By Constance K. Robinson, James L. Ewing and Peter M. Boyle
On 28 October 2003, the Federal Trade Commission ("FTC") - one of the two federal agencies responsible for enforcing U.S. antitrust laws - released a much-awaited report containing certain conclusions and recommendations based on its intellectual property/antitrust hearings.
The FTC held these hearings jointly with the other federal antitrust agency, the U.S. Department of Justice’s Antitrust Division ("DOJ"), between February and November 2002. The hearings explored how antitrust and intellectual property laws do and should co-exist in a knowledge-based economy, how they share the same goal of promoting innovation, and how each regime relates to the other.
Although the hearings addressed both competition policies and laws as well as intellectual property issues, the FTC’s report focuses on proposals aimed at improving perceived deficiencies in the U.S. patent system, which several participants discussed during the agencies’ hearings.
The FTC indicated that it will release a report jointly with the DOJ in the near future to address the findings and conclusions that the antitrust agencies have drawn from the hearings regarding antitrust and competition policy issues.
The report, although criticizing some aspects of the patent system, takes care to recognize that the patent laws generally enhance competition by, among other things, encouraging innovation. Thus the patent and antitrust laws should be deemed as serving complementary purposes.
The FTC acknowledges that the patent system for the most part strikes a proper balance with competition policy. It notes, however, that many hearing participants voiced concerns over significant deficiencies in the patent system. And its report asserts that the patent system, in some important respects, is not entirely in synch with competition policy. The quality of patents being issued by the U.S. Patent and Trademark Office ("PTO") is cited by the FTC as a significant concern since the more that questionable patents are issued, the greater the harm to competition by determining or raising the costs of innovation. Its recommendations focus heavily on addressing the concern.
But the FTC also proposed changes aimed at increasing business certainty and making the patent system more transparent by expanding the rules requiring publication of patent applications and taking steps to encourage companies to read their competitors’ patents.
The FTC’s recommendations
The FTC’s report makes the following 10 specific recommendations for improving the patent system:
1. Enact legislation to establish a new administrative process before the PTO in which third parties could challenge the validity of patents post-issuance
This recommendation addresses concerns that third parties have very limited rights to participate in the current administrative processes at the PTO for reviewing patents after the patent has been issued and, further, that challenging patents through litigation in federal court can be very costly and not always possible. At present, third parties have limited rights to participate in the review process, but only with regard to a few subjects that could affect the validity of a patent.
The FTC’s recommendation would give third parties a much greater ability to assert invalidity challenges in the administrative review process and give them a much more active role both in discovery and at the administrative hearings. According to the FTC’s report, allowing third parties to participate more actively in the post-grant review process would provide an efficient means for weeding out those questionable patents having significant economic consequences, while at the same time protecting against the possibility that competitors might harass patent applicants.
Moreover, the FTC points out that competitors, who are familiar with the field, could bring to the process valuable insights and information regarding the subject matter in question.
2. Enact legislation that would require courts to apply the less rigorous "preponderance of the evidence" standard when adjudicating challenges to a patent’s validity, as opposed to the currently applicable, heightened "clear and convincing" standard
To prove invalidity, a challenger must demonstrate the grounds for invalidity by "clear and convincing" evidence. This evidentiary standard requires more rigorous proof, and therefore is more difficult to satisfy, than the generally applicable "preponderance of the evidence" standard.
The justification used by courts for applying the heightened evidentiary standard is due to the presumption that patents are valid. To overcome the presumption, the argument goes, a party challenging validity must satisfy the more rigorous standard. During the patent prosecution process, however, a presumption exists favoring issuance of a patent and, due to the under-funding of the PTO, among other reasons, may feel that examiners do not have sufficient time to review applications fully. In these circumstances, the FTC concludes that subjecting validity challenges to the heightened evidentiary standard makes little sense.
3. "Tighten up" the legal standard for assessing obviousness of patents so obvious patents are less likely to be granted and, if granted, easier to invalidate
To be entitled to patent protection, an invention must be new, useful, and not obvious. The lack of rigor in assessing obviousness, according to several hearing participants, has resulted in the PTO’s issuing and the courts’ upholding too many patents on obvious inventions.
According to the FTC’s report, the legal standards for assessing obviousness need to be applied in a more "thoughtful" manner to address the perceived problem that large numbers of obvious patents are being issued. Obviousness is judged from the perspective of one having "ordinary skill in the art." And the courts have developed two tests – the commercial success test and the suggestion test – for determining whether one having ordinary skill in the area would consider the invention to be obvious.
An invention will be deemed not obvious under the former test if the patented invention (or a product having the features described in the patent) achieves commercial success. This test rests on the notion that commercial success demonstrates that there was an unmet need in the market that would not have existed if the technology were obvious.
In the FTC’s view, the "commercial success" test may too often result in a finding of non-obviousness when the commercial success has nothing to do with the product’s patented features, but rather has resulted from market conditions extraneous to the patented components.
Under the commercial success test, once a patent owner shows that a product incorporating the patented features has achieved commercial success, even if, for example, the success resulted from a clever marketing program and not from the patented features, the burden shifts to the party challenging the patent’s validity to rebut the presumption that the patented invention caused the commercial success. According to the FTC, this places too great a burden on parties challenging a patent on obviousness grounds and results in "unnecessary" patents being issued and surviving legitimate challenges.
The suggestion test asks whether the "prior art" – previously disclosed inventions or technology in the public domain – would have suggested to one skilled in the particular field the invention claimed in the patent. If so, the invention is obvious. The FTC feels that, as applied, this test places an unreasonably heavy burden on the party challenging validity, because the courts often fail to take account of the fact that those having ordinary skill in the art would also have enhanced creativity and problem-solving skills in the field, thus enabling them to combine the prior art in such a way as to make the claimed invention "obvious."
4. Provide adequate funding to the PTO
Many hearing participants complained, as have patent practitioners generally, about problems with inadequate funding provided to the PTO. This problem results in part because Congress diverts funds collected by the PTO from application fees to support other government agencies and programs.
The FTC advocates increasing funding to the PTO so that the PTO has sufficient resources to review patent applications thoroughly and thoughtfully. This recommendation, more than any other proposal in the FTC’s report, is likely to find general support among the antitrust and patent agencies, patent practitioners, and intellectual property owners and users.
5. Modify various PTO rules and implement various components of the PTO’s strategic plan for the 21st century
The FTC proposes several changes to try to enhance the thoroughness and quality of the application examination process.
a)Amend the PTO rules to allow the patent examiner to require that patent applicants submit statements explaining the relevance of the applicants’ prior art references:
Some hearing participants explained that applicants commonly overwhelm the patent examiner by citing a large number of prior art references in patent applications. This practice may provide the PTO with a great deal of information, but not much useful knowledge about the field. Giving the patent examiner discretion to require that an applicant explain how the applicant’s prior art references bear on the pending application would enhance the PTO’s ability to analyze applications in a meaningful way, according to the FTC’s report.b)Encourage patent examiners to solicit greater information from applicants under existing PTO rules of examination and amend the relevant rule to allow the patent examiner to make reasonable follow-up inquires:
The FTC’s report recommends efforts be taken, presumably by the PTO, to encourage patent examiners to make inquires under Rule 105 of the Patent Examination Procedures and to amend Rule 105 to allow the examiner to make reasonable follow-up inquiries. Moreover, the FTC proposes that Rule 105 be amended to place the burden on the application to provide useful information. Under the proposed amendment, applicants would be viewed as not providing a complex response to Rule 105 inquiries if they replied either that they did not know or that the information was not readily available to them.c)Implement the PTO’s recommendation to expand its "second-pair-of-eyes" review for certain types of patents:
The second-pair-of-eyes review allows the patent examiner to identify certain issues that need further attention by either the examiner or the examiner’s supervisor. The PTO successfully implemented the second-pair-of-eyes review in connection with reviewing business method patents, a type of patent that has triggered criticism about the proper scope of patentable subject-matter. The FTC proposed that this review method be extended to other important areas having potentially significant economic impact, such as semiconductors, software, and biotechnology patents.d)Continue to recognize that the PTO must strike a balance between the public’s interest in intellectual property protection and each individual applicant’s interest in seeing his or her patent application maturing to issuance:
The hearings touched on how the PTO has characterized applicants as "customers" and articulated its mission as helping "customers get patents." This approach, according to the FTC, fails to account adequately for the public interest in being free from overly broad and excessive patents. The FTC, however, notes that the PTO more recently has recognized that its mission needs to balance both the applicant’s and the public’s interests.6. Consider possible adverse effects on competition and other costs and benefits to the public interest before expanding the scope of patentable subject matter
The FTC notes that over the past 25 years the courts have significantly expanded the scope of patentable subject-matter. During the FTC/DOJ hearings, some panelists argued that patents were not needed to spur innovation in such areas as business methods or software. The FTC suggests that interpreting the scope of patentable subject matter under the Patent Act should not be divorced from the constitutional basis for patents i.e., that they "promote the progress of science and the useful arts." The FTC, therefore, finds it "highly desirable" that the potential harm to competition and other possible benefits and costs to society be considered before expanding the scope of patent protection to new types of subject matter.
7. Enact legislation to require publication of all patent applications 18 months after filing
Patent applicants filing only in the United States may opt out of the requirement that applications be published 18 months after filing. The FTC would eliminate this ability to opt out. The FTC suggests that publication of these applications will result in greater business certainty and reduce the problems associated with "submarine patents" – patents that surface years after products covered by the patents have already entered the market.
8. Enact legislation to create intervening and prior-user rights to safeguard parties from infringement suits based on claim language first introduced in continuation or other similar patent applications
The FTC notes a concern raised by several hearing participants that patentees commonly use continuation applications as a way to prolong the prosecution process, monitor developments in the market, and then amend their applications to cover products that had been introduced into the market after the filing of the initial patent application.
To prevent patentees from gaming the system in this fashion, the FTC proposes modifying the patent laws to create prior-user rights. These proposed changes would protect from infringement liability those who began using a claimed invention, first described in a continuation application, before publication of the continuation patent application.
9. Enact legislation to change the standard for determining "willfulness" to require either written notification of infringement by the patent owner or deliberate copying of the patented invention on the part of the infringer
Some commentators remarked at the hearings that concerns over exposure to treble patent damages discourages companies from reading patents in their fields so as to remain "blissfully ignorant." The FTC suggests this undermines the disclosure benefits from a patent system.
Accordingly, the FTC proposes legislation to change the standard for willfulness. Under the proposed standard, a patentee would have to provide written notice of infringement or prove deliberate copying of the patentee’s inventions. The written notice would provide a sufficient basis, under the FTC’s proposal, to give the alleged infringer standing to challenge the patent’s validity.
10. Expand the use of economic and competition policy to advance patent law analysis and decision-making
The FTC feels that both the Federal Circuit and the PTO may benefit by incorporating economic insights into their analyses to a much greater extent than they have in the past.
In addition to these ten proposals, the report indicates that the FTC intends to take steps to encourage greater communications between and among the antitrust enforcement agencies and the PTO. These steps include increasing its role as a competition advocate through filing "friend of the court" briefs in appropriate intellectual property cases, and taking a more pro-active role in asking the Director of the PTO to re-examine questionable patents that raise competitive concerns.
The FTC will take other steps to encourage communications between the PTO and the antitrust agencies, such as creating a "liaison panel" among the antitrust and patent agencies and perhaps a competition advocacy office within the PTO.
FTC’s report consistent with antitrust agencies’ focus on intellectual property
The FTC’s report represents another development, perhaps a significant one, in the federal antitrust agencies’ increasing focus on intellectual property and its impact on competition and antitrust enforcement policy.
Over the last decade or so, the antitrust agencies, through their remarks, policy statements, and enforcement actions, have exhibited a reinvigorated interest in determining how intellectual property rights might foster or impede competition, particularly in high-tech markets. And they have worked to establish antitrust enforcement policies designed to curb abuses of intellectual property rights but not lose the procompetitive benefits derived from intellectual property protection.
Beginning shortly before the FTC and DOJ released their Antitrust Guidelines for the Licensing of Intellectual Property in 1995 and continuing to the present, the agencies have focused a great deal of attention on determining how the economics of innovation should guide their enforcement policies in this area and identifying misuses of intellectual property that might be restrained through effective antitrust enforcement.
The agencies have been particularly active over the past few years investigating matters that implicate the overlap between the intellectual property and antitrust laws. The FTC’s recent enforcement actions have included suits against patent owners in the pharmaceutical industry for embedding allegedly unlawful market-allocation provisions within litigation settlement agreements with generic drug makers, and for abusing the food and drug regulatory processes to foreclose generic competitors impermissibly from the market, thereby enhancing the market value of their patents.
Along the same lines, the FTC has challenged patent owners in the petrochemical and computer industries for violating the antitrust laws by duping standard-setting bodies – in one case a state regulatory agency and in another a private standard-setting organization – into adopting patented technologies as industry standards. And the DOJ has challenged a non-compete clause in a joint venture related to development of long-shelf-life tomatoes, over which the joint venture partners held patent rights.
The FTC has taken a progressive approach to address problems not within its field
The FTC’s recent report represents a departure from the antitrust agencies’ traditional approach to the intellectual property/antitrust interface.
In the past, the agencies advanced policy developments by bringing novel cases, issuing guidelines, sometimes making public remarks and, on occasion, commenting on intellectual property matters that could significantly affect competition within markets important to the U.S. economy. But the antitrust enforcers generally took the intellectual property laws as a given, at times grudgingly, and developed antitrust enforcement policies around that framework.
Now the FTC has signaled that it may not be satisfied with formulating antitrust policy in this important area around a patent system that the FTC feels too liberally grants patent rights. The proposals found in the FTC’s report focus almost exclusively on modifications to the patent laws and administrative rules and procedures at the PTO – things neither within the FTC’s area of responsibility nor susceptible to resolution through creative use of the antitrust laws.
Within its recent report, the FTC, in its role as competition advocate, has raised the issue for public debate. How successful it will be in obtaining the proposed changes set forth in its report remains to be seen.
Several recommendations found in the report address common criticism lodged against the patent laws or the PTO for years, in particular the patent-quality concern. Unless the PTO and other institutions that have more direct responsibility for overseeing and administering the patent laws support the FTC’s initiatives, however, any changes will likely be slow in coming, if they are made at all.
The FTC’s foray into areas not within its areas of responsibility or expertise raises some very interesting questions. For example, how will the recommendations be received within the patent bar? And how will the FTC’s report affect the practice of U.S. patent law in the near future?
In general, the report identifies problems with the patent system that many patent practitioners readily acknowledge, but it may be difficult for some to accept a good number of the solutions proposed by the FTC.
In short, the FTC’s report may not have an immediate and substantial impact on the U.S. patent system or practice. It will be more likely to trigger additional debate and studies on how best to reconcile patent and competition policy. It could result in changes to patent laws and procedures over time. In this regard, in the long run, the FTC’s work in this area may prove quite significant.
The FTC’s 10 recommendations fit two general categories: non-controversial and controversial. The non-controversial provisions aim to increase support for the Patent Office. Such measures are already under way in the form of, for instance, legislation now pending in Congress to increase Patent Office funding. The FTC’s recommendations will be recognized as timely and appropriate, it not being lost on some that the Patent Office is a part of the U.S. Department of Commerce.
The controversial recommendations, while striving for the same general procompetitive end, will be slower to gain traction. They would restructure fundamental legal procedure and substantive law according to which U.S. patents are enforced, such as lowering the burden of proof and other standards for invalidating U.S. patents.
At a minimum, however, the recommendations reflect months of hearings involving testimony and position papers from various qualified organizations, individuals and points of view, and will therefore increase the level of debate on whether the U.S. patent policy currently strikes an appropriate balance in the continuing dialectic that pits free competition against property rights.
Just as some would attribute creation of the Court of Appeals for the Federal Circuit at least in part to the hostile reception given patents in court in the 1960s and early 1970s, some consider it appropriate now to ask whether the current playing field is tilted too heavily in favor of patent owners to the detriment of free competition.
Because the US District Courts and the U.S. Supreme Court – the courts that initially and finally address U.S. patent enforcement matters respectively – are courts of general jurisdiction and operate across the entire legal spectrum, and because of the increasing importance of intellectual property rights generally to all phases of commerce, both within the United States and globally, the FTC’s comments will resonate beyond the patent bar.
The U.S. judicial and legislative processes offer a potentially infinite number of subtle procedural and substantive mechanisms, decision points, and other opportunities to shift the balance in one direction or the other as technology and the law evolve. In at least that sense, the FTC recommendations and similar thinking will prove valuable in shaping an important area of law and commerce formerly entrusted to legal specialists in the patent field.
Conclusion
Only time will tell whether the FTC’s proposed changes to the U.S. patent system prove to be significant. Many may disagree with the FTC’s proposed solutions to problems with current patent laws and procedures, because their impact – if adopted – would be to cut back somewhat on a more expansive patent regime and shift the balance towards a more competitive regime.
However, the true significance of the FTC’s report probably will come from the dialogue that it will generate amongst policy-makers about some widely recognized deficiencies in the U.S. patent system.
Originally published in the December 2003/January 2004 issue of Competition Law Insight published by Informa Professional Publishing.
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