SECTION 3

OTHER PROPOSALS WHICH WOULD INCREASE INNOVATION

In addition to the proposals noted above, this subcommittee endorses the following proposals, which, in the opinion of at least a majority of the subcommittee, would result in significant stimulation of innovation.

PROPOSAL VI

Clarify the statutory definition of patentable invention: 35 U.S.C. §103

In the course of the foregoing discussion of national patent court (Proposal III), it was noted that the federal circuit courts of appeal have enunciated different and incompatible views of what constitutes, and the requirements for a finding of, patentable invention.

It is the view of this subcommittee that the creation of a national patent court will do much to eliminate these disparate views on the critical issue of what constitutes patentable subject matter and, in the process, to make for a more reliable and predictable patent system. A majority of this subcommittee also feels, however, that the patentability standards has been subjected over the years to such a wide variety of viewpoints, some of them antithetical to the constitutional purpose of promoting all the useful arts, as to militate strongly in favor of a Congressional restatement and clarification of the metes and bounds of patentable subject matter. Good legislative action would insure not only more consistent and predictable future adjudication but that which best comports with an implements the constitutional goal of promoting the progress of the useful arts, which is the raison d'etre of the patent system. Any such clarification should not only eliminate departures from rigorous application of the statutory standard of non-obviousness, as set forth acceptably in Graham v. John Deere Co., 383 U.S. 1 (1966), but should ensure the taking into account of the so-called secondary considerations involved in determining the presence or absence of non-obviousness.

Some members of the subcommitee feel that, as with almost any legislative changes, legislation further defining the standard of patentability might increase rather than reduce patent litigation, and could well result in more, rather than less uncertainty in predicting the strength of patents. These committee members believe that the standard of patentability is defined in the current statute as precisely as necessary; they contend that the problem is not the statutory definition but rather the tendency the courts have to apply the statutory definition non-uniformly (and this problem would be minimized upon implementation of this subcommittee's recommendation for a single court to hear patent appeals).

PROPOSAL VII

Permit licensee to agree not to challenge licensed patent

Some members of this subcommittee recommend legislation permitting a licensor and a licensee to expressly contract for a licensee estoppel (under which a licensee is prevented from contesting the validity of a licensed patent) to correct perceived abuses by patent licensees.

Under the Supreme Court decision in Lear Inc. v. Adkins, 395 U.S. 653 (1969), the patent owner, who is bound by a license contract, may offer a license to a potentially major infringer coincidental with the first sign of infringement, and may for a time "enjoy" the infringer's agreement to a license under which the infringer is to pay a royalty that may be substantial if the market develops as the patentee hopes. By the act of granting the license, however, the patent owner is at the virtual mercy of the licensee if the licensee later wishes to renege on the license agreement and to challenge the validity of the patent. Indeed, at least some licensees have signed agreements planning at that time to challenge the licensed patent at a later point in time.

By granting a license to a competitor, the patentee

(1) gives up his choice of time of litigation against the competitor;

(2) gives up his choice of forum for the litigation, which sometimes is dispositive in terms of results and very commonly has great effect on the settlement figure; and (3) has compromised too low the amount of royalty that he might get or ought to get from a valid patent because he thinks he is saving litigation costs and risks. The licensee, on the other hand, having taken the license, is enabled by Lear to pick his own time for litigation when he sees the market develop, and to pick his own forum in which to file a declaratory judgement action.

If the licensee wins then he may not pay anything following his validity challenge, though he received a very valuable consideration. Even if the licensee "loses" he can, as a practical matter, depend on the court not to assess a royalty higher than the contract's compromise low royalty as the damages, in spite of the fact that his act was quite deliberate in nature. Thus, by taking a license he never intends to honor, the licensee extorts a low royalty.

The majority of this subcommittee submits that the solution is to statutorily restore to the law the capacity of the licensor and licensee expressly to contract for a licensee estoppel, at least so long as the license continues in force. By restoring the licensor to a position of licensing parity with his licensee, the desirable social goals of protection of the inventor's property, fairness in the law and sponsorship of innovation by the inducements of Title 35, United States Code, are achieved.

Some members of the subcommittee can find no reason for not affording full freedom to contract for permanent licensee estoppel. They contend that this is the only mechanism whereby litigation may be finally settled and the reneging licensee is not permited to profit by his perfidy.

Other members of the subcommitee were of the view that this proposal, which is the only recommendation of the patent subcommittee specifically directed to the legislative overruling of a judicial decision, will have no effect on innovation. For these members, this view is further supported by what they feel is the conservative way in which Lear v. Adkins has been applied by the lower courts, and the fact that the elimination of invalid patents may remove blocks to innovation on the part of the industry covered by the patents.

PROPOSAL VIII

Extend patent term to compensate for delays in commercialization caused by governmental regulations

There are circumstances where extension of the term of the patent may be appropriate to insure that the rewards from the patent system enhance innovation. It is recognized that innovators of many different types of products may not lawfully vend such products within the U.S. without securing from various federal agencies such as the EPA, FDA, etc. pre-marketing approval. Inevitably such approvals require considerable testing of the product over a long period of time to establish environmental acceptability, safety, and, for some products, efficacy. Improved efficiency in the examination of patent applications by the Patent and Trademark Office results in the grant of patents to the innovator of such products long prior to federal approval for marketing of the product, resulting in a shorter patent-assured exclusivity period than the 17 years contemplated by Congress. This inequity could be remedied by legislation which would permit extending the patent term to compensate for delays in commercialization caused by governmental regulations. Such legislation would be similar in principle to current legislation which provides for the delayed issuance of patents to inventors when, for security reasons, their patent applications are prevented from issuing in the normal course (35 U.S.C. §§ 181 and 183).

Some members of the subcommittee feel that the proposed extension of patent term could cause difficulties in planning for competitive activities at normal patent expiration.

PROPOSAL IX

Encourage other countries to provide U.S. innovators the right to obtain enforceable patent rights

During the past ten to fifteen years, steady erosion of patent protection available for United States inventors has taken place in many foreign countries. This was due to agitation by certain economists and politicians in developing countries acting on the national scene, as well as through and with the help of intergovernmental organizations, particularly agencies of the United Nations. It is being incorrectly asserted by these circles that the patent systems in developing countries benefit only foreigners, and therefore maintenance of a strong, efficient patent system is not in the best interest of these countries. Mainly as a result of these activities, in large geographical areas of the world-notably, Latin America, Asia and Oceania (with the exception of Japan, Australia and New Zealand) and in Africa (with the exception of South Africa)-no effective patent protection exists at present. This development, which is continuing and is gaining momentum, has an adverse effect on United States industry, particularly those segments which are most researchintensive.

The extent of the funds which United States industry can make available to finance R&D activities is directly dependent upon the amount of domestic and foreign sales and profits realized. The loss of sales and profits, through inability of United States enterprises to obtain effective patent protection in many countries for the results of their R&D activities, could have a direct negative effect on the amount of funds available to support future R&D. The erosion of patent protection or the complete lack of it in certain fields of technology puts the innovative United States industry in an intolerable position by depriving it of the ability to defend itself against copiers of successful innovations who have not incurred heavy R&D expenses in creating and developing them. Turning large geographical areas and large current and potential markets into patent-free zones and subjecting United States enterprises to unfair competitive pressures by local enterprises and, increasingly, also by other multinational and state-owned enterprises, will inevitably result in serious erosion of United States technological leadership.

Foreign trade-in the form of direct exports, foreign investment in subsidiaries, and in manufacturing facilities-is an ever-increasing important part of the business of United States enterprises, particularly those which are highly researchintensive. In a number of industries, foreign business activities account for 50 percent or more of total corporate sales and profits.

In order to finance research and development, maintain United States technological leadership, and improve the balance of trade, it is imperative that the ability of United States enterprises to do business abroad shall not be impeded through the action of foreign governments or groups of governments denying patent protection. The respect for patent rights, whether owned by the nationals of a country or by foreigners, formerly universally recognized as socially and economically desirable, would also in the long run directly benefit the developing countries in creating employment, attracting investment, and encouraging the transfer of technology. A strong United States posture for seeking improved patent protection in third-world countries, which would in all likelihood be supported by other Western nations, would therefore be not merely in the enlightened self-interest of the United States, but also in the long-term interest of the developing countries.

United States Government action, as outlined, to support the reestablishment and maintenance of a full and effective patent system in foreign countries would no doubt trigger resistance and protest from third-world governments, various international organizations and United Nations agencies. The United States might be accused of serving its own narrow self-interest, and inflammatory slogans such as "economic imperialism" or "neo-colonialism" might also be uttered. The good faith of the United States in striving to assist developing countries in their rapid development and industrialization might also be questioned.

Nevertheless, it is submitted that there is no inconsistency. The primary and essential factor in the industrial development of third-world countries through the transfer of technology is the voluntary, good-faith cooperation between the transferor and transferee. This is a two-way street where the security and protection of industrial property rights are an essential element. It is therefore also in the enlightened self-interset of the technology-recipient countries that inventions should enjoy meaningful patent protection.

PROPOSAL X

Patent rights to be available for new technological advances

The Constitutional purpose of the patent system is to promote the progress of the useful arts. The subcommittee believes in the patent system, and supports the use of the patent grant as a method of encouraging invention and innovation as broadly as possible under the patent law. The subcommittee supports the following statement of Judge Markey: "As with Fulton's steamboat 'folly' and Bell's telephone 'toy', new technologies have historically encountered resistance. But if our patent laws are to achieve their objective, extra-legal efforts to restrict wholly new technologies to the technological parameters of the past must be eschewed. Administrative difficulties, in finding and training Patent and Trademark Office examiners in new technologies, should not frustrate the constitutional and statutory intent of encouraging invention disclosures, whether those disclosures be in familiar arts or in areas on the forefront of science and technology."2

By way of example, the subcommittee feels that patent protection should be accorded new life forms and computer programs.

1 See Patent Law Perspectives, Section A.2 at page 79.

2 In re Chakrabarty (CCPA, 1978) 197 USPQ 72 at page 76.

A. New Life Forms.-It is difficult to accurately forecast the extent of the benefits that can be provided to mankind by technologies which produce new, useful and unobvious life forms. However, we have already seen a preview of these benefits in the reports of the production of insulin and somatostatin (Chemical and Engineering News, June 19, 1978, pp. 4,5) and through the promise of quicker, more complete cleanup of oil spills (National Geographic, September 1976, pp. 374, 375) by certain genetically modified microorganisms.

At present, two patent appeals, In re Bergy et al (Patent Appeal No. 76-712) and In re Chakrabarty (Patent Appeal No. 77-535) are near resolution in the Court of Customs and Patent Appeals. Bergy relates to a life form which was found in nature but which was isolated and purified to produce a useful product. Chakrabarty relates to genetic manipulation to produce a useful life form previously unknown in nature.

If the position taken by the United States Patent and Trademark Office in both cases that a living thing is not patentable subject matter under Section 101 of the Patent Act of July 19, 1952 is not overruled by the courts, it will be necessary to seek implementing legislation from Congress if non-plant life forms are to be patentable.

In the Bergy situation where life forms discovered in the natural state are isolated and propagated, the argument has been made that it is unlikely that such cultures are within the Congressional intent as to patentable subject matter. Analogizing to the content of the Committee Reports (Senate Committee Report No. 315, 71st Congress, 2nd Session, and House Committee Report No. 1129, 71st Congress, 2nd Session) accompanying the bills (S. 4015 and H.R. 11372) resulting in the Plant Patent Act of 1930, it is pointed out that Congress refused to provide coverage for the mere discovery of wild varieties of plants. It is argued that however meritorious the discovery of a new and useful microorganism in the wild state, like the wild variety of plant, such microoganism even after culturing remains the same as its relatives in the wild state awaiting rediscovery by others.

Therefore, the culture should not be patentable. However, there is already some case law supporting the patentability of substances extracted and concentrated in purified form, and there are good reasons for this. The purified form of the microorganism did not exist in nature, would never have been available but for the work of the researcher, and the benefits to the public would not have been available. Thus, there is logic for saying that the purified form is a manufacture, was certainly not obvious and patentability should attach. The availability of patents in this instance is certainly a stimulus to research, just as in the pharmaceutical fields, and seems justified for that reason.

In the case of the genetically modified bacteria as in Chakrabarty, there is a strong argument that a new "manufacture" clearly exists. As such, the argument of availability in nature does not attach, and the only contention against patentability is the proposition that Congress did not intend to afford the patent grant to living organisms. This contention is based at least in part on the fact that it took a special statute to make plants patentable and that the same is needed for other life forms. (This argument of course also applies in the case of the pure culture.) The counter to this is that Congress when it has passed patent statutes over the years could not possibly have foreseen what man would evolve in the way of manufacture. Space vehicles, jet engines, computers, etc., were certainly beyond the imagination of the national legislature when it provided for the first patent coverage, but yet there has never been any question as to these. If the progress of science is in the national interest, the term manufacture should be construed broadly, and patentability afforded to the useful bacteria resulting only from the efforts of man.

Another argument in favor of patenting certain new, useful and unobvious life forms is that it provides an alternative to the less desirable avenue of trade secrets. Practically speaking, an industrial user must fully contain the microorganism within his facility lest the trade secret be lost. Such containment will increase the costs of the process or product, costs which inevitably are passed on to the consumer. Maintenance of trade secrets also tends to stifle the free exchange by technology and hinders the progress of science by postponing the benefits to mankind of these technologies. Underhindered by the threat of piracy, there will be stronger incentives to invest money in new and useful technology under the protection of the patent system. In the circumstance where the living invention is itself placed in the stream of commerce, it is impossible to maintain it as a trade secret. There the protection of the patent system is needed to stimulate investment because once the invention is used, it is disclosed to the world.

B. Use-Specific Chemical Formulations.—United States industry has effectively competed in the development of agricultural and pharmaceutical products of benefit

to mankind here and throughout the world—and have made a major contribution to the United States balance of trade in these fields. Major fields of research in this application of the life sciences relate to the development of chemical formulations (such as herbicidal emulsions, insecticidal solutions, and pharmaceutical tablets) which include as the essential ingredient in their composition a chemical which exhibits a newly discovered biological activity. These formulations, after appropriate testing for environmental and health safety and efficacy, become commerical entities and important to agriculture and health. Under the present interpretations of the patent laws, protection is denied to such chemical compositions if the biologically active chemical is not itself patentable. Patent protection available under such circumstances has been limited to method of use patents to be asserted only against those actually using such chemicals in the agricultural or pharmaceutical application of such products, i.e., against one spraying corps, ingesting the pills, etc. Courts have concluded that the patent owner is prohibited from enforcing his patent against those who similarly formulate the active ingredient so that it may be used in accordance with the patentee's teachings. The subcommittee believes that the denial of useful patent protection for such use-specific formulations has had an adverse effect on investment in innovation in such fields. To encourage testing and innovation of chemcial compounds, unpatentable as such, for their potential use in agricultural and pharmaceutical applications, the subcommittee recommends that patent protection be extended to such use-specific chemical compositions since the composition is rendered novel by the inclusion of the active ingredient for the new use. Without such a possiblity for useable patent support, discoveries of new biological uses for known compounds will necessarily be withdrawn from the innovation sequence because of the recognized high cost of innovation in these fields.

C. Patentability of Computer Programs. This topic is developed more full in the report of the Information section of the subcommittee. However, the Patent section of the subcommittee feels that patent protection should be accorded computer programs and computer software, provided the subject matter thereof meets the statutory definition of patentability.

SECTION 4

OTHER MATTERS CONSIDERED

In addition to the proposals discussed above, the subcommittee considered a number of other proposals and recommendations which are set out in this Section of the report.

This subcommittee makes no recommendations with respect to these matters, either because of lack of time to complete a thorough study or lack of concensus as to the wisdom of adopting these proposals.

A. Compensation of employed inventors

The committee as a whole agreed that corporations should be encouraged to motivate their employees to participate in all phases of the innovative process. This encouragement could be in the form of awards, promotions, release of unused inventions to the inventors and other systems presently being successfully used throughout industry in the United States.

Some members of the committee proposed that legislation requiring corporations to give employees a greater stake in their inventions would be a stimulus to innovation. The committee conceded that such legislation might increase the number of invention disclosures but not have a positive effect on the overall innovative process. In fact, the committee felt very strongly that an attempt to apply a uniform system on all corporations (such as is done in some European countries) would result in a singificant decline in overall innovation and could have the additional negative impact of flooding the Patent Office with patent applications directed to inventions of little or no commercial value. The results in countries that have initiated such systems bear out these results. The attached paper submitted by Mr. Richard C. Witte (Appendix G) entitled "Implication of a Federal Law Providing Employee Inventor Awards" sets forth in greater detail the implications of such proposed legislations.

Mr. Richard L. Garwin's paper presented to the subcommittee on November 16, 1978, and Mr. Eric P. Schillen's paper submitted to the subcommittee on December 8, 1978 set forth proposals for dealing with the inventions of employed inventors. Both papers are included in Appendix G.

B. Financial stimulus of innovation

The subcommittee did not have the time nor the availability of information as to what the Government has been doing or is authorized to do in providing either

52-476 - 80 28