David Kappos

What's Next for the Patent Office?

August / September 2009 By: David J. Kappos Volume 7 Number 4

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The author has been nominated by President Obama to be director of the U.S. Patent and Trademark Office. He is currently vice president and assistant general counsel for intellectual property law and strategy at the IBM Corporation. In March 2009 he offered testimony to the Senate Committee on the Judiciary about the Patent Reform Act of 2009 (S. 515) The following excerpts may provide some insight into the director-designate's views, although he was representing IBM when he gave his testimony.

The last half-century has been a time of unprecedented technological change. However, during this same period, the laws governing our U.S. patent system have not been significantly updated to reflect these changes. Innovation today is characterized by diverse forms of collaboration, multidisciplinary problem-solving, interconnected technologies, and complex products incorporating multiple inventions. The patent system must adapt to these changes.

IBM is committed to ensuring that our patent system is robust and that the United States economy is strong. We have been the leading assignee of issued patents in the United States for 16 consecutive years, and we earn about $1 billion annually in intellectual property related-income. IBM also invests more than $6 billion a year in research and development, and earns about $100 billion annually providing products and services. IBM is therefore uniquely positioned to promote a balanced patent system that will benefit patentees, producers, and the public—€¦.

The nature of innovation has changed. Today, we benefit from inventions made possible through highly collaborative and interconnected technologies. Many of the products that consumers demand are complex and include contributions from multiple innovators that incorporate hundreds if not thousands of patented inventions. At the same time, many new innovations require investments of unprecedented size to achieve a single new product protected by a single patent. For the United States to remain competitive our patent system must accommodate all of these innovation models. Yet our patent laws have not been significantly updated for over 50 years.—€¦.

While progress has been made in recent years through judicial reform in areas such as obviousness, injunctions, willfulness, and most recently venue in patent litigation, much remains to be done to restore balance to our patent system.

The problem of poor quality patents persists. Uncertain patent rights create speculation and lead to excessive litigation. IBM supports S. 5I5's approach to improving patent quality, including "first window" post grant review, enhanced reexamination, and pre-issuance submission of information. These reforms reduce the impact of poor quality patents by making it easier to promptly challenge the validity of a patent without resorting to litigation, and without subjecting patentees to an undue period of uncertainty.

A particular point of contention has been and remains the appropriate standard for reasonable royalty damages determinations. As with other issues with competing interests that have been resolved, IBM believes that this issue is reconcilable and a balanced solution can be achieved. In IBM's experience, the current legal standard does not provide the certainty needed to enable modern business to operate effectively. As a result, the precious time of skilled scientists and engineers is too often spent defending against costly and time-consuming litigation, instead of creating innovations that drive economic growth.

In reforming the law in this area, we must nevertheless be mindful of the fundamental importance of ensuring that patentees are appropriately compensated, or the patent system will fail to provide the incentive innovators require. IBM believes that the Supreme Court provided critical guidance in its recent, unanimous Quanta decision. In addressing the related issue of patent exhaustion, the Court focused on the essential features of the invention to determine if the patentee had received full compensation. An approach that uses the Quanta standard as a starting point will provide the guidance needed to properly compensate the inventor by focusing the damages inquiry appropriately.

IBM believes that by improving patent quality and reducing wasteful patent litigation, S. 515 will remove roadblocks to the development and implementation of new innovations, spurring economic growth. For the United States to maintain innovation leadership, our patent system must be in the future what it has been in the past—€”the best in the world. The need to act is urgent, the goal is achievable, and failure to act will harm our nation's economic interests. We urge enactment of the Patent Reform Act of 2009—€¦.

IBM strives to maintain and foster an innovation culture not only to meet our clients' demands, but also to remain competitive and thereby benefit our shareholders, our employees, and the communities we serve. Demands on our business and the businesses of our clients, partners and competitors are driven by new global marketplace realities. If America is to remain competitive, create jobs, and continue to be one of the most innovative nations on earth, it must adapt to these new realities.

In the Industrial Age, innovation primarily was the result of work by individuals or small groups within an enterprise. Today, interconnected technologies have created an environment that allows groups of people to innovate together across enterprises and national boundaries. This rich environment enables the development of multifunction products and services, and creates efficiencies and synergies through the contributions of many different creative sources. Many of the products that consumers demand are complex, include contributions from multiple innovators, and incorporate hundreds if not thousands of patented inventions. We benefit from inventions that are made possible through this "collaborative" innovation.

Incorporating innovation from multiple sources is enabled by: (1) open innovation environments; (2) technology standards, where innovators work collaboratively to create a common platform for product-level competition; and (3) licensing and cross-licensing of technology to gain access to others' innovations.

The diversity and interconnectedness of modem innovation models increases the need for predictability and clarity in determining the valid scope of patent rights, as well as valuing them for licensing purposes. For example, a licensing agreement that directly affects two parties is likely to indirectly affect many more. As a result, there is a heightened sensitivity to uncertainty. Such uncertainty in this context will increase transaction costs and make it increasingly difficult for innovators and implementers to trade the intellectual property rights needed to bring innovative products and services to consumers—€¦.
The U.S. patent system is widely acknowledged as underpinning America's leadership in innovation and IBM strongly shares this view. Patents play as important a role for IBM as they do for any other U.S. company. They provide an incentive to innovate by protecting our inventions while providing us the freedom of action to bring new products and services to market and partner with our clients to meet their needs. Patents spur successive innovation because patentees must disclose their inventions to the public, enabling others to build upon these innovations. As America competes in a global economy, we must rely on innovation for competitive advantage. Ensuring that our patent system properly promotes innovation is therefore central to America's ability to compete and to produce economic growth and jobs. Unfortunately, we continue to see developments that threaten the ability ofthe U.S. patent system to keep pace with and respond to changes in the nature of innovation. The U.S. patent system must be properly positioned to help our country maintain and grow its innovation leadership.

Two significant developments arise from the failure of our patent system to
adapt: the granting of low quality patents, and the adverse effects of excessive
patent litigation.

Low Quality Patents: High-quality patents that have been properly
prepared and examined to ensure that they meet all ofthe legal and policy
objectives ofthe patent system increase certainty around intellectual property
rights, reduce contention and free resources to focus on innovation. We believe the quality of patents issued in the U.S. has diminished, and that the substantial improvements needed to address this quality crisis are not possible without Congressional action.

Patent professionals are concerned about patent quality and are not confident
that matters will improve. In August 2005, the Intellectual Property Owners
Association (IPO) conducted a survey of its member corporate patent professionals regarding their views on U.S. patent quality. The findings are revealing. Over half (51.3 percent) said they rate the quality of patents in the U.S. as poor or less than satisfactory. This conclusion did not significantly vary based on industry. When asked whether they thought patent quality would decline, improve, or stay the same over the next three years, 28.7 percent responded that they thought patent quality would worsen and 51.2 percent thought things would stay the same.—€¦

The U.S. Patent and Trademark Office (USPTO) has not been able to keep
pace with the avalanche of applications it has received in recent years. In fiscal year 2007, the USPTO received nearly 485,000 patent applications which
represented a seven percent increase over the previous year. The backlog of
applications is growing. The USPTO has been hiring more examiners to reduce the backlog. But with such a significant increase in the number and complexity of applications, it is difficult to assure high quality.

Excessive Patent Litigation: Patent litigation has increased significantly
for more than a decade, in part driven by low patent quality that creates uncertainty around intellectual property rights, spawning increased speculation. This excessive litigation threatens to sap America's innovative capacity and its ability to compete in the world if left unaddressed.

The number of patent infringement suits filed annually in the U.S. nearly
doubled in the ten years ending in 2004, going from 1,617 in 1994 to 3,075 in
2004. There were 2,830 cases filed in 2006. Patent litigation has remained at this elevated level with some fluctuations. The National Academy of Sciences
reported in its 2004 study on improving the U.S. patent system that the number of patent infringement lawsuits settled or disposed of in federal court doubled between 1996 and 2002 from 1,200 to 2,400 cases per year.6 In 2007, nearly 2,800 U.S. district court patent cases were terminated, over 3,600 cases remained pending, and nearly 2,900 new cases were filed. From 2006 to 2007, the number of U.S. district court patent cases pending three years or more increased by over 15 percent from 353 to 408.

Patent litigation, according to the Phoenix Center for Advanced Legal and
Economic Public Policy Studies, costs the economy $4.5 billion annually. In a
survey conducted in 2007, the American Intellectual Property Law Association
found that the median cost to a party in bringing a patent infringement case to trial verdict with less than $1 million at stake was about $600,000 and in a case with more than $25 million at stake, the median cost was $5 million for each side.

As a matter of patent policy, the requirements for patentability and patent
validity should be clear and predictable. As the U.S. Supreme Court in Festa
explained, "[t]he monopoly [conferred by a patent] is a property right; and like any property right, its boundaries should be clear. Otherwise, the public cannot
discern the scope of the patent until after all infringement litigation has concluded and will not invest in innovative products that might potentially fall within the patent's scope—€¦."

The nature of innovation has changed. The drivers of growth today are quite
different from those in previous eras. America must rely more than ever before on the ability of its citizens to innovate to create economic growth and maintai competitive advantage.

The patent reform debate thus far unfortunately has been characterized as
adversarial, pitting one set of industries against another set of industries. To be sure, industries use the patent system in different ways and these differences affect how they view some reform proposals. However, we believe any differences are not insurmountable.

The Framers of our Constitution wisely gave Congress the express power
"[t]o promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries". Our patent system is facing real problems and urgent Congressional action is needed to address them.