Keith E. Maskus
Reforming U.S. Patent Policy
Getting the Incentives Right
The U.S. patent system comes under much criticism these days. In a lightning-rod
case, the maker of the popular BlackBerry communication device, Research in
Motion (RIM), chose to pay a $612.5 million settlement in order to avoid a court- ordered shutdown. In this case, the judge supported a patent infringement case brought by NTP Inc. despite the fact that the U.S. Patent and Trademark Office (USPTO) had preliminarily ruled that all five NTP patents were invalid. Inoltre, NTP did not provide email service or compete with RIM. In an April 2005 speech, Brad Smith, Microsoft’s general counsel, said that his company spends $100 mil-
lion per year defending itself against thirty-five to forty lawsuits at a time.1 He
observed a “need to ensure that high-quality patents are approved and low-quali-
ty patents are not.” Microsoft has called for patent law to be reformed in order to
make it easier to challenge the validity of patents after they are issued and to reduce
runaway patent litigation costs. The company has also cited a need to increase
Keith E. Maskus is Stanford Calderwood professor of economics at the University of
Colorado, Boulder. He is also a research fellow at the Institute for International
Economics, a fellow at the Kiel Institute for World Economics, and an adjunct profes-
sor at the University of Adelaide. He was a lead economist in the Development
Research Group at the World Bank from 2001 A 2002. He was a visiting senior econ-
omist at the U.S. Department of State from 1986 A 1987 and a visiting professor at
the University of Bocconi in Milan in 2006. He serves also as a consultant for the
World Bank, the United Nations Conference on Trade and Development, the World
Health Organization, and the World Intellectual Property Organization. His current
research focuses on the international economic aspects of protecting intellectual prop-
erty rights. He is the coeditor of International Public Goods and the Transfer of
Technology under a Globalized Intellectual Property Regime (Cambridge University
Press, 2005) and author of Intellectual Property Rights in the Global Economy
(Institute for International Economics, 2000).
This paper was previously published by the Council on Foreign Relations as
Council Special Report No. 19, novembre 2006 (The Bernard and Irene Schwartz
Series on American Competitiveness). The views expressed are those of the author, E
not of the Council on Foreign Relations.
© 2007 reprinted by permission of the Council on Foreign Relations® Inc.
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funding to improve patent examination procedures at USPTO. The BlackBerry
case and Microsoft’s calls for reform symbolize an American patent system that is
increasingly inefficient and costly for innovative firms. Its numerous structural
problems are rooted in two fundamental misconceptions:
(cid:121) The view—predominant in Congress and the courts—that patents are like tan-
gible property and that owners of such property have the basic right to sell and
license it (or not) as they wish; E
(cid:121) The virtually unchallenged view that more patent protection necessarily pro-
vides greater incentives for innovation and commercialization of technologies.
Neither view makes for good policy.
Patent policy needs to be balanced to protect the investments of original inno-
vators as well as to encourage access to technologies and products. Ever stronger
exclusive rights generate overlapping claims, monopoly power, and litigation costs
that actually discourage competitive innovation. Striking the proper balance
requires that U.S. policy relax the modern notion that intellectual property rights
are basic rights and return to the tradition of limiting the scope of patents in order
to encourage the use of new technologies and information.
Failure to rein in the patent regime could have global repercussions. To hinder
innovation is to hinder the dynamic competitiveness of U.S. companies. While
some aspects of the IPR system (such as copyrights) for American firms largely
remain sound, significant problems with patents put the U.S. system at a disadvan-
tage vis-à-vis more balanced and less costly foreign ones.
At present, Congress is considering whether to reform domestic patent law. In
2005, Representative Lamar Smith (R–TX) introduced HR 2795, which would
enact a number of reforms, some of which are advocated later in this report. Quello
legislation has languished in the House of Representatives.
In the upper chamber, Senators Orrin Hatch (R–UT) and Patrick Leahy
(D–VT) jointly introduced a Patent Reform Act in August 2006. The proposed act
has the support of the information technology and financial services sectors, but it
is viewed warily by pharmaceutical and biotechnology companies, which are con-
cerned that large changes to the system—especially the possibility of patent chal-
lenges long after a patent is issued—may reduce their patents’ value. The proposed
reforms would be the most sweeping in many years, but they still would not do
enough to improve the functioning of the clogged and costly patent system. IL
final section of this report will give suggestions for more comprehensive reform.
In contrast to the proposed domestic reforms (limited as they are), there seems
to be little interest in achieving greater balance in the U.S. approach to internation-
al patent rules. The United States continues to pursue an aggressive trade strategy
to harmonize global patent standards at U.S. levels. The approach achieved its first
major victory in 1995 with the adoption at the World Trade Organization of the
TRIPS agreement, which requires all members of the WTO to implement and
enforce a comprehensive set of minimum standards protecting the intellectual
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Reforming U.S. Patent Policy
property of both domestic and foreign firms. For many developing countries,
TRIPS forced a strengthening of their patent laws.
Tuttavia, it permits members substantial flexibility in limiting the market
power of patent holders. NOI. trade authorities still found the agreement insuffi-
cient for protecting the international economic interests of major American com-
panies in certain industries, so they have pushed the harmonization agenda far
beyond that level.
Such extensive harmonization is difficult to achieve. It is not surprising, there-
fore, that the efforts have only borne fruit in a series of bilateral trade agreements
with small nations. Even when the efforts have succeeded, they have made ques-
tionable contributions to global development and have generated resentment
among citizens in trading partners—resentment that bodes ill for the rest of the
NOI. trade agenda. It is advisable to abandon this high-level harmonization agen-
da. Unfortunately, at present there are few major economic interests pushing for
such rationalization in trade policy.
The current U.S. trade strategy appears even more senseless when we consider
the fact that the problem for most major U.S. companies is not that patent laws
abroad are inadequate, but that they are poorly enforced. A more effective strate-
gy to protect international economic interests would be to increase the pressure on
major developing countries, such as China, to improve their record on enforcing
patents and other forms of IPR.
A combination of carrots and sticks could be used to achieve this end. The car-
rot would be to collaborate more fully with other developed economies and inter-
national organizations to increase the amount of technical and financial assistance
available for improving enforcement. The stick would be for the United States and
other major developed economies, especially the EU and Japan, to marshal evi-
dence and arguments for a formal complaint at the WTO that specific countries
have failed to meet their enforcement obligations under TRIPS. A coordinated
effort would reaffirm that the United States is committed to a multilateral
approach to resolving tough trade problems and would deflect criticism that the
United States is a solitary and aggressive demander in global patent policy.
PATENTS AND INNOVATION
Innovation results from the interaction of norms, markets, incentives, regulations,
and infrastructure for the creation and use of technology. Education systems
encourage skills and technical competence. Venture capital markets finance the
investments of small U.S. companies in biotechnology, software, and related new
technologies. Mass communication systems foster access to knowledge. These and
other elements contribute to the skills, talents, capital, and competition that sup-
port innovation.
Most importantly for our purposes, innovation thrives under openness to
dynamic competition. Open markets encourage firms to enter and exit, restructure
through efficient takeovers, gain access to important inputs and suppliers, E
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develop and sell new products and process technologies. Information and new
products diffused throughout the economy generate greater competition and spur
more innovation. Finalmente, openness to international trade, investment, and licens-
ing is essential for facilitating technology transfer across borders.
Patents—the focus of this report—and other forms of IPR are only one part of
this system. Nevertheless, they often play a vital role in fostering innovation, a role
that becomes apparent after considering what would happen without IPR protec-
zione. Without protection, an inventor could spend considerable money, time, E
effort developing an idea that a rival could easily copy and sell for a fraction of the
cost. The inventor may be left not only without a profit but also with a sizable
loss—and a clear disincentive against future innovation.
Patents are the most direct incentive for developing commercially useful new
technologies and products. They facilitate dynamic gains—new products and
greater variety—by temporarily supporting exclusive market power. That is the
classic trade-off in the traditional view of patents, which sees innovation as the dis-
crete birth of a single-idea technology covered by a patent. Whether actual patents
match this view is widely debated and will be examined in the next section.
Patents also help to ensure the adoption and diffusion of innovative ideas. IL
publication of patent applications guarantees that inventions are disclosed and not
kept secret.
Commercialization—turning a new idea into a marketable product, service, O
technology—can be costly. Exclusive rights provide an incentive for firms to shoul-
der those costs. The exchange of technologies is made easier because patents pro-
vide a legal foundation for that exchange. Without that foundation, contract nego-
tiations over the terms of agreement might prove difficult or impossible. This is
also true for the specialized technology transfer services that are made possible by
patents.2 These economic roles—sufficient innovation, commercialization, E
diffusion— could be achieved in a number of ways. A major advantage of patents
and other IPR is that they work through the markets themselves. If new products
fail to attract consumers, the associated patent is virtually worthless, and con-
sumers do not suffer monopoly prices.
IPR therefore channel investment into new knowledge goods that are antici-
pated to provide consumer benefits.
Patent Standards
Despite the dynamic innovation that patents can facilitate, they also inject new
monopolies into markets. Accordingly, it is essential to develop the standards
under which patents are granted and protected with an eye to achieving the right
balance. In general terms, the major patent standards are eligibility rules, length
and breadth of patents, and limitations on rights.
Eligibility rules cover the elements of knowledge that may not be patented.
Most countries exclude fundamental scientific discoveries flowing from basic
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Reforming U.S. Patent Policy
physical laws of nature, including mathematical algorithms. Other subject matter
may be excluded in order to preserve national security or public health.
In all countries where patents are awarded, for an invention to be patented it
must: (1) be novel (that is, previously unknown), (2) contain an inventive step
(questo è, a step that is not obvious to one skilled in the area of technology it repre-
sents), E (3) demonstrate utility by being reduced to an item of commercial
applicability. Determining whether an invention meets these criteria is the job of
patent examiners. To be declared novel, an invention must survive a search of the
prior art, which is the total of relevant published knowledge. The inventive-step
standard is important to prevent obvious inventions from being patented. IL
utility standard determines the dividing line between unpatentable knowledge
derived from basic science and patentable applied arts. Clearly, it is possible for
examiners to make mistakes and issue patents that do not truly meet one or more
of these standards. To mitigate that risk, most systems permit interested parties to
bring prior art to the attention of examiners before a patent award, contest the
validity of a patent after it is issued, or both.
Patent applications are published within a certain time period in order to dis-
close the technical claims made and the mode of operating a technology or mak-
ing a product.
Timely publication is important for diffusing new technical information into
the economy and informing firms that particular technologies are protected.
After eligibility standards come standards determining the length and breadth
of a patent. The global standard for duration is twenty years from the filing date.
In terms of breadth, inventors make claims about the protectable novelty of their
inventions, although examiners can narrow or reject those claims. Some countries
permit only narrow claims on singly defined uses of information while others per-
mit multiple claims of novelty within a patent. To illustrate, a narrow patent on a
chemical formulation might claim rights only to a single resulting drug or acid
without covering products that use closely similar formulations. A broad and mul-
tiple-claim patent could cover the chemical process, specific products it achieves,
and close chemical substitutes.
Equally significant is the extent to which inventors can claim rights to uses not
specifically listed in the patent. Per esempio, biotechnological research tools may
be developed for a particular genetic application, but under a system allowing
broad claims, inventors may claim rights to later uses in different research areas. A
give another example, genome patents protect claims on long stretches of genetic
sequences whose potential future uses are not currently known. Where a country
recognizes a “doctrine of equivalents,” patent owners may litigate against compet-
ing products and technologies shown to rely on techniques that, in essence, per-
form the same functions in the same ways for the same results as those in the
patent grant.
A final set of standards is the set of limitations placed on the exercise of patent
rights. These exist for a variety of reasons, most prominently to protect public
health and other public goods and to maintain competition. Many countries per-
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mit free use of patented goods by governments. Governments also issue compul-
sory licenses, which force the patentee to surrender the technology on a nonexclu-
sive basis to another firm in return for a license fee, either to ensure domestic pro-
duction of essential technologies (such as medicines or environmental inputs) O
to enforce anti-monopoly provisions. Some countries recognize a prior-use excep-
tion to patents, under which firms that can demonstrate their earlier use of an
innovation that was later patented by another firm are able to continue using the
technology without having to pay royalties.
EMERGING COMPETITIVE PROBLEMS IN THE U.S. PATENT REGIME
Patent regimes exist along a spectrum, from weak rights that permit consumers
and rivals cheap access to new information goods to highly protected rights that
favor exclusivity for inventors. Recent trends in U.S. intellectual property protec-
tion have increasingly favored those who invent and own patents. At the same
time, standards for approving patents are weakening. As a consequence, the num-
ber of questionable patents has increased, and litigation and transaction costs have
risen for competing firms.
Patent Pathologies
The most important change in patent regulations since 1980 has been the expan-
sion of subject matter eligible for patent protection. In 1980, the Supreme Court
ruled in Diamond v. Chakrabarty that genetically engineered bacteria could be
patented. This ruling established that virtually all forms of life could be patented,
including genetic discoveries and research tools. In 1981, the Supreme Court rec-
ognized in Diamond v. Diehr that software could be patented, radically expanding
the ability of programmers to assert rights over their computer code. In 1998, UN
federal circuit court approved the eligibility for patents of business methods and
financial service products in State Street Bank & Trust Company v. Signature
Financial Group. This case, involving protection of a method of managing mutu-
al funds, opened the door to a proliferation of business methods patents, includ-
ing Amazon.com’s one-click Internet ordering process and Priceline.com’s reverse
auction for buying Internet products.3
The second major development came with the Bayh-Dole Act in 1980, Quale
gave universities control of inventions that resulted from federally funded research.
University patenting accelerated, and research universities established technology
transfer offices to facilitate licensing to private and faculty-based companies.
The third development was the 1982 creation of the Court of Appeals for the
Federal Circuit (CAFC), a special court managing appeals on IPR disputes and
other complex business litigation. The goal was to create expertise and predictabil-
ity in patent cases, but predictability has largely benefited patent holders. Before
1980, 62 percent of cases in which patents were found to be valid and infringed
were upheld on appeal; after 1990, that proportion rose to 90 per cento. In cases
where a patent was ruled invalid or not infringed, the fraction of decisions reversed
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Reforming U.S. Patent Policy
rose from 12 percent to 28 per cento. In addition, after the introduction of the
CAFC, the rate at which courts issued preliminary injunctions to block the use of
patented items during infringement proceedings rose sharply.4 The final contribu-
tion to stronger patents was the lengthening of effective patent terms. To meet the
requirements of TRIPS, NOI. patent length was extended from seventeen years
(from the date of grant) to twenty years (from the date of application).
The Hatch-Waxman Act of 1984 extended patent terms by up to five years for
pharmaceutical products where issuance of the patent had been delayed by lengthy
approval processes at the Food and Drug Administration (FDA).5
Dilution of Patent Standards
At the same time that policy was strengthening U.S. patent protection, its patent
standards were being weakened.6 It has become common to ridicule the USPTO
for issuing questionable patents, such as the J. M. Smucker Company’s patent for a
“method of making crustless peanut butter sandwiches.” A patent is of high qual-
ity if it protects an invention that is truly novel, inventive, and commercially use-
ful—requirements that form the essence of a well-functioning patent system.
Patents have low quality if they are issued to inventions that are obvious, ignore the
prior art, or duplicate existing technologies. The decline in patent quality is exac-
erbated if patent holders choose not to commercialize their inventions, instead
waiting to litigate against other firms that bring a similar technology, independent-
ly invented, to market.
Many factors have led to the dilution of patent standards. The first problem is
a shortage of patent examiners. The average patent gets only eighteen hours of
revisione, and many are only cursorily examined, yet there is still a backlog of more
di 400,000 applications at USPTO. Secondo, the expansion of patents to biotech-
nology, software, and business methods means there may not be sufficient written
prior art to reject applications on what might seem to be obvious technologies, E
examiners may not be adequately trained in those areas. Therefore, both the nov-
elty and nonobviousness standards have diminished sharply as applied, even in
cutting-edge technologies.
Third, all patents, even dubious ones, are buttressed by courts and regulation.
NOI. courts presume that an issued patent is valid; challenging that validity to
defend against infringement litigation is therefore difficult. In fact, it is hard to
challenge validity in any forum, as the United States is uniquely hostile to proce-
dures to vacate patents. The USPTO may be asked by interested third parties to
reexamine the validity of an awarded patent, but its procedures sharply restrict the
scope of the challenge to the patent. No challenges may be made to utility, even
though such challenges could, for instance, invalidate certain genome patents.
Third parties may challenge a patent by demonstrating a lack of novelty or inven-
tiveness, but only published prior art may be admitted as evidence. Requiring that
prior art be in published form can exclude critical evidence of earlier knowledge
in elements of new technologies. Software code, for instance, is not ordinarily pub-
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Keith E. Maskus
lished but could contain information demonstrating that an invention had already
been developed. If the challenge is not upheld upon reexamination, the ability of
the parties raising the challenge to vacate the patent in court is greatly restricted.
Inoltre, a lawsuit by a rival firm to invalidate a patent is only possible if the
patent holder has threatened the rival with infringement litigation.
In addition to concerns about quality, it is increasingly common for patents to
including “reach-
be written broadly, covering several technological claims,
through” claims to uses of research tools. As noted below, in technological areas
where products incorporate several interrelated ideas, and technical change builds
on earlier innovation, overly broad patents make it difficult for competing innova-
tors to discern the boundaries of what is protected, increase transactions costs in
licensing, and raise the market power of individual patentees.
A final concern has to do with the progressive lowering of the utility standard.
Technologies are supposed to be reduced to a commercially useful form in order
to qualify for patents. Tuttavia, under Bayh-Dole and legal interpretations of eli-
gibility rules by the courts, patents have been issued increasingly to subject matter
that previously would have been considered unpatentable, such as basic discover-
ies of nature, which have no direct commercial application.
Potential Problems for Innovation
Policy changes have made patents both stronger in scope (broader claims, longer
duration, extended eligibility, greater likelihood of prevailing in lawsuits) E
cheaper to acquire (diluted standards, lower quality). The resulting proliferation of
patent applications and grants in the United States is remarkable, with the former
rising from 164,000 In 1990 A 357,000 In 2004 and the latter from 90,000 A
164,000 over the same period.7 This increase in patents, Tuttavia, does not neces-
sarily correspond to an increase in innovation. Available evidence does not support
the view that enhanced patent protection necessarily stimulates more innovation.
Per esempio, surveys of technology officers reveal that, except in pharmaceuticals,
biotechnology, and some forms of machinery, inventing firms do not view patents
as significant reasons to invest in technology.8 Rather, they rely more on lead-time
advantages, trade secrecy, learning-by-doing, and complementary services. Invece
of representing more innovation, Poi, the recent surge of patents may have creat-
ed more impediments to innovation from litigation, transactions costs in licensing
and research, anti-competitive blockages, and a slowdown in sequential innova-
zione.
The decrease in the quality of patents, as well as the increase in quantity and
breadth, has raised uncertainty about the boundaries of the rights owned by pat-
entees. It has also fed an explosion in litigation costs, which may deter small com-
panies from entering the market for fear of infringing on patents with vaguely
defined boundaries.
Patent litigation is complex, uncertain, and more expensive than most other
civil lawsuits. It is estimated that for patent suits with less than $1 million under 134 innovazioni / autunno 2006 Scaricato da http://direct.mit.edu/itgg/article-pdf/1/4/127/704107/itgg.2006.1.4.127.pdf by guest on 08 settembre 2023 Reforming U.S. Patent Policy contention, median discovery costs and legal fees are $790,000; for suits between
$1 million and $25 million these costs are $3 million; and for suits with more than $25 million at stake they rise to $6.5 million.9 These figures do not include dam- ages, which may be treble in cases where willful infringement is found. In 2000, there were 2,000 patent lawsuits filed involving around 3,000 patents—double the number of lawsuits in 1990. About 2 percent of these lawsuits ultimately went to trial, a rate above that for civil cases in general. It is evident from these figures that litigation costs may be a deterrent for small companies as regards entry into competition that may infringe existing patents. It is also clear that com- panies generally prefer to settle out of court rather than risk an adverse judgment. Inoltre, the United States is unique in providing a right to a jury trial in IPR lawsuits, and juries are more likely than judges to favor patent holders. In addition to the costs of individual patents, researchers have to contend with “patent thickets.” That is, complex technologies, such as biomedical research tools, embody a number of technological inputs, many of which are patented. A differ- ent company, in turn, could own each patent. Negotiating these thickets raises the cost of securing rights. Weaker patent standards encourage patent proliferation and an enlargement of the thickets for research in areas such as biotechnology, agricultural chemicals, and pharmaceuticals. Whether thickets are a significant problem is the subject of much debate. One important survey found little evidence that thickets have prevented biomedical research from fully utilizing the most recent technologies.10 However, a statistical analysis of citation patterns of publications in biotechnology and life science jour- nals before and after a patent is granted suggested that patents in these areas have a modest research-diminishing effect, with additional evidence of a shift in research priorities toward less protected, and presumably less promising, areas.11 That suggests patent thickets and transactions costs may slow down the diffusion of scientific research. This concern was heightened by the CAFC decision in 2002 in Madey v. Duke, which is described in box 1. Prior to this case, universities engaged in research under a traditional research exemption permitting them to use patented technolo- gies freely without paying license fees. The court ruled that research supported potential commercial activities, thereby narrowing the legal scope of the exemp- tion substantially. The decision ultimately could force university scientists to nego- tiate licenses with multiple patent holders to continue basic research programs. Anecdotal evidence since Madey v. Duke suggests that campus legal offices have become more nervous about their scientists using patented technologies despite the nonprofit status of universities. It remains to be seen whether the case will slow down or shift the priorities of research programs at public laboratories and uni- versities. A way around these potential problems is licensing patented technologies. Large firms could build extensive patent portfolios that they cross-license with others to avoid infringement and gain access to knowledge. Under cross-licensing agreements, each firm lists a large number of patents it owns and other partici- innovazioni / autunno 2006 135 Scaricato da http://direct.mit.edu/itgg/article-pdf/1/4/127/704107/itgg.2006.1.4.127.pdf by guest on 08 settembre 2023 Keith E. Maskus Box 1. Madey v. Duke John Madey was a tenured professor at Stanford University, where he devel- oped the technology for two patents on an electron laser gun that is important for electron research. In 1988, he moved to Duke University, which built a spe- cial laboratory for his lasers. A fallingout caused Duke to remove him as lab director in 1998, but researchers at Duke continued to use machines embody- ing his technologies, and Madey sued for patent infringement. Duke claimed its use was protected under the experimental use defense for noncommercial enti- ties. Madey’s claim was upheld by the CAFC, Quale, in essence, ruled that because Duke was using the patented technologies in research that could gen- erate outcomes with licensing revenues, it was a commercial enterprise for this purpose. Fonte: Carmella Stephens, “Madey v. Duke University: Federal Circuit Sets Limitations on the Common Law Experimental Use Exemption,” Baker Botts LLP Intellectual Property Report 3, NO. 27, Luglio 7, 2003. pants are allowed to use any of the patents listed, with perhaps some net payments to firms with larger portfolios. A related solution is a patent pool, in which two or more firms combine ownership of specified patents but may not license them more widely. Such arrangements may reduce transactions costs enough to offset losses due to greater competition and may avoid litigation costs. Although such arrangements seem sensible, they pose practical problems. Primo, they give firms an incentive to build the largest patent portfolio to improve their negotiating positions, a factor underlying the proliferation of patents. Secondo, patent pools can be operated in anti-competitive ways. For example, Summit Technology Inc. and VISX Inc., which pioneered the development of equipment for laser eye surgery, created a jointly owned partnership that was given control of both companies’ primary patents. The partnership could license to third parties but only if both companies agreed, giving each a veto over decisions of the other to license. This agreement eliminated competition between them to offer such licenses.12 A third problem is that it may be difficult to draft contracts across multiple claims when, as noted above, those claims may be of uncertain validity. Finalmente, patent thickets may be an entry barrier to the extent that new firms must build a patent portfolio quickly in order to be able to cross-license with other firms. Ovviamente, cross-licensing also depends on firms’ willingness to license their technologies, and holders of U.S. patents have no legal requirement to do so. If companies build portfolios solely for the purpose of extracting payments, they may find it most profitable simply to litigate, especially if lawsuits emerge against a threat of preliminary injunctions and treble damages for willful infringement. 136 innovazioni / autunno 2006 Scaricato da http://direct.mit.edu/itgg/article-pdf/1/4/127/704107/itgg.2006.1.4.127.pdf by guest on 08 settembre 2023 Reforming U.S. Patent Policy This possibility limits the willingness of firms to invest in technologies that might infringe patents of even questionable validity. Allo stesso modo, patent holders with broad claims on platform technologies may try to use those claims to discourage competitors through licensing restrictions and litigation against technologies on similar products. A prominent example is the Chiron Corporation, which in the 1980s collaborated with the Centers for Disease Control (CDC) in the discovery of the hepatitis C virus. It was an expensive process, requiring the cloning of the virus through extensive trial and error. The breakthrough discovery, made in 1987, led to a reliable blood test for the disease and sparked further efforts to develop a cure. Chiron applied for a patent on the cloned virus but did not name the CDC or Daniel Bradley, the CDC virologist who had provided essential blood samples from infected chimpanzees, in the patent. Robert Lanman of the National Institutes of Health argued that Chiron should provide the government some control over licensing of the virus and blood test so that other researchers would have access on reasonable terms. Chiron disagreed but in 1990 signed an agreement with the CDC giving Chiron full rights to the patent in return for a payment of $2.2 million. Since that time Chiron has aggres-
sively enforced its patent, and critics claim that its enforcement has held up
research by other firms and agencies for years. For example, a French scientist
working with bioMérieux stated, “whether you are working on an antiviral or a
vaccine, you have to consider that the Chiron patent is going to be a problem.”13 A
2003 study by the National Academy of Sciences also singled out Chiron as a com-
pany with a reputation for limiting access to its patents. Inoltre, a number of
small companies interested in extending research on hepatitis C claim to have
abandoned that research because of an inability to license the Chiron patent.14 Yet
another problem with cross-licensing and patent pooling is that patented tech-
nologies may be components of technologies that make up important product or
technical standards, or become standards themselves. Product interface standards
are necessary for various components and programs to work in telecommunica-
tions and computer networks. To compete, companies must be able to design
products that are compatible with these standards. Per esempio, the application
programming interfaces that define compatibility with the Microsoft Windows
operating system is a critical industry standard. Yet it is possible that one compa-
ny may own patents that limit access to the standard or, increasingly, that multiple
companies claim rights that cover some portion of it. Infatti, Microsoft’s tradi-
tional approach has been to keep its patented standards proprietary. Such situa-
tions may give the patent holder considerable market power and raise licensing
problems similar to those above. Such “holdup” problems in patenting basic tech-
nologies can be severe in their effects on follow-on innovation.
The patent system was designed under the classical image of innovation as a
discrete technology with clear claims. Yet, as the emergence of these issues indi-
cates, that model increasingly is inconsistent with important new technologies that
rely on deep interrelationships across inventions. Firms in high-technology sectors
frequently build sequentially on existing inventions to achieve improvements and
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often embed patented technologies into their own products. In this kind of system,
future discoveries are more probable if there are more innovators. Stronger patents
may thus reduce profits and innovation.
To illustrate this inconsistency between the patent system and modern innova-
zione, one might ask why the U.S. software industry was highly innovative in the
1980S, even though it was not eligible for patents. The sequential, cumulative, E
complementary nature of innovation in software pushed product development
forward into many areas of technology. The classical view of patents predicts that
innovation should have increased after the Supreme Court affirmed in 1990 Quello
computer programs may be patented.
Tuttavia, the firms that acquired the bulk of these patents actually reduced
their research and development (R&D) spending as a proportion of sales, suggest-
ing a flattening of innovation incentives.15 The reason could be that patents are
overly strong protection for the industry. Patents last twenty years, which is far
longer than the typical life cycle of a software product. In platform programs with
network economies among users, patents can lock in an already significant market
advantage, deterring competing innovation.
The Role of Antitrust Policy
Many of the measures that companies take to restrict access to technology fall
under the jurisdiction of antitrust authorities. Per esempio, it is anti-competitive
to extend market power beyond individual patent claims by tying sales of unrelat-
ed or complementary goods to access to patented goods. Under some circum-
stances, refusals to license a critical enabling technology or important intermedi-
ate input may also excessively restrict competition. Antitrust policy could play a
role in such cases by ordering licensing.
NOI. antitrust authorities have taken action in some patent cases by issuing
nonexclusive compulsory licensing orders and negotiating breakups of patent
pools. Tuttavia, such actions are rare, as antitrust policy has been almost com-
pletely benign toward patents. Per esempio, NOI. policy generally will not interfere
in cases of “dependent patents,” the licensing of which is necessary for the market-
ing of a later application. This antitrust stance is founded on the same policy pre-
sumptions that prevail in U.S. patent law: that patents are property and the state
should not limit or order their exploitation, and that technology markets are gen-
erally more efficient in the absence of competition regulation.
Given the proliferation of questionable and overlapping patents in an era of
rapid technical change, antitrust policy could be a powerful tool for preserving
dynamic competition when the patent system fails to do so. The Federal Trade
Commission took a step in that direction recently when it raised concerns about
the wisdom of maintaining a strong separation between IPR and anti-monopoly
policy.16
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INTERNATIONAL DIMENSIONS
Difficulties in the U.S. patent regime may be limiting innovation, but it is a prob-
lem for international competitiveness only if competitors’ systems are more sup-
portive of technological innovation. The first step is to identify variations between
the U.S. patent regime and those of other significant countries.
Canada
Taken broadly, the Canadian and American patent systems are similar. Both pro-
vide patents for twenty years. Both systems award proprietary rights to exclude
others from making, using, and selling the patented processes or products of
claimed subject matter.
Tuttavia, there are significant differences, which reveal the Canadian system to
be more cautious in striking a balance between inventors and the users of new
informazione.
Canada has more restrictive eligibility for patents. The Canadian Supreme
Court affirmed that transgenic, higher-order animals are not eligible for patents.
Canada does not patent business methods, surgical methods, medical treatments,
or computer programs. (Computer-related devices that integrate processes and
apparatuses may be patented.) Like the United States, Canada publishes all patent
applications within eighteen months of filing, but it does not allow inventors to
prevent publication if they choose not to file abroad. Canada has stronger stan-
dards for what must be disclosed in a patent application. Further, it is possible in
Canada for any interested party to challenge patent validity before the patent is
granted by making prior art available. E, although procedures exist in both
nations to oppose the validity of patents after a grant is made, the U.S. courts have
made such challenges difficult to sustain.
For a long time, Canada has viewed compulsory licensing as an appropriate
form of transferring technology for purposes of industrial policy (although it has
rarely been used), while the United States has confined its use largely to antitrust
remedies. The question of interest is whether Canada’s approach of more limited
rights has generated less innovation growth than has the U.S. approach of strong
exclusive rights.
Evidence suggests that this is not the case. During the 1990s, when the United
States was considerably expanding the scope of its IPR regime, Canadian R&D
expenditures and innovation (as measured by patents registered abroad) rose rel-
ative to those in the United States. No definitive inference may be made, because
other factors could be at work, but the simple evidence does not favor the hypoth-
esis that the U.S. approach generates more investment in information creation.
European Union
The EU has a strongly protective IPR system. Although traditionally more reluc-
tant about patenting life forms than the United States, the EU has made patents
available for biotechnological inventions since 1998. Tuttavia, the European
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Patent Office (EPO) has taken a more cautious approach than the USPTO in issu-
ing patents with broad claims in core technologies, such as genetic research tools.
The EU treatment of software patents is similar to that in Canada. Computer pro-
grams, per se, are not eligible for patents, but they can be protected to the extent
that they give effect to the operation of a related apparatus or process.17 This basic
principle has supported an increasing number of patents for computer software
and Internet programs, although there is no clear definition of what constitutes a
“business method” in the EU.
The most important differences are the standards for patents. The EPO tends
not to permit overly broad claims in patent applications, and post-grant opposi-
tion is more robust in the EU, where there is less of a legal presumption of patent
validity. Unlike the United States, the EU recognizes a prior-use exception to
patents.
Finalmente, the EU antitrust body—the European Commission—is more inclined
to order licensing or related remedies where it finds excessive use of market power
from IPR. A prominent example was the decision in 2004 to order Microsoft to
make protocol technologies for Windows available to software firms upon pay-
ment of royalties.
Microsoft developed a licensing program, but in July 2006 the commission
determined that it was insufficient to meet the terms of the licensing order and
issued fines that will remain in place until compliance is achieved.
It is not possible to state definitively whether this approach has limited or
spurred innovation growth in the EU relative to the United States, as member
countries of the EU vary widely in their innovation capacities. Tuttavia, In 2003,
the United States ranked behind the United Kingdom, Germany, Sweden, Finland,
and France in terms of patents received in the USPTO and the EPO per million
dollars of R&D spending.18
China
Like the United States, Canada, and the EU, China has a system of IPR that is fully
consistent (on paper) with the TRIPS agreement. Tuttavia, China’s legal regime
makes greater use of TRIPS-consistent authority to limit exclusive rights and
encourage access to information. China does not permit patenting of business
metodi, medical treatments, surgical methods, or plant and animal varieties—in
particular, higher-order life forms or biological research tools. (Tuttavia, one way
China does bolster patent rights is by not permitting experimental use of patent-
ed materials.) Software users have a limited right to decompile computer code in
order to develop new programs, although the government is considering extend-
ing patents to computer programs. The country has liberal standards covering gov-
ernment use and compulsory licenses of patented technology.
The familiar problem in China is that patents are poorly enforced, a deficien-
cy that encourages massive copying and imitation. In this context, there is anecdot-
al evidence, based on interviews of domestic enterprise managers, that China’s fail-
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ure to enforce patents is becoming a greater drag on its own firms’ ability to inno-
vate and grow.
The remarkable aspect of China’s economy is that, despite this weak technolo-
gy protection and inadequate enforcement, massive amounts of technology have
flowed into the economy via foreign direct investment and joint ventures or licens-
ing deals.19 To date, most such transfers have been second-tier and mature tech-
nologies, because foreign firms wished to limit the loss of cutting-edge knowledge.
Increasingly, Tuttavia, international firms are shifting higher-technology produc-
tion facilities and research centers there. It seems likely that this trend will acceler-
ate as greater enforcement of the new laws takes hold.
Potential Implications
There are two potential implications of these differences across countries that
American policy-makers should consider. Primo, patent systems can provide signif-
icant incentives for investments at the same time that they safeguard opportunities
for dynamic competition and access. Many countries prefer to strike a balance
more in line with the needs of technology users, while transparently recognizing
the importance of innovation incentives. In contrast, the U.S. patent system has
become so protective of exclusive rights that it diminishes incentives for competi-
tive innovation in some respects.
Secondo, even if international regimes remain less protective of inventors’
rights, the fact that they have become stronger and more transparent in recent
decades increases the probability that firms will transfer technology and R&D to
international locations.20 Indeed, numerous software companies and high-technol-
ogy firms recently have opened research facilities in China and India.
This dynamic poses a challenge for U.S. policy-makers. They are understand-
ably concerned about the loss of technologies to imitation, industrial espionage,
and reverse engineering in new industrial competitors. Così, the United States has
a strong interest in pushing China and similar countries to strengthen their patent
standards, trade secrets, and enforcement efforts. Paradoxically, Anche se, such a
change ultimately would shift technology transfer away from older technology
toward first-tier technologies and research facilities as firms feel more confident
about their ability to protect proprietary knowledge. Because some portion of this
research off-shoring would be due to the competitive problems of the U.S. patent
system, the United States would be encouraging excessively rapid technology
transfer.
Despite that problem, more active enforcement by China and other nations
that misappropriate proprietary knowledge and confidential information would
generate significant gains for American technology exporters. Those gains would
include higher returns to licensing and longer periods within which firms would
benefit from market exclusivity in growing and dynamic economies. Therefore,
NOI. trade authorities should place greater emphasis on pushing governments in
major developing countries to meet their international obligations to enforce
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patents. As discussed more fully in the recommendations, a positive incentive
would be to expand the global resources available for providing technical and
financial assistance to these countries in order to improve their judicial systems
and enforcement regimes. This relaxation in technical and budget constraints
should reduce opposition to investments of scarce development resources in
enforcement. Tuttavia, real progress may require coordinated legal action at the
WTO to demand serious efforts to clean up infringement. This combined
approach should shift the politics of piracy in developing nations in favor of
emphasizing the dynamic gains from stronger protection for domestic and inter-
national technologies.
While enforcement initiatives have not been absent from trade policy, IL
United States has devoted far more effort to negotiating globally harmonized
patent standards or, failing that, to markedly strengthening patent regulations in
developing countries through trade agreements. Infatti, NOI. trade policy places a
strong priority on international patent harmonization at high levels of protec-
tion—a questionable ranking of priorities.
International Harmonization
There is a good reason to achieve some harmonization of patent rules, since it
could reduce transaction costs of inventive companies. Dealing with different
patent standards and fees is costly. There is an alternative to harmonization, how-
ever: to increase coordination among patent offices to mutually recognize patent
grants and reduce fees.
Mutual recognition would mean that a patent application considered in one
major IPR office would, if granted, be ruled presumptively valid in other partici-
pating countries, subject to local opposition procedures.
Mutual recognition would not tighten patent standards significantly. The U.S.
policy, in contrast, emphasizes the need for far stronger regulations, suggesting
that strategic objectives are in play. Primo, such harmonization would increase the
profits of U.S. firms in biotechnology, agribusiness, software, and other industries.
Secondo, a strong harmonization agenda could make competitive differences in the
NOI. system and international regimes less glaring.
The harmonization drive has come in three forums. Primo, the TRIPS agree-
ment established a comprehensive set of minimum standards that all member
countries must implement and enforce. For most developing countries, IL
changes required were significant, particularly regarding patents, the confidential
treatment of clinical test data for marketing approval, and compulsory licenses.
The TRIPS standards, Tuttavia, contain room for favoring competitive access over
strong exclusive rights. Countries may define their own standards for nonobvious-
ness, utility, and novelty, and many countries (such as Brazil and China) have cho-
sen rigorous standards to prevent awarding property rights to minimal changes in
technology. If enforced, these minimum standards provide some certainty for
investors but fall well below the U.S. standards in patents. Further, TRIPS has not
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forced convergence of patenting standards and exceptions among the developed
economies.
A second important effort has been the currently stalled negotiation of a
Substantive Patent Law Treaty (SPLT) at the World Intellectual Property
Organization (WIPO). The SPLT would largely harmonize patent examination
standards across member nations. NOI. negotiators have pushed for a global regime
that would adopt many of the American standards for eligibility, including of sub-
ject matter. This negotiation has been an attempt by the United States (and the EU
to some extent) to ratchet up patenting standards that were left more discretionary
under TRIPS. Many developing countries, led by Brazil and India, have resisted
this approach, while difficulties in achieving agreement among the United States,
the EU, Japan, and other developed countries have sidetracked the negotiations
ulteriore.
The third and most controversial U.S. approach has been the negotiation of
bilateral free trade agreements with developing countries in order to push patent
standards higher than TRIPS levels and closer to the U.S. modello. This so-called
TRIPSplus agenda (see box 2) has expanded over time, culminating in strong IPR
chapters in the agreements with Morocco, Jordan, Bahrain, Singapore, Peru, E
Colombia.21 TRIPSplus requirements have been controversial among health
authorities in developing countries because they place strict limits on the ability of
governments to encourage generic entry or issue compulsory licenses in pharma-
ceutical products.22 They also are resisted by information and education ministries
for their restraints on fair use in copyrights.
For all of this controversy, the benefits to innovation are questionable. Most of
the markets involved are small, so it is unlikely that research-based international
companies would perceive additional incentives for general investments or under-
take investments specific to those markets. These policies will not encourage inno-
vation by firms in the signatory countries because they do not provide much addi-
tional market access in the United States. It is difficult, Perciò, to see much rea-
son to expect more R&D induced by the patent components of these FTAs. A more
likely outcome is that local innovation will actually be discouraged by patent stan-
dards that exceed what would be sensible for development.
In addition to the damage done to innovation in smaller markets, initiatives to
open larger markets to U.S. exports may fall victim to the American focus on
patents.
The bilateral FTAs are not likely to go beyond agreements with relatively small
economies, as larger and middle-income countries have domestic interests that
would resist substantially stronger standards than those in TRIPS, and their gov-
ernments are better positioned to resist the restrictive aspects of patent policy in
TRIPS-plus. Brasile, Per esempio, has resisted negotiating an FTA with the United
States—concerns about IPR being a central reason—and has further opposed a
hemispheric Free Trade Agreement of the Americas. China in particular sees little
need for an agreement that would ratchet up its standards. Clearly, pursuit of har-
monization in these cases carries severe costs that merit consideration.
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Box 2. The U.S. TRIPS-plus Agenda
The expression “TRIPS-plus” refers to demands made by the United States and
other developed economies that trading partners agree to IPR standards that
exceed those required in WTO rules.
In the area of pharmaceuticals, the Doha Declaration clarified TRIPS by per-
mitting the least-developed countries to delay implementation and enforce-
ment of patent rules until 2016, stating that governments could accord priori-
ty to public health needs over intellectual property requirements and asserting
that developing nations could take full advantage of the flexibilities in TRIPS.
In its negotiations of bilateral free trade agreements (FTAs), the United States
has systematically ignored these provisions in favor of strong protection in
pharmaceuticals in particular and in IPR more generally.
In operational terms, TRIPS-plus means the following. Primo, for items that
are not negotiated within an FTA, the relevant TRIPS standards pertain.
Secondo, the FTA might negotiate standards that exceed those of TRIPS. Third,
newer areas of IPR that were not covered by TRIPS may be subject to negotia-
tions in FTAs. This approach meets U.S. negotiating priorities, including
requirements that IPR provisions of agreements “reflect a standard of protec-
tion similar to that found in U.S. law” and that standards strongly protect new
technologies and embodied intellectual property.
Primary items of TRIPS-plus include the following. Regarding patents, IL
United States prefers that countries provide extensions to patent coverage and
scope in a number of ways. One way is to narrow the exclusions from
patentability and, in particular, to make eligible life forms, including genetic
sequences. Other areas in which patents could be provided are plant varieties,
software, and business methods. A second way to extend coverage is to provide
patent-term extensions for drugs in cases where health authorities issued
patents with undue delay. Another is to issue second-use patents, which effec-
tively extend patent protection for chemical entities beyond original terms. Yet
another is to limit experimental use of patented materials and also to restrict
their use by potential generic firms in preparation for entry as patents expire.
But perhaps the most significant one is the demand that health authorities ban
the registration of any generic drugs during the lifetime of a patent. That would
effectively end access to compulsory licensing except in rare circumstances.
Prossimo, a central demand of the United States is exclusive use rights for con-
fidential clinical and field trial test data on behalf of original applicants for a
period of at least five years for pharmaceutical products and ten for agricultur-
al chemicals. Recent FTAs go beyond that and effectively permit ten-year exclu-
sivity (by giving firms up to five years to apply for marketing approval in the
country and then adding data rights) before data may be used. That is a strong
restriction on competition, even in medicines where no patent is issued.
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Is Harmonization worth the Cost?
TRIPS-plus raises profits of major U.S. industries selling products abroad, ma il
agenda offers few innovation benefits for American consumers and may impose
costs on citizens in partner countries. In return, Tuttavia, the United States pays an
incalculable, but substantial, cost in terms of its foreign relations. These one-sided
demands in patent standards increase suspicion in developing countries that trade
agreements are designed unfairly and do not consider development needs. Infatti,
concerns about the rules governing regulation of pharmaceuticals held up negoti-
ations with Colombia until the public objections of the health minister could be
neutralized. In both Colombia and Peru, the recently signed trade agreements with
the United States are unpopular among many citizens primarily because of the IPR
provisions.
Attempts to internationalize U.S. patent practices raise considerable opposi-
tion more generally abroad. The U.S. Basmati rice patent (see box 3) raised wide-
spread concerns in developing countries, despite the fact that central claims in the
patent were overturned, that the American patent system could be used to appro-
priate traditional technologies. Those countries fear that it will fall to their compa-
nies and governments, rather than the U.S. patent examiners, to overturn obvious-
ly invalid U.S. patents.
SUGGESTED REFORMS
Based on the analysis in this report, the United States should pursue the following
policy recommendations to build coalitions for reform.
Domestic Reforms
Given the evolution of patent doctrine and judicial practice, it is impossible to
remove whole technologies (such as software and business methods) from patent
eligibility.
Invece, the United States should return, at least in part, to the first principles
of examining patents. As noted in the introduction, legislation has been intro-
duced in both houses of Congress that would make some progress in reforming the
patent system. The House bill would:
(cid:121) shift the U.S. system from a first-to-invent patent award to a first-to-file award,
thus eliminating litigation to determine the first inventor and making our sys-
tem more consistent with the rest of the world;
(cid:121) require publication of virtually all applications within eighteen months of the
filing date;
(cid:121) permit interested parties to challenge the validity of a patent within six months
of its granting by filing a petition at USPTO rather than engage in costly law-
suits; E
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Box 3. Basmati Rice
In late 1997, an American company, RiceTec Inc., was granted a patent by the
NOI. patent office to grow the aromatic rice known as Basmati and label such
rice grown outside India with that name. RiceTec had been trying, with little
success, to enter the international Basmati market with brands like Kasmati
and Texmati described as Basmati-type rice. Tuttavia, with the Basmati patent
rights, RiceTec would have been able not only to call its aromatic rice Basmati
within the United States, but also to label it Basmati for its exports. Farmers in
India and Pakistan were outraged because they would lose access to the large
NOI. import market and also face greater competition for traditional Basmati
exports in such crucial markets as the EU, the Middle East, and west Asia. Many
observers in the Indian media suggested that patenting Basmati in the United
States was akin to diminishing their history and culture. The Indian govern-
ment protested three (of twenty) claims in the patent, pointing out that its
exclusive titles to growing rice plants with certain characteristics identical to
Basmati, the grains they produce, and the method of selecting plants based on
a starch index, all related to items that had been known for many years and
should be considered prior art. In 2001, the USPTO invalidated these claims in
the patent but permitted RiceTec to sustain its patent on rice-breeding innova-
tions unrelated to this prior art of indigenous farmers.
(cid:121) permit third parties to submit published materials to USPTO prior to its issuing
a patent, in order to make sure that patents are not granted on inventions that
were already known.
The Senate bill would:
(cid:121) shift to a first-to-file system;
(cid:121) provide more structure for judges in determining patent damages;
(cid:121) permit third-party submission of prior published materials; 33
(cid:121) limit sharply the definition of “willful infringement” under which treble dam-
ages may be awarded; E
(cid:121) provide a second window for post-grant opposition, during which firms accused
of infringement could challenge the patent’s validity.
These bills may be as much as can be accomplished due to countervailing
political pressures. Unfortunately, they would not go far enough to achieve a fully
effective balance in the patent system. Così, domestic reform should remain on the
agenda for the near term until it incorporates all of the following:
(cid:121) Congress should require that more rigorous standards for determining whether
an invention is obvious or novel be applied to patent applications. A tal fine,
it should permit the USPTO to keep enough fees to fund an expansion of exam-
ination professionals to serve as a “second set of eyes” for business methods
patents, software patents, and other relevant applications. This financial shift
would reduce the granting of dubious patents.
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(cid:121) Third parties should be permitted to submit additional prior art upon publica-
tion of patent applications. This requirement would also reduce the granting of
patents to inventions that are obvious or not novel.
(cid:121) Congress should lay the groundwork for an effective and expeditious post-grant
opposition system. Legislation to that end should permit any interested party,
not just those involved in litigation, to petition the USPTO within nine to twelve
months to reconsider the scope and validity of a patent. It should also allow an
alleged infringer to request reconsideration of the patent within six months of
receiving notice of infringement from a patent holder. The goal is to provide a
cheaper and faster means of reviewing patent validity than the current costly
and one-sided court procedures.
(cid:121) Congress should scrap the requirement that a competitor cannot challenge a
patent until and unless it is sued for infringement, as it raises substantial uncer-
tainty. It should also weaken considerably the strong legal presumption that
issued patents are valid simply because they were issued.
(cid:121) Congress should eliminate the presumption that preliminary injunctions should
be issued by courts in cases of alleged patent infringement and replace it with an
approach considering all relevant business factors in deciding whether to issue
an injunction or to stay an injunction. Per esempio, plaintiffs should be asked
to show that they would suffer irreparable damage that could not be compen-
sated monetarily before a court issues an injunction against a defendant.
(cid:121) Congress should limit the grounds on which willful infringement is found. For
esempio, the presumption of a willful violation when the infringer did not first
obtain a lawyer’s opinion should be ended. Generally, punitive damages should
be awarded only in circumstances of egregious conduct, not where defendants
acted with no intent to infringe. These measures would reduce the hesitancy of
researchers to take advantage of published patents and other forms of available
informazione.
(cid:121) Congress should implement a legitimate prior-use right against patent infringe-
ment suits.
(cid:121) The United States should establish an office of competition advocacy within
USPTO to consider the economic implications of broad patent claims before
they are granted. This examination should be restricted to patent applications
on technologies that would have significant market power, an approach similar
to the antitrust role of staff economists at the Federal Trade Commission and
the Department of Justice.
International Reforms
(cid:121) The United States should pursue mutual patent recognition among the United
States, the EU, Japan, Canada, Australia, China, and other nations. This would
lower overall costs of the global patent regime.
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(cid:121) The U.S. harmonization agenda should be softened to involve accommodation
by the United States at least as much as the other way around. This would
include the following steps:
– A shift in U.S. practice to award patents on a first-to-file (rather than first-to-
invent) basis.
– Pursuit of limited convergence of global patent standards, perhaps through
procedures that differ by region or development level. One could imagine a
patent application that would cover the United States, Canada, Europe, E
Japan and that would be examined in any of those patent offices under a sys-
tematized procedures manual. There might also be a single patent application
for the Association of Southeast Asian Nations (ASEAN) in conjunction with
China, wherein China would undertake primary responsibility for examina-
tion under a developing-country set of standards. This technical arrangement
would not absolve China of its international obligation to enforce patents.
– Abandonment of the TRIPS-plus objectives in bilateral trade agreements,
especially in regard to patents and procedures in medicines that could nega-
tively affect the ability of developing countries to manage health policy.
Specifically, NOI. trade authorities should stop demanding strict concessions
regarding compulsory licensing, experimental use, second-use patents, E
extended periods of test data exclusivity.
Developing a Consensus
NOI. pharmaceutical companies, biotechnology firms, and others that rely on inter-
national patent protection will oppose these international reforms. Firms in other
sectors do not place a high priority on these ideas, as they are more focused on
domestic patent reforms.
Tuttavia, all IPR-exporting companies would gain if there were serious
progress on enforcement of their rights in major developing countries. Piracy and
counterfeiting are important in their own right for many industries but also mat-
ter to patent holders, who sell goods using complementary copyrights and trade-
marks. In truth, there has been virtually no progress in dealing with patent
infringement, copyright piracy, and trademark counterfeiting in China and else-
Dove. This situation blunts interest in wider reforms and therefore is an impor-
tant roadblock to achieving them.
Così, to generate consensus on a relaxation of the international harmoniza-
tion agenda, there must be serious progress in enforcement. Industry estimates
suggest that U.S. firms suffer tens of billions of dollars in lost sales annually to
infringement of various kinds. The United States—in concert with the EU and
Japan, where firms experience similar losses—should place more emphasis on
achieving a global consensus to ensure effective IPR enforcement, particularly in
such large markets as China, Turkey, and South Africa. Greater enforcement would
have the direct benefit of expanding sales opportunities for international firms and
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the indirect benefit of reducing concerns in Congress about the rapid loss of tech-
nologies.
For their part, middle-income and emerging industrial powers have good rea-
son to strive for greater enforcement, since simple piracy and counterfeiting, how-
ever profitable, do little to promote technical change and are an increasing burden
on the expansion of domestic enterprises. Allo stesso tempo, the domestic political
economy in those countries militates against reforms, because in the short run the
primary beneficiaries would be IPR owners from abroad while the losers would be
domestic infringing firms, which are often well connected. Further, major enforce-
ment activities would demand large public investments, thereby commanding a
greater share of scarce development resources.
A consensus needs to be reached that would coordinate the long-term interests
of dynamic firms in developing economies with the medium-term interests of
patent-intensive companies in developed countries. This coordinated approach to
enhancing enforcement should be built around two basic principles. Primo, because
international firms from all technologically advanced nations suffer losses from
infringement, a joint effort among countries in the Organization for Economic
Cooperation and Development (OECD) to considerably expand technical and
financial assistance for IPR enforcement would be a positive inducement for
change. The technical assistance should involve additional training in judicial prin-
ciples and enforcement procedures. Developed countries should also commit to
providing greater financial assistance for effective enforcement procedures in order
to relax budget constraints. To a substantial degree this additional assistance could
be paid for through nominal fees imposed on international patent and trademark
applications at WIPO, which would have the advantage of charging beneficiaries—
global patent registrants—a portion of the costs of improving their competitive
landscape. In brief, the carrot of substantial assistance, in combination with a
relaxation of U.S. pressure for higher global patent standards, should provide pos-
itive incentives to developing countries for upgrading enforcement.
Scattered financial and technical assistance of this kind has been offered for
years, and the United States has complained strongly about the enforcement issue
in China, India, Thailand, and elsewhere. Tuttavia, neither assistance nor jawbon-
ing has been effective in raising the incentives of governments to improve marked-
ly their enforcement activities. It is naive to expect the provision of further assis-
tance to achieve meaningful progress except over a lengthy time period, so an
external stick may be required to change domestic politics in favor of rapidly
implementing effective enforcement mechanisms. Così, the second principle is to
hold major developing economies accountable for their unwillingness or inability
to enforce patents, trademarks, and copyrights in their own laws. China, for exam-
ple, has undertaken extensive reforms to its laws governing IPR but has made only
minor investments in enforcement and continues to turn a blind eye to extensive
infringement, piracy, and counterfeiting. A similar situation exists in other large
developing countries.
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Keith E. Maskus
This lack of progress is inconsistent with commitments made in Part III of
TRIPS to “ensure that enforcement procedures…are available under the law so as
to permit effective action against any act of infringement of intellectual property
rights.” Developed countries could use this as the basis for a substantive WTO dis-
pute that their rights have been nullified or impaired by weak enforcement efforts.
Demonstrating damages would not be difficult, and such a case could help estab-
lish a better framework for improved enforcement.
A WTO case is far more likely to be effective if it is undertaken as a multilater-
al effort by developed countries. A broader complaint will get more attention from
plaintiff countries because any prospective trade sanctions imposed would restrict
access to all their most important export markets. It would also spread the costs of
preparing the case and suffering the damages from potential trade barriers among
multiple countries that stand to benefit from stronger enforcement.
The prospect of better enforcement over the medium term, along with achiev-
ing some efficiencies in international patent procedures, may not be sufficient to
induce U.S. firms to support the call made here for scaling back the harmonization
agenda. Without it, Tuttavia, the overall reform package advocated here cannot
proceed. In definitiva, what should matter is the ability of the domestic and interna-
tional patent systems to support those firms’ ability to compete in technology
development and to protect their rights. The needs of innovation will be better
served by a more flexible—and better enforced— global regime than by the har-
monization agenda being pushed by U.S. trade negotiators.
CONCLUSION
For more than twenty years, the United States has increasingly strengthened the
exclusive rights of inventors at the expense of those who need access to new tech-
nologies, while patents have been granted too easily and written too broadly. These
policies reflect the misguided belief that stronger rights will always expand incen-
tives for innovation.
Invece, the patent system raises roadblocks for licensing and cumulative inno-
vation, becoming a threat to competitiveness and growth.
The dogmatic assertion that “more is better” also drives U.S. trade policy in
setting global patent rules. The global trading system cannot thrive under a “one
size fits all” approach to any major regulatory regime, including patents. Countries
need the flexibility provided under TRIPS—the multilaterally agreed regime—to
manage and support their own innovation and competition policies. Pushing a
high-level harmonization agenda has not been fruitful but has generated resent-
ment in trading partners and raises risks for the future of U.S. bilateral trade pol-
icy.
Così, the fundamental approach of protecting low-quality patents with ever-
stronger domestic rights, while pressing for more harmonized global patent stan-
dards, should give way to a framework that emphasizes flexibility and gets the
incentives for innovation right. On the domestic front, this requires significant
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Reforming U.S. Patent Policy
reforms in patent law and judicial practice. On the international front, a willing-
ness to relax demands for harmonization and TRIPS-plus standards should be
combined with greater assistance for reforms and an insistence on effective
enforcement in major developing countries. This two-pronged reformation in the
stance of domestic and international patent policy would move a long way toward
restoring sense to the patent system and expanding confidence that true innova-
tion will be rewarded, wherever it occurs.
Acknowledgements
I am grateful to Douglas Holtz-Eakin, director of the Maurice R. Greenberg Center
for Geoeconomic Studies, for the opportunity to write this Council Special Report,
and to both him and James Bergman, the research associate on this project, for
their comments and edits on various drafts. I also thank the members of the
Council on Foreign Relations advisory committee: Seth F. Berkley, Michael J.
Bingle, Michael J. Christenson, Judith Church, James P. Dougherty, Marc D.
Foodman, Eleanor M. Fox, Charles Kinzig, Drew J. Ladner, Thea Mei Lee, Daniel
O’Keefe, Andrew Tilton, Peter D. Trooboff, Elisa M. Westfield, Minky Worden, E
especially the chair, Daniel F. Burton Jr. All of the members of the advisory com-
mittee made valuable comments on the draft as it progressed, although none are
responsible for the opinions expressed in this report.
Over the years, I have had numerous conversations with a number of scholars
and experts on U.S. and international intellectual property rights systems. I espe-
cially wish to thank Professors John H. Barton, Wesley M. Cohen, Jean Olson
Lanjouw, Josh Lerner, Jerome H. Reichman, and Suzanne Scotchmer, Carsten Fink
of the World Bank, and Richard Wilder, an attorney in private practice.
I also thank Council President Richard N. Haass, James M. Lindsay, the direc-
tor of studies when this project first took shape, and Gary Samore, his successor,
for their comments and guidance throughout the process of producing this report.
For their efforts in the production and dissemination of this report, I thank
Patricia Dorff and Molly Graham in the Council’s Publications department, E
Lisa Shields and Brittany Mariotti on the Communications team.
Finalmente, I would like to thank the Bernard and Irene Schwartz Foundation for
its generous support of this project.
1. Declan McCullagh, “Microsoft, Oracle Call for Patent Reform,” CNETnews.com, April 25, 2005.
2. This important point is documented, in the context of international technology transfer, by
Ashish Arora, Andrea Fosfuri, and Alfonso Gambardella, in Markets for Technology: The Economics
of Innovation and Corporate Strategy (Cambridge, MA: CON Premere, 2001).
3. The latter was overturned upon litigation.
4. Figures in this paragraph are from Adam Jaffe, “The U.S. Patent System in Transition: Policy
Innovation and the Innovation Process,” Research Policy 29, April 2000, pag. 531–57; and Jean
Olson Lanjouw and Josh Lerner, “Tilting the Table? The Use of Preliminary Injunctions,” Journal
of Law and Economics 44, ottobre 2001, pag. 573–603.
5. The TRIPS requirement is for a minimum term of twenty years and countries are free to offer
longer protection. Così, there is no inconsistency between TRIPS and Hatch-Waxman on patent
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duration.
Keith E. Maskus
6. Adam B. Jaffe and Josh Lerner offer several examples and discuss the general decline in patent
quality in their book Innovation and Its Discontents: How Our Broken Patent System Is Endangering
Innovation and Progress, and What to Do about It (Princeton: Princeton University Press, 2004).
7. NOI. (Federal) Government Patenting, 1/1977–12/2005 (Washington, DC: NOI. Patent and
Vedere
Trademark
settembre
Office,
2006),
8. The most recent survey is by Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, “Protecting
Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Prefer
to Patent (or Not),” National Bureau of Economic Research Working Paper no. 7552, Febbraio 2000.
9. Data from American Intellectual Property Law Association, Report of the Economic Survey 2003
(Washington, DC: Fetzer-Kraus, Inc., 2003).
10. See John P. Walsh, Ashish Arora, and Wesley M. Cohen, “The Patenting and Licensing of Research
Tools and Biomedical Innovation,” paper prepared for the U.S. National Academies of Science,
Tecnologia, and Economic Policy Board, 2002.
11. See Fiona Murray and Scott Stern, “Do Formal Intellectual Property Rights Hinder the Free Flow
of Scientific Knowledge? An Empirical Test of the Anti-Commons Hypothesis,” National Bureau
of Economic Research Working Paper no. 11465, Luglio 2005.
12. In 1998, the Federal Trade Commission challenged the arrangement as anti-competitive. IL
companies dissolved the partnership and replaced it with a cross-licensing agreement.
13. Quoted in. Mike McGraw, “Patent Agreement Draws Federal Review,” Kansas City Star, Febbraio
15, 2004.
14. Ibid. A recent report by the Federal Trade Commission, To Promote Innovation: The Proper
Balance of Competition and Patent Law and Policy (Washington, DC: Federal Trade
Commission, ottobre 2003), provides further examples.
15. James Bessen and Robert M. Hunt, “An Empirical Look at Software Patents,” Federal Reserve
Bank of Philadelphia Working Paper no. 03-17/R, Marzo 2004.
16. Federal Trade Commission, To Promote Innovation (2003).
17. After extensive lobbying over several years, the European Parliament in July 2006 rejected a draft
law to make computer programs directly eligible for patents.
18. Figures from OECD, Main Science and Technology Indicators 2005 (Dicembre 2005).
19. It should be recognized that multinational firms have somewhat greater ability to enforce their
patents in China than domestic enterprises.
20. There is substantial evidence that strengthening patent rights attracts more technology flows to
middleincome developing countries. For an extensive review and analysis, see Keith E. Maskus,
“Encouraging International Technology Transfer,” UNCTAD-ICTSD Project on IPR and
Sustainable Development Issue Paper no. 7, May 2004.
21. Australia also agreed to strengthen its rules in its bilateral trade agreement with the United States.
22. These agreements generally contain a side letter that affirms the ability of partner countries to
take actions to protect public health in the event of a health emergency.
References and further reading
American Intellectual Property Law Association. Report of the Economic Survey 2003. Washington,
DC: Fetzer-Kraus, Inc., 2003.
Arora, Ashish, Andrea Fosfuri, and Alfonso Gambardella. Markets for Technology: The Economics of
Innovation and Corporate Strategy. Cambridge: CON Premere, 2001.
Besen, Stanley M. and Leo J. Raskind. “An Introduction to the Law and Economics of Intellectual
Property.” Journal of Economic Perspectives 5, NO. 1 (Inverno 1991), pag. 3–27.
Bessen, James and Robert M. Hunt. “An Empirical Look at Software Patents.” Federal Reserve Bank
of Philadelphia Working Paper no. 03-17/R (Marzo 2004).
152
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Reforming U.S. Patent Policy
Bessen, James and Eric Maskin. “Sequential Innovation, Patents, and Imitation.” MIT Department of
Economics Working Paper no. 00-01 (Gennaio 2000).
Chellaraj, Gnanaraj, Keith E. Maskus, and Aaditya Mattoo. “The Contribution of Skilled
Immigration and International Graduate Students to U.S. Innovation.” University of Colorado
manuscript, 2006.
Cohen, Wesley M., Richard R. Nelson, and John P. Walsh. “Protecting Their Intellectual Assets:
Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not).” National
Bureau of Economic Research Working Paper no. 7552 (Febbraio 2000).
Federal Trade Commission. To Promote Innovation: The Proper Balance of Competition and Patent
Law and Policy. Washington: Federal Trade Commission, ottobre 2003.
Ganslandt, Mattias and Keith E. Maskus. “Parallel Imports and the Pricing of Pharmaceutical
Products: Evidence from the European Union.” Journal of Health Economics 23 (Febbraio 2004),
pag. 1035–1057.
Jaffe, Adam B. “The U.S. Patent System in Transition: Policy Innovation and the Innovation Process.”
Research Policy 29 (April 2000), pag. 531–57.
Jaffe, Adam B. and Josh Lerner. Innovation and Its Discontents: How Our Broken Patent System Is
Endangering Innovation and Progress, and What to Do About It. Princeton: Princeton University
Press, 2004.
Lanjouw, Jean Olson and Josh Lerner. “Tilting the Table? The Use of Preliminary Injunctions.”
Journal of Law and Economics 44 (ottobre 2001), pag. 573–603.
Maskus, Keith E. Intellectual Property Rights in the Global Economy. Washington: Institute for
International Economics, 2000.
Maskus, Keith E. “Encouraging International Technology Transfer.” UNCTAD-ICTSD Project on
IPR and Sustainable Development Issue Paper no. 7 (May 2004).
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Accession, Policy Reform, and Poverty Reduction Strategies. Oxford: Oxford University Press, 2004.
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2006, available at http://strategis.ic.gc.ca/epic/internet/inippd-dppi.nsf/en/ip01237e.html.
Maskus, Keith E. and Christine McDaniel. “Impacts of the Japanese Patent System on Productivity
Growth.” Japan and the World Economy 11 (Dicembre 1999), pag. 557–74.
McCullagh, Declan. “Microsoft, Oracle Call for Patent Reform.” CNETnews.com, April 25, 2005.
McGraw, Mike. “Patent Agreement Draws Federal Review.” Kansas City Star, Febbraio 15, 2004.
Murray, Fiona and Scott Stern. “Do Formal Intellectual Property Rights Hinder the Free Flow of
Scientific Knowledge? An Empirical Test of the Anti-Commons Hypothesis.” National Bureau of
Economic Research Working Paper no. 11465 (Luglio 2005).
OECD. Main Science and Technology Indicators 2005. Dicembre 2005.
Sakakibara, Mariko and Lee Branstetter. “Do Stronger Patents Induce More Innovation? Evidence
from the 1988 Japanese Patent Law Reforms.” RAND Journal of Economics 32 (Primavera 2001), pag.
77–100.
Scotchmer, Suzanne. Innovation and Incentives. Cambridge: CON Premere, 2004.
Stephens, Carmella. “Madey v. Duke University: Federal Circuit Sets Limitations on the Common
Law Experimental Use Exemption.” Baker Botts LLP Intellectual Property Report 3, NO. 27, Luglio 7,
2003.
NOI. (Federal) Government Patenting, 1/1977–12/2005. Washington, DC: NOI. Patent and
at
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http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm.
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Walsh, John P., Ashish Arora, and Wesley M. Cohen. “Research Tool Patenting and Licensing and
Biomedical Innovation,” in Wesley M. Cohen and Steven Merrill, eds., Patents in the Knowledge-
Based Economy. Washington, DC: National Academies Press, 2003.
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