Innovation Policy

United States Patent and Trademark Office

The United States Patent and Trademark Office (USPTO) is the organization within the United States government that reviews and grants patents and trademarks. The USPTO is tasked with defining patent types and what each type covers and protects. Established under the Department of Commerce on July 19, 1952[1] by 35 U.S.C. §1[2], the USPTO is intended to fulfill the mandate in Article I, Section 8, Clause 8 of the United States Constitution "to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."[3]. Since 1790, the US has issued more than 6.5 million patents[4]. The agency's main offices reside in Alexandria, Virginia, with several satellite offices around the country.

Current Issues Facing the Patent System

Criticisms

In recent years, there has been an increase in patent reform legislation due to wide range of criticisms on current patent institutions and practices demanding stricter reform.

USPTO: In April 2016, the USPTO had an unexamined patent backlog of 549,896 and 352,573 application filings for review. The unexamined patent backlog is a record of how many UPR Patents are waiting for review by a patent examiner, and application filings are how many patents are being sent in for review. [5] The USPTO reports that in 2016 the average total pendency time, the time between filing a patent application and issuing or dismissing a patent, has been 26 months. Harvard Business Review reports that the increase in cases being referred to lower, random courts raises the cost of processing a patent application and causes the patent system to rely on juries often without requisite technical or procedural expertise. These juries are expected to decide whether high level technology or processes satisfy the requirements for protection.

Patent Litigation: Critics at Wired believe that the amount of patent litigation and patent infringement claimed has created a "disastrous environment for innovation." (Wired) Litigation and lawsuits may result in a significant decrease in product development. In 2015, Google and Apple invested more in supporting patent purchases and litigation than in R&D.(NYT-PW) Additionally, "junk patents" are a source of contention as HBR suggests they lead to pointless trials. The technology industry often suffers of overly broad patents, which also may lead to pointless litigation. Amazon has successfully patented buying things with one-click in the United States, and Apply has claimed ownership of rounded-edged, rectangular-shaped communication devices on which icons are arranged in a grid with a row of persistent icons at the bottom.

Rapidly Growing Industries: The biotechnology industry as a whole provides new ethical challenges to the patent system and introduces new competitive threats such as me-too drugs. Me-too drugs are approved after pioneering drugs to function as substitute products [6]. Limiting the scope of discoveries that can be patented in biotechnology is an ongoing issue. The DOJ's declaration that genes may not be patented in a case dealing with Myriad Genetics and the University of Utah Research Foundation resulted in sharp public criticism in 2010. [7] The Biotech industry along with others such as e-commerce or computer software face the challenge of overcoming overlapping patents that could result in many separate patent infringements. [8]

Patent Pools

Patent pools are agreements between patent owners to share, or cross-license, their own patents with one another.(WIPO) Generally, patent pools cover mature and complex technologies that require complementary patents to develop compatible products and services. (WIPO). Complementary patents are patents that are must be used together for the development of a specific new product, and therefore, necessitate shared licensing (WIPO).

More recently, the Department of Justice (DOJ) has taken steps to standardize patent pools in order to prevent violations of antitrust laws. The DOJ requires the following characteristics for a patent pool:

1. Essential patents included only.
2. Complementary patents included only.
3. Sensitive information may not be shared amongst parties.
4. Substitute products may still be developed by parties included in the licensing agreement.
5. Patent pool has an established expiration date.
6. Pricing in downstream production cannot be affected by or discussed by members of the patent pool. [9].

Support

Efficiency: The creation of patent pools mainly benefits the owners of complementary and essential patents. Essential patents are patents required for a product or process to meet a given sector's technical standards. Cross-licensing between companies in a patent pool facilitates building upon previous technologies and increases the efficiency of innovation by organizing complementary intellectual property assets under one contract (WIPO). Mutually blocking patents often slow technological developments as neither party can make use of its technology without infringing on the other party's patent. By forming a patent pool, both parties can develop substitute technologies without risk of infringement.

Cost Reduction: Companies can also reduce the amount spent on litigation by settling disputes with the creation of patent pools. This would benefit small- and medium-sized businesses that usually cannot afford the costs of expensive litigation. (WIPO) Transaction costs as well as royalties can also be lowered in a patent pool.

Criticisms

Elimination of Competition: Opponents criticize patent pools for the potential of anti-competitive behavior and collusion, primarily with regards to substitute patents. Substitute or non-essential patents cover competing technologies that can be developed in parallel without risk of infringement [10]. Patent pools formed between companies holding substitute patents eliminate competition in that particular technological sector. The Intellectual Property Organization refers to patent pools exhibiting this behavior as cartels. Certain patent pools have been found to share competetitively sensitive information such as marketing and pricing strategies and R&D findings.[11] For example, R&D information and developments could be shared in grant-back provisions, where companies share new or downstream technologies and innovations with members of the pool without additional fees.

Licensing Practices: If a patent pool restricts its members from licensing its patents independently, it lowers the incentive to produce alternatives and inflates the costs of goods or technology for consumers. The Department of Justice and Federal Trade Commission stated that patent pools may create barriers to entry for new firms since the required patents will be inaccessible (DOJ) Additionally, downstream products or firms may unknowingly use technology protected by a patent pool. An article published by the [12] claims that these companies may then be burdened by cumulative taxes and a time holdup in production.

Pricing: Given agreements between patent holders to reduce royalties, there may be collusion to fix higher prices for consumers. Technology may become inaccessible to a large number of consumers, hurting the overall public good.

Patent Trolls

Patent Trolls are an innovation bogeymen and the most prevalent complaint launched against the patent system, as numerous research articles and legislation addressing ways to curb troll activity. Experts dispute terms for such corporations, labeling them as either Patent Assertion Entities (PAEs) or Non-Practicing Entities (NPEs). PAEs are defined by the FTC as companies that earn revenue by purchasing patents and accusing companies using those patented technologies of infringement.[13] NPEs are firms that rely on Patent Licensing activities for revenue. [14] Patent litigation involving NPEs in 2015 accounted for approximately 67% of cases reviewed by District Courts. The high-tech sector is highly vulnerable to NPE lawsuits as 88% of high-tech patent litigation in 2015 was related to NPEs. Patent Trolls generate revenue through suing or threatening to sue businesses that infringe on patents. Typically, the damages asked for by Patent Trolls are far beyond the market value of the patent in order to scare small businesses in the initial demand letter, when pressing them to pay the fee to license the patent.

Prize System for Inventions

The current patent system allows companies to file for the right to exclude if they have a novel, non-obvious invention. The right to exclude creates a temporary monopoly for a certain product, which leads to higher product costs for the consumer. One example of a patent leading to exorbitantly high prices would be Daraprim, a drug produced by Turing Pharmaceuticals. Martin Shkreli, the CEO of Turing Pharmaceuticals, led the charge to increase the price of Daraprim from $13.50 to $750 per pill. (BBC)

Critics of the current patent system also believe it does not incentivize enough research and development for drugs that benefit society as a whole. (Economic Times)

Because of such abuses of patent protections, economists and legislators have advocated for a prize system (see Medical Innovation Prize Fund Act) instead of a patent system for pharmaceutical drugs. (Washington Post) Under this system, companies that invent a new drug will receive a lump sum prize. The rights to the drug will then be placed in the public domain, creating generic drugs. The biggest benefit of a prize system is the ability to target research towards a specific problem. With prize money as the incentive, research companies are more likely to devote time and resources towards the identified issue. In addition, the prize system lowers barriers to entry; nontraditional parties are encouraged to participate.

Although the prize system idea sounds promising for individuals requiring medication without high reservation price, the issue of sustained government funding for such endeavors hurts this proposal. Private investors, such as the Bill and Melinda Gates Foundation, offer similar prize systems for pharmaceuticals discoveries. However, if private investment has proven to be effective, why does the government need to intervene?

Legislators have proposed bills that provide for prize systems for a small class of drugs (see Prize Fund for HIV/AIDS Act).

Prize systems could take many different forms:

1. Opt-in systems where the government pays at least the monopoly profits that the patent holder would expect to receive
2. System where patents are exchanged for compensation through an auction
3. Offer cash subsidy to consumers who value the patented product more than the marginal cost but cannot afford the patented product at a monopoly price

Problems & Considerations Surrounding the Prize System

No one knows the economic effects of prize systems; there is lack of empirical evidence supporting the benefits of a prize system over a patent system. There are several factors that need to be considered in creating a prize system (BU):

Valuation Problems What is the criteria for awarding a prize and how much prize money is each innovative drug worth? This is one of the biggest problems in establishing a prize system. Prize payments that are too low won’t provide enough incentive, while payments that are too high may incur resource duplication costs. The prize payment amount also has to be individually tailored to the benefit of the drug. People suggest the value of the payment be dependent on the ‘social value’ of a drug, but how is that social value determined? Will a distinction be made between medically necessary drug inventions and lifestyle improvement drugs (e.g. acne medication)?

Timing of Prize Payments The timing of the prize payment has to be timed well; if awarded too early other companies may not be incentivized to produce a drug that would’ve been higher quality than the drug that won the prize. After the prize is awarded, incentive to commercialize the drug is reduced since there is no patent system. One potential solution is to defer prize payment until there has been a certain degree of commercialization.

Administrative Problems The MIPF creates a board of trustees that has the responsibility of awarding prize payments. Though the board of 13 members is designed to be unbiased, it is unlikely that they will not be subject to political and external pressures, leading to a distorted allocation of resources.

A negative aspect of the patent system is the controversy and dispute that follows patent distribution of benefits. We can expect that there will also be challengers regarding the recipient of prize payments, thus the prize system has to specify how to resolve disputes, and also develop a thorough screening mechanism to confirm the reported benefits of the invented drug.

Patent Reform

Proposed Legislation

• Innovation Act
• PATENT Act
• TROL Act
• STRONG Patents Act
• Demand Letter Transparency Act
• Innovation Protection Act

Future Legislation

• Innovation Promotion Act

Previously Considered Patent Reform

• Leahy Smith America Invents Act
• Prize Fund for HIV/AIDS Act
• Medical Innovation Prize Fund Act
• The Shield Act
• Patent Fee Integrity Act

References

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