislative problem.  Congress has the opportunity to ensure that the requirements of section 112 are clearly articulated as statutory bars against patentability if not met, not merely a set of guidelines for good patent practice, and to codify what the Courts have roughly developed as a workable, but strict, section 112.

 Secondly, proposed is a new way of defining prior art for purposes of the novelty and obviousness statutory bars to patentability.   In the proposal, prior art is defined in section 100 of the code so that its use in other sections of the statute can be standardized and exceptions made on a section by section basis.  This seems a logical approach to what has been a troublesome problem for the drafters of HR 2795.  Each of three published committee prints9 contained extensive tangled revisions of sections 102 and 103 that demonstrate an unrecognized need for a global definition of prior art with section-specific exceptions.

 Finally, the issue of an “experimental use” exemption to the patent right is an important one to the biotechnology industry.   The Court of Appeals for the Federal Circuit (CAFC) has ruled strongly on behalf of the patent owner against an experimental use exemption.   However, it seems clear that a contrary public interest is also involved, the need of the public for free access to the latest in medical technology.  We call upon Congress to break this deadlock.  The incentive to patent is a powerful force for progress and any exception to that incentive made for the public good must be weighed carefully.  The statutory language of section 284 on medical research activities, and section 203 on “march-in rights” (Bayh-Dole) must be revisited with this in mind.   Are we to have compulsory licensing, or a category of inventions that are not patentable under any circumstances, or a smoothly working system for engaging the patent right and the wheels of commerce? 

Congress must decide, and HR 2795 is incomplete without addressing the unmet patent reform needs of the biotechnology industry.

* * *
 

 

 

About the Author


 

The author, K Karel Lambert, is the principal and of Lambert & Associates and is a member of the WBBA’s Patent Legislative Advisory Committee.  Lambert joined the patent bar in 2002 after a career as a scientist, engineer and inventor in academia and industry.  He was the principal inventor (product and process) on two commercialized products from start-up to market [Tocosol®, and Optison®].  Tocosol has been funded by Schering AG in a deal estimated at $160M (SNUS/NASDAQ).  Optison is marketed worldwide by Amersham Imaging.  Lambert also helped discover and investigate two human genes, lead a chemical synthesis team, designed clinical diagnostics and medical devices, and now specializes in intellectual property issues in selected technology areas.  His patent services practice draws on experience in Architecture, Chemical Engineering, Laboratory Clinical Pathology, Nutraceuticals, Pharmaceuticals, Molecular Biology and Microbiology.  Lambert is a registered Patent Agent, and is fully licensed with the US Patent and Trademark Office.  A CV is posted at www.4ipt.com/KKL-Vita.htm.  For more information on patent law reform, click on www.4ipt.com , http://Patentlaw.typepad.com/, and www.Promotetheprogress.com

 

© KKL 2005 – Grant of permission to copy, reproduce or prepare derivative works made without reservation.

 

[1]   Rep Lamar Smith, (R Tex): Chairman of the House Subcommittee on Courts, the Internet, and Intellectual Property, author of the Bill.

[2]  ABA, American Bar Association; AIPLA, American Intellectual Property Law Association; BSA, Business Software Alliance; ITIC, Information Technology Industry Council; IPOA, Intellectual Property Owners Association; Members of the Coalition for Patent Reform, including: Abbott Laboratories, AstraZeneca, Baxter Healthcare Corporation, Bristol-Myers Squibb, Cargill Incorporated, Eli Lilly and Company, GlaxoSmithKline, Henkel Corporation, Hoffman-La Roche Inc., Johnson & Johnson, Merck, Monsanto, Novartis Corporation, Novo Nordisk, Pfizer, Procter & Gamble, and Wyeth [as of 1 Sep 2005].

[4]   To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy A Report by the Federal Trade Commission. 2003. US Govt Printing Office. http://www.ftc.gov/os/2003/10/innovationrpt.pdf

[7]   A Patent System for the 21st Century.  2004. (Stephen A. Merrill, Richard C. Levin, and Mark B. Myers, Eds), Committee on Intellectual Property Rights in the Knowledge-Based Economy, National Research Council, National Academies Press, Washington DC.  [http://www.nap.edu/openbook/0309089107/html]

[9]   Appendix to Patent Reform and its Implications for the Biotechnology Industry.  http://www.4ipt.com/vol2005_10.htm