ADDITIONAL ARTICLES, LETTERS, AND STATEMENTS

DRAFT REPORT ON PATENT POLICY

A Draft Report of the Advisory Subcommittee on Patent and Information Policy of the Advisory Committee on Industrial Innovation established as part of the Domestic Policy Review, December 20, 1978.

Notice. This report represents the views of the Subcommittee on Patent and Information Policy of the Advisory Committee on Industrial Innovation, an advisory committee convened by and reporting to the Secretary of Commerce. The views of the Subcommittee do not necessarily represent those of the Department of Commerce or any other agency of the Federal Government.

ADVISORY SUBCOMMITTEE ON PATENTS AND INFORMATION

Herbert R. Brinberg, cochairman, information, president, Aspen Systems Corp. Robert B. Benson, cochairman, patents, director, patent law department, AllisChalmers Corp.

Rudolph J. Anderson, Jr., associate general counsel, Merck & Co., Inc.

*Tom Arnold, Arnold, White & Durkee.

Henry L. Bachman, vice president, quality, Hazeltine Corp.

Gerard M. Beaugonin, vice president, Control Data Corp.

*Homer Blair, vice president, patents and licensing, Itek Corp. Gloria Cohen, consultant, Information Services.

*Joseph A. DeGrandi, Beveridge, Degrandi, Kline & Lunsford. *Joe Engelberger, president, Unimation.

*Charles Heiken, Esq.

H. E. O'Kelley, president and chief executive officer, Datapoint Corp.

Dan Lacy, vice president, McGraw-Hill.

*Pauline Newman, director, patent and licensing, FMC Corp.

Donald J. Quigg, patent counsel, Phillips Petroleum Co.

William Ragan, vice president, research and development, Becton & Dickinson Co. *Eric P. Schellin, Esq.

Clarence Spangle, president, Honeywell Information Services.
*David E. Sunstein

Leo J. Thomas, Jr., director of research, Eastman Kodak.
Lawrence Welke, president, International Computer Program.

SUMMARY

In general, the patent system has served the country well. Major overhaul of the patent system is not recommended. Nevertheless, some modification to the system could have a beneficial effect on innovation. The most serious problems with the patent system are the uncertainty about the reliability of patents and the long time and high costs associated with resolving such uncertainty through litigation. When proper consideration is given to these problems as they relate to those independent inventors and small businesses whose success-and indeed very existence-depends upon the innovation process, it becomes clear some changes must occur. These problems deter investment of the money required to commercialize an invention (a necessary and expensive step in the innovative process). It is here that modifications to the patent system can have their most beneficial impact. Steps should be taken to increase the assurance that a patent is a valuable piece of property, something that offers protection to subsequent investment.

The committee has identified four major goals to which attention must be addressed to enhance the innovation process through improvement of the present patent system:

1. Enhancement of the reliability of the patent grant to the inventor and those investing in the commercialization of his invention;

*Member of the Working Group on Patent Policy.

(411)

2. Reduction in the cost-both in time and money-of judicial enforcement of the rights derived from the patent;

3. Extension of the availability of commercial exclusivity derived from patents to technological advances presently denied patentability; and

4. Development of systems transferring the commercial rights to government supported inventions to those in the private sector capable of their innovation. We have three major recommendations to improve the reliability of the patent grant.

(1) Upgrade the Patent Office by:

(a) Providing an adequate examining staff to assure a rigorous high quality examination. This would increase confidence in the patents that are issued.

(b) Providing modern search tools that increase the probability of finding the relevant prior art. This would be a cost-effective investment by reducing search time per examiner, as well as reducing the frequency of subsequent proceedings to argue the prior art.

(2) Provide a reexamination process-available to all interested parties-in order to ensure that the patentability of the invention described in the patent has been considered by the Patent Office in the light of all relevant prior printed publications.

(3) Provide a central court to hear patent appeals. This would provide greater consistency in judicial decisions, thus reducing uncertainty.

To reduce the present cost of judicial enforcement of the patent grant, a request should be directed to the Supreme Court, and the Judicial Conference, to require each federal court to exercise a high degree of control over the conduct of patent litigation, with particular concern for the time and expense of discovery.

To foster commercialization of inventions made in governmental laboratories, under government research contracts and in university laboratories supported with federal funds, the subcommittee recommends that the commercial rights in such inventions be structured in a manner capable of being transferred to industrysmall or large-to insure capital investment in their development. Such transfers should be subject to a license right reserved to the government to insure no further payment for governmental use of the invention.

The subcommittee also recommends clarifying the statutory standard of patentability and permitting licensees to agree not to attack the validity of licensed patents. An adequate extension of the patent term should be provided when commercialization of patented inventions is delayed due to federal regulations.

The subcommittee recommends establishment of foreign policy which encourages other countries to provide United States innovators the right to obtain enforceable patent rights, thus extending the incentive to commercialize United States innovations in international markets.

Further, study should begin of the appropriate extension of patent rights to presently unpatentable technological advances, with consideration to be given to patentability of new life forms for industrial applications, use-specific chemical formulations based upon unpatentable biologically active ingredients and computer software.

SECTION 1

BACKGROUND

The United States has been the leading innovative nation in modern times and has created many new industries. One need only look at the major new industries started within the last fifty years, such as those involving electronics, laser, antibiotics, synthetic fibers, instant photography and xerography. There is still room for further innovation and it will continue if provided with a proper environment. Such an environment existed for years and produced outstanding results. Our patent system contributed significantly to an environment which promotes innovation. [1] Unfortunately, there have been disturbing recent indications that there has been a decrease in the rate of innovation and in that portion of the R&D investment devoted to new product lines and basic research.

Capital investment is growing more slowly in the U.S. than it is elsewhere: 14 percent in the U.S., 30 percent in Japan, 20 percent in Germany, and the U.S. trading position, even in high technology products, has deteriorated.

An even more dramatic indicator of the innovation decline is evidenced by the recent decrease in investment capital obtained by businesses. This decline can be readily seen from the following table that shows the capital acquired by firms with less than $5 million in net worth from public offerings since 1969:

The catastrophic decline in capital obtained by small businesses is apparent, and the trend extends to other sources of small business financing, including professionally managed venture capital sources and high-risk investments by individuals. There has been a net decline in total United States expenditures for R&D, as measured in constant dollars, since about 1970. [2], [3] That decline was the result of a significant cutback on R&D spending by the federal government in the last ten years, particularly in aerospace research. Industrial R&D has shown an average real growth rate of about 2 to 3 percent annually. The data do not suggest a decrease in resources applied to R&D by the private sector. However, some analysts support the idea that there has been a shift in the emphasis of R&D from a search for new technology to upgrading existing technology and compliance with government regulations.

The high technology industries have the largest concentration of R&D effort. The ratio of R&D expenditure as a percent of sales has remained fairly constant, the ratio being higher for high technology corporations than low technology corporations.

Despite the fact that U.S. industrial R&D has not declined, in high technology areas there has been a substantial increase in the number of patents granted to foreign companies. Of the patents granted to United States residents in high technology areas, the large majority are owned by corporations and very few by individuals. In certain high technology fields, such as drugs and chemicals, about 90 percent of the patents are assigned to corporations, rather than individuals. [4] Individuals tend to own relatively more patents in less technical areas. At least in part, this is explained by the high cost and complexities of doing research in high technology areas, again underlining the need for effective patent support in these innovative businesses.

The total number of patents issued annually has declined since 1971 [5] suggesting a decline in innovation; however, when considered on the basis of filing dates, the changes are small, with only a slight downward trend. There has been an increase in the number of patents granted annually to foreign residents and a decrease in the number of patents granted to United States residents. The share of U.S. patents issued to foreign applicants has doubled in the last 14 years. These data suggest that inventors in other countries are becoming more active, rather than a sharp decline in the rate of United States invention. Further, the data suggest that United States innovators are facing increased competition from innovators in other countries. Individuals and the full range of firm sizes, from small to large, are important to the innovation process. An adequate patent system is important to all, and is often critically important to individuals and small firms.

Some studies have shown that small firms produce major innovations at a higher rate than large firms, [6] although it has been suggested that larger firms may have fewer major innovations per R&D dollar because they produce more expensive innovations. [7]

Small firms tend to put to commercial use a higher percentage of their patented inventions than larger firms, [8] although both large and small firms report about the same percentage of patented inventions as being useful when, in addition to commercial use, licensing and other purposes are considered. [9] Patented inventions appear to have a greater effect on reducing costs of commercial production in large firms, [10] but a greater effect on increasing sales in smaller firms. [11] Both large and small firms report that the net return on patented inventions varies over an extremely wide range, [12] which is some evidence that the number of patents, as such, fails to meaningfully measure the worth of patented inventions. [13] Large and small firms which have a higher utilization of patents tend to experience greater sales growth than firms with a lesser utilization of patents. [14]

Eighty-five percent of United States exports are made by only one percent of United States companies. [15] There is a strong correlation between exporting and R&D in the United States. There is a positive trade balance in R&D intensive products and a negative trade balance in non-R&D intensive products. [16] There is also a positive trade balance in technology transfer. [17] A positive relationship appears between increased exports to foreign countries and patent filing in respec

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tive countries of export; i.e., the more patents, the more subsequent exports. [18] Improvements in our ability to innovate could have a significant impact on our balance of trade.

About fifty percent of all litigated patents are held invalid, which is virtually the same outcome as in many other fields of litigation, such as wills, land titles and contracts; [19] however, a higher percentage (about sixty-five to seventy percent) of appealed patent cases result in holdings of patent invalidity.[20] [21] Patent litigation is extremely expensive; members of the committee who handle patent litigation report that they advise clients to be prepared to spend at least $250,000 for patent litigation.

Stimulation of innovation by the patent system

Our subcommittee concludes that the patent system is an essential element in our free enterprise system and has made a significant contribution to the economic development of our country.[22] This is so well accepted by the members of our subcommittee, who have worked for many years directly with the patent system, that we tend to take it for granted. Studies have concluded that the patent system has performed well its Constitutional mandate to promote the progress of useful arts." [23][24][25] These and other studies set out many well-known examples which illustrate how the patent system has stimulated the decision to commercialize inventions, resulting in large financial gains for individuals, firms, and the country (e.g., taxes and jobs). Many less well known examples of important inventions commercialized at least in part as a result of the patent system, and which have resulted in more modest financial rewards, appear in reported tax rules. [26]

Several qualitative studies [27] [28] including recent studies by the United States Patent and Trademark Office and the Industrial Research Institute [29][30] have concluded that the patent system, while fundamentally sound, could be strengthened so that it does a better job in promoting decisions to commercialize inventions. While the subcommittee can cite no rigorous evidence which establishes that changes in the patent system would have a major impact on the rate of R&D, there is a consensus among the members of the subcommittee that the availability of reliable patents has an impact on the focus of R&D and on decisions to invest in the commercialization of patented products.

Continuing efforts by governmental spokesmen within the Department of Justice and the Federal Trade Commission to limit the available methods of commercially using patent rights has had the effect of reducing the usefulness of patents in raising capital, especially for the purpose of completing the innovation process by commercializing an invention.

One of the ways to encourage investment to complete the innovation process by commercializing inventions is by reducing the risks involved in decisions to commercialize. The risks of commercializing inventions can be reduced if the inventions are the subject of reliable patents [31] and if uncertainties relating to the utilization of patent rights can be resolved quickly and inexpensively. Also, the availability of reliable patents encourages decisions to disclose inventions through the patent system; and, disclosure of inventions to patents appears to exert a stimulative effect on competitive R&D. [32]

The subcommittee has identified four major goals to which attention must be addressed to enhance the innovation process through improvement of the present patent system.

(1) Enhancement of the reliability of the patent grant to the inventor and those investing in the commercialization of his invention;

(2) Reduction in the cost-both in time and money-of judicial enforcement of the rights derived from the patent;

(3) Extension of the availability of commercial exclusivity derived from patents to new technological advances; and

(4) Development of systems transferring the commercial rights to government supported inventions to those in the private sector capable of their innovation. Sections 2 and 3 of this report set out the subcommittee's recommendations to enhance the innovation process by improving the patent system in the aboveidentified areas.

NOTES

1. Robert F. Dale and James K. Huntoon, "A Cost-Benefit Study of the Domestic and International Patent Systems", "Idea," Volume 3, No. 3, Fall 1967, page 351, used several different methods to approximate the benefits of the United States patent system, which resulted in benefit-cost ratios ranging from 5:1 to 50:1, with monetary benefits in the range of $2 to $15 billion annually (page 405).

See also Robert B. Benson, "Patents In Our Free Enterprise System", presented at the John Marshall Law School, February 20, 1976, attached as Appendix C.

2. "Science Indicators," National Science Board, 1976, pages 108 through 115. 3. Business Week, July 3, 1978, page 58.

4. Supra, Footnote (2), page 112, Table 4-22.

5. Supra, Footnote (2), pages 95 through 105.

6. "Science Indicators," National Science Board, 1976, pages 35 through 41.

7. Supra, Footnote (6), page 118.

8. B. S. Sanders, "Patterns of Commercial Exploitation of Patented Inventions by Large and Small Corporations" "PTC J. Res. & Ed.," Volume 8, No. 1, Spring 1964, page 51, at page 53.

9. Ibid., page 74.

10. Ibid., page 79.

11. Ibid., page 77.

12. Ibid., page 89; see Appendix B.

66* *

13. Richard L. Sandor, "The Commerial Value of Patented Inventions", "Idea," 15:557, Winter 1971-1972, at page 562: * it is not really the total number of patents which a firm has assigned to it which increases profit but only those which are used. The aggregate number of patents may over- or underestimate the effect of inventive activity on profits."

14. Supra, Footnote (1), at page 352. There is a slight, but not statistically significant, tendency for small firms with a high propensity to patent to experience greater percentage sales years than large firms with a high propensity to patent. See pages 366 and 367. Dale and Huntoon also observe that firms with high R&D tend to show more sales growth than firms with low R&D; and, firms with both high R&D and a high propensity to patent tend to experience greater sales growth than other firms.

15. Business Week, April 10, 1978, pages 60 through 66.

16. Supra, Footnote (6), page 116.

17. Ibid., page 31.

18. Supra, Footnote (1) at page 352.

19. Howard T. Markey, Chief Judge, U.S. Court of Customs and Patent Appeals, "The Status of the U.S. Patent System-Sans Myth, Sans Fiction", address before the European Study Conference, London, England, January 25, 1977, reprinted in "J. Patent Office Society," Volume 59, No. 3, March, 1977, page 164 at page 169. Chief Judge Markey notes that many more holdings of invalidity are reported than holdings of validity; he also suggests that the number of appellate patent decisions does not represents a statistically valid sample of United States Patents: "The fundamental error which has caused so many from other nations to join those Americans looking askance at the U.S. patent system, is the employment of statistics to gauge court attitudes. The number of appellate patent decisions is simply too small to justify the drawing of any conclusions, as some of the reporters of statistics have themselves cautioned in their reports. The number of patents adjudicated by the appellate courts between 1968 and 1972, for example, was less than one-third of those adjudicated in the district courts, only 11 percent of those on which suit was filed, and less than two-tenths of 1 percent of those issued. Between 1953 and 1971 over 1,000,000 patents were issued. Only 1,080 were litigated or 0.1 percent. The total number of patents subject to litigation, i.e., those issued up to 17 years prior to 1953, is even greater and further reduces the statistical sample to far less than 0.1 percent. Conclusions drawn from such a de minimis sample in any other field would be laughed off the stage by trained statisticians." (page 167)

20. Ibid., page 171.

21. In Germany, in 1975, 90 patents were challenged for invalidity. Twenty-two percent were found invalid, and another nineteen percent were found partially invalid. See Bernard Nash, "Remarks Before the Industrial Research Institute", Philadelphia, Pennsylvania, October 18, 1876, reprinted in "J. Patent Office Society," Volume 59, No. 3, page 143 at page 147.

22. Memorandum for Jordan J. Baruch, Assistant Secretary for Science and Technology from Donald W. Banner, United States Department of Commerce, Patent and Trademark Office, dated October 13, 1978.

23. "Industrial Research Instituted Position Statement on the U.S. Patent System", 1978. See Appendix D.

24. "Study of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary", United States Senate, Study No. 1, United States Government Printing Office, 1956. See, for example, page 12, footnote 26, and page

15.