FTC Urges Changes to U.S. Patent Policy

In October, the FTC issued a report titled “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy.” Citing an existing system that relies on presumptions in favor of the issuance and validity of patents and that makes challenges to the validity of existing patents difficult and costly, the report contains specific recommendations on what the FTC considered to be improvements to the U.S. patent system. The report comes nearly 1 year after the FTC and the DOJ completed a series of public hearings on the proper balance between patent and antitrust law with an aim to foster innovation and maximize consumer welfare. The hearings, which took place over 24 days between February and November of 2002, attracted the participation of more than 300 panelists and more than 100 written submissions from business representatives, the independent inventor community, and leading patent and antitrust practitioners, scholars and organizations.

Avoiding Patent 'Arms Race'

While praising patent law policy for achieving a proper balance with competition policy for the most part, the report expresses concerns that the patent system is out of balance with competition policy in some ways. One important concern voiced by hearing participants is the issuance of questionable patents that are likely invalid or overly broad. The report identifies a number of situations in which such patents can be harmful to competition, including increasing the cost of innovation or discouraging innovation altogether in some areas. Certain firms reported refraining from entering a business or continuing with research covered by what they identified as questionable patents. The issuance of questionable patents also appears to lead to costly patent “arms races,” encouraging companies to amass increasingly large portfolios of sometimes questionable patents to better their bargaining power when facing questionable patents held by others.

In some cases, the FTC's recommendations for improvement are in line with the USPTO's own recommendations. One important example, and one that has potential to significantly impact the patent system, is the recommendation that legislation be enacted that would create an effective administrative post-grant procedure for private parties to oppose existing patents, short of federal court litigation. According to the FTC, the existing post-grant procedure for challenging a patent outside of court, ie, the re-examination process, contains significant restrictions, including no discovery and limitations on both the issues subject to review by the USPTO and the evidence that can be presented to the USPTO. Due to such restrictions, litigation is currently the most effective way to challenge a patent. Aside from the time and costs attendant in patent litigation, declaratory actions are currently only available where the patent owner has threatened infringement litigation, making many patents effectively off-limits to such challenges.

Another recommendation made in the report that would lead to significant changes in the patent system, calls for legislation to lower the evidentiary threshold for challenging the validity of a patent. Currently, courts require a litigant challenging the validity of a patent to prove its case by clear and convincing evidence. The FTC believes that this standard is too high, in effect giving issued patents an overly strong presumption of validity on top of the fact that “a plethora of presumptions and procedures tip the scales in favor of the issuance of a patent” in the first place. To make the system more evenhanded, the FTC recommends that the standard required to rebut a patent's presumption of validity be lowered to a “preponderance of the evidence” standard.

Federal Circuit Concerns Addressed

In line with recent articulations by the Federal Circuit, the FTC also recommends more meaningful application of the standards used by the PTO to evaluate whether a patent is “obvious,” a statutory requirement crucial to preventing the issuance of patents on trivial ideas or ideas already in the public domain. This recommendation is particularly applicable in relation to assessing commercial success. The FTC also recommends that decision makers consider the possible harm to competition before further extending the scope of patentable subject matter. The fairly recent determination, made in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed.Cir. 1998), that business methods were, and always had been, within the scope of patentable subject matter, for instance, was criticized by some hearings participants. These participants felt that patent protection on business methods was not necessary to spur the invention, commercial development, or public disclosure of business methods. The FTC expressed concern that future expansions of the scope of patentable subject matter may serve to deter innovation rather than promote it.

Other recommendations made in the report include:

• providing stepped up funding for the PTO, to allow the agency to improve patent quality;
• implementing portions of the PTO's 21st Century Strategic Plan that would improve the patent examiners' ability to evaluate patent applications;
• enacting legislation that would (i) require the publication of all patent applications within 18 months of filing, (ii) enable prior users to continue using technology without infringing patents subsequently issued, pursuant to certain types of patent applications, (iii) require actual, written notice of infringement from the patentee or deliberate copying of the patentee's invention (knowing it to be patented) before willful infringement could be found; and (iv) generally expand the consideration of economic learning and competition policy concerns in patent law decision making.

A Pledge to Balance Competition Law and Patent Law Policy

The FTC also pledged to make its own efforts to improve the balance between competition law and patent law policy, including: advocating against questionable patents in appropriate circumstances, a renewed commitment to the filing of amicus briefs in appropriate cases, and the establishment of a liaison panel between the antitrust agencies and the USPTO to permit the exchange of views on issues that impact both competition and patent law policy.

Reaction to the FTC's report has been mixed. Some commentators have praised the FTC's recommendations regarding the creation of a post-grant opposition process (much like the one currently used in Europe) lowering the standard for proving invalidity, improving the USPTO's application of the test for nonobviousness, and suggesting changes to the willful infringement standard. The Federal Circuit has recently decided to address the manner in which courts handle claims of willful patent infringement in its en banc hearing involving Knorr-Bremse Systeme Fuer Nutzfahrzeuge GMBH v. Dana Corp., Fed Cir., No. 01-1357. In an amicus brief filed in that case by the AIPLA on Nov. 3, 2003, it was argued that: 1) the duty to obtain legal advice before taking actions that may be infringing should be eliminated; 2) no adverse inferences should be drawn from the failure to obtain or disclose legal advice; and 3) a substantial defense at trial may sometimes defeat liability for willfulness.

Other commentators have criticized the FTC's recommendations to improve the funding of the USPTO (arguing that the management, legal structure, and priorities of the USPTO need to be improved instead), to publish all patent applications within 18 months (which is claimed to be harmful to individual inventors only seeking protection within the United States), and to expand prior user rights beyond the currently limited scope of business method patents (arguing that such an expansion would be of limited value and would significantly raise the cost of patent litigation).

A second, equally anticipated report, to be issued jointly by the FTC and the Antitrust Division of the DOJ, is forthcoming and will make specific recommendations for changes to antitrust law policy to allow for a proper balance with the patent system.

In October, the FTC issued a report titled “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy.” Citing an existing system that relies on presumptions in favor of the issuance and validity of patents and that makes challenges to the validity of existing patents difficult and costly, the report contains specific recommendations on what the FTC considered to be improvements to the U.S. patent system. The report comes nearly 1 year after the FTC and the DOJ completed a series of public hearings on the proper balance between patent and antitrust law with an aim to foster innovation and maximize consumer welfare. The hearings, which took place over 24 days between February and November of 2002, attracted the participation of more than 300 panelists and more than 100 written submissions from business representatives, the independent inventor community, and leading patent and antitrust practitioners, scholars and organizations.

Avoiding Patent 'Arms Race'

While praising patent law policy for achieving a proper balance with competition policy for the most part, the report expresses concerns that the patent system is out of balance with competition policy in some ways. One important concern voiced by hearing participants is the issuance of questionable patents that are likely invalid or overly broad. The report identifies a number of situations in which such patents can be harmful to competition, including increasing the cost of innovation or discouraging innovation altogether in some areas. Certain firms reported refraining from entering a business or continuing with research covered by what they identified as questionable patents. The issuance of questionable patents also appears to lead to costly patent “arms races,” encouraging companies to amass increasingly large portfolios of sometimes questionable patents to better their bargaining power when facing questionable patents held by others.

In some cases, the FTC's recommendations for improvement are in line with the USPTO's own recommendations. One important example, and one that has potential to significantly impact the patent system, is the recommendation that legislation be enacted that would create an effective administrative post-grant procedure for private parties to oppose existing patents, short of federal court litigation. According to the FTC, the existing post-grant procedure for challenging a patent outside of court, ie, the re-examination process, contains significant restrictions, including no discovery and limitations on both the issues subject to review by the USPTO and the evidence that can be presented to the USPTO. Due to such restrictions, litigation is currently the most effective way to challenge a patent. Aside from the time and costs attendant in patent litigation, declaratory actions are currently only available where the patent owner has threatened infringement litigation, making many patents effectively off-limits to such challenges.

Another recommendation made in the report that would lead to significant changes in the patent system, calls for legislation to lower the evidentiary threshold for challenging the validity of a patent. Currently, courts require a litigant challenging the validity of a patent to prove its case by clear and convincing evidence. The FTC believes that this standard is too high, in effect giving issued patents an overly strong presumption of validity on top of the fact that “a plethora of presumptions and procedures tip the scales in favor of the issuance of a patent” in the first place. To make the system more evenhanded, the FTC recommends that the standard required to rebut a patent's presumption of validity be lowered to a “preponderance of the evidence” standard.

Federal Circuit Concerns Addressed

In line with recent articulations by the Federal Circuit, the FTC also recommends more meaningful application of the standards used by the PTO to evaluate whether a patent is “obvious,” a statutory requirement crucial to preventing the issuance of patents on trivial ideas or ideas already in the public domain. This recommendation is particularly applicable in relation to assessing commercial success. The FTC also recommends that decision makers consider the possible harm to competition before further extending the scope of patentable subject matter. The fairly recent determination, made in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed.Cir. 1998), that business methods were, and always had been, within the scope of patentable subject matter, for instance, was criticized by some hearings participants. These participants felt that patent protection on business methods was not necessary to spur the invention, commercial development, or public disclosure of business methods. The FTC expressed concern that future expansions of the scope of patentable subject matter may serve to deter innovation rather than promote it.

Other recommendations made in the report include:

• providing stepped up funding for the PTO, to allow the agency to improve patent quality;
• implementing portions of the PTO's 21st Century Strategic Plan that would improve the patent examiners' ability to evaluate patent applications;
• enacting legislation that would (i) require the publication of all patent applications within 18 months of filing, (ii) enable prior users to continue using technology without infringing patents subsequently issued, pursuant to certain types of patent applications, (iii) require actual, written notice of infringement from the patentee or deliberate copying of the patentee's invention (knowing it to be patented) before willful infringement could be found; and (iv) generally expand the consideration of economic learning and competition policy concerns in patent law decision making.

A Pledge to Balance Competition Law and Patent Law Policy

The FTC also pledged to make its own efforts to improve the balance between competition law and patent law policy, including: advocating against questionable patents in appropriate circumstances, a renewed commitment to the filing of amicus briefs in appropriate cases, and the establishment of a liaison panel between the antitrust agencies and the USPTO to permit the exchange of views on issues that impact both competition and patent law policy.

Reaction to the FTC's report has been mixed. Some commentators have praised the FTC's recommendations regarding the creation of a post-grant opposition process (much like the one currently used in Europe) lowering the standard for proving invalidity, improving the USPTO's application of the test for nonobviousness, and suggesting changes to the willful infringement standard. The Federal Circuit has recently decided to address the manner in which courts handle claims of willful patent infringement in its en banc hearing involving Knorr-Bremse Systeme Fuer Nutzfahrzeuge GMBH v. Dana Corp., Fed Cir., No. 01-1357. In an amicus brief filed in that case by the AIPLA on Nov. 3, 2003, it was argued that: 1) the duty to obtain legal advice before taking actions that may be infringing should be eliminated; 2) no adverse inferences should be drawn from the failure to obtain or disclose legal advice; and 3) a substantial defense at trial may sometimes defeat liability for willfulness.

Other commentators have criticized the FTC's recommendations to improve the funding of the USPTO (arguing that the management, legal structure, and priorities of the USPTO need to be improved instead), to publish all patent applications within 18 months (which is claimed to be harmful to individual inventors only seeking protection within the United States), and to expand prior user rights beyond the currently limited scope of business method patents (arguing that such an expansion would be of limited value and would significantly raise the cost of patent litigation).

A second, equally anticipated report, to be issued jointly by the FTC and the Antitrust Division of the DOJ, is forthcoming and will make specific recommendations for changes to antitrust law policy to allow for a proper balance with the patent system.