Let me start by saying that there are a number of provisions in the Senate patent reform bill that I strongly support. That being said, the Department of Commerce released a White Paper suggesting that patent reform will wildly benefit the US economy by significantly reducing patent pendency and reducing litigation costs.
This is hardly a surprise given that the PTO is part of the Department of Congress. The paper was written by two PTO officials and the Commerce Department’s chief economist.
The good thing about the paper is that it suggests that the Obama Administration understands the role of innovation in our economy. This can hardly be said for many in the anti-patent movement. The paper notes that wages in highly innovative industries such as computers, electronics, and chemicals grew at nearly two and a half times the national average at US companies from 1990-2007 and 76% of startup managers reported that venture capitalists consider patents to be very important to their funding decisions. The paper aknowledges that patents can be especially important to R&D investment in the biotechnology, pharmaceutical, and medical device industries.
Next, the paper recognizes that the PTO’s application backlog, long pendency, poor quality patents, and high cost of litigation are significant problems affecting investment in innovation. The paper cites a recent work by the UK Intellectual Property Office that concludes that “backlogs of the sort that the USPTO is currently facing could lead to ‘foregone innovation,’ costing the economy billions of dollars annually.”
The paper continues by noting that the high costs associated with litigating a patent may preclude a number of invalid patents from being adjudicated as such. Many competitors may simply wait until someone else challenges the patent and thereby reap the benefits of an invalidity judgment. The paper cites litigation costs of $5 million or more per side in cases where $25 million is at stake. The paper also cites civil litigation rules as hampering patent challenges by competitors.
So, what is the solution to all of these woes besetting the patent system? Why, the patent reform bill currently pending in the Senate of course.
First, the paper supports granting the PTO fee-setting authority for which the agency has long lobbied. The paper suggests that patent applicant fees are too back-loaded. Issue and maintenance fees subsidize a large share of the cost of applications that are abandoned. The majority of the PTO’s work is at the examination stage, but current filing and examination fees only cover about a third of the cost of undertaking those tasks. Very little work is required in the case of processing maintenance fees, and these are paid at the whim of the applicant. During the recent economic downturn, many patents were abandoned for failure to pay maintenance fees. Since the PTO relies so heavily on this revenue, this has significantly contributed to the PTO’s recent revenue woes.
The paper cites current patent pendency at 34 months, which we know is not the real number given how the PTO calculates RCE’s as new applications and applicant priority claims. The real number is significantly higher. The paper then makes the outrageous statement that the 34 month number could be reduced by 40% by simply giving the PTO fee-setting authority. This would put average pendency at the absurd level of 20 months. That is a pipe dream. Not surprisingly, the paper provides no support for this assertion.
Next, the paper cites post-grant review as the solution to the problem of high cost litigation. The paper suggests that the costs of post-grant review will be 50-100 times lower than for patent litigation. This means that for the $25 million dispute cited above, the costs to each side would be only $50,000-100,000. Again, that seems pretty unlikely.
[R]esearchers believe the cost-benefit ratio of adopting an efficient system of enhanced post-grant review procedures, such as that created by patent reform, could be as high as 1 over 15 — in other words, so long as PGR costs do not exceed $100,000, benefits are expected to range, conservatively, from a high of $15 to a low of $8 for each $1 invested.
Wow! In that case, by all means let’s do it! The paper asserts that one-third to one-half of the patents challenged in a post-grant review procedure would be held to be invalid, thus saving future litigation costs surrounding those patents.
Finally, in another misleading statement, the paper recites that the time for a patent to reach final judgment in a district court action is 8 years on average from patent grant to final resolution of validity. In a quarter of the cases, the time is more than 11 years! The post-grant review procedure, by constrast, would resolve validity within a year of the patent grant.
This would suggest that average district court pendency is 8 years with many cases lasting more than 11 years. Post-grant review is such a significantly better procedure because it can cut 7 years off the average. What the paper fails to note is that most patent lawsuits are not filed on the day the patent is granted. In fact, they may be filed one year, two years, five years, ten years, or longer after the patent is granted, indeed at any time during its effective life.
Again, as I noted above, I am not completely against patent reform or the current Senate bill. I think the bill has many flaws that should be addressed, but there are many improvements there as well.
The White Paper, unfortunately, is not effective in advocating for passage of the bill because it contains too many over-the-top assertions and outrageous predictions. There is no way that by simply providing the PTO with fee-setting authority that all of its current ills will be resolved: the backlog will disappear and pendency will drop to 20 months. Especially given that the bill calls for a relatively small number of test cases for post-grant review during the first few years, it is unlikely that the procedure will solve all of the problems with patent litigation.
A more effective paper would have cited smaller projected improvements based on passage of the reform bill. As we know, that’s not how the political game is played.