Certain aspects of a patent reform bill that has passed in the US House of Representatives and is currently awaiting a vote in the Senate could add as much as $1.6 billion yearly to the cost of getting patents approved in the US, and increase the odds 140-fold that a US patent is revoked, according to a study released last week by the Biotechnology Industry Organization.
Coupled with documents recently released by various other members of the biotechnology, academic, small-business, and venture-capital communities, the study provides evidence that that if passed as written, the bill could undermine innovation, increase investor risk, and stifle technology commercialization efforts, BIO said.
In addition, according to the BIO-commissioned study, the bill would make it cheaper for parties to infringe patents and be caught – making it “just another business decision” for them – while undermining the confidence investors might have in entities holding the infringed-upon patents.
The report, entitled “The Economic Implications of Patent Reform: The Deficiencies and Costs of Proposals Regarding the Apportionment of Damages, Post-Grant Opposition, and Inequitable Conduct,” was authored by noted economist Robert Shapiro, currently chairman of consulting firm Sonecon; and health-care policy expert Aparna Mathur, a research fellow at the American Enterprise Institute.
The study examined three controversial provisions contained in S.1145, also known as the Patent Reform Act of 2007: apportionment of damages, a broad new post-grant opposition system, and the codification of the “inequitable conduct” doctrine.
According to the study, the proposal to change the rules for apportioning damages in cases of patent infringement would likely increase the number and brazenness of infringers.
Under current patent law, courts have the discretion to award damages based on a wide range of factors that affect the patent’s market value. This method generally requires guilty parties to pay IP owners monetary damages based on profits lost due to the infringement or, at a minimum, a reasonable royalty for the use of the invention.
Under the proposed changes, however, courts would be directed to ensure that a reasonable royalty is applied only to the economic value attributable to the patentee’s specific contribution over prior art, and not the invention as a whole — a change that “in almost all cases … would produce residual royalties far less than those provided for under current law,” according to the study.
The study said the bill’s requirements would also burden judges and juries in patent cases with massive additional amounts of data, thereby increasing the length of patent-infringement cases.
Such changes, the report continues, “could have less detrimental effects in software and other areas of IT, where innovations are incremental and relatively simple. But it would be very difficult and potentially damaging in biomedical areas, for instance, where the contribution of a particular patented element is highly complicated and its significance apart from the whole is not often well understood.”
In the case of possible changes to the procedures by which outside parties can challenge the validity of granted patents, the authors compared the current US system of post-grant opposition with a broader system used by the European Union, which is similar to the system proposed in the Patent Reform Act.
One of the main differences between the two systems is that in the US, challenging parties have nine months from the date a patent is issued to challenge its validity. By comparison, under the EU system, challengers have the entire lifetime of the patent to file challenges — which significantly increases the probability both of patent challenges and revocations, the report contends.
According to the study, under the EU system, the probability that a patent is challenged is 8 percent throughout its life while the probability that the challenge leads to a revocation is 35 percent. Taken together, these numbers suggest a 2.8-percent probability that the investment that produces a patent will eventually be lost through opposition proceedings.
In the current US system, however, the probability of a challenge is 0.2 percent, while the probability of revocation is 10 percent, suggesting that the probability of a total loss on investment is 0.02 percent.
Therefore, the authors argue, the enactment of an opposition system in the style of the EU’s would increase these uncertainties 140-fold, “a result that suggests that an opposition regime could significantly reduce investment in R&D and slow the pace of innovation.”
A broader post-grant opposition window would also cost the US economy significantly more money, the authors wrote.
“Before the bill comes to the floor, we hope that we’ll come up with something that responds to our serious concerns, and that we can get something done in this arena. But if not, we will vigorously object to it and try to block its passage in the Senate.”
“While it is not possible to measure directly the impact of an opposition system on rates of invention and the quality of innovations, our approach here … estimate[s] the direct costs of an opposition proceeding, relative to the benefits in avoided litigation costs, compared to the direct costs and comparable benefits of the current re-examination arrangements,” the report states.
Specifically, the authors concluded that replacing re-examinations with a broad opposition process would increase costs by $11,890 to $39,890 per patent issued. In 2006, the US Patent and Trademark Office issued 96,174 patents to US residents, suggesting that the direct additional costs of an opposition system, compared to re-examination, would be between $1.14 billion and $3.84 billion.
Extrapolating this cost over 10 years and the expected increase in the number of US patents issued, the authors estimated that adopting a broad opposition system in the US — and using even “the most conservative estimate of the average cost of an opposition proceeding” — would increase the costs of patent validation by nearly $16 billion over the next 10 years, or about $1.6 billion per year.
The report also said the bill would codify certain “harmful elements” of the doctrine of inequitable conduct in patent law, which defines as unenforceable any patent secured by omitting or misrepresenting critical information.
Although allegations of inequitable conduct rarely succeed, according to the report, “the doctrine’s broad availability and use drive up length and cost of patent suits, and increase the costs of patenting and technology transfer activities due to the fears of [such] charges years after the fact.”
The report concludes that each of the proposals presents challenges for all enterprises – but particularly the biotechnology industry – that rely on patent protection because they would collectively reduce the value of patents, dampen investments in R&D, and slow the pace of innovation.
“Innovation in biotechnology, perhaps more than any other industry, depends on strong patent rights and protections,” the report states, claiming that on average, each of the 155 biotechnology drugs and vaccines currently used worldwide took a decade or longer and cost $800 million to $1.2 billion to develop.
“Only 10 to 30 percent of biotech development projects produce useful treatments … and only 30 percent of the treatments that reach patients earn revenues that match or exceed the average R&D costs,” the report states.
“Biotechnology companies and their investors can continue to accept these high costs and large risks and uncertainties … only if they can continue to rely on patent laws that enable them to earn returns on their investments,” the authors wrote.
Separate but similar versions of the Patent Reform Act were first proposed in Congress last year. The bill was introduced in the Senate and House of Representatives by Sen. Patrick Leahy (D-Vt.) and Sen. Orrin Hatch (R-Utah); and by Rep. Howard Berman (D-Calif.), and Rep. Lamar Smith (R-Texas).
The act in its current form passed the US House of Representatives last September with a final vote of 220 to 175. Supporters of the bills have stated that patent reform would bring certainty and clarity to the patent system and would create a more streamlined and effective way of challenging the validity and enforceability of patents.
However, the House vote caused various concerned parties from the biotech and university tech-transfer communities to voice disappointment and call for the Senate to address their concerns before voting on its version of the bill, S. 1145 (see BTW, 9/10/2007).
In a conference call last week, Jim Greenwood, president and CEO of BIO, reiterated BIO’s “vigorous” opposition to S.1145 in its current form.
“Before the bill comes to the floor, we hope that we’ll come up with something that responds to our serious concerns, and that we can get something done in this arena,” Greenwood said. “But if not, we will vigorously object to it and try to block its passage in the Senate.”
The BIO report is the latest in a series of statements by various members of the biotechnology, academic, and venture-capital community railing against the controversial aspects of S.1145. These entities have included the Association of American Universities, the Association of University Technology Managers, the National Venture Capital Association, and the California Healthcare Institute.
Despite the efforts of its opponents, S. 1145 appears to be moving forward, though there is evidence that Congress is working with parties on both sides of the issue to amend certain controversial aspects of the bill — particularly the section defining apportionment of damages.
Earlier this month, the Bush Administration voiced its objections to some aspects of the patent reform bill, particularly the apportionment of damages section. In a letter to Sen. Leahy, the Senate Judiciary Committee chairman, the White House stated that, as currently written, the section would “likely lead to less than adequate compensation for many patent holders and could promote infringement.” (See BTW, 2/6/2008)
However, the White House supported other contentious provisions in the bill to which the biotech and universities communities have objected — including the post-grant patent review provision — and reiterated a desire to pass sweeping patent-modernization legislation as soon as possible.
The same week, Senators Leahy and Hatch issued a statement in response to the letter indicating that members of the Senate were eyeing a possible vote on the bill this month.
“Throughout [this] process, the Judiciary Committee has sought to address the concerns of members of the Senate, the administration, and stakeholders from all parts of the patent world,” the statement read. “As a result, the committee passed legislation in July, and we are preparing for its consideration in the Senate this month.
“A critical piece of the Patent Reform Act addresses how courts determine damages for patent infringement,” the statement continued. “Since its passage in committee, we have been working to strike the right balance to ensure patent holders obtain appropriate compensation in infringement cases. We have worked and will continue to work with the White House as the Senate prepares to consider this important legislation.”