By Kevin E. Noonan —

One of the hopes of the members of the patent community who have been paying attention is that the passing of the current administration may result in better times for the U.S. patent system.  Political appointees like Secretary of Commerce Guttierrez, USPTO Director Jon Dudas, and Undersecretary of Commerce Margaret Peterlin will certainly be packing up their desks next January.  However, we can expect that the Congress will be similarly constituted as it is now, and that could result in efforts for even more dubious patent reform schemes.

This message is delivered by Professor Harold Wegner (at right) in a cover story article published in ipFrontline (see "Keys to 111th Congress Patent Reform").  The source of his concern is the patent economics tome Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk by James Bessen and Michael J. Meuer.  The work has been lauded by patent academia:  Professor Dennis Crouch excerpted it extensively on his Patently-O blog prior to publication, and the published work carries glowing accolades from the darling of patent academia, Professor Mark Lemley of Stanford University.  While the approval of the academic patent intelligentsia is one thing, more worrisome is that Patent Failure thesis, the familiar "the patent system is broken," is gaining traction among policymakers.

The basis for this influence can be summarized in this graph (from Professor Wegner’s article):

The graph purports to show not just that the patent system is broken, but calls into question the system’s value to innovation and the U.S. economy.  The graph is based on two statistics:  the positive value of patent protection versus the negative effects of patent litigation.  The message of the graph – that patents cost more than they are worth – seems simple and empirical.  While acknowledging that patents seem to benefit certain industries, like biotechnology and pharmaceutical companies, the message of this analysis is that the majority of American "mainstream" industries suffer more harm than benefit from the patent system.

But as Professor Wegner notes, there are some indications that the data don’t completely support the message.  For example, the profits ascribed to the pharmaceutical industry are only $15 billion, citing his analysis of the data from his review of Patent Failure in The Financial Times:

The fraction of patents in the biotech/pharma and chemistry sectors may be small in terms of numbers of patents but that is where patent exclusivity is most vigorously enforced and where the bulk of all patent rent value lies.  The authors estimate the global patent value for US companies in the chemicals (including pharmaceuticals) sector in 1999 was $[15 billion] compared with only $3.2 [billion] for all other sectors.  In fact, the $[15 billion] figure is ridiculously low:  sales of the top 10 drugs account for roughly $40 [billion] in domestic sales alone – with no patent protection, that $40[billion] would vanish.

("The right medicine for a flawed system," May 8, 2008).

Further, Professor Wegner notes that when Eli Lilly and Company lost its patent on Prozac® in 2001, "its market cap dropped $36 billion in one day, roughly triple what the authors say is the annual profit for the entire pharmaceutical and chemistry industries in one year."  He also identifies the reason for this discrepancy:  "the auhors have explained the seemingly low figure of $15 billion in annual patent profits in pharmaceuticals and chemicals by stating that their figures are calculated based upon "patent ‘rents’ not sales and not patent value.  . . .  In economic theory it is the rents from patents, not the associated sales, that provide the reward to inventors."  One way of looking at this analysis is to say that patent rents are the measure of the difference between the profits that are made with patent protection and the profits that would be made in the absence of patents.  Another way is to recognize that it assumes that there would be profits for pharmaceuticals in the absence of patents, an analysis that ignores the reality that pharmaceutical companies (and their investors) need patents to ensure sufficient return on investment (ROI) necessary to justify the risk created by the supranormal costs of bringing a drug to market.

As noted in an earlier Patent Docs post, the Bessen–Meurer analysis is at odds with the results of a study by the European Commission reported in 2005 and directed to the very question of the economic value of patents in Europe (the study was entitled "Study on Evaluation the Knowledge Economy – What are Patents Actually Worth?").  The study was comprehensive, surveying 9,000 patent owners who had used the European Patent Office to obtain patents between 1993 and 1997.  The study showed that the median value (half the respondents reporting more and half less) of the patents produced was €300,000, and 10% of the respondent patent owners reported values of €10 million or more.

As an antidote – or perhaps a prophylactic – to "reforms" driven by the Bessen-Meuer analysis, Professor Wegner proposes the following changes in U.S. patent law that might be sufficient to appease the patent "reformers" while not wreaking extensive havoc on innovation:

• Establish a patent maintenance fee system along the lines of the ones in most European countries, where patents are subject to an increasing annuity for each year of patent life; this would impose a much higher cost on patent "trolls" and discourage acquisition of patents merely to assert them against mainstream industries.

• Permit delayed examination (up to seven years) to let commercial activities weed out those applications that are not necessary to protect a product or provide a competitive advantage.  Professor Wegner opines that the failure to enforce most patents indicates substantive examination is an "extreme waste of money" for most patents.  He even proposes a "spoonful of sugar" for the USPTO, where the examination fees would still be collected and subject to only an 80% refund if an applicant decides not to pursue examination.

• In an effort to balance the interests of patent-dependent industries like biotech/pharma with those industries that may suffer more of a burden than a benefit, Professor Wegner proposes giving intervening rights to anyone who commercializes an invention more than 30 months after an application filing date (i.e., one year after the application publishes), while permitting applicants to obtain an "unlimited" extension of prosecution of a pending application.  The latter would purportedly be beneficial to biotech and pharma companies, by giving them time to collect clinical trial results.  An additional benefit, according to Professor Wegner, would be that "the majority" of patent applications would be abandoned prior to prosecution.

• In the event these reforms are implemented, Professor Wegner proposes that all continuation applications (excluding divisional applications) be prohibited at any time after 18 months from filing.

• He would also bolster inter partes reexamination, which has not been particularly successful.  The Professor blames the PTO for the "bottleneck"; the estoppel provisions in the 1999 law provide an equally likely explanation not mentioned by Professor Wegner.  His proposal would put all inter partes reexaminations under a single administrative patent judge and have all proceedings take place before the Board, with the examining corps providing "designated examiners" to assist in the initial reexamination.  As part of this reform (but justified in its own right) there would be a substantial increase in the number of APJ’s.

The viability of these ideas, as well as the veracity of Bessen-Meuer’s analysis, will be the subject of future posts (and Patent Docs has, in fact, already discussed several of these ideas).  For now, Professor Wegner’s article merely reinforces the message that we all need to remain vigilant in protecting the integrity of U.S. patent system.  Or maybe to put it more bluntly:  it’s not over.