During 2002, the Federal Trade Commission (FTC) and Department of Justice conducted hearings addressing how antitrust and intellectual property policies each take different and sometimes conflicting paths towards the goal of spurring innovation in the economy. On October 28, 2003, the FTC released the first installment of its report and recommendations arising from those hearings, focusing on the patent system and its balance with competition policy. The FTC has recommended certain legislative and regulatory changes in the patent system "to maintain a proper balance with competition law and policy."1 A press release, executive summary and the extensive FTC report can be accessed on the FTC's website at http://www.ftc.gov/opa/2003/10/cpreport.htm.2 For your convenience, we have summarized below the main recommendations and reasons therefor as described in the report. It is unclear at this time whether any of the proposals have any prospect for enactment, and we are confident that many of the FTC's suggestions raise thorny policy as well as practical questions.
The report discusses the role of both competition and patents in spurring or discouraging innovation. It describes the different implications of patent protection on innovation in selected high-technology industries: pharmaceutical, biotechnology, computer hardware (including semiconductors), software and the Internet.3 Notwithstanding the differences, however, the FTC's view is that "poor patent quality" is a global concern because such patents (overbroad (e.g. "method of doing business"), invalid, etc.) can deter or raise the costs of innovation. In industries characterized by incremental innovation,4 poor quality patents can increase "defensive patenting" and complicate licensing by virtue of the so-called "patent thicket." The costly nature of litigation to invalidate patents and the lack of a less costly mechanism to review questionable patents (especially given the limited involvement of third parties in the issuance and reexamination of patents) further aggravates the problem. Hence, the FTC's first set of recommendations is heavily weighted towards changes in the way that patents are issued and challenged.
Recommendation 1: Create a New Administrative Procedure to Allow Post-Grant Review of and Opposition to Patents
In a goal the FTC says it shares with the PTO, it recommends legislation to permit meaningful challenges to patent validity short of federal court litigation. The proposed review should be allowed to address important patentability issues, at a minimum issues of novelty, non-obviousness, written description, enablement and utility. The proceedings should be subject to defined time limits, presided over by an administrative judge, and allow for cross-examination of witnesses and carefully circumscribed discovery. Suitable threshold and other limitations should be established to protect patentees against harassment and delay.
Recommendation 2: Enact Legislation to Specify that Challenges to the Validity of a Patent Are To Be Determined Based on a "Preponderance of the Evidence"
In patent litigation, the presumption of validity, combined with the requirement that invalidity be shown with proof that is "clear and convincing" is seen by the FTC as inconsistent with the nature and realities of the ex-parte PTO examination process, and leads, in the FTC's view, to the enforcement of patents that are weak. In the FTC's view, a "preponderance of the evidence" standard for invalidity would be preferable. Combined with some of its other recommendations, this recommendation could result in a marked increase in litigation challenging the validity of patents - and could also result in a distortion of royalty rates acceptable in light of increased risks of successful challenges.
Recommendation 3: Tighten the "Obviousness" Requirement
The report suggests that the statutory standard of "non-obviousness" be reinterpreted to make it more difficult to obtain a patent. In particular, the FTC would tighten the Federal Circuit's "suggestion test" and "commercial success test" for assessing obviousness. The suggestion test asks whether prior art would have suggested the invention to "one of ordinary skill in the art." The report criticizes recent court decisions that required concrete suggestions in prior art as to how to combine all of the features of a claimed invention to find obviousness and urges the application of a rule that would ascribe to the person having "ordinary skill in the art" an ability to combine or modify prior art references consistent with the creativity and problem solving skills that, in fact, are characteristic of those having ordinary skill in the art. The commercial success of a product can also establish nonobviousness. Contrary to some decisions that presume a lack of obviousness from commercial success, the FTC would have courts evaluate on a case by case basis whether commercial success is a valid indicator of the technical non-obviousness of the claimed invention. The FTC would place the burden on patentees to demonstrate that the claimed invention (rather than other factors) caused the commercial success of the patented product. The report points out that commercially successful products are more likely to confer market power than less successful products and that undue reliance on "commercial success" therefore raises competitive concerns.5
Recommendation 4: Provide Adequate Funding for the PTO
In a less controversial recommendation, the Commission strongly recommends that Congress increase the PTO's funding so that it can improve the quality of its determinations of patentability.
Recommendation 5:Modify Certain PTO Rules Regarding Examinations
In order to improve the quality of the examination of patent applications, the report recommends the following changes to PTO procedures: (i) require that applicants submit statements of relevance upon the request of an examiner. This will enable the examiner to draw more fully on the patent applicant's knowledge base, and identify the most relevant portions of prior art references;6 (ii) Under PTO Rule 105, examiner inquiries should be used more often and more extensively to obtain more complete information and substantive responses should be required; the current rule allows patent applicants to reply to inquiries by simply stating that the information is unknown or not readily available; (iii) The FTC further endorses the PTO's own recommendation that it expand its enhanced, "second-pair-of-eyes" reviews to "fields with substantial economic importance," such as semiconductors, software and biotechnology. Overall, the FTC also endorses the PTO's own recognition that its role is to protect the public interest and not solely to help applicants receive patents.
Recommendation 6: Consider Possible Harm to Competition - Along with Other Possible Benefits and Costs - Before Extending the Scope of Patentable Subject Matter
Criticizing the extension of patentable subject matter to business methods (and computer software), the report suggests that courts take into account whether the extension of patentability is necessary to spur invention or public disclosure of invention, or whether the issuance of patents will tend to hinder competition that could spur increased innovation.
Recommendation 7: Require Publication of All Patent Applications 18 Months After Filing
The report advocates requiring that patent applications be published 18 months after filing, regardless of whether the filing was made in multiple jurisdictions or solely in the U.S. The publication requirement currently allows an applicant to opt out of publication where there is only a U.S. patent application. The FTC believes mandatory publication will cut down on the problem of "submarine patents" used to hold up competitors for royalties.
Recommendation 8: Create Intervening or Prior User Rights to Protect Parties from Infringement Allegations That Rely on Patent Claims First Introduced in a Continuing or Other Similar Application
To deal with opportunistic broadening of patent claims to capture competitors' products, which the FTC believes creates the potential for an anticompetitive "hold-up," the report recommends legislation that will protect third parties who have developed or are using a product or process that infringes only because of claims asserted in a continuance.
Recommendation 9: Change the Standard for Willful Infringement
The FTC recommends that legislation be enacted limiting enhanced (up to treble) damages for willful infringement to circumstances where there is actual written notice of infringement from the patentee or there is "deliberate copying of the patentee's invention, knowing it to be patented." Some hearings participants noted that they deliberately do not read their competitors' patents out of concern for increased liability for willful infringement. The FTC believes its recommendation would permit such reading while preserving the notion that deliberate wrongdoers should face increased liability.
Recommendation 10: Expand Consideration of Economic Learning and Competition Policy Concerns in Patent Law Decision Making
The report notes that:
Over the past twenty-five years, the incorporation of economic thinking into antitrust has provided significant insights that have substantially improved the development of antitrust law and competition policy. The Federal Circuit and the PTO may also benefit from much greater consideration and incorporation of economic insights in their decision making.
Finally, the FTC commits in the report to pursue steps to increase communication between the Antitrust Agencies and Patent institutions. The FTC will continue to file amicus briefs in cases raising issues at the intersection of antitrust and patent law and will initiate reexamination of questionable patents that raise competitive concerns in appropriate circumstances. The report also proposes specific means to facilitate inter-agency communication: (i) establishing a liaison panel between the Antitrust Agencies and the PTO; (ii) founding an Office of Competition Advocacy within the PTO; and (iii) legislation that will expand Patent Public Advisory Committee membership to include competition experts and economists.
Taken as a whole, the recommendations are a not-so-subtle criticism of the patent system and its institutions for, in the FTC's view, not giving enough weight to competition issues that arise from the manner in which inventions are patented and patents enforced. The FTC view is that competition deserves a higher status in the scheme of laws (including patent and antitrust) that are designed to promote and reward innovation. It remains to be seen whether any of the foregoing recommendations will see the light of day. However, it is quite clear that the antitrust agencies have continuing concerns about intellectual property doctrines that are seen as unnecessary "to promote the progress of science and useful arts" and hence, in their view, simply reduce competition. It is also clear that the debate about line drawing between antitrust goals and intellectual property goals that characterized the hearings last year will continue.1 Executive Summary at 1.
2 A forthcoming second report by the FTC and DOJ will make recommendations for antitrust law to maintain a proper balance with the patent system.
3 In the pharmaceutical and biotechnological industries strong patent protection is considered essential to innovation, which is characterized as costly, unpredictable and requiring a significant amount of pioneering research. Industry representatives have also testified that they use patent information disclosures required by the patent statutes to direct their R&D into areas not claimed by the patents and to "design around" patents for the development of non-infringing generic versions of brand-name drug products. By contrast, in the computer hardware and software industries competition was generally emphasized as a driver for innovation. Particularly in the software industry the innovation process was described as significantly less costly and product life cycle as generally much shorter. The report presents observations of representatives from the computer hardware and software industries that firms are obtaining patents for defensive purposes at rapidly increasing rates.
4 Most notably the computer hardware and software industries.
5 The report comments that other patentability standards - the enablement requirement, the doctrine of equivalents, the written description requirement and the PTO's utility guidelines - appear to accord reasonably well with competition and innovation. In relation to disclosure doctrines, the Commission notes the need for accurate, up to date assessments of the predictability of the art and the nature and skill level of the person with ordinary skill in the art, which implicate the breadth of disclosure requirements.
6 The PTO's own "21st Century Strategic Plan" proposed but then withdrew a change requiring applicants citing more than 20 prior art references to explain the relevance of the references. The FTC characterizes its proposal as "more modest."
Alan J. Weinschel is a Partner and Idit Froim is an Associate in the Trade Practices & Regulatory Law Department in the New York City office of Weil, Gotshal & Manges LLP.