Mark Leahey07.27.07
Will Innovation Become a Patent Reform Casualty?
By Mark Leahey
Currently in Washington, there is a heated debate over dramatic changes being proposed to the patent system. Following is an overview of the issues that draws from a white paper released by the California Healthcare Institute (CHI) and information collected by the Medical Device Manufacturers Association (MDMA) discussing many of the concerns that the medical technology industry has with the bill. (To view the full report, visit www.chi.org/uploadedFiles/CHI%20Patent%20Law%20changes%20paper.pdf)
Life-science research is extremely expensive and a particularly difficult market for new innovative entrants to compete. Attracting the necessary investment into companies developing the next generation of technologies depends on a strong, reliable patent system to ensure that critical innovations remain proprietary for a period, especially for a new entrant. Due to abuses by a few—resulting in high-profile and large damage awards to entities not developing products—a public perception has evolved that the patent system needs significant reform. These concerns already have led to several recent developments that, while potentially eliminating abuses, could have serious negative implications to the medical technology industry. Three Supreme Court decisions within the past year will have a huge impact on patents. The med-tech industry believes it is prudent for Congress to pause and see what effect these decisions will have on controlling patent abuses as well as innovation before any new legislation is passed.
Recent Court Decisions
In May 2006, in Ebay, Inc. v. MercExchange, LLC, the Supreme Court reduced the availability of permanent injunctions in patent infringement cases. This decision reduces the value of patent rights, particularly for those not commercializing their inventions. In January 2007, in MedImmune, Inc. v. Genentech, the Supreme Court further weakened patents by enhancing a patent licensee’s ability to challenge the validity of a licensed patent. In its most recent patent decision, KSR International Co. v. Teleflex, Inc., the Supreme Court again weakened patents by substantially reducing the standard for showing a patent invalid as obvious. These decisions already have reduced the strength of patents significantly and should deal with the perceived abuses.
Keeping Perspective
Even without these cases, it is important to place the perceived abuses into perspective. The highly publicized large awards in favor of companies that are not even commercializing technology are not the norm but are cited by those who would like to destroy the patent system. The truth is that the median patent award actually is about $3.9 million for those that result in a verdict for the plaintiff. This is less than the median cost to litigate a patent suit. In addition, more than 97% of patent cases settle before trial, presumably at values that are lower still. Finally, the plaintiff does not always win. Patents are sometimes held invalid, unenforceable or not infringed at summary judgment or at trial. Thus, prior to considering legislation that would chill innovation, it is important to maintain perspective rather than focus on a few aberrations.
The Patent Reform Act of 2007
The Patent Reform Act of 2007 includes provisions that, when combined with the changes that have already taken place, threaten to devastate life-sciences investment and, thereby, innovation. Some of the most pressing concerns for the MDMA and its members are provisions dealing with US Patent and Trademark Office (USPTO) rulemaking authority, apportionment of damages, the open-ended nature of the post-grant review window and the lack of redress for the growing use of the inequitable conduct defense. Below is a more thorough explanation of each provision and the impact it would have on the life science industry
Limiting Continuations Would Harm Innovation
The USPTO has made clear that it desires to limit continuation filings, despite record opposition from the patent community. The enhanced rule-making authority in the Patent Reform Act would permit these limits and significantly reduce the ability of smaller life-sciences companies to obtain full patent coverage for their inventions. At an early stage, budding innovative companies do not have the resources to file claims for every invention disclosed in a patent application and use continuations to overcome this limitation in resources.
Also, because there usually is a critical time window during which an applicant needs to demonstrate value to prospective investors, there is great pressure to accept quick issuance of narrower claims. The applicant uses the continuation process to then pursue broader protection. Because patents only last 20 years from the earliest filing date, the use of these continuations already comes at a cost for the applicant—a shortened patent life. The KSR decision would compound the effect of limiting continuations, because it is likely to take longer to obtain reasonably broad claims. Thus, the fledgling company usually will face either not obtaining funding or accepting narrow protection, even where the innovation is fundamental and they are entitled to broader protection.
The USPTO’s stated reason for limiting continuation filings is administrative—to reduce backlog. The proper solution to the backlog is to eliminate fee diversion, not filings, thereby allowing the USPTO to apply user fees for the purpose they were provided.
Open-Ended Post-Grant Oppositions Would Harm Innovation
The second window in the post-grant opposition proceeding would create uncertainty and prohibitive costs for start-up companies, as well as provide an effective vehicle for larger companies to cause smaller companies to spend resources that are best used for developing innovative technology. The cost of prosecuting a patent could go from about $20,000 to more than $100,000 for even one post-grant opposition period. Challenges should be limited to reexamination requests. Given the more critical eye being applied by the USPTO’s new central reexamination unit, this provides ample opportunity to challenge issued patents.
Apportionment of Damages Creates an Artificial Calculation
The proposed reform to apportion damages also would be devastating by artificially reducing the value of patents. The current language looks at all the existing pieces and subtracts those from the total product value for calculating damages. Thus, even if the patented invention truly is the reason for the sale of an entire product, but from a cost perspective is virtually costless to add to the product, the patentee would obtain virtually no royalty. Courts already consider the value of the invention in relation to the product as a whole under the Georgia-Pacific case.
Any Legislation Needs to Address the Inequitable Conduct Defense
Finally, although the device industry believes that pausing to see the effect of the Supreme Court decisions is the more prudent approach, if there is going to be legislation, industry is seeking reform on inequitable conduct included in such legislation. Inequitable conduct has become an overused and too easily applied defense, with a draconian remedy. It used to be said of the inequitable conduct defense that it was the most often pled, and least often proven, defense. However, even granting summary judgment on this defense, which is supposed to require a finding of “intent” to mislead, has become commonplace.
The courts simply infer intent when the patent applicant “should have known” that the information would have been interesting to the examiner. Some examples are Ferring v. Barr Laboratories, Bruno Independent Living Aids v. Acorn Mobility Services, Critikon v. Becton Dickinson and eSpeed v. BrokerTec USA. In mid-June, in McKesson Information Solutions v. Bridge Medical, the Federal Circuit upheld a finding of inequitable conduct, but a dissenting opinion recognizes the problem that has developed with this defense: “This Court returns to the ‘plague’ of encouraging unwarranted charges of inequitable conduct, spawning the opportunistic litigation that here succeeded despite consistently contrary precedent.”
The remedy is too severe, given the ease at which the defense is being applied today. The device industry believes that the inequitable defense should be discontinued entirely, replaced with a provision that naturally encourages disclosure. Some have proposed that the best way to encourage disclosure is to reduce the burden of proof on invalidity to a preponderance of the evidence with respect to any material prior art not before the USPTO. Thus, if an applicant does not disclose information before the examiner, it becomes much easier for the defendant to prove invalidity over that information. This is a very significant consequence, but it naturally encourages—rather than artificially mandates—the desired behavior. It also eliminates complex, difficult and costly to comply with rules, lengthy litigation about intent and the current disconnect between the materiality standards being applied by the USPTO and those being applied by the Courts.
Overall Impact
Each of these issues creates special challenges for the life-sciences applicant. Taken individually, they make obtaining a patent more complicated and costly. Taken together, they represent dramatic shifts that would create incalculable problems for the life-sciences community in maintaining essential patent protection for inventions. The net effect would reduce the ability to protect innovation and create a chilling effect on the industry. This, in turn, would result in the public being denied the benefit of lifesaving technology that otherwise might have been economically feasible to develop.
The perceived need for these reforms reflects the fundamental difference in business models between industries. Life-sciences inventions require years of development, extensive clinical testing and regulatory approval before they can be marketed. In contrast, software, IT and other similar technologies are developed incrementally and commercialized more quickly, with no regulatory delay and, frequently, much less need for large investment.
The Supreme Court’s decisions over the past year will have a huge impact on patents. The industry believes it is prudent to pause and see what effect these decisions have on not only controlling any patent abuses, but also ensuring that patents are not so weakened as to stifle innovation. Any legislation passed today could have very negative consequences to medical technology, patient care and fundamental innovations in general. However, at minimum, Congress must address the provisions above to help mitigate the chilling effect on innovation, so medical technology companies continue to attract investment and develop lifesaving products.