Patent Reform Cacophony

Everyone's a critic--particularly when it comes to the beleaguered U.S. patent system. Prodded by legions of critics from industry, academia, and government, the U.S. Congress is now debating and amending the Patent Reform Act of 2005--the most significant package of changes to patent law in half a century. The aim is to redress a perceived imbalance between promoting innovation and protecting the rights of patent holders.

While representing diverse constituencies, the critics and reformers largely agree on the problem: overly broad or obvious, unchallengeable patents hobble legitimate innovators. The cause is twofold. First, patents are much cheaper to obtain than to invalidate. The legal presumption of patent validity erects a high bar against a challenge, so even an idiotic patent can present a potent threat, not least because patent lawsuits can be fearsomely expensive to defend or prosecute.

Second, the system places the initiative in the hands of the patent owner. Suppose someone comes up with an innovation, and then stumbles across a bad patent on which the invention might infringe. Even if the inventor is willing to resort to litigation to invalidate the patent, the courtroom doors remain closed until the patent's owner either sues the innovator or makes an overt threat. Only then can the innovator file for a declaratory judgment that the patent is either invalid or does not cover the invention. But in the meantime, the sword of Damocles is hanging overhead, increasing risk and thus discouraging investors.

To address this problem, the Patent Reform Act proposes a "post-grant review" system. Under this process, after the patent office and the applicant have come to an agreement, but before the patent is finally issued, the public receives an opportunity to weigh in. Up until relatively recently, the post-grant review idea has drawn surprisingly little controversy, given the potential impact on innovation. But in fact, it's a proposal that illustrates how efforts to improve the system may, in the end, merely contribute another layer of cost, delay, and uncertainty.

Like itinerant preachers, the reformers have sought to build support for their proposals in a series of "town meetings," one of which took place in Bost on last March. Representatives of the National Academy of Sciences (NAS) and the U.S. Federal Trade Commission presented the plan in detail and invited comment from the public.

The Bostonians weren't buying. Perhaps the most insightful objection to the proposed reforms came from Robert Millman, chief intellectual property counsel of Alnylam Pharmaceuticals Inc., in Cambridge, Mass., who warned that the real problem is the length of time, or pendency, it takes the patent office to process applications. "Pendency is currently what's killing technology," said Millman. "Anything that increases pendency is really detrimental to the ability to secure capital."

He's right. Patents already take too long to obtain--more than two years on average, closer to four years for many software and network applications. Because the term of a patent is measured from its filing date, any delay subtracts from the period of exclusivity the patent provides.

How long would a post-grant review take? The patent office already conducts a form of post-grant review called "reexamination." This procedure, which may be initiated by anyone during a patent's life, is fairly simple, because only certain types of evidence--prior patents and printed publications--may be considered. Yet two years or so typically elapse before the proceeding ends.

The experience in Europe is not encouraging, either. Post-grant challenges have long been an option in Europe, where they are called "oppositions." On average, European oppositions take more than three years (often closer to five) to resolve.

What about cost? From start to finish, the average price of a U.S. patent ranges from US $5000 to $25 000, depending on the complexity of the invention. A reexamination proceeding can cost each side $10 000 to $100 000, and oppositions will almost certainly cost more, since a much wider range of evidence will be considered.

Not to worry, says the NAS, which contends that only a very few patents will actually be opposed. But that depends on how you define "few." In Europe, nearly 8 percent of all granted patents face opposition. By contrast, fewer than half of 1 percent of U.S. patents undergo reexamination.

The reasons for the difference aren't immediately obvious. One factor discouraging reexamination has been the way it historically favored the patent owner. While any member of the public can initiate the process, that person would be sidelined as soon as the patent office agreed to the review and could only watch helplessly as the patent owner and the examiner--often the same one who granted the patent in the first place--worked through the reexamination together.

Certainly that wasn't the intent of the process, and recent changes to the reexamination framework offer a more level playing field. But the point is that a procedure that seems well balanced in theory may not be balanced in effect. European oppositions are often filed because it's economically attractive to do so. A third of oppositions ultimately lead to no change whatsoever in the patent's coverage; yet every opposition is taken seriously, adding cost and delay to the process. Oppositions asserting fact-intensive deficiencies in the patent, such as whether a product had previously been on sale or how well the patent explains the invention, can take an especially long time to decide because the issues are complex and subjective.

But let's assume the reformers have it right--that the existing mechanism of reexamination is inadequate for policing bad patents and that post-grant opposition really would create an intermediate waypost between the current options and full-blown litigation. Would the economic benefits outweigh the costs?

No one knows. Reliable data are in short supply; we can't say that bad patents curtail innovation in the United States any more than we can blame slow economic growth in Europe on its opposition system. For every anecdote of innovation nipped in the bud by someone else's overbroad patent, there's the story of an invention cleverly designed around one--precisely the kind of originality the patent system is intended to foster.

Debating hypothetical societal gains is academic. The investor's perspective, on the other hand, is quite real. A post-grant opposition system, no matter how finely tuned, would suddenly make patents a far dicier proposition. Even if European statistics give a patent a 92 percent chance of escaping opposition, all eyes would lock onto that vulnerable 8 percent.

It only makes sense: recent studies confirm that the more valuable the patent, the more likely it will face opposition. Because investors assume they are investing in the winners--that is, in research likely to be profitable and therefore to invite patent oppositions--values placed on technology companies will probably fall as perceived risk, expense, and delay increase. Inventors, for their part, may fear that the visibility of professional investment can turn otherwise unobtrusive patents into targets.

The patent system will never be perfect. The question is whether proposed changes will help or hurt. Groping for answers without clear signals either way, reasonable people can disagree. Rest assured, however, that whatever patent reform is enacted, we lawyers will rise to the challenge gladly, energetically, and for a reasonable fee.