Patent Nonsense

Pending legislation threatens to tilt the intellectual-property playing field toward established market giants and greatly compound the risks for innovators and their backers. The bill’s effects would be so far-reaching that a group of more than two dozen 30 Nobel laureates in science and economics, ranging across the political spectrum from Milton Friedman to Franco Modigliani to Paul Samuelson, have taken the unusual step or writing an open letter of opposition to the U.S. Senate. They warn that the pending legislation threatens “lasting harm to the United States and the world.” According to the protesting laureates, Senate Bill (S.507), championed by Orin Hatch (R-Ut.), will “discourage the flow of new inventions that have contributed so much to America’s superior performance in the advancement of science and technology” by “curtailing the protection obtained through patents relative to the large multinational corporations.”

S. 507, a version of which has already passed in the House, is a multifaceted bill that would make many changes in the U.S. patent system, some of which have desirable aims though not necessarily the mest means. But at the heart of the bill is a provision to create “prior-user rights,” which would undermine one of the fundamental goals of patents: to encourage the publication of inventions to stimulate innovation. The patent system works by giving an inventor a temporary exclusive right to use or license to the others the invention in exchange for publishing the invention so that others can learn from it. Currently, entities that suppress, conceal, or abandon a scientific advance are not entitled to patents or other intellectual property rights. It is the sharing of a trade secret that earns a property right. But under S. 507’s prior-user rights provision, if a company elects to keep an idea secret instead of patenting it, it might still acquire significant property rights by claiming it already had the idea moving toward commercialization when someone else patented it. The company would then be allowed to use the invention without paying royalties to the patent holder. There would be no limits on volume or usage, and a business could be sold with its prior-user rights intact.

The rationale offered for prior-user rights is that because of the costs of patent protection, U.S. companies must choose carefully what they patent because it is impractical to patent every minor innovation in a product or process. Advocates raise the specter that a company that neglects to patent some small change in an important product could be prevented from using the innovation if someone later patented the idea. But former patent commissioner Donald Banner disputes this argument: “Companies don’t have to file patents on every minor invention in order to protect themselves. If something is of marginal value, all companies have to do is publish it. Then it can’t be patented and used against them.”

It is understandable that many lawyers for large corporations, including foreign companies, might covet prior-user rights. But prior-user rights gut the core concepts of the U.S. patent system, because they slow the dissemination of knowledge by promoting the use of trade secrets and destroy the exclusivity that allows new players to attract startup financing. That is why the laureates warn that “the principle of prior-user rights saps the very spirit of that wonderful institution that is represented by the American patent system.”

Robert Rines, an inventor and patent attorney who founded the Franklin Pierce Law Center, warns that “prior-user rights will destroy the exclusivity of the patent contract and thereby chill the venture capital available for many startups.” After taking the sizable risks of R&D and market testing, a fledgling enterprise would collapse if a market giant such as GE, 3M, Intel, Mitsubishi, or Microsoft suddenly followed up with a no-royalty product. Moreover, the litigation costs of challenging the validity of prior-user rights will favor those with deep pockets.

Consider the impact on university technology transfer. According to an MIT study, in 1995 alone, U.S. universities granted 2,142 licenses and options to license, most of them exclusive, on their patents. These licenses provide income for the universities and are often essential to the success of startup companies. Cornelius J. Pings, president of the Association of American Universities, recently wrote Senator Hatch that Hatch’s prior-user rights provision will effectively eliminate a university’s ability to exclusively license inventions. Thus, prior-user rights would dramatically interfere with the university-to-industry innovation process.

Inevitably, the loss of exclusivity in patents will also make university research more dependent on the largess of large companies and put universities in a weaker bargaining position. If universities cannot count on income from exclusive patents to help support research, they will turn to large companies that can provide direct research funding, with universities losing some control over research direction. Moreover, greater reliance on trade secrets, combined with prior user rights, will increase the incentive for industrial espionage, to which the open university environment is particularly susceptible.

There is also a constitutional question. Most legal scholars, including James Chandler, head of the Intellectual Property Law Institute in Washington, D.C., interpret the Constitution’s provision on patents as intending that the property right be “exclusive.” Prior-user rights would eliminate that exclusivity and thus lead to a potentially lengthy legal battle that would put patents on uncertain footing for an extended period.

The bill’s bulk obfuscates

One of the difficulties in talking about S. 507 is that it is not just about prior-user rights: It is a complex omnibus bill that also includes controversial provisions such as corporatizing the patent office and broadening the ability of a patentee’s opponents to challenge a patent within the patent office throughout the life of the patent.

The bill was designed not for reasoned debate of its multiple features but for obfuscation. The sponsors have modified and expanded the bill repeatedly in strategic attempts to placate opponents. Significant differences exist between the bill passed in the House and the one under consideration by the Senate. No one can be certain what would result from a House-Senate conference to merge two bills that are each more than 100 pages long.

The director of Harvard University’s Office of Technology and Trademark Licensing, Joyce Brinton, observes that although the original bill was much worse, “bill modifications to re-examination and prior-user rights have not fixed all the problems.” On balance, says Brinton, “the bill is not a good deal for universities seeking to license the fruits of their research. It should be divided into component parts that can be dealt with separately.”

Says Janna Tom, vice president for external relations for the Association of University Technology Managers, “University organizations have difficulties putting forth a broad consensus position on an entire omnibus bill packed with so many patent issues, some of which we don’t oppose, but some of which, such as prior-user rights, are not favorable to the university tech transfer community. It would be far easier to address issues one by one, but Congress seems reluctant to separate them.”

The House version of the bill (H.R. 400) also suffers from “the attempt to bundle several pieces of patent legislation into one bill,” observes Shirley Strum Kenny, president of the State University of New York at Stony Brook, with the “parts that may be beneficial to all inventors outweighed by the harmful sections.” For example, Kenny and many others support a provision of the bill that lengthens the term of patents by amending recent legislation that effectively shortened the term of many patents.

Patent policy isn’t a topic that lends itself to the usual sausage-making of Congress. Any attempt to seriously improve patent bills should begin with the ability to address its measures separately. “What we want,” says MIT’s Franco Modigliani, “is that the present version (S. 507) should be junked, should not even be presented to the Senate.”

Indeed, no need has been demonstrated for moving this bill quickly or for keeping its elements intact. The more closely one looks at the bill, the more its main thrust appears to be an effort by companies at the top to pull the intellectual property ladder up after them. The patent system may be in need of periodic updating and and fine-tuning to enhance its mission of bringing new blood to our economy, but it is too important to the economic health of the country to be subjected to illconsidered, wholesale overhaul. Repeated corrections of hasty actions will only confuse and clog the system. Let’s take the time to consider each of the proposed changes separately and deliberately.