Earlier this year, patent reform advocates were in high spirits that 2009 would finally bring reform to a patent system that has resulted in a huge backlog of patent applications and long wait times for patents. The only seriously contentious issue during the Senate Judiciary Committee hearings seemed to be the damages reform issue. Meaningful debate did not occur on the other issues at the committee, as Chairman Sen. Patrick Leahy (D-VT) was in an extreme hurry to pass the bill.
On the damage apportionment issue, Scott Shane, Professor of Economics at Case Western, wrote a paper on how the changes to damage apportionment would hurt the patent system and the economy. Sen. Jeff Sessions (R-AL), the new ranking member of the Judiciary Committee, asked Prof. Shane to take a look at the post-grant opposition and expanded inter partes reexamination provisions of the bill. Yesterday, Prof. Shane issued his report on how these changes would affect the patent system. Prof. Shane reaches the following conclusions on the proposed changes to the process for administratively challenging a patent:
- Increase the length of patent pendency. Under the proposed changes, the length of time between patent application and patent issuance would increase from 32 months to 40 months.
- Increase the costs of defending patent validity by an estimated $2.2 billion over the current cost of litigation.
- Reduce investment in R&D. Reducing the value of patents significantly reduces investment in R&D. The proposed changes would lead to an annual reduction of $4.4 billion in industrial R&D.
- Compromise certainty about patent validity. The new post-grant review and expanded inter partes reexamination processes would make uncertain the validity of approximately $1.4 billion to $1.7 billion of patents issued annually, totaling $8.1 billion to $10.3 billion of patents over the six years it takes to get an outcome of the average review case.
- Decrease the disclosure of knowledge necessary for others to build on innovation. Patent disclosures are a source of information which increase U.S. innovation.
- Hinder efforts of U.S. universities to transfer their inventions to the private sector. Weakening patent protections through expanded administrative challenges would jeopardize over $1 billion annually due to a reduction in the amount of university technology that would be commercialized by industry.
- Increase strategic patenting behavior by large, established firms. Strategic efforts to hinder the performance of competitors by forcing them to defend their patents against multiple challenges, beginning with reexamination and review proceedings and ending with litigation, are a likely outcome of the proposed changes.
Moreover, the proposed legislation will not have many of the beneficial effects the proponents of the legislation claim it will have. In particular, the proposed legislation:
- Will not improve patent quality;
- Will not reduce the cost of patent litigation;
- Will not speed the determination of patent validity.
Much of Prof. Shane’s analysis resulted from a study of the European Patent Office (EPO) post-grant opposition system. His conclusion that the average application pendency will increase by 25% is based on the fact that examiners would need to spend time focusing on oppositions that would normally be spent examining applications. Otherwise, the PTO would need to shift resources from the examining corps to administrative law judges to conduct opposition proceedings. Either way, absent additional funding, application pendency will increase. His paper doesn’t consider that additional funding would result from opposition filings. Based on his assumption (from the EPO) that opposition proceedings take 8 times more examiner time than patent applications, however, the fees for filing an opposition would need to be substantial ($8000-10,000+) to off-set the time requirements.
Prof. Shane estimates that direct legal costs in post-grant oppositions would run about $150,000 per case, thus increasing the cost of achieving patent validation. Many companies may simply choose to keep their inventions as trade secrets rather than incur the additional costs. This would result in reduced R&D investment and reduce the market for universities to transfer their patents to the private sector.
Based on behavior in Europe, Prof. Shane argues that post-grant oppositions will not actually be used to weed out “bad” patents, those that are invalid and should not have been issued. Instead, large companies use opposition proceedings strategically to delay and hinder enforcement by smaller companies. In many cases, a non-infringement defense is stronger than an invalidity challenge, thus leaving the “bad” patents in the market.
Post-grant opposition proceedings are slow and take a long time. Estimates for EPO cases show a median duration of 3.1 years with an average of 4.0 years. A quarter of all cases last longer than 6.2 years. These times include opposition and appeal. Thus, he argues that the purported benefits of post-grant opposition proceedings will not happen.
The Manufacturing Alliance on Patent Policy has issued a press release on Prof. Shane’s paper.
IPWatchdog believes that this means that patent reform is on life support and near death. Anything that will increase average pendency by 25% will not pass in Congress. He also reviews how the PTO manipulates pendency times by counting RCEs as new applications. Thus, average pendency is really longer than 32 months.
