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To Promote Innovation

To Promote Innovation:
The Proper Balance of
Competition and Patent Law and Policy
A Report by the Federal Trade Commission
FEDERAL TRADE COMMISSION
October 2003

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To Promote Innovation

  1. 1. FEDERAL TRADE COMMISSION To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy A Report by the Federal Trade Commission October 2003
  2. 2. FEDERAL TRADE COMMISSION TIMOTHY J. MURIS Chairman MOZELLE W. THOMPSON Commissioner ORSON SWINDLE Commissioner THOMAS B. LEARY Commissioner PAMELA JONES HARBOUR Commissioner Susan A. Creighton Director, Bureau of Competition J. Howard Beales III Director, Bureau of Consumer Protection Luke Froeb Director, Bureau of Economics William E. Kovacic General Counsel Anna H. Davis Director, Office of Congressional Relations Rosemarie A. Straight Executive Director Report Contributors Susan S. DeSanti, Deputy General Counsel for Policy Studies, Office of the General Counsel William E. Cohen, Assistant General Counsel for Policy Studies, Office of the General Counsel Gail F. Levine, Deputy Assistant General Counsel for Policy Studies, Office of the General Counsel Hillary J. Greene, Project Director for Intellectual Property, Office of the General Counsel Matthew Bye, Attorney, Policy Studies, Office of General Counsel Michael S. Wroblewski, Assistant General Counsel for Policy Studies, Office of the General Counsel Robin Moore, formerly Attorney, Policy Studies, Office of General Counsel Michael Barnett, formerly Attorney, Policy Studies, Office of General Counsel Nicole Gorham, Legal Assistant, Policy Studies, Office of General Counsel Cecile Kohrs, Legal Assistant, Policy Studies, Office of General Counsel David Scheffman, formerly Director, Bureau of Economics Mark Frankena, Associate Director for Competition Analysis, Bureau of Economics Roy Levy, Economist, Economic Policy Analysis, Bureau of Economics Alden F. Abbott, Assistant Director for Policy and Evaluation, Bureau of Competition Suzanne Michel, Special Counsel for Intellectual Property, Bureau of Competition Paige Pidano, formerly Legal Assistant, Bureau of Competition Karina Lubell, formerly Legal Assistant, Bureau of Competition Inquiries concerning this report should be directed to: Susan S. DeSanti, Deputy General Counsel for Policy Studies, Office of the General Counsel (202) 326-3190 or sdesanti@ftc.gov
  3. 3. Acknowledgments: The Commission wishes to note the expertise and time contributed by Hearings participants. For all of their contributions, the Commission conveys its thanks. The Commission thanks the Antitrust Division of the Department of Justice and the Patent and Trademark Office for participating in many of the panels at, and for recommending many of the participants in, the Hearings. The Commission thanks the Competition Policy Center and the Berkeley Center for Law and Technology at the University of California at Berkeley for providing facilities to allow some of the Hearings to be held on the West Coast. Cover: Clip art on cover obtained under license from Microsoft Corporation. Patents: Front Cover Patent No. 549,160 - Selden Road Engine Patent No. 4,779, 268 - Frame Decoding for Digital Signal Transmission Patents: Back Cover Patent No. 4,302,281 - Method for Producing Pulp Patent No. 4,805,654 - Sun Shield for Automobiles
  4. 4. TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY EXECUTIVE SUMMARY Innovation benefits consumers the FTC and the Antitrust Division of the through the development of new and Department of Justice (DOJ) (forthcoming), improved goods, services, and processes. will discuss and make recommendations for An economy’s capacity for invention and antitrust to maintain a proper balance with innovation helps drive its economic growth the patent system. and the degree to which standards of living increase.1 Technological breakthroughs Competition and Patent Law and such as automobiles, airplanes, the personal Policy Promote Innovation and computer, the Internet, television, Benefit the Public. telephones, and modern pharmaceuticals illustrate the power of innovation to increase Competition through free enterprise prosperity and improve the quality of our and open markets is the organizing principle lives. for most of the U.S. economy. Competition among firms generally works best to achieve Competition and patents stand out optimum prices, quantity, and quality of among the federal policies that influence goods and services for consumers. Antitrust innovation. Both competition and patent law, codified in the Sherman Act, the FTC policy can foster innovation, but each Act, and other statutes, seeks “to maximize requires a proper balance with the other to consumer welfare by encouraging firms to do so. Errors or systematic biases in how behave competitively.”3 one policy’s rules are interpreted and applied can harm the other policy’s effectiveness. Competition can stimulate This report by the Federal Trade innovation. Competition among firms can Commission (FTC) discusses and makes spur the invention of new or better products recommendations for the patent system to or more efficient processes. Firms may race maintain a proper balance with competition to be the first to market an innovative law and policy.2 A second joint report, by technology. Companies may invent lower- cost manufacturing processes, thereby 1 increasing their profits and enhancing their Federal Reserve Board Vice Chairman Roger ability to compete. Competition can prompt W. Ferguson, Jr., Patent Policy in a Broader Context, Remarks at 2003 Financial Markets Conference of the firms to identify consumers’ unmet needs Federal Reserve Bank of Atlanta (April 5, 2003), at and develop new products or services to http://www.federalreserve.gov/boarddocs/speeches/2003/20 030407/default.htm. 2 3 The Federal Trade Commission issues reports I PHILLIP E. AREEDA & HERBERT HOVENKAMP, pursuant to Section 6(f) of the Federal Trade Commission ANTITRUST LAW : AN ANALYSIS OF ANTITRUST PRINCIPLES Act, 15 U.S.C. § 46(f). AND THEIR APPLICATION ¶100a at 4 (2000). 1
  5. 5. satisfy them. and technical information is part of the consideration that the inventor gives the Patent policy also can stimulate public.6 innovation. The U.S. Constitution authorizes Congress “[t]o promote the Competition and Patents Must Work Progress of Science and useful Arts, by Together in the Proper Balance. securing for limited Times to . . . Inventors the exclusive Right to their respective . . . Competition and patents are not Discoveries.”4 To obtain a patent, an inherently in conflict. Patent and antitrust invention (that is, a product, process, law “are actually complementary, as both machine, or composition of matter) must be are aimed at encouraging innovation, novel, nonobvious, and useful. Moreover, a industry, and competition.”7 Patent law patentee must clearly disclose the invention. plays an important role in the property rights A patent confers a right to exclude others regime essential to a well-functioning from making, using, or selling in the United competitive economy. For example, firms States the invention claimed by the patent may compete to obtain the property rights for twenty years from the date of filing the that patents convey. Patents do not patent application. necessarily confer monopoly power on their holders,8 and most business conduct with This property right can enable firms respect to patents does not unreasonably to increase their expected profits from restrain or serve to monopolize markets. investments in research and development, Even when a patent does confer monopoly thus fostering innovation that would not power, that alone does not create an antitrust occur but for the prospect of a patent. violation. Antitrust law recognizes that a Because the patent system requires public patent’s creation of monopoly power can be disclosure, it can promote a dissemination of scientific and technical information that would not occur but for the prospect of a placing in their hands a means through the use of which patent. their wants may be supplied.” 1 WILLIAM ROBINSON, THE LAW OF PATENTS FOR USEFUL INVENTIONS § 22 at 305 (1890), cited in ROBERT P. MERGES & JOHN F. DUFFY , Like competition policy, patent PATENT LAW AND POLICY: CASES AND MATERIALS 361 (3d policy serves to benefit the public. “The ed. 2002). basic quid pro quo contemplated by the 6 See James E. Rogan, Prepared Remarks of Constitution and the Congress for granting a James E. Rogan, Under Secretary of Commerce for patent monopoly is the benefit derived by Intellectual Property and Director of the United States the public from an invention with substantial Patent and Trademark Office (2/6/02) 2, at http://www.ftc.gov/opp/intellect/rogan.htm. utility.”5 The public disclosure of scientific 7 Atari Games Corp. v. Nintendo of Am., 897 F.2d 1572, 1576 (Fed. Cir.1990). 4 U.S. CONST. art. I, § 8. Other sections of this constitutional provision authorize copyright law. 8 ROBERT L. HARMON, PATENTS AND THE FEDERAL CIRCUIT § 1.4(b) at 21 (5th ed. 2001) (“Patent 5 Brenner v. Manson, 383 U.S. 519, 534-35 rights are not legal monopolies in the antitrust sense of the (1966). The consideration an inventor gives in return for a word. Not every patent is a monopoly, and not every patent “is the benefit which he confers upon the public by patent confers market power.”). 2
  6. 6. necessary to achieve a greater gain for competition that might have developed consumers. based on the obvious technology. See Box 1. Conversely, competition policy can Analogously, the Supreme Court has recognized the importance of competition to the Bo x 1. An Inv alid Pa tent on an Obv ious Inven tion Can H arm 9 Com petition . patent system. “[F]ree competition” is “the baseline” on In 1895, George Selden obtained a U.S. patent with a claim so broad which “the patent system’s that “it literally encompasse[d] most automobiles ever made.” Yet incentive to creative effort the basic invention covered by that claim – putting a gasoline engine 10 depends.” By limiting the on a chassis to make a car – was so obvious that many p eop le worldwide thought of it independently as soon as the most primitive duration of a patent, “[t]he Patent gasoline engines were developed. The association that licensed the Clause itself reflects a balance Selden patent collected hundreds of thousands of dollars in royalties between the need to encourage – raising costs and reducing the output of automobiles – before innovation and the avoidance of Henry Fo rd and others cha llenged the patent, and the patent claim monopolies which stifle was judicially narrowed in 1 911 . See M ERGES & D UFFY , P A T EN T L A W A N D P OLICY : C A S ES A N D M ATERIALS at 644-46. competition without any concomitant advance in the ‘Progress of Science and useful Arts.’”11 The patentability requirements for undermine the innovation that the patent novelty and nonobviousness “are grounded system promotes if overzealous antitrust in the notion that concepts within the public enforcement restricts the procompetitive use grasp, or those so obvious that they readily of a valid patent. See Box 2. could be, are the tools of creation available to all.”12 The FTC/DOJ Hearings Examined the Balance of Competition and A failure to strike the appropriate Patent Law and Policy. balance between competition and patent law and policy can harm innovation. For To examine the current balance of example, if patent law were to allow patents competition and patent law and policy, the on “obvious” inventions, it could thwart FTC and the DOJ held Hearings from February through November 2002. The Hearings took place over 24 days, and 9 See Bonito Boats, Inc. v. Thunder Craft Boats, involved more than 300 panelists, including Inc., 489 U.S. 141, 146 (1989) (federal patent laws embody business representatives from large and “a careful balance between the need to promote innovation small firms, and the independent inventor and the recognition that imitation and refinement through imitation are both necessary to invention itself and the very community; leading patent and antitrust lifeblood of a competitive economy.”). organizations; leading antitrust and patent practitioners; and leading scholars in 10 Id. at 156. 11 Id. at 146. 12 Id. at 156. 3
  7. 7. Bo x 2. Overzealous Antitrust Enforcement Can Commission’s conclusions about and Underm ine the Innovation that Patents Promo te. recommendations for the patent system. In the 1970's, antitrust enforcers viewed CONCLUSIONS AND grantbacks (e.g., when a licensee has improved patented technology, it “grants back” to the RECOMMENDATIONS original patentee access to the improvement) as automatically illegal. Mo re recently, antitrust I. Although Most of the Patent enforcers recognize that “[g]rantbacks can have procompetitive effects,” for example, by System Works Well, Some encouraging a patentee to license its patent in the Modifications Are Needed to first place, thereb y enab ling the licensee’s improvement. Antitrust enforcers now evalua te Maintain A Proper Balance likely pro com petitive and anticompetitive effects of Competition and Patent of grantbacks. Past antitrust rules may have Law and Policy. deterred some p rocom petitive grantbacks, however, thus deterring some innovations using paten ted technolo gy. See U.S. Department of The patent system does, for the most Justice and Federal T rade C omm ission, Antitrust part, achieve a proper balance with Guidelines for the Licensing of Intellectual competition policy. The statutory standards Pro perty § 5.6 (A pr. 6, 1 995 ), reprinted in 4 Trade of patentability appear largely compatible Reg. Rep. (CCH) ¶ 13,132, available at http://www.usdoj.gov/atr/public/guidelines/ipguide with competition; properly interpreted, they .htm. tend to award patents only when necessary to provide incentives for inventions, their commercial development, or their disclosure. Congress has enacted new economics and antitrust and patent law.13 In statutes that protect competition by, among addition, the FTC received about 100 written other things, facilitating disclosures of submissions. Business representatives were patent applications. The Court of Appeals mostly from high-tech industries: for the Federal Circuit, the sole court for pharmaceuticals, biotechnology, computer most patent law appeals, has brought hardware and software, and the Internet.14 stability and increased predictability to This report discusses Hearings testimony various elements of patent law. This has and independent research, and explains the reduced legal uncertainty and facilitated business planning. The Patent and 13 Trademark Office (PTO) has implemented The Commission thanks the DOJ and the Patent and Trademark Office for participating in many of initiatives to deal with new types of patents the panels at the Hearings and for recommending many of and has released a Strategic Plan for the 21st the participants in the Hearings. For providing facilities to Century to improve patent quality (i.e., allow some of the Hearings to be held on the West Coast, the Commission thanks the Competition Policy Center and reduce errors) and streamline procedures.15 the Berkeley Center for Law and Technology at the Hearings participants found much to praise University of California at Berkeley. in the current patent system. The Commission wishes to note the expertise and time contributed by Hearings participants. For all of their contributions, the Commission conveys its thanks. 15 See United States Patent and Trademark Office, The 21st Century Strategic Plan, at 14 See Appendices A and B. www.uspto.gov/web/offices/com/strat21/index.htm. 4
  8. 8. A. Questionable Patents Can Deter or Nonetheless, many participants in Raise the Costs of Innovation. and observers of the patent system expressed significant concerns that, in some ways, the One firm’s questionable patent may patent system is out of balance with lead its competitor to forgo R&D in the competition policy. Poor patent quality and areas that the patent improperly covers. For legal standards and procedures that example, firms in the biotech industry inadvertently may have anticompetitive reported that they avoid infringing effects can cause unwarranted market power questionable patents and therefore will and can unjustifiably increase costs. Such refrain from entering or continuing with a effects can hamper competition that particular field of research that such patents otherwise would stimulate innovation. This report makes several Bo x 3. Bloc king Patents recommendations for the legal standards, procedures, and institutions of the patent The patents of others can block a patentee ’s ability system to address such concerns. to exploit its own invention. For example: “[S]uppose that Admiral Motors obtains a patent on an II. Questionable Patents Are a internal combustion engine for use in automobiles. Later, Significant Competitive Betty Beta purchases an automobile marketed by Admiral Mo tors that embodies the patented invention. B eta Concern and Can Harm experiments with her new car and develops a dramatica lly Innovation. improved fuel injector useable only in the patented Admiral Mo tors engine. Even if Beta patents her improved fuel injector, she cannot practice that A poor quality or questionable technology without infringing A lpha’s b asic pa tent. . . . patent is one that is likely invalid or Unless one of the parties licenses the other, Beta must contains claims that are likely overly wait until Admiral Mo tors’ patent expires before broad. Hearings participants raised practicing her own patented improvement invention.” concerns about the number of ROGER E. SCHECHTE R & JO H N R. T H O M AS, I NTELLECTUAL P ROPERTY : T HE L A W OF C OPYRIGHTS , questionable patents issued.16 Such P ATENTS A N D TR A D EMARKS § 20.1.1 at 462 (20 03). If patents can block competition, see Box 3, the blocking patent is invalid or overbroad, then no and harm innovation in several ways. public benefits exist to justify its effects on follow-on innovation. appear to cover.17 Such effects deter market entry and follow-on innovation by 16 For example, software firms raised concerns 17 about patents that they believed should not have been See, e.g., FTC/DOJ Hearings on Competition granted, because the inventions were obvious based on and Intellectual Property Law and Policy in the preceding work in the area. While praising patents as the Knowledge-Based Economy, David J. Earp Testimony Feb. basis for their industry, biotech firms also raised concerns 26, 2002, at pages 290-91, 238 (hereinafter, citations to that some overbroad patents may discourage further transcripts of these Hearings state the speaker’s last name, innovation in some biotech areas. See generally Chs. 2 and the date of testimony, and relevant page(s)); Blackburn 3. 2/26 at 296; Caulfield 3/19 at 161. 5
  9. 9. competitors and increase the potential for In some industries, such as computer the holder of a questionable patent to hardware and software, firms can require suppress competition. access to dozens, hundreds, or even thousands of patents to produce just one If a competitor chooses to pursue commercial product. One industry R&D in the area improperly covered by the representative from a computer hardware questionable patent without a license to that firm reported that more than “90,000 patents patent, it risks expensive and time- generally related to microprocessors are held consuming litigation with the patent holder. by more than 10,000 parties.”19 Many of If the competitor chooses to negotiate a these patents overlap, with each patent license to and pay royalties on the blocking several others. This tends to create questionable patent, the costs of follow-on a “patent thicket” – that is, a “dense web of innovation and commercial development overlapping intellectual property rights that increase due to unjustified royalties. a company must hack its way through in order to actually commercialize new Another option is to find a legal technology.”20 means to invalidate the patent. PTO procedures allow only very limited Much of this thicket of overlapping participation by third parties, however. A patent rights results from the nature of the lawsuit in federal court may not be an technology; computer hardware and alternative, because a competitor may not software contain an incredibly large number sue to challenge patent validity unless the of incremental innovations. Moreover, as patent holder has threatened the competitor more and more patents issue on incremental with litigation. If the competitor is not on inventions, firms seek more and more the verge of marketing an infringing patents to have enough bargaining chips to product, the patent holder may have no obtain access to others’ overlapping reason to threaten litigation. In these patents.21 One panelist asserted that the time circumstances, as one biotech representative and money his software company spends on complained, “there are these bad patents that creating and filing these so-called defensive sit out there and you can’t touch them.”18 If patents, which “have no . . . innovative value litigation does take place, it typically costs in and of themselves,” could have been millions of dollars and takes years to better spent on developing new resolve. This wastes resources. B. In Industries with Incremental 19 Detkin 2/28 at 667-68. Innovation, Questionable Patents Can Increase “Defensive 20 Carl Shapiro, Navigating the Patent Thicket: Patenting” and Licensing Cross Licenses, Patent Pools, and Standard-Setting, in 1 Complications. INNOVATION POLICY AND THE ECONOMY 119, 120 (Adam Jaffe et al. eds., 2001). 21 The forthcoming FTC/DOJ joint report will discuss the proper antitrust evaluation of licensing 18 Blackburn 2/26 at 295-96. techniques used in such situations. 6
  10. 10. technologies.22 economic significance, “it is much cheaper for society to make detailed [patent] validity Questionable patents contribute to determinations in those few cases [in which the patent thicket. In the context of a patent patents are challenged] than to invest thicket, questionable patents can introduce additional resources examining patents that new kinds of licensing difficulties, such as will never be heard from again.”24 royalties stacked one on top of another, and Accordingly, the FTC’s recommendations can increase uncertainty about the patent focus first on procedures and presumptions landscape, thus complicating business used in challenging questionable patents, planning. Questionable patents in patent because such challenges are more likely to thickets can frustrate competition by current involve patents of competitive significance. manufacturers as well as potential entrants. Because a manufacturer needs a license to Recommendation 1: all of the patents that cover its product, firms can use questionable patents to extract high As the PTO Recommends, Enact royalties or to threaten litigation.23 For Legislation to Create A New example, a questionable patent that claims a Administrative Procedure to Allow single routine in a software program may be Post-Grant Review of and asserted to hold up production of the entire Opposition to Patents. software program. This process can deter follow-on innovation and unjustifiably raise The PTO discusses patent costs to businesses and, ultimately, to applications only with the patent applicant. consumers. Until recently, third parties could only bring certain relevant documents to the attention C. Recommendations to Improve of, and, in limited circumstances, file a Patent Quality and Minimize written protest with, an examiner or to Anticompetitive Costs of the request the PTO Director to reexamine a Patent System. patent. To address this situation, Congress passed legislation to establish limited One recent article argues procedures that allow third parties to persuasively that because most patent participate in patent reexaminations. Recent applications involve claims of little amendments have improved those procedures, but they still contain important restrictions and disincentives for their use. 22 Greenhall 2/27 at 377, 420. Once a questionable patent has issued, the most effective way to challenge it is through 23 “Large and small companies are increasingly litigation. Litigation generally is extremely being subjected to litigation (or its threat) on the basis of questionable patents.” United States Patent and Trademark Office Fee Modernization Act of 2003: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the House Comm. on the Judiciary, 108th Cong. 2 (2003) (Statement of Michael K. Kirk, Executive Director, American Intellectual Property Law Association), available at 24 http://www.aipla.org/html/Legislative/108/testimony/FeeLe Mark A. Lemley, Rational Ignorance at the g.htm. Patent Office, 95 NW. L. REV. 1495, 1497 (2001). 7
  11. 11. costly and lengthy,25 and is not an option should preside over the proceeding, which unless the patent owner has threatened the should allow cross-examination and potential challenger with patent carefully circumscribed discovery, and infringement litigation. which should be subject to a time limit and the use of appropriate sanctions authority. The existing procedures attempt to Limitations should be established to protect balance two perspectives. On the one hand, against undue delay in requesting post-grant third parties in the same field as a patent review and against harassment through applicant may have the best information and multiple petitions for review. The expertise with which to assist in the authorizing legislation should include a evaluation of a patent application, and delegation of authority permitting the PTO’s therefore might be useful participants in the conclusions of law to receive deference from process of deciding whether to grant a the appellate court. Finally, as is the case patent. On the other hand, the limited with settlements of patent interferences, involvement of third parties in the issuance settlement agreements resolving post-grant and reexamination of patents reflects proceedings should be filed with the PTO genuine concern to protect patent applicants and, upon request, made available to other from harassment by competitors. This government agencies. remains an important goal. To continue to protect against the possibility of competitors Recommendation 2: harrassing patent applicants, any new procedure should be available only after a Enact Legislation to Specify that patent issues. Challenges to the Validity of a Patent Are To Be Determined Because existing means for Based on a “Preponderance of the challenging questionable patents are Evidence.” inadequate, we recommend an administrative procedure for post-grant An issued patent is presumed valid. review and opposition that allows for Courts require a firm that challenges a patent meaningful challenges to patent validity to prove its invalidity by “clear and short of federal court litigation. To be convincing evidence.” This standard meaningful, the post-grant review should be appears unjustified. A plethora of allowed to address important patentability presumptions and procedures tip the scales issues.26 The review petitioner should be in favor of the ultimate issuance of a patent, required to make a suitable threshold once an application is filed. In addition, as showing. An administrative patent judge many have noted, the PTO is underfunded, and PTO patent examiners all too often do not have sufficient time to evaluate patent 25 A biotechnology case, for example, can cost applications fully. These circumstances between five and seven million dollars and take two or suggest that an overly strong presumption of three years to litigate. See Ch. 3. a patent’s validity is inappropriate. Rather, 26 courts should require only a “preponderance At a minimum, patent challengers should be of the evidence” to rebut the presumption of able to raise issues of novelty, nonobviousness, written description, enablement, and utility. validity. 8
  12. 12. The PTO works under a number of facts, the PTO does not have facilities with disadvantages that can impede its ability to which to test the accuracy or reliability of reduce the issuance of questionable patents. such information. Perhaps most important, the courts have interpreted the patent statute to require the Moreover, presumptions in PTO PTO to grant a patent application unless the rules tend to favor the issuance of a patent. PTO can establish that the claimed invention For example, “[i]f the examiner does not does not meet one or more of the produce a prima facie case [of obviousness], patentability criteria. Once an application is the applicant is under no obligation to filed, the claimed invention is effectively submit evidence of nonobviousness.”29 presumed to warrant a patent unless the PTO Similarly, “[o]ffice personnel . . . must treat can prove otherwise. as true a statement of fact made by an applicant in relation to [the asserted The PTO’s procedures to evaluate usefulness of the invention], unless patent applications seem inadequate to countervailing evidence can be provided that handle this burden. The patent prosecution shows that one of ordinary skill in the art process involves only the applicant and the would have a legitimate basis to doubt the PTO. A patent examiner conducts searches credibility of such a statement.”30 Likewise, of the relevant prior art,27 a focal point of the “[t]here is a strong presumption that an examination process, with only the adequate written description of the claimed applicant’s submissions for assistance. The invention is present when the application is patent applicant has a duty of candor to the filed.”31 PTO, but that duty does not require an applicant to search for prior art beyond that The PTO’s resources also appear about which the applicant already knows.28 inadequate to allow efficient and accurate If the patent applicant makes assertions or screening of questionable patent files documentary evidence regarding certain applications. Patent applications have doubled in the last twelve years and are increasing at about 10% per year.32 With 27 yearly applications approximating 300,000, “Prior art” consists of materials – often patents and publications, although affidavits and testimony also may present prior art – that reflect one or more of the 29 features or elements of the claimed invention. An MPEP § 2142. invention is “obvious” if it does not represent a sufficient step beyond the prior art. 30 United States Patent and Trademark Office, Utility Examination Guidelines, 66 Fed. Reg. 1092, 1098- 28 The PTO’s Manual of Patent Examining 99 (2001). Procedure (MPEP) states that the agency “does not investigate” duty of disclosure issues and “does not . . . 31 United States Patent and Trademark Office, reject” applications on that basis. See United States Patent Guidelines for Examination of Patent Applications under and Trademark Office, Manual of Patent Examining the 35 U.S.C. 112 ¶ 1, “Written Description” Requirement, Procedure § 2010 (8th edition 2001) (explaining that such 66 Fed. Reg. 1099, 1105 (2001). PTO determinations “would significantly add to the expense and time involved in obtaining a patent with little 32 or no benefit to the patent owner or any other parties with Lerner 2/20 at 157; James Langenfeld, an interest”), available at Innovation, Competition, and Intellectual Property: http://www.uspto.gov/web/offices/pac/mpep/mpep.htm Providing an Economic Framework (2/20/02) (slides) at 6, (hereinafter MPEP). at http://www.ftc.gov/opp/intellect/langenfeld.pdf. 9
  13. 13. they arrive at the rate of about 1,000 each grant of a patent application, combined with working day.33 A corps of some 3,000 the limited resources available to the PTO, examiners must deal with the flood of counsel against requiring “clear and filings.34 Hearings participants estimated convincing evidence” to overturn that that patent examiners have from 8 to 25 presumption. We believe the “clear and hours to read and understand each convincing evidence” burden can undermine application, search for prior art, evaluate the ability of the court system to weed out patentability, communicate with the questionable patents,36 and therefore we applicant, work out necessary revisions, and recommend that legislation be enacted to reach and write up conclusions. Many found amend the burden to a “preponderance of the these time constraints troubling.35 Hearings evidence.” participants unanimously held the view that the PTO does not receive sufficient funding Recommendation 3: for its responsibilities. Tighten Certain Legal Standards Finally, the PTO grants patents based Used to Evaluate Whether A only on the “preponderance of the Patent Is “Obvious.” evidence.” This standard applies in the context of an underlying presumption that Patent law precludes patenting if the the patent should be granted unless the PTO differences between the claimed invention can prove otherwise. It does not seem and the prior art37 are such that “the subject sensible to treat an issued patent as though it matter as a whole would have been obvious had met some higher standard of at the time the invention was made to a patentability. person having ordinary skill in the art.”38 “Nonobviousness asks whether a Defenders of the application of the development is a significant enough “clear and convincing” evidence standard technical advance to merit the award of a urged that a finding of patent validity by a patent.”39 A proper application of this neutral government agency using a statutory requirement is crucial to prevent knowledgeable examiner justifies placing a the issuance of questionable patents, heavy burden on those who challenge a including trivial patents and patents on patent’s validity. We disagree. inventions essentially already in the public Presumptions and procedures that favor the domain. The courts have developed a variety of tests to evaluate the obviousness of a claimed invention. Two in particular – 33 Chambers 2/8 (Patent Law for Antitrust Lawyers) at 86 (hereinafter 2/8 (Patent Session)). 36 34 See T.S. Ellis 7/11 at 119-20. Chambers 2/8 (Patent Session) at 84. 37 35 See supra note 25. See, e.g., Dickinson 2/6 at 64-65 (“Patent examiners need more time to examine.”); Kirschner 2/26 at 38 35 U.S.C. § 103. 242-43 (time available “clearly inadequate” for a meaningful examination of a biotech patent application); 39 Kesan 4/10 at 100 (time constraints do not allow adequate See MERGES & DUFFY , PATENT LAW AND search for software prior art). POLICY: CASES AND MATERIALS at 644. 10
  14. 14. the “commercial success test” and “the sufficiently searching inquiry when they suggestion test” – require more thoughtful conclude that commercial success application to weed out obvious patents. demonstrates a claimed invention is not obvious. Under current standards, if the a. In applying the “commercial patent holder shows that the claimed success” test, 1) evaluate on a case- features of the patent are coextensive with by-case basis whether commercial those of a successful product, then it is success is a valid indicator that the presumed that the invention – rather than claimed invention is not obvious, other factors – caused the commercial and 2) place the burden on the success. The burden shifts to the challenger patent holder to prove the claimed to present evidence to rebut that invention caused the commercial presumption.40 success. This test fails to ask, first, whether The Supreme Court has advised that, factors other than the invention may have in some circumstances, courts may consider caused the commercial success. By contrast, the commercial success of a claimed the PTO properly requires that commercial invention to indicate that it was not obvious. success be “directly derived from the For example, in some cases early in the invention claimed” and not the result of twentieth century, courts found the “business events extraneous to the merits of commercial success of an invention that the claimed invention.”41 Second, the satisfied a long-felt need that had resisted judicial standard too easily shifts the burden the efforts of others to solve the problem to the challenger. The patent holder is the tended to show the claimed invention was best source of information on what has not obvious. caused the commercial success of its product and should be required to show that, in fact, Commercial success can result from the claimed invention caused the many factors, however, some of which have commercial success. nothing to do with the claimed invention. For example, marketing, advertising, or an b. In applying the “suggestion” test, incumbent’s unique advantages may cause assume an ability to combine or commercial success. An undue reliance on modify prior art references that is commercial success to show nonobviousness consistent with the creativity and can raise a number of competitive concerns. problem-solving skills that in fact Commercially successful inventions may be are characteristic of those having more likely than others to occur even ordinary skill in the art. without the prospect of a patent. Patents on commercially successful products are more If the prior art already would have likely to confer market power than those on suggested the claimed invention, then the less successful products. 40 Certain patent experts and other See HARMON, PATENTS AND THE FEDERAL CIRCUIT at 169-70. Hearings participants expressed concern that courts and juries sometimes fail to use a 41 MPEP § 716.03(b). 11
  15. 15. claimed invention is obvious. If not, then It is important to protect against the the claimed invention is not obvious. The issuance of obvious patents that may confer “suggestion test” thus asks a helpful market power and unjustifiably raise costs. question – that is, to what extent would the Requiring concrete suggestions beyond prior art “have suggested to one of ordinary those actually needed by a person with skill in the art that this process should be ordinary skill in the art,45 and failing to give carried out and would have a reasonable weight to suggestions implicit from the art likelihood of success.”42 The Federal Circuit as a whole and from the nature of the justifiably has sought to protect inventors problem to be solved, is likely to result in from findings of obviousness based purely patents on obvious inventions and is likely on hindsight. “Good ideas may well appear to be unnecessarily detrimental to ‘obvious’ after they have been disclosed, competition. The Federal Circuit’s most despite having been previously recent articulations of the suggestion test unrecognized.”43 The Federal Circuit also seem to signal greater appreciation of these has sought to ensure that the PTO provides issues and would better facilitate an administrative record susceptible to implementation of the test in ways sensitive judicial review. to competitive concerns. Hearings participants expressed Recommendation 4: concern, however, with some recent applications of the suggestion test. To show Provide Adequate Funding for the that a claimed invention is obvious, some PTO. cases seem to require the PTO to point to particular items of prior art that concretely Participants in the Hearings suggest how to combine all of the features of unanimously expressed the view that the a claimed invention. Such an application of PTO lacks the funding necessary to address the suggestion test may have found that the issues of patent quality. Presidential patent claimed invention of the Selden patent – that review committees have long advocated is, putting a gasoline engine on a carriage – more funding for the PTO to allow it to was not obvious, because there was no improve patent quality. 46 As recently as document that suggested that combination. 2002, the Patent Public Advisory Committee The invention likely was obvious, however; stated that the PTO “faces a crisis in funding “[e]verybody seemed to know that if you got a new engine of any kind, you would put it 45 on a carriage.”44 Cf. Barr 10/30 at 53-54 (arguing that current obviousness standards fail to reflect the skill of his company’s engineers, who “every day” independently invent things that have been deemed nonobvious). 42 Brown and Williamson Tobacco Corp. v. 46 Philip Morris, 229 F.3d 1120, 1124 (Fed. Cir. 2000) E.g., THE ADVISORY COMMISSION ON PATENT (emphasis added). LAW REFORM, REPORT TO THE SECRETARY OF COMMERCE (Aug. 1992), available at 43 http://world.std.com/obi/USG/Patents/overview; REPORT Arkie Lures, Inc. v. Gene Larew Tackle, Inc., OF THE INDUSTRIAL SUBCOMM. FOR PATENT AND 119 F.3d 953, 956 (Fed. Cir. 1997). INFORMATION POLICY OF THE ADVISORY COMM. ON INDUSTRIAL INNOVATION, REPORT ON PATENT POLICY 44 Duffy 7/10 at 132-33. (1979). 12
  16. 16. that will seriously impact . . . the quality of . examiner requests them. These statements . . issued patents.”47 The FTC strongly could materially enhance examiners’ ability recommends that the PTO receive funds to provide quality patent examinations by sufficient to enable it to ensure quality drawing more fully on the patent applicant’s patent review. knowledge base to identify the most relevant portions of prior art references. Recommendation 5: b. Encourage the use of examiner Modify Certain PTO Rules and inquiries under Rule 105 to obtain Implement Portions of the PTO’s more complete information, and 21st Century Strategic Plan. reformulate Rule 105 to permit reasonable follow-up. a. Amend PTO regulations to require that, upon the request of the PTO Rule 105 permits examiners to examiner, applicants submit request “such information as may be statements of relevance regarding reasonably necessary to properly examine or their prior art references. treat the matter [under examination].”50 The Commission recommends that the PTO Some Hearings participants asserted make a concentrated effort to use examiner that, far from holding back information, inquiries more often and more extensively. patent applicants tend to provide an As one panelist emphasized, “to get better examiner with numerous prior art citations, quality and shrink the amount of work,” resulting in lots of “information,” but little there is a need to seek more knowledge in “knowledge.”48 The 2002 version of the the possession of applicants, who typically PTO’s 21st Century Strategic Plan proposed “know more about the technology than the requiring applicants that cited more than 20 examiner does, and [know] where you might prior art references to provide statements to find something that might be relevant.”51 To explain the relevance of references, but the be fully effective, however, Rule 105 should PTO has now withdrawn that proposal.49 be amended so that applicants who reply that The FTC’s proposal is more modest than the they do not know the answer to the PTO’s original proposal; it would require examiner’s inquiry, or that the necessary relevance statements only when the information “is not readily available to the party or parties from which it was requested” are not accepted as a complete 47 PATENT PUBLIC ADVISORY COMMITTEE, reply,52 as they are now, but rather are ANNUAL REPORT 6 (Nov. 29, 2002), available at treated as responses on which the examiner http://www.uspto.gov/web/offices/com/advisory/acrobat/pp may follow up. acannual12-05-02.pdf. 48 E.g., Kesan 10/25 at 60-61. 50 37 C.F.R. § 1.105. 49 United States Patent and Trademark Office 21st Century Strategic Plan, Mandatory Information 51 Kushan 4/11 at 89. Disclosure Statements (IDS), P-09 at 3 (June 3, 2002). See The 21st Century Strategic Plan, available at 52 www.uspto.gov/web/offices/com/strat21/index.htm. See 37 C.F.R. § 1.105. 13
  17. 17. c. Implement the PTO’s Recommendation 6: recommendation in its 21 st Century Strategic Plan that it expand its Consider Possible Harm to “second-pair-of-eyes” review to Competition – Along with Other selected areas. Possible Benefits and Costs – Before Extending the Scope of Second-pair-of-eyes review allows Patentable Subject Matter. the PTO quickly to flag issues that need further attention by the examiner or the Section 101 of the Patent Act states, examiner’s supervisor. The PTO first used “Whoever invents or discovers any new and this method to improve the quality of useful process, machine, manufacture, or business method patents, and it received composition of matter, or any new and good reviews from participants in the patent useful improvement thereof, may obtain a system. The Commission believes that patent.”54 Despite this broad mandate, expanding this program to fields with courts have long held certain types of substantial economic importance, such as inventions unpatentable. Traditional semiconductors, software, and common law exceptions include phenomena biotechnology, as well as other new of nature, abstract intellectual concepts, technologies as they emerge, could help to mental steps, mathematical algorithms with boost patent quality in areas where it will no substantial practical application, printed make the most difference. matter, and, for many years, business methods. d. Continue to implement the recognition that the PTO “forges a Over the past twenty-five years, balance between the public’s however, the scope of patentable subject interest in intellectual property and matter has expanded significantly. For each customer’s interest in his/her example, the Supreme Court, through two patent and trademark.”53 landmark decisions in 1980, held that both man-made, living organisms and computer The PTO functions as a steward of software constitute patentable subject matter the public interest, not as a servant of patent pursuant to Section 101. In 1999, the applicants. The PTO must protect the public Federal Circuit ruled that business methods against the issuance of invalid patents that can be patented. Some Hearings participants add unnecessary costs and may confer claimed that patents on computer software market power, just as it should issue valid and business methods are not necessary to patents to encourage invention, disclosure, spur the invention, commercial and commercial development. development, or public disclosure of 53 United States Patent and Trademark Office, FY2002 Corporate Plan 28 (2001) (describing role of PTO Under Secretary and Director), at http://www.uspto.gov/web/offices/com/corpplan/fy2002/in 54 dex.html. 35 U.S.C. § 101. 14
  18. 18. software or business methods.55 Others In addition to questionable patents, disagreed. Some Hearings participants other portions of the patent system raise contended that software and business competitive concerns. This section briefly method patents can raise significant describes each issue and the Commission’s competitive concerns and deter innovation, recommendation(s) to address it. especially because so much of the innovation in those fields builds Recommendation 7: incrementally on preceding work. This may raise the potential for thickets of patents to Enact Legislation to Require hinder, rather than accelerate, innovation Publication of All Patent and commercial development. Applications 18 Months After Filing. The constitutional intention that patents “promote the Progress of Science Until relatively recently, patents were and useful Arts” should be taken into published only when issued; patent account in interpreting the scope of applications were not published. During the patentable subject matter under Section 101. time that would pass between the filing of a Decisionmakers should ask whether granting patent application and the issuance of a patents on certain subject matter in fact will patent, an applicant’s competitor could have promote such progress or instead will hinder invested substantially in designing and competition that can effectively spur developing a product and bringing it to innovation. Such consideration is consistent market, only to learn, once the patent finally with the historical interpretation of issued, that it was infringing a rival’s patent patentable subject matter, which implicitly and owed significant royalties. This recognizes that granting patent protection to scenario disrupts business planning, and can certain things, such as phenomena of nature reduce incentives to innovate and discourage and abstract intellectual concepts, would not competition. advance the progress of science and the useful arts. For future issues, it will be A relatively new statute requires that highly desirable to consider possible harms most patent applications – all except those to competition that spurs innovation – as filed only in the United States – be well as other possible benefits and costs – published 18 months after filing. Patent before extending the scope of patentable applicants are protected from copying of subject matter. their inventions by statutory royalty rights, if the patent ultimately issues. This new III. Other Patent Laws and procedure appears to have increased Procedures Also Raise business certainty and promoted rational planning, as well as reduced the problem of Competitive Concerns. unanticipated “submarine patents” used to hold up competitors for unanticipated royalties. For these reasons, Hearings 55 See generally Ch. 3. See also Robert M. participants advocated expanding the 18- Hunt, You Can Patent That? Are Patents on Computer month publication requirement to include Programs and Business Methods Good for the Economy?, Q1 BUSINESS REVIEW 5, 14 (2001). patents filed only domestically, because such 15
  19. 19. patents may well have competitive proposed remedy for the opportunistic significance. Protection from copying broadening of claims should also protect similar to that already available for other such legitimate uses. Creating intervening published applications should be extended to or prior use rights would most directly those filing domestic patent applications as achieve this balance; it would cure potential well, and any necessary protections for competitive problems without interfering independent inventors also should be with legitimate needs for continuations. considered in terms of their likely costs and Such rights should shelter inventors and benefits. users that infringe a patent only because of claim amendments following a continuation Recommendation 8: or other similar application,56 provided that the sheltered products or processes are Enact Legislation to Create developed or used (or the subject of Intervening or Prior User Rights substantial preparation for use) before the to Protect Parties from amended claims are published. Infringement Allegations That Rely on Certain Patent Claims Recommendation 9: First Introduced in a Continuing or Other Similar Application. Enact Legislation to Require, As a Predicate for Liability for Willful After publication of its patent Infringement, Either Actual, application, an applicant may continue to Written Notice of Infringement amend its claims. Through this claim from the Patentee, or Deliberate amendment process, a patent that states Copying of the Patentee’s broader claims than those published at 18 Invention, Knowing It to Be months can still emerge. If the applicant Patented. uses procedures such as continuing applications to extend the period of patent A court may award up to three times prosecution, the potential for the amount of damages for a defendant’s anticompetitive hold up increases. Indeed, willful infringement of a patent – that is, the several panelists asserted that some defendant knew about and infringed the applicants keep continuing applications patent without a reasonable basis for doing pending for extended periods, monitor so. Some Hearings participants explained developments in the relevant market, and that they do not read their competitors’ then modify their claims to ensnare patents out of concern for such potential competitors’ products after those treble damage liability. Failure to read competitors have sunk significant costs in competitors’ patents can jeopardize plans for their products. Patent reform efforts have a noninfringing business or research long focused on how to remedy strategy, encourage wasteful duplication of opportunistic broadening of claims to effort, delay follow-on innovation that could capture competitors’ products. Legitimate reasons exist to amend 56 See infra Ch. 4(II)(C)(1) for a description of claims and use continuing applications. Any the types of filings that should be covered. 16
  20. 20. derive from patent disclosures, and consideration and incorporation of economic discourage the development of competition. insights in their decisionmaking. It is troubling that some businesses IV. The FTC Will Pursue Steps refrain from reading their competitors’ to Increase Communication patents because they fear the imposition of between Antitrust Agencies treble damages for willful infringement. Nonetheless, infringers must not be allowed and Patent Institutions. to profit from knowingly and deliberately using another’s patented invention due to a Many Hearings participants low likelihood that the patent holder can expressed concern that the patent and afford to bring suit or obtain substantial competition communities appear to exist in damages. The FTC’s recommendation separate worlds, interacting infrequently at would permit firms to read patents for their best. Patent practitioners and scholars disclosure value and to survey the patent further expressed concern that patent landscape to assess potential infringement institutions do not always fully understand issues, yet retain a viable willfulness or accommodate economic learning or doctrine that protects both wronged competition concerns. Increased interaction patentees and competition. appears desirable to foster better understanding and communication between Recommendation 10: the patent and competition communities. Expand Consideration of The FTC wishes to do its part to Economic Learning and improve communication between the Competition Policy Concerns in competition and patent communities. Patent Law Decisionmaking. Accordingly, the FTC will pursue the steps listed below. The Supreme Court has made clear in several decisions that there is room for A. The FTC Will Increase its policy-oriented interpretation of the patent Competition Advocacy Role laws.57 Indeed, to find the proper balance through Filing Amicus Briefs in between patent and competition law, such Appropriate Circumstances. policy-oriented interpretations are essential. Over the past twenty-five years, the The Commission will renew its incorporation of economic thinking into commitment to the filing of amicus briefs in antitrust has provided significant insights important patent cases that can affect that have substantially improved the competition, as well as in cases at the development of antitrust law and intersection of patent and antitrust law. competition policy. The Federal Circuit and When such cases have high stakes for the the PTO may also benefit from much greater public, the Commission can serve the public interest by filing amicus briefs to present its perspectives regarding the implications of certain issues for consumer welfare. 57 See, e.g., supra notes 10-12; Graham v. John Deere Co., 383 U.S. 1 (1966). 17
  21. 21. B. In Appropriate Circumstances, the V. Conclusion FTC Will Ask the PTO Director to Reexamine Questionable Patents Both patents and competition make that Raise Competitive Concerns. significant contributions to innovation, consumer welfare, and our nation’s A collective action problem may prosperity. We recognize the importance of frustrate business challenges to questionable the patent system; the recommendations in patents. Instead of challenging a patent’s this Report are designed to increase the validity, many firms may simply license it, likelihood that the valid patents are issued because no single firm has the incentive to and upheld. There is broad consensus on the finance an expensive legal challenge that significant role that these patents can play to would benefit all of the affected firms, not spur innovation and to encourage the just the challenger. An enforcement agency, disclosure and commercial development of however, can consider the cost of a inventions. questionable patent to an entire industry and to consumers and can solve this coordination The importance of competition as a problem. In appropriately narrow spur to innovation also should be circumstances, the FTC will do so. recognized. More patents in more industries and with greater breadth are not always the C. The FTC Will Encourage best ways to maximize consumer welfare. A Increased Communication questionable patent can raise costs and between Patent Institutions and prevent competition and innovation that the Antitrust Agencies. otherwise would benefit consumers. The FTC looks forward to working closely with One means of improving interagency the PTO and other patent organizations to communication would be the establishment increase communication and include all of a Liaison Panel between the FTC and the parties in discussion and implementation of DOJ’s Antitrust Division (collectively, the the FTC’s recommendations. Antitrust Agencies) and the PTO. Such a panel could function as a practical, policy- oriented group designed to permit the exchange of views on important issues as they arise. Another means would be to establish an Office of Competition Advocacy within the PTO. Such an office could, when appropriate, advise PTO policymakers about the likely competitive impact and economic consequences of policy decisions. A final means would be to request that Congress amend the membership categories of the Patent Public Advisory Committee (“P-PAC”) to include competition experts and economists. 18
  22. 22. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 INTRODUCTION AND BACKGROUND I. THE RELATIONSHIP OF COMPETITION AND PATENT LAW AND POLICY A. Each Policy Reflects Fundamental Assumptions about How Best to Organize an Economy and Encourage Innovation B. Competition and Patent Policy Both Promote Consumer Welfare Over Time, and Competition and Patent Policy Generally Work Well Together C. Tension Can Arise Between Competition and Patent Law and Policy in Certain Limited Circumstances II. VIEWS ON HOW BEST TO BALANCE COMPETITION AND PATENTS TO ACHIEVE CONSUMER WELFARE HAVE VARIED WIDELY OVER TIME A. For Much of the Twentieth Century, Patent and Antitrust Law Have Traded Ascendency with Each Other B. 1980-1990: Congress and the Courts Strengthen Patents, and Antitrust Incorporates an Updated Economic Framework III. COMPETITION AND PATENT POLICY CONTINUE TO SEEK A PROPER BALANCE, AND GROWTH OF THE KNOWLEDGE-BASED ECONOMY ADDS NEW CHALLENGES A. Antitrust and Patent Policy Have Worked to Achieve Better Balance B. The Growth of the Knowledge-Based Economy Creates Ongoing Controversy and Challenges Competition and Patent Policy to Continue Seeking a Better Balance IV. THE HEARINGS EXAMINED THE CURRENT BALANCE OF COMPETITION AND PATENT LAW AND POLICY IN FOSTERING INNOVATION A. The Hearings Did Not Address Certain Fundamental Questions or Issues with International Ramifications
  23. 23. B. The Hearings Examined the Appropriate Balance of Competition and Patent Law and Policy from a Competition and Economic Perspective C. Organization of the Report CHAPTER 2 THE ROLE OF COMPETITION AND THE PATENT SYSTEM IN SPURRING INNOVATION Introduction I. PATENTS’ EFFECTS ON STAND-ALONE INNOVATION A. Patents Can Spur Stand-Alone Innovation B. Costs Of, and Limits To, Patents’ Power to Spur Stand-Alone Innovation II. COMPETITION’S EFFECTS ON INITIAL AND FOLLOW-ON INNOVATION A. Competition Can Spur Innovation, Whether Initial or Follow-On B. Costs Of, and Limits To, Competition’s Power to Spur Innovation III. PATENTS’ EFFECTS ON FOLLOW-ON INNOVATION A. The Roles of Managed and Independent Follow-On Innovation B. Follow-On Innovation in the Face of a Single Blocking, Initial Patent C. Follow-On Innovation in the Face of Multiple Existing Patents Conclusion CHAPTER 3 BUSINESS TESTIMONY: CURRENT INNOVATION LANDSCAPE IN SELECTED INDUSTRIES I. SUMMARY II. THE PHARMACEUTICAL INDUSTRY A. Introduction B. Industry Description C. The Role of Patents in Spurring Pharmaceutical Innovation
  24. 24. D. The Role of Competition in Spurring Pharmaceutical Innovation E. The FTC’s Pharmaceutical Industry Enforcement Actions and Generic Drug Study F. Conclusion III. THE BIOTECHNOLOGY INDUSTRY A. Introduction B. Industry Description C. The Role of Competition in Spurring Biotechnology Innovation D. The Implications of Patent Protection for Innovation E. Licensing Practices for Biotechnology Research Tools F. Conclusion IV. THE COMPUTER HARDWARE INDUSTRIES, INCLUDING SEMICONDUCTORS A. Introduction B. Industry Description C. The Role of Competition in Spurring Computer Hardware Innovation D. Alternative Means of Fostering Innovation E. The Implications of Patent Protection for Innovation F. Tools to Navigate the Patent Thicket G. Conclusion V. THE SOFTWARE AND INTERNET INDUSTRIES A. Introduction B. Industry Description C. The Role of Competition in Spurring Software and Internet Innovation D. Alternative Means of Fostering Innovation
  25. 25. E. The Implications of Patent Protection for Innovation F. Licensing Strategies to Navigate the Patent Thicket G. Conclusion CHAPTER 4 COMPETITION PERSPECTIVES ON SUBSTANTIVE STANDARDS OF PATENTABILITY I. STATUTORY STANDARDS OF PATENTABILITY II. THE INTERPRETATION AND APPLICATION OF THE STANDARDS OF PATENTABILITY A. The Interpretation and Application of the Nonobviousness Requirement B. Enablement, Written Description, and Best Mode C. Other Doctrines that Affect Patent Breadth D. Utility and Research Issues E. Business Method Patents: An Illustration of Transition Issues III. CONCLUSION CHAPTER 5 COMPETITION PERSPECTIVES ON HOW PROCEDURES AND PRESUMPTIONS AFFECT PATENT QUALITY I. IMPACT ON COMPETITION II. PATENT EXAMINATION A. Data on Overall Performance B. Ex Parte Nature C. Analysis III. REEXAMINATION, OPPOSITION, AND REVIEW A. Current Procedures B. Proposals for Reform
  26. 26. C. Analysis IV. PATENT LITIGATION A. General Trends B. Presumption of Validity/Clear and Convincing Evidence Recommendation C. Willfulness/Treble Damages Recommendation V. CONCLUSION CHAPTER 6 COMPETITION AND PATENT POLICY CAN AND SHOULD WORK TOGETHER Introduction I. ANTITRUST AND PATENT LAW AND POLICY A. Antitrust Law and Policy Can and Should Take Patent Policy into Account to Promote Consumer Welfare Over Time B. Patent Law and Policy Can and Should Take Competition Policy into Account to Promote Consumer Welfare Over Time II. THE FEDERAL CIRCUIT: GOALS, JURISDICTION, CHOICE OF LAW, AND CASE LAW TRENDS A. The Federal Circuit and its Intended Effect on the Law B. Jurisdiction and Choice of Law Issues at the Federal Circuit C. Trends in the Law of the Federal Circuit III. INSTITUTIONAL CONSIDERATIONS FOR THE ANTITRUST ENFORCEMENT AGENCIES AND THE PTO A. Recommendations Relating to the PTO B. The FTC Will Pursue Steps to Increase Communication Between Antitrust Agencies and Patent Institutions
  27. 27. APPENDIX A CONTRIBUTORS TO FTC/DOJ HEARINGS APPENDIX B PUBLIC COMMENTS APPENDIX C GLOSSARY OF PATENT TERMS APPENDIX D SELECTED FEDERAL STATUTES
  28. 28. CHAPTER 1 INTRODUCTION AND BACKGROUND I. THE RELATIONSHIP OF COMPETITION AND PATENT LAW AND POLICY . . . . 3 A. Each Policy Reflects Fundamental Assumptions about How Best to Organize an Economy and Encourage Innovation . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. Competition Policy and Antitrust Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Patent Policy and Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 B. Competition and Patent Policy Both Promote Consumer Welfare Over Time, and Competition and Patent Policy Generally Work Well Together. . . . . . . . . . . 7 C. Tension Can Arise Between Competition and Patent Law and Policy in Certain Limited Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1. Grant of a Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 a. Is the Patent Warranted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 b. Does the Grant of the Patent Confer Market Power on the Patentholder or Unnecessarily Increase Transaction Costs? . . . . 11 2. Business Conduct with Respect to a Patent. . . . . . . . . . . . . . . . . . . . . . . 12 a. Is Antitrust Enforcement Warranted? . . . . . . . . . . . . . . . . . . . . . 13 b. Does Antitrust Enforcement Undermine the Incentives Created by the Patent System? . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3. Enhancing Consumer Welfare Requires a Proper Balance of Competition and Patent Law and Policy . . . . . . . . . . . . . . . . . . . . . . . . . 14 II. VIEWS ON HOW BEST TO BALANCE COMPETITION AND PATENTS TO ACHIEVE CONSUMER WELFARE HAVE VARIED WIDELY OVER TIME. . . . . . 14 A. For Much of the Twentieth Century, Patent and Antitrust Law Have Traded Ascendency with Each Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1. 1890-1930: Patents Receive Little Antitrust Scrutiny . . . . . . . . . . . . . . 15 2. 1930-1980: Antitrust Is Generally Ascendant. . . . . . . . . . . . . . . . . . . . . 15 B. 1980-1990: Congress and the Courts Strengthen Patents, and Antitrust Incorporates an Updated Economic Framework. . . . . . . . . . . . . . . . . . . . . . . . . . 18 1. Congress and the Courts Strengthen Patents . . . . . . . . . . . . . . . . . . . . . . 18 a. Congress Creates the Court of Appeals for the Federal Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 b. The Supreme Court Interprets Patentable Subject Matter Broadly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2. Antitrust Incorporates an Updated Economic Framework. . . . . . . . . . . . 22
  29. 29. III. COMPETITION AND PATENT POLICY CONTINUE TO SEEK A PROPER BALANCE, AND GROWTH OF THE KNOWLEDGE-BASED ECONOMY ADDS NEW CHALLENGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A. Antitrust and Patent Policy Have Worked to Achieve Better Balance . . . . . . . . 23 1. Antitrust Policy Has Continued to Implement New Economic Learning in Addressing the Intersection of Antitrust and Patents. . . . . . 23 2. Patent Policy Has Implemented Certain Reforms and Rules that Can Lessen Anticompetitive Conduct and Increase Competition . . . . . . 26 a. Congress Enacted the American Inventors Protection Act of 1999 (AIPA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 b. The Federal Circuit Has Increased Business Certainty and Has Noted Competition Concerns in Certain Contexts . . . . . . . . . . . 28 c. The PTO Has Implemented Certain Reforms that Can Aid Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 B. The Growth of the Knowledge-Based Economy Creates Ongoing Controversy and Challenges Competition and Patent Policy to Continue Seeking a Better Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1. Follow-On Innovation, Product Commercialization, and Patent Proliferation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2. Procedures that Third Parties Can Use to Challenge Questionable Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3. Patent Prosecutions and Examinations within the PTO . . . . . . . . . . . . . . 33 4. Patent Quality and Patentable Subject Matter. . . . . . . . . . . . . . . . . . . . . . 35 IV. THE HEARINGS EXAMINED THE CURRENT BALANCE OF COMPETITION AND PATENT LAW AND POLICY IN FOSTERING INNOVATION. . . . . . . . . . . . . 35 A. The Hearings Did Not Address Certain Fundamental Questions or Issues with International Ramifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 B. The Hearings Examined the Appropriate Balance of Competition and Patent Law and Policy from a Competition and Economic Perspective . . . . . . . . . . . . . 36 1. The Legal System Should Provide Efficient Incentives for All Types of Innovation, Including Both Single-Stage and Follow-On Innovation . . . 36 2. Safeguard the Patent System’s Disclosure Function . . . . . . . . . . . . . . . . 37 3. The Patent System Should Avoid Creating or Upholding Unwarranted Patents that Confer Market Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 4. The Patent System Should Rely on Substantive Standards and Procedures that Minimize the Sum of Error and Process Costs and the Detrimental Effects of Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 C. Organization of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy A Report by the Federal Trade Commission FEDERAL TRADE COMMISSION October 2003

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