On March 8, 2011, the United States Senate passed S. 23, the Senate version of patent reform, by an overwhelming vote of 95 to 5. Just about three weeks later the House Judiciary Committee unveiled the House version of patent reform. While the framework of the House bill is largely the same as the framework of the bill that achieved overwhelming bipartisan support in the Senate, there are some non-trivial deviations that place the likelihood of achieving patent reform squarely in doubt. The two big ticket items being kicked around as differences that threaten the entirety of patent reform are inter partes review and prior user rights. These two issues could cause a splintering of stakeholders and place us back in the limbo we have been in for the past 6 years, which would be tragic because Congress is finally poised to adequately fund the United States Patent and Trademark Office.
I have previously written about prior user rights, see Prior User Rights is Poison Pill and Expanded Prior User Rights is a Bad Idea, so today I will focus on inter partes review. Inter partes review (IPR) was created in the Senate patent bill as an administrative proceeding for the revocation of existing patents, replacing current law’s inter partes reexamination procedure. The new IPR proceeding in S. 23 has the same legal scope as current law, which means that it is limited to questions of anticipation (35 U.S.C. 102) and/or obviousness (35 U.S.C. 103) and only patents or printed publications may be used to challenge previously issued claims, leaving out the possibility that things such as a prior use or previous sale could be considered. Also similar to the existing law is the threshold standard for initiating the review, which is as follows:
The Director may not authorize an inter partes review to commence unless the Director determines that the information presented in the petition filed under section 311 and any response field under section 313 shows that a substantial new question of patentability exists.
This inter partes review could be instituted up to 12 months after the grant of the patent or issuance of a reissued patent, or if a post-grant review was instituted up until the date of the termination of the post grant review.
Under the Senate patent reform bill, S. 23, the threshold form initiating an inter partes review is higher. The Senate articulation of the threshold is as follows:
The Director may not authorize an inter partes review to commence unless the Director determines that the information presented in the petition filed under section 311 and any response filed under section 313 shows that there is a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.
So S. 23, deviates from the current law which would allow a reexamination to proceed if there is a substantial new question of patentability to make inter partes review possible only when there is a “reasonable likelihood” of success. This is extremely important because adoption of the House language would make it virtually impossible in practical terms for the Patent Office to deny an inter partes review petition. While such a claim will seem overblown and grandstanding, that is the only conclusion the data supports.
If IPR proceedings are required on a showing of a mere “substantial new question of patentability,” the PTO would be compelled to grant almost every request. This is true because today the standard for instituting a reexamination is that same “substantial new question of patentability” and approximately 95% of all reexamination requests are currently granted. So one doesn’t have to wonder what the Patent Office will do if the standard for inter partes review is a “substantial new question of patentability,” because we quite clearly know what history shows they do, which is grant 19 out of 20 requests.
Both the House and Senate bills create the opportunity for continual and constant challenges, one right after another. For example, challengers could tie up issued patents in post-grant review, followed by inter partes review and subsequently, or simultaneously, by challenges in one of the Federal District Courts. Thus, the settling of patent rights seems a distant dream if a well funded challenger wants to tie up a patent. The only hope for the patent owner is that with every subsequent challenge it becomes more difficult to challenge. That is what S. 23 sets up by having a “substantial new question of patentability” standard to initiate a post-grant review and then a much heightened “likelihood of success” standard to institute inter partes review.
Unfortunately, the House bill as it currently stands doesn’t make it harder to challenge, so the House bill merely provides opportunity after opportunity to challenge issued patent rights, including rights that have been vetted not once, but twice, by the United States Patent and Trademark Office. Such a construct has no logical basis other than to weaken patent rights and make it easier for infringers and those who don’t innovate to circumvent the legitimate rights of innovators.
The IPR provisions of S.23 represent a carefully-crafted, and finely-tuned, compromise that adequately balances the interests of the Patent and Trademark Office not to be over-burdened by reviewing and re-reviewing the same patent over and over again, patent owners, patent challengers, and manufacturers from a broad range of industry sectors. S.23 expands and improves the opportunities for administrative review of questionable patents, while protecting patent owners against abuse and harassment by infringers, who legally are nothing more than copy-cats.
Simply put, the weakening of patent rights through the refusal to allow patent rights to settle in terms of scope and ownership does nothing to enhance innovation. It makes innovating more expensive and will make keeping innovations as trade secrets more attractive. The entire purpose for the United States patent system is to provide an appropriate reward to get innovators to disclose, which benefits society because then future innovators can build on what has come before. Any weakening of patent rights upsets this balance, is antithetical to the Constitutional purpose and will result in less, not more, innovation.
Investment is the life blood of many innovative companies and some entire sectors. For example, the biotechnology sector and more broadly the life sciences sector simply cannot exist without inventors. Many, if not most, life sciences companies have a 10 year horizon from start to profitability. That 10 year period in which there is no profitability must be paid somehow, and it is paid by investors. Investors are not typically sophisticated science professionals or legal experts, but they are highly sophisticated in the art of making money, particularly through investments. Property rights of all kind are critical for many reasons. If you own something and the business fails at least you know you have the value of the property, which is true for intellectual property rights as well.
More critical for investors in high-tech start-ups is the likelihood of having a competitive advantage. Without a competitive advantage there is simply no way to recoup the investments spent in research and development. Without a competitive advantage the second comer can and will be able to charge lower prices because they have not had to bear the burden of research and development costs. Thus, if the second comer can copy the innovator they compete with the innovator using the invention of the innovator and charge less. That makes it impossible to justify the enormous cost of innovation. Strong patent rights are absolutely critical for high tech start-ups that need to attract investment funds, and the weakening of patent rights through allowing never ending challenges does nothing but make the task of generating funding more difficult.
Incidentally, if you haven’t noticed, the U.S. and world economy is still struggling from the Great Recession, the unemployment rate is extremely high and governments around the world spend more than they bring in. It is often said that we don’t have a revenue problem, but rather a spending problem. That seems certainly true, but even more correct is to recognize that we have a jobs problem.
In the United States our economy is overwhelmingly driven by consumer spending, to the tune of about 70% of spending. It doesn’t take a rocket scientist to figure out that individuals do what governments can’t seem to comprehend, which is in tough times you spend less. Moreover, it doesn’t take a rocket scientist to appreciate that people without jobs and no income have no money to spend. So everything needs to start with jobs, and the biotechnology sector, for example, has those to offer, but only if they can attract the funding necessary to begin the many year process toward sustainability.
For example, a study of the biotechnology sector from 2001 – 2008, which was released in 2010, shows that total employment in the U.S. bioscience sector reached 1.42 million jobs in 2008, and that for every new bioscience job, another 5.8 jobs are created. In fact, the study demonstrated that the bioscience sector employment growth greatly outpaced national employment growth during the same time period. Additionally, in 2008 the average annual wage for bioscience jobs was $77,595 which is $36,366 more than the average annual wage of the total US private sector.
While somewhat dated and, for the most part, prior to the Great Recession, more recent confirmation of the type of high paying jobs the biotechnology sector provides comes from what appears to be a rather exhaustive Biotechnology 2011 report prepared by Monster.com. Monster looked at 2010 numbers, leveraging more than 165,000 Biotechnology resumes coupled with online job postings and surveys of industry professionals and recruiters. The report concludes that “the employment outlook remains good as more entrepreneurs begin new businesses and more existing companies advance in the biotechnology field.” Furthermore, Monster explains that in 2010 the median salary offered in 2010 was $76,960, largely in line with the annual salaries from 2008.
So there is a lot at stake here in this patent reform debate and definitely more than meets the eye. When you scratch the surface and look at what the House is proposing, whether it is the authorization of continual challenges to patents without any increase in the threshold, or the addition of prior user rights, or the cutting off of discretion vested in District Courts to determine whether a patent infringement litigation should be stayed, all of this adds up to continued pressure on patent rights.
It is naive in the extreme not to believe that at some point investors will look at highly speculative start-up companies and question the viability of investing large sums of money with patent rights that are weakened, at least by today’s standard. If that does happen, and high-tech start-up companies are starved for capital, the jobs outlook will become even more bleak and any recovery unnecessarily stalled or slowed.
These House of Representatives’s proposed changes to S. 23 moves patent reform in a patent-hostile direction that jeopardizes the carefully-crafted compromise struck in the Senate and supported by the majority of stakeholders. If the House continues to demand these provisions be in the ultimate legislation the coalition that supports patent reform will splinter and we will once again see industries line up on competing sides. History indicates that once that happens with patent legislation nothing gets done. That would be truly unfortunate given that both the House and Senate have taken the sensible step to authorize the Patent Office to set fees high enough to justify the work being performed and to keep 100% of the fees collected. That sweetener is going to be hard to pass up, but it is far from sweet enough to support the House vision of patent reform, and looks more and more like it is placed there to get the industry to hold its nose and swallow hard. Unfortunately, most in Congress really don’t understand anything about innovation or patents, so I suspect they are on the verge of overplaying their hand and causing patent reform, including those uncontroversially good parts, to die yet another miserable death.