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Arnold, president of the American Patent Law Association and Harry Manbeck, Jr., patent counsel, of the General Electric Co.

I will invite these gentlemen to come forward at the same time. We will hear from both of them and then return to both with questions.

Mr. Arnold is a senior partner in the Houston law firm of Arnold, White & Durkee. He was a member of the industry advisory group on patent and information policy to the administration's Domestic Policy Review on Innovation. In addition to serving as general patent counsel for GE, Mr. Manbeck chairs a Committee on Economic Development task force on patents, part of a larger CED innovation study that parallels the administration's effort.

Gentlemen, we welcome you. We are grateful for your help. If you would like to summarize your statements, I would be happy to include the full statements in the record.

Let's proceed with you, Mr. Arnold.

STATEMENT OF TOM ARNOLD, PRESIDENT, AMERICAN PATENT

LAW ASSOCIATION, ARNOLD, WHITE & DURKEE Mr. ARNOLD. Thank you, sir. It is certainly my pleasure to have an opportunity to represent the American Patent Law Association before the committee, and perhaps also to share with you the personal views of one of those who went through the study of the Advisory Committee on Domestic Policy Review on Industrial Innovation, because some of the views that some of us developed out of that study were, of course, not includable within the ultimate report.

First, as to S. 1215, I might say that the American Patent Law Association is for it. We have suggested a few amendments which will appear in my written statement. But we feel basically that the idea of that bill is very excellent and we support it in every way that we know how.

I have been prompted by the invitation that you have sent me to spend the bulk of my time today, however, addressing the role of the patent system in industrial innovation.

I lead off with the observation that industrial innovation is clearly on the decline. The decline of industrial innovation in our Nation is very serious in quite a number of ways, not the least of which is the international balance of payments deficit as to which the decline in our industrial innovation is very fundamental.

This decline is the result, not just of deficiencies in the patent system, but also of many non-patent-system factors that are involved.

This morning, however, I will address only the role of the patent system in the decline of industrial innovation.

What is the role of the patent system in industrial innovation?

Well, the Constitution concept of the patent system was not to make inventors rich at the expense of the public, but rather, by holding out the carrot of a property right in any inventions to induce investors of sweat, investors of intellect, and investors or capital to invest in research and development whereby the public would enjoy a wealth of new and better things. This is a high-risk investment with cost overruns as certain as death and taxes and success as unpredictable as the weather, so strong incentives are needed to induce major investments in R. & D.

The constitutional clause, if you will recall, is that, "the Congress shall have the power * * * to promote the progress of science and useful arts by securing for limited times to authors and inventers the exclusive rights to their respective writings and discoveries.”

That, of course, is the focus that we are addressing this morning, the promotion of the progress of the useful arts.

The system announced in our Constitution and enacted in our statutes has certainly worked well for us over most of our history. Every responsible study has concluded that the patent system does, in fact, promote the progress of the useful arts. It does, in fact, induce the commitments of sweat, intellect, and capital into research and development.

If the patent system works so well, and there are so many of these non-patent-oriented factors that I referred to, that have contributed to industrial decline, that might imply that the patent system is not at fault. But that is not correct. I regard the shortcomings of the patent system as being a serious contributor to the decline in innovation.

The Constitution and the patent statute promised to the inventor and his financial backer the exclusive right to their invention, title to their invention, as it were, as a piece of property.

No one can use your property without your permission and you can ask anything you want to for the privilege of somebody using your property.

But the modern egalitarian sophistry of our divided power system of government now makes the promise of the Constitution and the statute into a deception upon anybody who would rely upon their promise of an exclusive right because the system simply does not deliver that exclusive right, at least in the vast majority of instances.

For the most part, the system offers half a loaf, the right to license, as distinguished from the exclusive right that the statute and the Constitution purport to promise.

The system is fairly well riddled with deficiencies. I will approach it in four general categories:

First, the cost of using the patent system, which is hideously excessive.

Second, the time delay in using the patent system, which is hideously excessive.

Third, the uncertainty of result of using the patent system, which is hideously excessive.

And fourth, an unrealistic standard of what inventions are patentable, as applied at least in many of our courts.

Let's start in the Patent and Trademark Office as an example. I often use its old name, simply Patent Office or its nickname "PTO.” Owing directly to chronic underfunding of the Patent Office by the Congress, and I might add, to some extent owing to inefficiencies in Patent Office management-my office is not perfectly managed, the Senate is not perfectly managed, and neither is the Patent Office—we find that the Patent Office has no computerized search facility for either patents or trademarks.

In this day and time, that is just a crime.

Further, there are in the PTO search shoes, which contain the prior art references that engineers search to find out whether they're being asked to reinvent the wheel that has already been invented, and that lawyers and patent examiners search in order to find out whether the alleged invention is, in fact, new or whether it is old.

Those search shoes in the Patent Office are incomplete. In many of them 8 or 10 percent of the references are missing. Perhaps that's the average of the references that are missing from those search shoes. People borrow references and fail to return them. Some few of the search shoes, in the most interesting and active arts of the day, have been found to be missing 28 percent of the references that are supposed to be there.

So the lawyer spends perhaps $300 performing a patentability search for his client and does not find the best references.

The lawyer then spends $3,000, perhaps, to draft an application for a patent and prosecute that patent to issue for his client. And the patent examiner performs a search, and he, too, does not find the best references. And he has less time now to study the references that he does find than he did a number of years ago.

And so the patent examiner is bound by circumstances that deter him from doing a good job and he issues a patent that perhaps he shouldn't issue.

When the patent is issued and the accused infringer comes along, he's got a lot at stake. So he spends perhaps $100,000 in a search, searching in poor search facilities and elsewhere. He finds new references that were not found by the inventor's attorney, nor by the patent examiner.

Now if those new references should invalidate the patent, then all of this effort has been for naught. But it is much worse than that.

If bankers or if investors committed capital based upon the protection of the invention which was soberly promised in the patent issued by the Patent Office under the great seal of the United States, then those bankers and investors have effectively been swindled by the great seal of the United States on the patent that was issued when it should not have been issued.

So you see: Poor search facilities and poor PTO examination deters investors from investing in patents that so frequently are poor patents because the Patent Office was not given funds for management by which to do its job well.

Further, the law is also acutely uncertain on a number of substantive points. Even when two courts have the same references before them, some courts apply one standard of patentability and other courts apply other standards of patentability. And our systems of judicial process by which the Supreme Court does not reconcile all of those conflicts has left us with the situation where we've got different standards of patentability in different courts.

Some judges have sat for 20 years and never found a single patent valid.

One result of all of this is that lawyers advising their clients tend in this area perhaps more than any other to render inconsistent opinions and that beget litigation.

practice of course, ears ng mas the exclusivose years latent of

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It also begets the cost of litigation, which in patent cases may be typified at a half million dollars to try a patent infringement suit to conclusion including appeal.

That is not an unlikely figure to pay these days. A million dollars is not rare. It also means delay, like 8 or 10 years.

I hazard a guess that in the last 10 years, there has never been a single exclusive right actually granted by the entry of an injunction within 10 years of the time that the invention was reduced to practice.

And, of course, those first 10 years are at least not uncommonly the important years of market development, technical development, potential licensing.

Those are the years when the exclusive would have been important, but we don't get any exclusive in those years because we have several years of delay in getting through the Patent Office and several years of delay in getting through the court.

So we end up with a long period of time, 8 to 10 years before we can ever have any hope of getting the exclusive, and then we find the uncertainty that half of the patents are held invalid, as a result of some of the things that I have already alluded to.

Then there is the point of what inventions should be patentable-only the once-in-a-generation breakthrough invention or all inventions which give to the public an enjoyment they did not before have access to? If we protect only the once-in-a-generation invention, the system provides no economic incentive to R. & D., provides no return on investment in the research lab month in and month out, where it costs over $100,000 per year to keep a researcher working. Only if the courts follow the statutory scheme by which all inventions which an R. & D. buck will buy, that are new to pubic enjoyment and not truly within the prior reach of the public to enjoy, can we expect to provide enough return on investment on R. & D. investment for the system to be an incentive to innovation. In perhaps half of our country today, the present statutory scheme is simply not what the courts enforce; in perhaps half of our country, only the once-in-a-generation invention is offered any hope of protection.

Well, these things will move an investor away from investing in R. & D. and encourage him to invest rather in real estate or some other more certain investment where he can be sure of his title to his property and be sure of it now instead of having to wait 8 or 10 years to find out whether he has title to the property he wants to do business with.

Then there's the confusion of the law as to a bunch of areas, and I will mention only one-the law of license.

The Department of Justice man in charge of this subject matter a year or so ago said, “There are no per se legalities” for the licensor. “There are no safe harbors” for the licensor.

A law with that degree of uncertainty is obviously a discouragement to the transfer of technology and to the licensing of technology and we need some address to it.

So then, in summary, about the subject matter, I would say it this way. Innovation, by its nature, is a very high risk investment with cost overruns as certain as death and taxes, and with techni

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