Patent Preparation Costs: How Low Can You Go?

According to recent statistics, approximately 342,441 utility patent applications were filed in 2003 in the United States, and 169,028 utility patents were granted. These totals have nearly doubled over the past decade. Nonetheless, patent prosecution costs have seemed to trend lower or remain flat in recent years, even as courts are requiring more and more from application drafters. Does this prosecution revenue squeeze portend an increased economic risk for the patent practitioner? Does this pose more trouble for patent quality in general? Is a market glut of patent attorneys creating downward pressure on patent prosecution costs and resulting patent quality? Besides refusing to enter into a pricing war that is ultimately bad for our patent system, patent attorneys may wish to consider implementing changes to the patent system that help improve patent quality by reducing the recent flood of patent attorneys and agents entering the market.

Falling Costs vs. Increased Risk/Exposure

“You get what you pay for” has never been more apropos than in the current IP environment. As early as 1997, the Court of Appeals for the Federal Circuit recognized a premium on forethought in patent drafting. See Sage Products, Inc. v. Devon Industries, Inc., 126 F.3d 1420 (Fed. Cir. 1997). The Federal Circuit warned:

This court recognizes that such reasoning places a premium on forethought in patent drafting. Indeed this premium may lead to higher costs of patent prosecution. … Given a choice of imposing the higher costs of careful prosecution on patentees, or imposing the costs of foreclosed business activity on the public at large, this court believes the costs are properly imposed on the group best positioned to determine whether or not a particular invention warrants investment at a higher level, that is, the patentees. Id. at 1425.

While this forethought premium has translated into more stringent requirements regarding expertise and accountability, it has not translated into increased prosecution costs.

The forethought premium or lack thereof was also on recent display with the creation of an apparent need for extremely explicit definitions in some areas, with the Federal Circuit holding claims invalid based on the patentee's failure to clearly define the claim term “about.” See Merck & Co. Inc. v. Teva Pharmaceuticals USA, Inc., 395 F.3d 1364, 1372 (Fed. Cir. 2005). Applicants attempting to be their own lexicographers are now required to redouble their efforts to ensure that any necessary definitions are very clearly set forth in each specification. This process can be extensive and very time consuming if done properly.

The more recently argued Phillips case is set to resolve issues concerning the construction of patent claims. The Federal Circuit has asked whether the primary source of claim construction should be dictionaries or the specification, or both of them together, and if both, then in what order? See Phillips v. AWH Corporation, 376 F.3d 1382 (Fed. Cir. 2004). That this issue remains unclear, or has been unclearly applied by various panels of the Federal Circuit, further illustrates the potential for patent practitioners to find themselves on “the horns of a dilemma.” This uncertainty casts further doubt as to the level of confidence that can be assumed regarding the quality of patents. Mix in downward pressure on prosecution costs, and it is easy to understand why there is apprehension regarding the quality of the patents that are being obtained.

Although more companies may be taking an active role in managing their intellectual property, there is cause for concern that some approaches may simply be attempting to increase the number of patent applications while simultaneously decreasing costs. As Benjamin Hershkowitz, editor-in-chief of this newsletter, notes, such an approach could actually result in higher overall costs and fewer granted patents due to increased numbers of needed amendments and lower issuance rates. See Hershkowitz, B: Maximizing Your Patent Prosecution Dollars: A Few Simple Considerations. Patent Strategy & Management, Aug. 2003.

In addition, an approach that attempts to obtain more patents for less money may improperly assume that the quality of issuing patents is relatively the same, regardless of revenues expended. Unfortunately, this approach treats the resulting patent as just another standard commodity. The implication that patents are just so many interchangeable “commodities” infers that acquiring a patent is no different than acquiring the deed to a parcel of residential real estate, or purchasing stock on NASDAQ. Patent preparation is not a highly standardized area of legal practice.

Volume Discounts Still Good

Historically, it has been understood that vendors are able to offer price concessions in exchange for greater volumes of work, ie, volume discounts. However, some companies may not fully appreciate the entire value of such a practice, choosing instead to spread their IP portfolio work between many different law firms. But what is the real cost of using 10 law firms for 10 patent applications per firm, versus divvying the applications between just two firms at 50 applications each? While it can certainly be argued that competition is good for negotiating better prosecution rates, other factors associated with using more firms to do the same amount of work may actually drive prosecution costs higher in the long run. In the first instance, if a firm has gained expertise in the specific technology targeted by a company, its lawyers will likely be more efficient and accurate in their drafting than would multiple firms that each must learn the technology separately. Furthermore, the potential for miscommunication increases dramatically when a managing attorney must deal with and coordinate among multiple firms prosecuting similar art. In addition, while loss in patent quality could theoretically be mitigated by strict quality control based on objective drafting guidelines, this approach requires more extensive time involvement by in-house attorneys and increased managerial monitoring.

Maintaining a consistent patent prosecution strategy becomes much more difficult as well. It is certainly possible that the actions of one firm could counteract the actions of another firm, whether in scope of protection, disclaimers, or legal arguments that nullify each other, all of which could result in less protection than desired. The amount of increased overhead involved when dealing with multiple firms will likely result in higher costs, whether monetary costs or the costs of sacrificing patent quality, even if those costs are not paid directly to a law firm.

The long-term effects of these added costs are difficult to measure but could certainly be more significant than moderately higher prosecution costs. Consequently, the “whole” cost of abandoning the volume discount approach could be substantially higher than the volume discount approach.

Preserving the Profession

A rapidly increasing number of patent attorneys and agents may be contributing to a reduction in patent quality by creating additional downward pressure on the costs of prosecution. Consequently, it may indeed be time for raising the standards for admission to the patent bar, or at least returning the patent bar exam to the level of difficulty that existed when the exam contained a subjective claim-drafting portion. While such a protectionist approach may seem self-serving for those who are already members of the patent bar, it would be naive to suggest that an oversupply of patent attorneys and agents would have no affect on patent quality. While it is theoretically possible that some “fat trimming” may be done without threatening overall patent quality, it is hard to argue that practitioners having drastically less available time for preparing patent applications has no affect on patent quality.

In addition, post-registration exams or continuing education requirements should also be implemented. Continuing changes in the patent laws and interpretations by courts increase the need for ensuring that education does not stop as soon as someone passes the patent bar exam. In addition, while many of the continuing education classes that patent attorneys are typically required to attend will focus on changing patent laws, patent agents are not required to obtain any type of continuing education credit. Obtaining a registration number should not only be more difficult, but holding onto that registration number should also require keeping up with changes in the practice, thereby improving patent quality in general. Commentators have been concerned for years about the continuing decline in patent quality, and downward trends in pricing will only worsen any such trends.

Conclusion

So, how low will patent prosecution costs go? The answer depends on whether the industry begins engaging in a price war that reduces the importance of quality, which ultimately hurts everyone involved. In addition, an oversupply of registered patent attorneys and patent agents will contribute to the problem, so measures should be taken to maintain the integrity of the system.

According to recent statistics, approximately 342,441 utility patent applications were filed in 2003 in the United States, and 169,028 utility patents were granted. These totals have nearly doubled over the past decade. Nonetheless, patent prosecution costs have seemed to trend lower or remain flat in recent years, even as courts are requiring more and more from application drafters. Does this prosecution revenue squeeze portend an increased economic risk for the patent practitioner? Does this pose more trouble for patent quality in general? Is a market glut of patent attorneys creating downward pressure on patent prosecution costs and resulting patent quality? Besides refusing to enter into a pricing war that is ultimately bad for our patent system, patent attorneys may wish to consider implementing changes to the patent system that help improve patent quality by reducing the recent flood of patent attorneys and agents entering the market.

Falling Costs vs. Increased Risk/Exposure

“You get what you pay for” has never been more apropos than in the current IP environment. As early as 1997, the Court of Appeals for the Federal Circuit recognized a premium on forethought in patent drafting. See Sage Products, Inc. v. Devon Industries, Inc., 126 F.3d 1420 (Fed. Cir. 1997). The Federal Circuit warned:

This court recognizes that such reasoning places a premium on forethought in patent drafting. Indeed this premium may lead to higher costs of patent prosecution. … Given a choice of imposing the higher costs of careful prosecution on patentees, or imposing the costs of foreclosed business activity on the public at large, this court believes the costs are properly imposed on the group best positioned to determine whether or not a particular invention warrants investment at a higher level, that is, the patentees. Id. at 1425.

While this forethought premium has translated into more stringent requirements regarding expertise and accountability, it has not translated into increased prosecution costs.

The forethought premium or lack thereof was also on recent display with the creation of an apparent need for extremely explicit definitions in some areas, with the Federal Circuit holding claims invalid based on the patentee's failure to clearly define the claim term “about.” See Merck & Co. Inc. v. Teva Pharmaceuticals USA , Inc., 395 F.3d 1364, 1372 (Fed. Cir. 2005). Applicants attempting to be their own lexicographers are now required to redouble their efforts to ensure that any necessary definitions are very clearly set forth in each specification. This process can be extensive and very time consuming if done properly.

The more recently argued Phillips case is set to resolve issues concerning the construction of patent claims. The Federal Circuit has asked whether the primary source of claim construction should be dictionaries or the specification, or both of them together, and if both, then in what order? See Phillips v. AWH Corporation , 376 F.3d 1382 (Fed. Cir. 2004). That this issue remains unclear, or has been unclearly applied by various panels of the Federal Circuit, further illustrates the potential for patent practitioners to find themselves on “the horns of a dilemma.” This uncertainty casts further doubt as to the level of confidence that can be assumed regarding the quality of patents. Mix in downward pressure on prosecution costs, and it is easy to understand why there is apprehension regarding the quality of the patents that are being obtained.

Although more companies may be taking an active role in managing their intellectual property, there is cause for concern that some approaches may simply be attempting to increase the number of patent applications while simultaneously decreasing costs. As Benjamin Hershkowitz, editor-in-chief of this newsletter, notes, such an approach could actually result in higher overall costs and fewer granted patents due to increased numbers of needed amendments and lower issuance rates. See Hershkowitz, B: Maximizing Your Patent Prosecution Dollars: A Few Simple Considerations. Patent Strategy & Management, Aug. 2003.

In addition, an approach that attempts to obtain more patents for less money may improperly assume that the quality of issuing patents is relatively the same, regardless of revenues expended. Unfortunately, this approach treats the resulting patent as just another standard commodity. The implication that patents are just so many interchangeable “commodities” infers that acquiring a patent is no different than acquiring the deed to a parcel of residential real estate, or purchasing stock on NASDAQ. Patent preparation is not a highly standardized area of legal practice.

Volume Discounts Still Good

Historically, it has been understood that vendors are able to offer price concessions in exchange for greater volumes of work, ie, volume discounts. However, some companies may not fully appreciate the entire value of such a practice, choosing instead to spread their IP portfolio work between many different law firms. But what is the real cost of using 10 law firms for 10 patent applications per firm, versus divvying the applications between just two firms at 50 applications each? While it can certainly be argued that competition is good for negotiating better prosecution rates, other factors associated with using more firms to do the same amount of work may actually drive prosecution costs higher in the long run. In the first instance, if a firm has gained expertise in the specific technology targeted by a company, its lawyers will likely be more efficient and accurate in their drafting than would multiple firms that each must learn the technology separately. Furthermore, the potential for miscommunication increases dramatically when a managing attorney must deal with and coordinate among multiple firms prosecuting similar art. In addition, while loss in patent quality could theoretically be mitigated by strict quality control based on objective drafting guidelines, this approach requires more extensive time involvement by in-house attorneys and increased managerial monitoring.

Maintaining a consistent patent prosecution strategy becomes much more difficult as well. It is certainly possible that the actions of one firm could counteract the actions of another firm, whether in scope of protection, disclaimers, or legal arguments that nullify each other, all of which could result in less protection than desired. The amount of increased overhead involved when dealing with multiple firms will likely result in higher costs, whether monetary costs or the costs of sacrificing patent quality, even if those costs are not paid directly to a law firm.

The long-term effects of these added costs are difficult to measure but could certainly be more significant than moderately higher prosecution costs. Consequently, the “whole” cost of abandoning the volume discount approach could be substantially higher than the volume discount approach.

Preserving the Profession

A rapidly increasing number of patent attorneys and agents may be contributing to a reduction in patent quality by creating additional downward pressure on the costs of prosecution. Consequently, it may indeed be time for raising the standards for admission to the patent bar, or at least returning the patent bar exam to the level of difficulty that existed when the exam contained a subjective claim-drafting portion. While such a protectionist approach may seem self-serving for those who are already members of the patent bar, it would be naive to suggest that an oversupply of patent attorneys and agents would have no affect on patent quality. While it is theoretically possible that some “fat trimming” may be done without threatening overall patent quality, it is hard to argue that practitioners having drastically less available time for preparing patent applications has no affect on patent quality.

In addition, post-registration exams or continuing education requirements should also be implemented. Continuing changes in the patent laws and interpretations by courts increase the need for ensuring that education does not stop as soon as someone passes the patent bar exam. In addition, while many of the continuing education classes that patent attorneys are typically required to attend will focus on changing patent laws, patent agents are not required to obtain any type of continuing education credit. Obtaining a registration number should not only be more difficult, but holding onto that registration number should also require keeping up with changes in the practice, thereby improving patent quality in general. Commentators have been concerned for years about the continuing decline in patent quality, and downward trends in pricing will only worsen any such trends.

Conclusion

So, how low will patent prosecution costs go? The answer depends on whether the industry begins engaging in a price war that reduces the importance of quality, which ultimately hurts everyone involved. In addition, an oversupply of registered patent attorneys and patent agents will contribute to the problem, so measures should be taken to maintain the integrity of the system.