Category: Patent Law

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Conferences Patent Law

CPIP 2020 Fall Conference: Day One Recap

The following post comes from Terence Yen, a 4E at Scalia Law and a Research Assistant at CPIP. This is the first of two posts (see day two recap) summarizing our two-day 5G at the Nexus of IP, Antitrust, and Technology Leadership conference that was held online from George Mason University Antonin Scalia Law School on October 7-8, 2020.

CPIP 2020 Fall Conference flyerBy Terence Yen

On October 7-8, 2020, CPIP hosted its Eighth Annual Fall Conference, 5G at the Nexus of IP, Antitrust, and Technology Leadership, online from George Mason University Antonin Scalia Law School in Arlington, Virginia. The conference featured a keynote address by the Honorable Andrei Iancu, and it was co-hosted by Scalia Law’s National Security Institute (NSI).

This conference addressed fast-emerging intellectual property (IP), antitrust, and technology leadership issues in the 5G and “Internet of Things” innovation ecosystem. Coverage included standard-essential patents (SEPs) along with established and emerging markets on a regional and global basis. Speakers were drawn from the academic, industry, and policymaking communities, with an emphasis on using objective fact-based analysis to explore points of convergence among legal, economic, and geopolitical perspectives on the IP and regulatory infrastructures that underlie these critical industries.

OPENING REMARKS & INTRODUCTIONS

CPIP Executive Director Sean O’Connor opened the conference by welcoming everyone to this year’s event and explaining that the conference was limited to a few hours each day to avoid “Zoom burnout.” Prof. O’Connor discussed the developing technologies of 5G and Internet of Things (IOT), which represents the systems that connect everyday objects and allow them to communicate with each other in real time. This technology increases the capability of a wide variety of industries, including automotives, home appliances, healthcare systems, and more.

CPIP Deputy Director Joshua Kresh then highlighted the various topics that would be covered during the four panel sessions and the keynote address and fireside chat by USPTO Director Andrei Iancu. Mr. Kresh also thanked the CPIP team, including Kristina Pietro, Devlin Hartline, and Mary Clare Durel, and the conference sponsors for making the conference possible.

SESSION 1: USING DATA TO INFORM POLICY: EMPIRICAL EVIDENCE ON SEPS, SSOS AND FRAND ROYALTIES

The first panel focused on the use of data to inform policy, compared with the use of theoretical models for standard-essential patents (SEPs), standard setting organizations (SSOs), and fair reasonable and non-discriminatory (FRAND) commitments. The panelists included Dr. Anne Layne-Farrar of Charles River Associates, Prof. Stephen Haber of Stanford University, and Prof. Daniel Spulber of Northwestern University, and the panel was moderated by Ted Essex of Hogan Lovells.

The panelists discussed how one of the biggest issues in this field is the setting up of royalty rates for industries such as the automotive sector, which utilize 5G and IOT. In the past, economists have warned the public about the looming problem of royalty stacking. Royalty stacking is a theory about industry collapse, wherein market power is exercised excessively and repeatedly. The theory is based on the concept that one monopoly is bad, two monopolies is worse, three monopolies is even worse, and so on. The fundamental concept is that each monopolist sets its price without taking into consideration the prices charged by other monopolists, leading to a situation where, as the number of patent owners increases, the aggregate royalty grows unsustainably and output collapses.

Despite the fears generated by royalty stacking models, however, this issue has not seemed to materialize in the real world. For example, the actual cumulative royalty yield on a smartphone is less than one-twentieth of that predicted by royalty stacking models. The reason we don’t observe this in the real world is that the theory is built on the notion of “one-time” play, meaning the people setting royalties do so independently of each other. As the data shows, this is an inaccurate portrayal of how royalty rates are set up.

The panel then went on to explain that it is important to check theories against data and real results. At the beginning of FRAND litigation, courts worried that implementers were being anticompetitively harmed by high royalty prices. As such, decisions were issued with the policy goal of protecting implementers. Over time, however, we have begun to see more balance from the courts and a higher demand for data prior to the acceptance of theoretical models.

Courts have now recognized that there is a very real problem of people using products without licenses, and that strategic or opportunistic behaviors can happen on either side of the bargaining table. As such, they are now more willing to act as gatekeepers to enforce good faith on both sides, often falling back to comparable licenses as a basic standard.

With this new emphasis on fair play from the courts, most royalty decisions are now being settled through out-of-court negotiations. Evidence shows that practically all SEP licenses are now subject to negotiation. While patent pools are often cited as the main exception, even they generally still have the option of negotiation. Evidence also suggests that SSOs develop standards through consensus decisions that are procompetitive, and most SEP licenses are mostly negotiated and enforced with contract law, making litigation rare. FRAND commitments have generally been found to be clear and effective, and it is believed that excessive regulation and antitrust intervention would impede standardization. Data shows that FRAND commitments encourage the adoption of standards, do not generate market power, and are consistent with invention and innovation.

The increase in negotiation eliminates many predicted outcomes for theories, which makes data even more important. Accurate real-life data informs public policy, and research in this field is shifting towards new techniques for gathering and analyzing big data, as well as increased use of AI and big data.

This trend helps to avoid policy decisions based on guesswork and provides evidence-based analysis helpful to courts and agencies.

KEYNOTE ADDRESS & FIRESIDE CHAT

“IP controls the destiny of virtually every industry.” Andrei Iancu, Under Secretary of Commerce for Intellectual Property and Director of the USPTO, started his keynote address with this bold statement. Advanced digital technologies are transforming virtually every product, manufacturing process, and logistical system, and protecting the IP rights to those technologies is not only a right mentioned in the Constitution, but is the foundation of wealth creation for our nation.

As Director Iancu explained, the advancement of 5G and IOT technology will form the backbone of a new system of autonomous vehicles, smart cities, intelligent appliances, telerobotic surgeries, precision agriculture, and much more. However, our nation faces the reality that the United States is falling behind in the intellectual property arms race.

Twenty years ago, the number of patent applications being filed by Chinese citizens was practically zero. By 2018, however, that number reached almost 1.5 million per year, approximately three times the number of American applications. Chinese applications have increased at an average rate of 26% each year, as opposed to a 2-3% annual increase for the U.S. While some may call into question the quality of these Chinese patent applications, Director Iancu noted that the sheer magnitude indicates that China is at minimum attending diligently to its intellectual property portfolios in areas critical to the next technological revolution. This remarkable trend can in part be attributed to China’s extensive system of government incentives for IP, which include tax incentives, subsidies for patents, and other monetary and nonmonetary rewards. As foreign nations like China continue to outperform the U.S. in amassing a rich depth of technological patents, U.S. companies may end up paying billions in royalties as those patents become increasingly vital to the upcoming technological revolution.

Director Iancu went on the explain that the U.S. must take steps to ensure that American technology is able to keep up with foreign technological development. To do so, we must have a robust system of predictable patent rights to maintain the incentives to innovate. If we are forced to use only technologies that are in the public domain, standards will inevitably be stunted.

Recognizing that private sector inventions are the primary source of SEPs, Director Iancu explained the need for a market-driven licensing system and the role of the government in the transition to 5G. He emphasized that it is the Patent Office’s goal to maintain balance between licensors and licensees, and he ended his presentation with the promise that the “USPTO will be steadfast in ensuring that we have a fair and balanced licensing system driven by the needs of the industry.”

Director Iancu then went on to have a fireside chat with CPIP Executive Director Sean O’Connor, taking questions from the audience at the end.

SESSION 2: IP MEETS ANTITRUST AROUND THE GLOBE: POLICY DEVELOPMENTS IN THE LEGAL TREATMENT OF SEPS AND FRAND

The final session of the day included panelists Maureen Ohlhausen of Baker Botts, Dr. Urška Petrovčič of the Hudson Institute, Prof. Daniel Sokol of the University of Florida, and Prof. John Yun of Scalia Law. The panel was moderated by Prof. Henry Butler, Dean of Scalia Law and Executive Director of the law school’s Law & Economics Center.

The panelists discussed how innovation is crucial to the U.S. economy and how IP has been one of the primary drivers of the economy for the last 60 years. Throughout that time, IP and antitrust law have consistently been found to be complementary fields, as both are aimed at encouraging innovation, industry, and competition.

FRAND issues arise in the context of standards setting, as SDOs commonly adopt patent policies to promote access after a standard is adopted. In tech areas especially, hundreds of patents are often necessary to create a working product. This requires standards for fair and reasonable licensing policies, though there is some dispute as to whether the breach of FRAND commitments is an antitrust concern. Blanket licensing policies can offer higher efficiencies related to reduced transaction costs and patent peace, but the concern is that it may be a form of tying arrangement. However, it should be noted that U.S. antitrust agencies have long acknowledged that blanket licensing does not always raise antitrust concerns.

One issue of contention is the topic of injunctions. The confusions raised on the subject have drawn the attentions of the DOJ and FTC, most recently with their post-Madison approach. The DOJ holds that patent holdup is not an antitrust problem and that SSOs should better protect against holdout to ensure maximum incentives to innovate. It believes that patent owner injunction rights should be protected, not persecuted, and that a unilateral and unconditional refusal to license a valid patent should be per se legal. The FTC agrees with some of that approach, with the opinion that breach of FRAND alone is not an antitrust problem, but both hold-out and hold-up can raise serious concerns.

As a general trend, U.S. courts have begun to move away from the idea that IP owners are very constrained by antitrust and must license. However, the advent of 5G is sure to raise a whole new slew of issues, and the 5G battle will be a very different conflict from what we have seen before. Up until now, many of the most politically connected companies around the world have not played a significant role in this debate. With 5G being the future of IOT, however, many more elements of the supply chain will be involved on this issue, and many previously uninvolved players will want to shake up the case law in their favor.

Thus far, European courts have also moved towards the trend of acknowledging that FRAND compliance may make injunctions more difficult, but there are no rules specifically barring injunctions, so the option remains on the table. European courts have generally put forth the opinion that they want to protect the interests of both implementers and SEP owners, and they are currently less willing to adopt conclusions based on categorical rules or abstract theories, preferring evidence-based analysis instead.

At the center of this multisided issue is SSOs. SSOs balance the interests of two competing groups with different incentives: the innovators and the implementers. By design, SSOs are avoiding cracking down on the issue with bold decisions so as not to disrupt the balance between two sides.

The panelists agreed that, as of right now, nothing is set in stone. Antitrust, especially in combination with IP and contract law, remains in a state of flux. This has led to a lot of uncertainty in investments, which may impact our ability to innovate. Amongst its concluding thoughts on the issue, the panel noted that there are titanic conflicts yet to come, and as far as this field is concerned, “winter is coming.”

Categories
Patent Law

Mark Schultz: Weaker Patent Protection Leads to Less Venture Capital Investment

The following post comes from David Ward, a 2L at Scalia Law and a Research Assistant at CPIP.

a lit lightbulb shatteringBy David Ward

Venture capitalists pouring money into a small startup has become a sort of new American Dream for many innovators. The success stories of big American companies starting with nothing more than an idea have pervaded their way into pop culture, inspiring TV shows, movies, and the like. However, CPIP Senior Scholar Mark Schultz has released a new report for USIJ entitled The Importance of an Effective and Reliable Patent System to Investment in Critical Technologies showing that this dream may be harder to attain today due to recent shifts that have weakened the patent system and driven away venture capital investment.

Background

There has been an ongoing debate in the past two decades about whether patents should be stronger or weaker. Proponents of stronger and more effective patents have made the case that they are more valuable, incentivizing investors and innovators to fund and create valuable innovations. On the flip side, critics of the patent system have stated that stronger patents inhibit innovation since they create a web of restrictions and licenses, inhibiting access to important innovations.

This ongoing debate has resulted in several landmark changes to our patent laws and rules in recent years. Prof. Schultz points out several key changes:

These changes have weakened patents by making them easier to challenge, less accessible for smaller companies, and harder to obtain overall. However, with all these changes, there is now data to explore whether weaker patents really do allow for more innovation as patent critics have contended.

Weak Patents Don’t Attract Funding

The short answer is the data doesn’t support the patent critics’ contention that weaker patents clear the way for more innovation because investors no longer see many patent-intensive industries as a good investment. From 2004 to 2017, the share of funding received in patent-intensive industries dropped from over 50% to about 28%. Prof. Schultz is cognizant of the fact that correlation is not causation, but there is an ever-growing pile of evidence that points to one simple explanation: weaker patents result in less funding for innovation.

Patents and intellectual property are critical to venture capitalists (VCs) who want more certainty of a return on their investments. Pending patents that have a lower chance of being granted or patents that could be challenged at any moment create uncertainty for both the patents’ validity and the future costs of litigation. Hence, the weaker patent laws of recent years have led to a decrease in funding for many patent-heavy sectors.

Prof. Schultz’s report doesn’t just rely on the data to reach this conclusion. It also includes several case studies, surveys, and interviews with innovators and investors alike. Perhaps the most telling is a survey by Prof. David Taylor of SMU Law investigating how recent patent cases changed VC and private equity behavior. Of the 475 investors surveyed, 74% said that patent eligibility is an important consideration in firms’ investment decisions, and 62% said that their firms were less likely to invest if patent eligibility changes make patents unavailable. Almost one-third of investors who knew about recent court decisions said it had affected investment decisions away from biotech, medical devices, and pharmaceuticals.

The data again backs this up, as Prof. Schultz’s report shows that those industries have seen some of the biggest loses in VC funding since 2004. In a world where biotech, medical devices, and pharmaceuticals could quite literally be the most important sectors needing innovation and funding to tackle the COVID-19 pandemic, this is less than ideal. Typically, medical treatments cost hundreds of millions of dollars and have a 10-year road ahead of them. The prospect of reaching the end of the road without being able to protect the investment with a strong and effective patent has spooked many investors to other sectors. As a result, there has been less innovation in live-saving treatments, and more of a focus on safer, quality-of-life investments.

Looking Ahead

There is some trend in the positive direction, however. Prof. Schultz notes that USPTO Director Andrei Iancu has demonstrated strong support for the role of patents in the economy with several policy changes aimed at strengthening patent protection. It is also of note that many policymakers are realizing the changes have gone too far, and there are now several pending legislative proposals aimed at fixing these issues. These realizations, coupled with Prof. Schultz’s quantitative and qualitative data, paint a clear picture that all but proves a single point: strong patents promote innovation more than weaker patents. In the words of Prof. Schultz: “Society needs its most successful people working on its most compelling problems. The patent system should support such work.”

To read the report, please click here.

Categories
Innovation Patent Law

New CPIP Policy Brief: The Long Shadow of the Blackberry Shutdown That Wasn’t

CPIP logoCPIP has published a new policy brief by CPIP Senior Fellow for Innovation Policy Jonathan Barnett entitled The Long Shadow of the Blackberry Shutdown That Wasn’t. The policy brief looks at how the Blackberry litigation and the “patent troll” narrative ultimately contributed to the Supreme Court’s 2006 decision in eBay v. MercExchange that limited the availability of injunctive relief for successful patentees.

Professor Barnett then examines the problematic legacy of the post-eBay case law, which significantly shifted the legal infrastructure supporting the U.S. innovation markets. In particular, he explains how this shift has led to opportunistic infringement that favors downstream incumbents with the resources to fund extensive litigation at the expense of upstream innovators—a dynamic that is exemplified in the recent litigation between Sonos and Google.

The introduction is copied below:

Introduction

In early 2006, there was widespread public interest in a seemingly arcane patent infringement litigation brought by a small IP licensing entity, NTP, Inc., against Research in Motion (or “RIM”), the maker of the then-ubiquitous Blackberry mobile communications device. The reason: NTP alleged that the Blackberry device and service infringed upon its patents relating to wireless email communications. In the district court litigation, NTP had secured a judgment of willful patent infringement against RIM, entitling NTP to treble damages, attorneys’ fees, and a permanent injunction (stayed pending appeal) that placed at risk the continued operation of the Blackberry service.

Given NTP’s success at the district court, and uncertainty surrounding RIM’s ability to design a non-infringing alternative, there seemed to be a material risk that the appeals court would sustain the lower court’s rulings and, most importantly, the injunction order. Faced with this predicament, RIM settled all claims with NTP in March 2006 for the impressive sum of $612.5 million.

In this contribution, I revisit the almost 15-year-old Blackberry litigation and its connection with both the Supreme Court’s 2006 decision in eBay, Inc. v. MercExchange LLC, which limited patent owners’ ability to secure injunctions, and ongoing infringement litigation (commenced in January 2020) involving Google and Sonos, a leading innovator and supplier of wireless audio systems. While the eBay decision may have deterred certain opportunistic uses of patent infringement litigation, there are growing indications that it has had a significant adverse effect on the innovation ecosystem.

As illustrated by the Google/Sonos litigation, eBay and post-eBay case law has enabled incumbents that maintain key technology platforms and distribution pathways to infringe upon patent-protected technologies held by others at relatively modest legal and business risk. The increasing normalization of patent infringement as a rational business strategy endangers the property-rights infrastructure behind important segments of the U.S. innovation economy.

To read the policy brief, please click here.

Categories
Legislation Patent Law

New Paper Looks at “Ill-Advised Legislative Proposals” to Address Pharmaceutical “Evergreening”

The following post comes from Yumi Oda, an LLM Candidate at Scalia Law and a Research Assistant at CPIP.

dictionary entry for the word "innovate"By Yumi Oda

Many believe that drug prices in the U.S. are unnecessarily high because the pharmaceutical industry is exploiting legal loopholes and acquiring dubious patents to extend protection and delay generics from entering the market (so-called “evergreening” behavior by drug innovators). However, CPIP Senior Scholar Chris Holman of the University of Missouri-Kansas City School of Law has published a new paper arguing that these recent concerns regarding patents and drug prices are unfounded. The paper, entitled Congress Should Decline Ill-Advised Legislative Proposals Aimed at Evergreening of Pharmaceutical Patent Protection and published in the University of the Pacific Law Review, further challenges recent legislative proposals aimed at pharmaceutical evergreening, finding that they “are largely misguided, and, if enacted, would be likely to cause more harm than good by discouraging innovation in pharmaceuticals without effectively addressing the core concern.”

Concepts and Doctrines in the Evergreening Debate

Prof. Holman starts by reviewing the academic literature and other commentaries relevant to the current evergreening debate. He divides his discussion into five concepts and doctrines that have come under scrutiny as purportedly facilitating evergreening: product hopping, product thicketing, secondary patents (or follow-on patents), double patenting, and continuation practice.

1. Product Hopping. Prof. Holman explains that the pejorative term “product hopping” is aimed at “pharmaceutical companies’ efforts to develop follow-on products and to switch patients to these products from an earlier version of the drug.” Critics, who now acknowledge “the fact that literal evergreening generally does not occur,” have shifted the argument to blame product hopping for forcing a market shift by making only a small change to an existing patented drug, such as with a new form, formulation, or dosage, and convincing doctors to prescribe it. Of course, while no patent directed to an earlier composition or biologic is permissible, a new patent on a new formulation, manufacturing process, or use of a previous drug is allowed in our patent system. While some may attack these new patents as a type of evergreening, Prof. Holman points out that these are the very types of innovations the patent system is meant to encourage.

2. Patent Thicketing. Prof. Holman describes another pejorative term, “patent thickets,” which refers to pharmaceutical “companies obtaining multiple patents covering a single pharmaceutical product.” Popularized in the early 2000s and dating back to the term “patent anticommons” that was coined in the late 1990s, patent thickets originally raised concerns that when “too many patents” around the same product are held by different owners, transactional licensing costs could increase substantially. Prof. Holman points to a recent review of patent thicket literature demonstrating that the term is not used coherently. In fact, patent thickets today are sometimes claimed to exist even when the patents are held by the same owner, where potential transaction cost issues would not apply.

3. Secondary or Follow-On Patents. So-called “secondary patents” are those that claim something other than the active ingredients in drugs, such as new formulations or dosages. Prof. Holman dislikes the term “secondary patents” since it suggests they are somehow less meritorious and less worthy of patent protection, and he instead chooses to call them “follow-on patents” since they generally follow the invention of the active ingredient. Critics often target follow-on patents based on the belief that “a drug is a single product and thus should only be subject to the protection of a single patent.” However, Prof. Holman explains that this view oversimplifies how pharmaceutical inventions come about and underappreciates their true value for patients. For example, his earlier article illustrates how Burroughs-Wellcome obtained a follow-on patent for AZT, a failed cancer drug that was ultimately used to treat AIDS.

4. Double Patenting. Some critics complain that pharmaceutical companies are engaged in “double patenting,” where they obtain multiple patents on the same invention or obvious variations of a patented invention. Prof. Holman explains that double patenting rejections—especially nonstatutory, “obviousness-type” rejections—prevent a patent applicant from extending the patent term by filing a second patent “on a non-identical but still merely obvious variant of a patented invention.” Nevertheless, some critics argue that companies are avoiding such rejections by “dressing up part” of their original invention “as a new one,” and they claim that prohibitions on double patenting should be strengthened. Prof. Holman notes that these arguments typically focus particularly on pharmaceutical products, and they fail to consider the effect such changes would have on inventions more generally.

5. Continuation Practice. Prof. Holman explains that some commentators argue that pharmaceutical companies are using continuation practice to engage in evergreening. Continuations entitle patent applications to benefit from the filing date of an earlier-filed patent application, and the patent applicant can amend claims or even add new ones so long as they are supported by the parent application. Some critics claim that this practice allows pharmaceutical companies to “obtain multiple patents covering obvious variants of the same drug” and to extend effective patent terms. However, Prof. Holman notes that these concerns have already been successfully addressed by Congress in statutory amendments.

Proposed Legislation Aimed at the Pharmaceutical Industry

Having identified and summarized the concepts and doctrines that arise in the evergreening debate, Prof. Holman then analyzes three proposed bills from 2019 that are specifically designed to rein in evergreening in the pharmaceutical industry: the Affordable Prescriptions for Patients Act of 2019, the No Combination Drug Patents Act, and the Terminating the Extension of Rights Misappropriated Act of 2019.

1. Affordable Prescriptions for Patients Act of 2019. The Affordable Prescriptions for Patients Act of 2019 attempts to tackle product hopping and patent thicketing. To combat product hopping, the bill would make it a prima facie antitrust violation for a drug manufacturer to (1) discontinue or withdraw the “reference drug’s” application (or announce discontinuance of or withdrawal of the application) once it receives notice of an application to market a generic version or (2) market or sell a follow-on product during a period of time referred to as the “competition window.” A drug manufacturer can rebut the presumption by showing that the drug was discontinued or withdrawn from the market for “significant and documented safety reasons.”

The bill would also make pharmaceutical patent thicketing a prima facie antitrust violation. The bill broadly defines “patent thicketing” as covering any action by a patentee to limit competition for an approved drug when certain conditions are met. A drug manufacturer can rebut the presumption by establishing that the pro-competitive effects of the action are not outweighed by its anti-competitive effects, which in turn can be rebutted by the FTC demonstrating that the harm to consumers outweighs the benefit from the action.

Prof. Holman warns that the effect of this bill “would be to discourage pharmaceutical innovators from improving existing products,” instead of encouraging further innovation and research to improve the first version of a drug. Prof. Holman cites testimony by Prof. David Olson before the Senate Judiciary Committee stating that, despite the common misconception that a large number of patents delays innovation, “there is no conclusive evidence that smartphone or other high-tech innovation is being retarded by the large numbers of patents that may cover these devices.” Prof. Olson explains that this is also true for pharmaceutical patents, where the number of patents covering one specific drug is relatively low—not enough “to constitute a substantial thicket that will deter innovation.”

2. No Combination Drug Patents Act. The No Combination Drug Patents Act would change the nonobviousness standard under Section 103 for follow-on pharmaceutical innovations. If enacted, it would create a presumption that any “covered claimed invention” is obvious if it “contains or uses a drug or biological product that is prior art” and differs from the prior art under one or more of four enumerated criteria. An applicant may rebut this presumption by showing that the invention is either a new treatment for a new indication or that it leads to a statistically significant increase in the drug’s efficacy.

Prof. Holman points out that the proposed “rule of construction” exempting certain claimed inventions “could largely eviscerate the bill’s effect,” depending on how it is interpreted. He presents three possible interpretations, two of which could be easily overcome by filing a divisional application. Under the third possible interpretation, which seems like the one the bill’s drafters intended, Prof. Holman predicts that pharmaceutical companies would be forced to significantly change their current patent filing strategy, which affords some time to figure out and secure claims directed to inventions that were unknown when the parent application was filed, by starting to file many patent applications at the outset.

Stepping back for a moment, Prof. Holman explains that the proposal to raise the nonobviousness bar especially for follow-on pharmaceutical patents is not new. However, he questions such a proposition because the “assumption that many types of pharmaceutical inventions are inherently obvious and undeserving of patent protection” does not withstand scrutiny. Prof. Holman notes that numerous follow-on inventions have been upheld by the courts and recognized for the positive impact they have on people’s lives. (For a CPIP policy brief by Prof. Holman responding to such a proposal by the United Nations, please see here.)

3. Terminating the Extension of Rights Misappropriated Act of 2019. Finally, Prof. Holman discusses the Terminating the Extension of Rights Misappropriated Act of 2019, which is designed to prevent double patenting in drug patents by presuming that the patentee has “disclaimed the patent term for each of the listed patents after the date on which the term the first patent expires.” Prof. Holman explains that the bill neither alters the standard for determining obviousness-type double patenting, nor the remedy, but it does shift the burden of proof from the PTO to the patent applicant to prove that the listed patents are patently distinct from one another. The bill would also require the PTO to conduct a comprehensive review of its examination procedures.

Conclusion

Prof. Holman echoes Senator Thom Tillis’ concern that “by just focusing on patent protections, and the number of patent protections available to a single product, [Congress] may be doing more harm than good to our nation’s innovation economy.” And he notes that it “is important to bear in mind that the reason there has been such an uproar over the price of drugs is that these drugs provide huge benefits for society, far exceeding most other patentable innovation.” Prof. Holman mentions that these drugs would probably not have been available in the first place without proper incentives, and he worries that the legislation aimed at preventing the perceived problems with evergreening “could discourage the investment necessary to bring the next generation of pharmaceutical innovation to patients.”

Further, Prof. Holman criticizes the current evergreening debate for failing to target the supposed misuse of patents by going after the patents and not that misuse. For example, if the claim of product hopping were true and patients were being prescribed much more expensive drugs with no additional benefit, that would be an issue with the market, not with the patent system. Similarly, if drug companies were using anti-competitive means in the same scenario, that would be an antitrust violation, not a patent issue. As such, instead of the current legislative proposals targeting the patents themselves, Prof. Holman concludes that any legislation should focus on the alleged bad actions of pharmaceutical companies, not on changing the patent incentives for pharmaceuticals inventions overall.

Categories
Patent Law Patent Theory

New Paper Explores Possibility of Gold-Plated Patents Beyond the PTAB’s Reach

files labeled as "patents"What if there is a way for a patent applicant to obtain a “gold-plated patent” that is immune to administrative cancellation before the Patent Trial and Appeal Board (PTAB) at the U.S. Patent and Trademark Office (PTO)? This intriguing notion is the subject of a recent paper by Professor Michael S. Greve of Scalia Law, titled Exceptional, After All and After Oil States: Judicial Review and the Patent System and published in the Winter 2020 edition of the Boston University Journal of Science and Technology Law. Prof. Greve presented an early draft of this paper at the “Perspectives on the PTAB: The New Role of the Administrative State in the Innovation Economy” conference that was co-hosted by CPIP and the Gray Center at Scalia Law.

Examining the PTAB through his administrative law lens, Prof. Greve spots what he calls a “Sandy,” that is, a hypothetical, newly discovered relative of an ancient animal species that was thought to have gone extinct. This clever conceit with “Sandy,” which runs through the paper, refers to a Section 145 action to obtain a patent in the Eastern District of Virginia. This particular “Sandy,” Prof. Greve explains, “is unknown to, and greatly at variance with, contemporary administrative law, which operates on the principles of agency adjudication and deferential, on-the-record appellate review.” He argues that Article III prevents a patent obtained through a Section 145 action from subsequently being cancelled at the PTAB—in other words, “Sandy” gives a successful plaintiff a “gold-plated patent.”

To set the stage, Prof. Greve runs through the history of Section 145, placing it within the Patent Act’s current statutory scheme for reviewing validity determinations and the administrative state more broadly. A vestige of the Patent Act of 1836, Section 145 provides that an “applicant dissatisfied” with an appeal to the PTAB following an examiner’s rejection “may . . . have remedy by civil action” against the Director of the PTO. If the court adjudges “that such applicant is entitled to receive a patent for his inventions,” the “adjudication shall authorize the Director to issue” the patent. The alternative pathway for a “dissatisfied” applicant is an appeal directly to the Federal Circuit under Section 141.

The two provisions are markedly different. An applicant that chooses a Section 141 appeal to the Federal Circuit waives the right to proceed under Section 145 before the district court. Like agency adjudication generally, a Section 141 appeal is on the record—no new evidence may be introduced—and deference is given to the PTAB. The decision is then remanded to the PTO for further proceedings. Section 145 actions, by contrast, allow the introduction of new evidence, and the district court can adjudicate validity de novo—without deference to the PTAB. If the plaintiff is successful, the district court directs the PTO to issue the patent. According to Prof. Greve, the lack of deference to the PTO and the ability to introduce new evidence seems foreign—a mythical creature in the modern administrative state.

Turning to the case law, Prof. Greve looks at Dickinson v. Zurko, where the Supreme Court in 1999 held that the Federal Circuit must follow the Administrative Procedure Act (APA) framework when reviewing the PTO’s findings of fact in a Section 141 appeal. The Federal Circuit had applied the Federal Rules of Civil Procedure, which state that a reviewing court must not set aside a district court’s factual findings unless they are clearly erroneous. The Court held that the more deferential review standard of the APA should instead be applied to the PTO. As Prof. Greve explains, the Federal Circuit later extended the Court’s holding, thus directing district courts to apply a deferential standard of review to the PTO’s factual findings in a Section 145 action.

This push to impose the APA standard of review onto Section 145 was short lived. In 2012, the Supreme Court in Kappos v. Hyatt rejected the notion that background principles of administrative law dictate that Section 145 requires a district court to review the PTO’s factual findings deferentially. The Court also rejected the argument that plaintiffs in Section 145 actions should be permitted to introduce new evidence only if they did not have the opportunity to present it to the PTO. Thus, Section 145 plaintiffs may introduce new evidence subject only the ordinary rules of evidence and procedure, and the district court may review these new facts de novo. In other words, appeals under Section 141 are very different than direct actions under Section 145. As Prof. Greve remarks of Hyatt, “Welcome back, Sandy.”

In Oil States v. Greene’s Energy, the Supreme Court in 2018 laid to rest the argument that an inter partes review (IPR) before the PTAB violates Article III. Invoking the public rights doctrine, the Court characterized an IPR as the PTAB’s decision to reconsider the PTO’s earlier grant of a patent—not as a decision to annul a property interest that has already vested. This same sort of reasoning, Prof. Greve points out, has led to decisions that allow the PTAB to cancel patents that have been upheld in infringement actions before the federal courts. He argues that those decisions are inapplicable when it comes to a “gold-plated patent” under Section 145—an issue that surprisingly has not yet been litigated. Such patents, Prof. Greve asserts, cannot be revoked by the PTAB under Article III.

Prof. Greve explains that the validity of a patent cannot conclusively be established in an infringement action in the federal courts. Indeed, this explains why subsequent PTAB cancellations are constitutional. However, the same is not true for patents secured in a Section 145 action. Under Hyatt, Prof. Greve contends, a successful plaintiff is entitled to the patent “as a matter of right,” and the unsuccessful Director of the PTO, by contrast, is “duty-bound” to issue the patent. Unlike with infringement actions, the very point of a Section 145 action is to conclusively establish the patentability of the claims at issue. And this difference, Prof. Greve avers, is critical. Section 145 patents are issued “as the consequence of a conclusive, binding judgment of an Article III court,” and Supreme Court case law prevents final judgments of Article III courts from being “subject to executive revision.”

Prof. Greve explains:

If that reading of Hyatt is right, a patent issued pursuant to a § 145 proceeding cannot be subject to the AIA’s review and reexamination procedures. If § 145 patents issue as of right and neither require nor, in the ordinary course, permit further administrative proceedings, it follows a fortiori that the Director cannot then entertain or initiate an administrative review or reexamination proceeding that would divest the patentee of the benefits of a conclusive Article III judgment. . . . Once the initial patent grant pursuant to § 145 has become final, it has res judicata and estoppel effect in any court; and that preclusive effect cannot be circumvented by means of an administrative reversal and subsequent (deferential) appellate review. The short of it is that “§ 145 patents” are immune from administrative review and reexamination except under the most unusual circumstances.

 

If the issue of subsequent administrative cancellation of a Section 145 patent were to reach the Supreme Court, Prof. Greve believes that the Court will reaffirm the “gold-plated” nature of such a patent in light of Hyatt. He further suggests that if this is true, it seems likely that more applicants will choose the Section 145 route. As things are now, very few people choose this option. Indeed, presumably to discourage the filing of such actions, the PTO recently took the position that Section 145 plaintiffs must pay the pro-rated salaries of the government’s lawyers—a notion the Supreme Court rejected last year in Peter v. Nantkwest. Regardless, a Section 145 action before the district court and the inevitable appeal to the Federal Circuit are risky, expensive, and time-consuming. However, if this route really does produce a “gold-plated patent” that the PTAB cannot strike down, Prof. Greve predicts that “Sandy may yet shine a light into our stoned faces.”

Categories
Patent Law

Supreme Court to Assess USPTO’s Controversial Attorneys’ Fees Position

U.S. Supreme Court buildingBy Chris Katopis & Devlin Hartline

This week, the U.S. Supreme Court agreed to hear an important case concerning patent law procedures and the American legal system in general. In Iancu v. NantKwest, the Court asks, “Does all really mean all?” Specifically, the Court will examine whether Section 145 of the Patent Act, which provides that “[a]ll the expenses of the proceedings shall be paid by the applicant,” includes the personnel expenses that the U.S. Patent & Trademark Office (USPTO) incurs when its employees and attorneys defend the agency in the proceedings.

Under U.S. patent law, a patent applicant who is disappointed with the final decision of the Patent Trial and Appeal Board (PTAB) has the right to seek judicial review through one of two options. Applicants may either appeal directly to the U.S. Court of Appeals for the Federal Circuit under Section 141, or they may file a civil action against the Director of the USPTO in the U.S. District Court for the Eastern District of Virginia under Section 145. Unlike Section 145, Section 141 mentions nothing about recouping expenses.

In the present case, NantKwest is the assignee of a patent application directed to a method for treating cancer. The examiner rejected the claims as obvious and the PTAB affirmed. NantKwest then sued the Director of the USPTO in the Eastern District of Virginia. The district court held on summary judgment that the claims were obvious, and the Federal Circuit affirmed in a nonprecedential opinion.

In the district court, the USPTO moved for reimbursement of nearly $112,000 in expenses under Section 145 to cover attorneys, paralegals, and expert witnesses. The district court granted the expert-witness expenses but denied the personnel expenses. A divided panel of the Federal Circuit reversed, finding that the personnel expenses were compensable under Section 145. The Federal Circuit then took the case en banc, with the majority affirming the district court’s holding that the personnel expenses were not “expenses” under Section 145.

The USPTO then petitioned the Supreme Court for a writ of certiorari, which NantKwest opposed. Just yesterday, the Court agreed to hear the case. The USPTO argues that when Congress enacted Section 145, it was clear that “all” meant “all” regarding any costs or expenses arising from the district court litigation. Accordingly, the USPTO argues, an applicant who initiates a civil action under Section 145 must pay all of the expenses borne by the USPTO in the proceedings, including the salaries of the government’s attorneys and paralegals.

Notably, this recent position on Section 145 by the USPTO is a sharp departure from decades of earlier practice. It also presents a potentially costly factor for patents applicants seeking to challenge adverse PTAB decisions in the Eastern District of Virginia, where they would have to pay the government’s personnel expenses even if their patent rights are vindicated by the federal courts.

In its en banc majority opinion by Judge Kara Stoll, the Federal Circuit held that “the American Rule prohibits courts from shifting attorneys’ fees from one party to another absent a ‘specific and explicit’ directive from Congress.” Under the American Rule, the opposing parties in litigation pay their own attorneys’ fees, whether they win or lose. This Rule, the majority noted, promotes “fair access to the legal system” for those who “might be unjustly discouraged from instituting actions to vindicate their rights,” especially the “small businesses and individual inventors” who seek to avail themselves of Section 145’s benefits.

Having held that the American Rule’s presumption against shifting attorneys’ fees applies to Section 145, the Federal Circuit found that nothing in the text of Section 145 rebutted it. Under Supreme Court precedent, there must be a “specific and explicit” authorization by Congress to displace the American Rule. The Federal Circuit held that Section 145’s statement that applicants must pay “[a]ll the expenses of the proceedings” was ambiguous and thus fell short of the Supreme Court’s stringent standard.

The majority emphasized the fact that, under the USPTO’s interpretation, even successful applicants would have to pay the government’s personnel expenses, and it noted that the USPTO itself could not identify any other such provision for shifting fees to the prevailing party. That sharp departure from the bedrock principle of the American Rule, the majority reasoned, made the government’s anomalous position all the more suspect since Congress would have made it more clear if it intended this odd result.

This case has significant ramifications for the American innovation economy. Patent applicants at the cutting-edge of innovation occasionally receive multiple rejections from patent examiners that are affirmed by the PTAB. Some seek to vindicate their rights in the Eastern District of Virginia, which is their right under Section 145 of the Patent Act as enacted by Congress. The shifting of attorneys’ fees to such applicants would increase the cost of inventing and commercializing new technology. It would strongly discourage dissatisfied applicants from challenging the PTAB before a federal district court.

The American Rule is grounded on the notion that those who feel they have been wronged should not be afraid to seek justice in the courts. The USPTO would flip this bedrock principle on its head, even in cases where the courts reverse the agency’s wrongful denial of patent rights to innovators. Hopefully the Supreme Court will affirm the Federal Circuit’s defense of the American innovation economy, lest our innovative entrepreneurs be forced to think twice before taking their case to the federal courts.

Categories
Patent Law Pharma

Recognizing the Limits of Government Procurement in the Pharmaceutical Industries

pharmaceuticalsWhile recent headlines claim that rising drug prices can be easily addressed through government intervention, the procedures involved with government use of patented technologies are complex and often misunderstood. In addition to owning and practicing a vast portfolio of patents, the government has the power to procure and use patented technologies—including pharmaceutical medicines—in limited circumstances without specific authorization, license, or consent. But despite established mechanisms for government use of intellectual property, some advocates are now promoting an unprecedented and expansive interpretation of procurement that would deprive patent owners of their rights and threaten pharmaceutical innovation.

Today, escalating health care costs raise concerns from lawmakers on both sides of the political aisle. The U.S. pharmaceutical market alone was $333 billion in 2014.[1] Critics cite the escalating cost of certain specialty drugs as a leading cause of the high cost of health care, and some argue that price disparities have a disproportionate effect on certain groups. Accordingly, it has been argued that the federal government already has a responsibility and the necessary legal tools to combat the high price of drugs, e.g., through its procurement procedures. Yet combating disproportionate drug prices through government procurement should be a carefully considered process and not one based on misrepresentations of the history and rationale behind federal procurement procedures.

Federal Government Procurement Overview

The U.S. government oversees a vast and complex procurement system, including the General Services Administration (e.g., real estate, property, and services), the Federal Acquisition Regulation (FAR) system, and vast federal contracting. In sum, the annual federal budget will exceed $4.4 trillion in 2019.[2] Advocates note that the federal government spent nearly $1.1 trillion on health care alone in 2018.[3] In the health care sector, the federal government’s role is also exemplified by the following categories of activity: the direct purchasing of pharmaceutical through federal agency programs including, the Veterans Health Administration, Department of Defense, Indian Health Service, and Federal Bureau of Prisons; indirectly through other federally sponsored health insurance programs, notably Medicare and Medicaid; and, more broadly through its oversight and other involvement with private sector health insurance plans.

There is no denying that the federal government is a significant participant in the health care system. In the aforementioned contexts, the government generally seeks the legal right to use a patented product (e.g., a medicine or medical device) at a specified purchase price. But federal law provides a mechanism for the government to procure patented products and services without a specific authorization, license, or consent. Further, federal law allows it to use patents without prior consent (this is the quintessential definition of infringement), under limited circumstances, in exchange for compensation to the patent holder. Advocates argue that the federal government should now broadly and unprecedentedly employ this procurement power to combat high drug prices.

Congress’ Enactment of Section 1498(a)

In the early 1900s, Congress enacted legislation permitting the federal government to use patented products without the permission of the rights holder in exchange for some compensation. The statute, § 1498, states:

Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.

28 U.S.C. § 1498(a) (emphasis added).

Congress enacted this law (and its subsequent amendments) in response to a number of war time and national security needs, which required the government and its federal contractors to use the inventions of recalcitrant patent owners. In essence, § 1498(a) is a waiver of the federal government’s historic sovereign immunity (hence allowing for lawsuits against the government) while ensuring that the patent owners receive fair compensation. As the statute currently reads, this government intervention is offset by promising “reasonable and entire compensation for such use and manufacture.”

Section 1498 emerged as a solution to a technical standing problem that was preventing IP owners from suing the government for infringement (going back into the 1800s) without reverting to legal fictions such as implied contract. It did not arise simply as strong-arm takings power to benefit the government and contractors. Rather, it is a careful compromise to provide a clear path forward for IP owners while freeing the government from the threats of litigation, such as injunctive relief. While any government intervention in the marketplace must be viewed with some suspicion, the statute ensures that the government will recognize the contribution of innovators through some form of compensation (e.g., an ex post facto royalty).

Scholars conclude that that the statute’s original purpose was to allow the federal government and contractors more flexibility in activities during war time efforts[4]—for example, the government’s procurement of the parts necessary for military equipment or naval ship building. The statute has been used in very few other categories. The Supreme Court observed:

The intention and purpose of Congress in the Act of 1918 was to stimulate contractors to furnish what was needed for the War, without fear of becoming liable themselves for infringements to inventors or the owners or assignees of patents. The letter of the Assistant Secretary of the Navy, upon which the Act of 1918 was passed, leaves no doubt that this was the occasion for it.

Richmond Screw Anchor Co. v. United States, 275 U.S. 331, 345 (1928).

The law and literature reveals two important aspects about § 1498(a). First, it was intended for the government’s limited use of a certain category of patented inventors while respecting their innovative contribution with compensation for their efforts. Rather than civilian inventions, the § 1498(a) case law presents a theme: a series of military, war time, and post-war research related inventions, including weapons, communications equipment involving the Signal Corps of the Army, to stealth airplane carbon fiber fighter plane panels.[5] Second, it was intended as a war time safety valve against recalcitrant inventors – essentially, as a national defense provision. It has been used rarely and in limited contexts. Even when the nation faced an anthrax attack scare, its use was threatened by then HHS Secretary Tommy Thompson, but never actually used.[6] Moreover, it is not a price control mechanism. Nowhere in the text of the statute, the legislative history, nor Supreme Court case law endorses § 1498 as a discount federal procurement mechanism. In other words, § 1498(a) is not a “Groupon” for discounted federal shopping sprees.

Even those advocating for the use § 1498 as a discount procurement tool note a number of potential problems, which include the likelihood of undercompensating innovators and undermining pharmaceutical firms’ incentives to innovate, the potential overuse by the federal government, and giving too much responsibility and discretion to courts to make decisions in this category. Critics of the statute’s use in this context observe that as with any government intervention in the marketplace, consequently, it has a number of negative effects—e.g., chilling innovation, more uncertainty around R&D. The issue about preserving the incentives for R&D for new cutting-edge medicines is not abstract. A Tufts University center study reports that, on average, more than $2.6 billion is spent on R&D for a new prescription drug that gains market approval; the life-cycle cost rises to $2.9 billion when other post-approval develop costs are included.[7] In practice, for every drug that is successfully developed, reviewed, and made available to patients, many dozens more fail.[8] Due to this high failure rate and the costly investment in R&D, well-balanced intellectual property rights are essential for innovators to commercialize the products that do make it to market and improve—or even save—patients’ lives.

In practice, the use of § 1498(a) raises a number of other challenges. The application of a “reasonable royalty” itself leads to uncertainty and lengthy dispute settlement time frames. Ultimately, the retroactive decision of whatever truly is a “reasonable royalty” requires a heightened reliance on the courts to determine its “reasonableness.” The opponents note that this undermines certainty and chills the incentives for innovation. Also, the limited scope of the government’s direct applicability (e.g., prisons, Indian tribes) questions whether this makes its use either an ineffective solution for the public at-large or it will distort markets further by the misallocation of costs on different communities.

Notwithstanding its poor legal mooring for this purpose, in the end, § 1498 is an impractical tool for lowering drug pricing nationwide, vis-à-vis, the widespread government procurement of medicines in the national health care marketplace. As a general proposition, every fundamental understanding of government and liberty informs us that the federal government cannot just seize one’s property—house, livestock, vehicles—for free. Nor can the government use patented inventions (IP) for free.

Conclusion

Today, the Nation faces an increasing populist hue and cry surrounding a number of public health challenges, including the availability and affordability of patented pharmaceuticals. As the cost of drugs sharply rises, outpacing the rate of inflation, policy-makers consider a range of public policy options. The use of a compulsory license or the § 1498 statute offers a superficial false hope/promise to reduce health care spending. Hence, it is naïve to suggest that the government procurement process is designed to give short shrift to inventors by depriving them of just compensation.

Nothing in the § 1498 statute’s wording, history, nor congressionally-mandated purpose supports its role as either a general procurement or price control tool. As with all government interventions into the market place, it has potential consequences. In this context, the consequences are ultimately harmful, e.g., threatening to harm future medical innovation by reducing the incentives for R&D and creating uncertainty in the marketplace. While the goals at the heart of this debate are quite worthy (i.e., increased drug availability and affordability), policy-makers should consider other measures that avoid the inevitable negative consequences. The federal government has an alternate, powerful array of tools at its disposal to improve the access and quality for health care. In sum, § 1498 was never contemplated to be a general procurement discount vehicle—hence the federal government should not begin mistakenly prescribing it.

[1] https://www.trade.gov/topmarkets/pdf/Pharmaceuticals_Executive_Summary.pdf.

[2] The federal government purchases hundreds of billions of dollars of goods and services annually through an array of intricate procurement procedures and systems. These systems are based on willing sellers who work within the government framework (e.g., the schedules also known as Federal Supply Schedules and the Multiple Award Schedules (MAS)) to ensure fairness and a level playing field with pre-negotiated prices rather than letting the federal government use patented products without compensation. See generally https://www.gsa.gov/buying-selling/purchasing-programs/gsa-schedules.

[3] https://www.taxpolicycenter.org/briefing-book/how-much-does-federal-government-spend-health-care (The break down includes spending Medicare ($583 billion), the Medicaid and Children’s Health Insurance Program (CHIP) ($399 billion), and veteran’s medical ($70 billion)).

[4] Sean M. O’Connor, Taking, Tort, or Crown Right? The Confused Early History of Government Patent Policy, 12 J. Marshall Rev. Intell. Prop. L. 145-204 (2012).

[5] Id. at 190.

[6] “Thompson Negotiating With Drug Companies to Purchase Anthrax Antibiotics; Sees No Need to Override Cipro Patent,” June 11, 2009 (“Tony Jewell, an HHS spokesperson, said that agency officials ‘do not believe’ that breaking the patent is necessary, adding, ‘It would not save money to break the patent.'” https://khn.org/morning-breakout/dr00007586/.

[7] https://www.scientificamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b/.

[8] “The overall attrition rate for new drugs remains high—‘horrendously high’ according to [U.S.] NIH Director Francis Collins—and may be increasing. Recent estimates place the phase 2 failure rate at sixty-five to seventy percent and even higher for drugs with new mechanisms of action.” Erika Lietzan, The Drug Innovation Paradox, 83 Missouri Law Review 39 at 78-79 (2018) (describing the U.S. regime).

Categories
Patent Law

CPIP Scholars Join Amicus Brief Arguing that the Government Cannot Petition for CBM Review

U.S. Supreme Court buildingOn December 17, 2018, CPIP Senior Scholars Adam Mossoff and Kristen Osenga joined an amicus brief written on behalf of seven law professors by Professor Adam MacLeod, a CPIP Thomas Edison Innovation Fellow for 2017 and 2018 and a member of CPIP’s growing community of scholars. The brief, which was filed in Return Mail Inc. v. United States Postal Service, asks the Supreme Court to reverse the Federal Circuit’s determination that the federal government has standing to challenge the validity of an issued patent in a covered business method (CBM) review before the Patent Trial and Appeal Board (PTAB).

The petitioner, Return Mail, owns a patent for a method of processing mail that is returned as undeliverable. After the Postal Service refused to take a license, Return Mail sued it for “reasonable and entire compensation” in the Court of Federal Claims under Section 1498(a). Thereafter, the Postal Service filed a petition at the PTAB seeking CBM review, arguing that several claims were unpatentable. Return Mail contested the ability of the Postal Service to petition for CBM review, arguing that it is not a “person” who has been “sued for infringement” within the meaning of Section 18(a)(1)(B) of the Leahy-Smith America Invents Act of 2011 (AIA). Over a forceful dissent by Judge Newman, the Federal Circuit upheld the PTAB’s determination that the Postal Service has standing to challenge Return Mail’s patent before the PTAB.

The amicus brief written by Prof. MacLeod argues that the Federal Circuit was wrong to hold that the federal government could be treated as a “person” who has been charged with infringement. The brief points out that the federal government cannot be liable for patent infringement since it has sovereign immunity. Instead, the government has the authority to take a license whenever it pleases under its eminent domain power—so long as it pays just compensation to the patentee. The Federal Circuit classified the Postal Service’s appropriation as infringement, thus bringing it within Section 18(a)(1)(B) of the AIA. But, as the amicus brief notes, an infringement is an unlawful exercise of the exclusive rights granted to a patentee. The government may have exercised Return Mail’s patent rights, but it did not do so unlawfully, and as such it is not in the same position as a private party who has been charged with infringement.

The Summary of Argument is copied below, and the amicus brief is available here.

SUMMARY OF ARGUMENT

The United States Postal Service (“Postal Service”) wants to be a sovereign power. It also wants not to be a sovereign power. It exercises the right of sovereignty to take patent rights by the power of eminent domain. But it wants to stray beyond the inherent limitations on sovereign power so it can contest the validity of patent rights in multiple venues and avoid the duty to pay just compensation for a license it appropriates.

At the same time, the Postal Service asserts the private rights of an accused infringer to initiate a covered business method review (“CBM”) proceeding though it is immune from the duties and liabilities of an infringer. In other words, the Postal Service is trying to have it both ways, twice. It wants the powers of sovereignty without its disadvantages, and the rights of a private party without exposure to liability.

The United States Court of Appeals for the Federal Circuit erroneously ruled that the Postal Service can exercise both the sovereign power to initiate an administrative patent review, which is entrusted to the Patent Office, and the sovereign power to appropriate patent rights by eminent domain, which is delegated to federal agencies that may exercise patent rights. Congress separated those powers and delegated them to different agencies for important constitutional and jurisprudential reasons. Furthermore, the Federal Circuit ruled that the Postal Service can be both immune from liability for infringement and vested with the powers of an accused infringer. It did this by misstating what a “person” is within the meaning of United States law and by reading unlawfulness out the definition of “infringement,” as the Petitioner explained in its Petition.

In the Leahy-Smith America Invents Act of 2011 (“AIA”), Pub. L. No. 112-29, 125 Stat. 284, Congress created alternatives to Article III litigation concerning patent validity—inter partes review (“IPR”), post-grant review (“PGR”), and covered business method proceedings (“CBM”). IPR, PGR, and CBM proceedings are intended as alternatives to inter alia infringement actions in which an accused infringer might challenge patent validity. This suggests that the Government, which is immune from liability for infringement, is not a “person” with power to initiate an IPR, PGR, or CBM proceeding.

In jurisprudential terms, the Postal Service claims the powers and immunities of the legislative sovereign, who possesses the inherent power of eminent domain and is immune from liability for infringement. At the same time, the Postal Service tries to claim the powers of an accused infringer and so disavow the legal disadvantages of the sovereign. It cannot have both.

In fact, the Postal Service cannot infringe and cannot be charged with infringement. The sovereign who exercises the power of eminent domain and pays just compensation has acted lawfully, not unlawfully, and therefore has not trespassed against the patent. And the Postal Service must pay compensation when it appropriates a license to practice a patented invention. Vested patents are property for Fifth Amendment purposes, and the Government must pay for licenses taken from them, just as it pays for real and personal property that it appropriates.

To read the amicus brief, please click here.

Categories
Inventors Patent Law

Qualcomm Founder Dr. Irwin M. Jacobs Delights Attendees at CPIP’s Sixth Annual Fall Conference

2018 Fall Conference flyerBy Kathleen Wills*

On October 11-12, 2018, the Center for the Protection of Intellectual Property (CPIP) hosted its Sixth Annual Fall Conference at Antonin Scalia Law School in Arlington, Virginia. The theme of the conference was IP for the Next Generation of Technology, and it featured a number of panel discussions and presentations on how IP rights and institutions can foster the next great technological advances.

In addition to the many renowned scholars and industry professionals who lent their expertise to the event, the conference’s keynote address was delivered by Dr. Irwin M. Jacobs, founder of Qualcomm Inc. and inventor of the digital transmission technology for cell phones that gave birth to the smartphone revolution. The video of Dr. Jacobs’ keynote address, embedded just below, is also available here, and the transcript is available here.

After beginning his career as an electrical engineer and professor at the Massachusetts Institute of Technology (MIT), Dr. Jacobs’ vision for the future of wireless communications drove him to found his first company, Linkabit, in the late 1960s. In the years that followed, Dr. Jacobs led teams that developed the first microprocessor-based satellite modem and scrambling systems for video and TV transmissions. In 1985, Dr. Jacobs founded Qualcomm, which pioneered the development of mobile satellite communications and digital wireless telephony on the national and international stage.

Dr. Jacobs’ keynote address focused on intellectual property’s role in the development of technology throughout his 50-year career. He began his speech by discussing his background in electrical engineering and academia at MIT and at the University of California, San Diego (UCSD). After publishing a textbook on digital communications, Dr. Jacobs explained that he then transitioned into consulting and started Linkabit, where he learned the importance of intellectual property.

Dr. Jacobs recounted how he later sold the company to start Qualcomm with the “mobile situation” of satellite communications on his mind. At Qualcomm, Dr. Jacobs wanted to break from the standard technology in favor of code-division multiple access (CDMA). CDMA had the potential to attract more users with a system that limited the total amount of interference affecting each channel, and it wasn’t long before Qualcomm was assigned the first patent on the new technology.

Qualcomm’s first product was Omnitracs, a small satellite terminal designed for communicating with dishes that led to the creation of a GPS system. Qualcomm’s patented GPS device used antenna technology to calculate locations based on information about the terrain, and it was very valuable to the company.

Using that source of income, Dr. Jacobs revisited CDMA at a time when the industry pursued time-division multiple access (TDMA) for supporting the shift to second-generation digital cellular technology. However, Dr. Jacobs knew that CDMA had the potential to support 10 to 20 times more subscribers in a given frequency band per antenna than TDMA. Within one year, Qualcomm built a demonstration of CDMA. At that time, the size of the mobile phone was large enough to need a van to drive it around!

Dr. Jacobs explained that commercializing the technology required an investment for chips, and it wasn’t long before AT&T, Motorola, and some other companies signed up for a license. Qualcomm decided to license every patent for the next “n” years to avoid future licensing issues and collect a small royalty. The industry eventually set up a meeting comparing TDMA to CDMA, and CDMA’s successful demonstration convinced the Cellular Telephone Industry Association to allow a second standard. A standards-setting process took place and, a year and a half later, the first standard issuance was completed in July of 1993.

Speaking on the push for CDMA, Dr. Jacob’s explained that there were “religious wars” in Europe because governments had agreed to only use an alternate type of technology. Nevertheless, CDMA continued to spread to other countries and rose to the international stage during talks about the third generation of cellular technology involving simultaneous voice and data transmissions. Dr. Jacobs visited the European Commissioner for Competition and eventually arranged an agreement with Ericsson around 1999 based on a strategic decision: instead of manufacturing CDMA phones in San Diego, there would be manufacturers everywhere in the world.

Selling the infrastructure to Ericsson, Qualcomm dove into the technology, funded by the licenses. The strategic decision to embed technology in chips in order to sell the software broadly has been Qualcomm’s business model ever since. Dr. Jacobs explained that since “we felt we had well-protected patents,” and had a steady income from the licenses, the team could do additional R&D. With that support, they were the first to put GPS technology into a chip and into a phone, developed the first application downloadable for the phone, and looked ahead at the next generation of technology.

Dr. Jacobs said that he’s often asked, “Did you anticipate where all of this might go?” To that question he replies, “Every so often.” Qualcomm was able to move the industry forward because of the returns generated through its intellectual property. Dr. Jacobs early realized that the devices people were carrying around everywhere were going to be very powerful computers, and that “it’s probably going to be the only computer most of us need several years from now.”

“Protecting intellectual property, having that available, is very critical for what was then a very small company being able to grow,” Dr. Jacobs said. Because Dr. Jacobs relied on secure intellectual property rights to commercialize and license innovative products, and in turn used income from licensing patents for R&D, Qualcomm was—and continues to be—able to prioritize high performance computing and to keep the cellular technology industry moving forward.

To watch the video of Dr. Jacobs’ keynote address, please click here, and to read the transcript, please click here.

*Kathleen Wills is a 2L at Antonin Scalia Law School, and she works as a Research Assistant at CPIP

Categories
Innovation Patent Law Pharma

A Cure Worse Than the Disease? Proposed Changes to European Patent Law are Threatening Pharmaceutical Innovation

a hand reaching for a hanging, shining keyInnovation is all around us. We love and appreciate the latest video games, software apps, and smartphones. We await the integration of self-driving cars and other forms of artificial intelligence. Beyond the gadgets and luxuries we think we can’t live without, there are even more essential products that affect the lives of millions around the world on a daily basis. Patented medicines are at the top of the list of innovations that save lives and preserve the quality of life. Unfortunately, some proposed changes to European patent law are jeopardizing the development and delivery of safe and effective drugs, threatening jobs and innovation, and putting global public health at risk.

Policy-makers and the public acknowledge that balance is critical in the legal regimes governing essential medicines. Our generation is the beneficiary of patent protections which strike a balance. European regulators have long acknowledged that the benefits of new cures (e.g., arising from the research and development of therapies) require a societal investment in the form of intensive capital resources and strong intellectual property protection. In turn, a balanced system includes a reasonable patent term as a quid pro quo for the public disclosure of knowledge and the follow-on generic industry.

The medicines sector highlights the need for that careful balance, as well as the success of the current legal regime. New drug research and the development of new cures is extremely capital intensive. Legions of European scientists, engineers, and clinicians can work for years on a new drug’s development and regulatory review. A recent Tufts University center study reports that, on average, more than $2.6 billion is spent on R&D for a new prescription drug that gains market approval; the life-cycle cost rises to $2.9 billion when other post-approval development costs are included.[1] This is a 145% increase, correcting for inflation, over the estimate the center made in 2003.

In practice, for every drug that is successfully developed, reviewed, and made available to patients, many dozens more fail. CPIP Senior Scholar Erika Lietzan has observed:

The overall attrition rate for new drugs remains high—‘horrendously high’ according to [U.S.] NIH Director Francis Collins—and may be increasing. Recent estimates place the phase 2 failure rate at sixty-five to seventy percent and even higher for drugs with new mechanisms of action.[2]

Due to this high failure rate and costly investment in R&D, well-balanced intellectual property rights are essential for innovators to commercialize the products that do make it to market and improve—or even save—consumers’ lives.

Medicines must be safe and effective, and while regulatory review is essential, it is a time-consuming and highly expensive process. The reality is that the essential patent term is eaten away by years of regulatory review delay.[3] This extra review process is what makes the investment and research questions in the bio-pharmaceutical space so different from a smartphone or the latest virtual reality entertainment software. Professor Lietzan christened this the “innovation paradox.” She explains:

In medicine today, we face an innovation paradox. Companies that develop new medicines depend on a period of exclusive marketing after approval, to fund their research and development programs. This period is made possible by patent protection and regulatory data exclusivity.[4]

Likewise, it is the reason that there needs to be some supplementary legal protection to raise new capital and investments for cures and therapies.

The practical effect is that the necessary regulatory review results in the loss of years of effective patent term protection, warranting special treatment for innovative pharmaceutical products that come to market with little time to realize the benefits of exclusivity. In the 1990s, European policy-makers successfully restored the balance between innovation and the public interest by establishing the Supplementary Protection Certificate (SPC), which provides limited exclusive legal protection after a patent’s expiry.

Supplemental Protection Certificates Ensure a Necessary Balance

Supplementary Protection Certificates (SPCs) reinforce the balance between the rights of innovators and the public by extending the exclusive term for a variety of compounds, e.g., human and veterinary medicines and plant products. SPCs provide a limited extension of legal protections (e.g., exclusivity capped at five-and-one-half years) to compensate for the patent term effectively lost during the regulatory review process to ensure safety and efficacy.

Since SPCs were established, it is estimated that more than 20,000 SPCs for patented products have been filed in Europe during the period 1991–2016.[5] Despite the SPC’s twenty-plus-year track record of success, it, and the balance it preserves, is coming under pressure due to special interest lobbying by the generic drug industry.

The European Commission (EC) recently proposed waiving the SPC for pharmaceuticals and biosimilars[6] and permitting limited generic drug protection via the following two provisions prior to the SPC’s expiration:

(1) The “Manufacturing Provision.” This proposal would “allow EU generic or biosimilar manufacturers to develop and store generic or biosimilar manufacturers in Europe . . . with the goal of enabling immediate generic or biosimilar market entry following the expiration of intellectual property protections . . . .”

(2) The “Export Provision.” This proposal would “allow generic or biosimilar manufacturers to export products to countries where no intellectual property protection for the products is in place.”

While these two proposals are touted as limited in scope, their impact would be significant and detrimental on many fronts across Europe, including for the public health, innovation, jobs, and trade.

The Dangerous Impact of SPC Waiver

The overall impact of the SPC waiver threatens the balance that has worked so well for twenty-plus years, plain and simple. Specifically, the negative impact and risks are evidenced through the inherent complexity of a medicine’s regulatory review process, undermining the public health via counterfeit medicines, and harming Europe’s economy and jobs.

a. Risks of Limiting Innovation for a Variety of Important New Compounds and Cures

 

The most important reason to preserve the current balance is that it is a proven path to develop new medicines for the public’s health. Recently, a commentator highlighted two critical medicines that would not be available to patients, but for the opportunity afforded by the SPC process: (1) Fingolimod (a drug to treat renal failure after a kidney transplant that was subsequently brought to the market for the treatment of multiple sclerosis (MS)); and, (2) Secukinumab (a treatment of psoriasis, psoriatic arthritis, and ankylosing spondylitis (a type of spinal arthritis) that required an extended, more complicated clinical trial review period).[7] In both cases, the benefits of the additional period of exclusivity under the SPC provided the necessary time and resources for the follow-on clinical trials and research for the medicine’s safety and efficacy review.

Ultimately, SPCs benefit capital intensive pursuits, such as new drug discovery and development, by yielding new drugs or new applications for such drugs. More importantly, the patients who need these drugs clearly benefit. As Europe looks to an aging population and increasing health care costs, there is an ever growing need for effective cures for diseases such as HIV/AIDS, Alzheimer’s, multiple sclerosis (MS), cancers, and others requiring orphan drugs.[8] The SPC system is an important part of how the next generation of pioneering life-saving medicines will come into being.

b. Risk to the Public Health and Safety Through Counterfeit Medicines

 

Another key concern for stakeholders and the public at-large resulting from the current proposals is the inevitable increase of piracy and counterfeiting of these medicines. Global piracy and counterfeiting of medicines is big business. A 2016 study estimated that drug piracy costs Europe more than €10 billion each year, may result in the loss of up to 40,000 direct jobs, and may have a total direct and indirect negative impact of over €17 billion and 90,000 job losses.[9]

In addition to the significant financial impact, piracy and counterfeiting is a matter of public health and safety. It is often the case that the counterfeit medicines are manufactured without sufficient quality controls, or worse, with unsafe or dangerous substitute ingredients. The SPC Export Provision waiver heightens the risk that poor quality or unsafe counterfeits will be diverted across borders. Counterfeit drugs are a massive public health risk throughout Europe and big business for criminal enterprises that either ship fake, unsafe medicine or divert counterfeits across borders trying to profit on the product demand and price differentials among nations.

The SPC Export Provision waiver will ultimately increase medicines piracy and counterfeiting on many grounds, including making it difficult to distinguish between medicines produced legally in one country and other jurisdictions without adequate IP protection, making it difficult to prevent product diversion, and diminishing quality control due to infringement.

c. The European Economic Case: Jobs and Trade

 

Europe boasts a first-class research-based pharmaceutical industry which is estimated to have invested €31.5 billion in R&D in 2015 alone.[10] The leading European countries which contribute to this annual R&D investment include Germany, France, Italy, Spain, and the U.K. The research industry trade association, EFPIA, explains some of the economic benefits of the SPC regime:

The SPC is part of an incentives framework that helps to generate the 35 billion in investment in R&D in Europe by the research-based industry. . . . It helps to safeguard over 750,000 jobs directly employed by biopharmaceutical companies and critically facilitates, research into unmet medical needs, finding treatments and cures for patients across Europe and beyond.[11]

R&D Investment in Europe (2016). Germany, 19%. France, 15%. Italy, 4%. Spain, 3%. U.K., 16%. Rest of Europe, 43%.

European Pharmaceutical Industry: Recent Trends and Statistics[12]

Evaluating the economic factors around an industrial policy proposal—new manufactured units, SMEs, direct and indirect jobs—is a legitimate part of the policy debate. In the public health context, it is one of several factors for policy-makers. Both sides of the debate have offered competing economic analyses of the impact of the waiver.[13] However, the past is prologue, and Europe has 20-plus years of a positive economic experience with the SPC regime.

Today’s debate over the SPC waiver is reminiscent to biotechnology patentability debates in the 1980s that weakened intellectual property rights and drove innovative activity out of Europe. As a recent article explains, the legal choices made by Europe during that crucial era led to an irreparable loss of its technological global leadership in the biotech and health care arena:

Europe lost the competitive and commercial edge in biotechnology to the U.S., which had the foresight to protect a new and innovative industry. This new industry both revolutionized modern medical research and healthcare treatments and brought economic growth to the many U.S. cities in which these new companies sprouted and flourished.[14]

Likewise, additional commentators warn that an SPC waiver poses a threat to Europe’s global competiveness: “Europe is becoming an innovation backwater, easily outspent on R&D by peer nations such as the United States, Japan, South Korea and Australia, according to the 2017 European Innovation Scorecard.”[15] While there are allegations that the SPC waiver would be beneficial for European jobs and its economy, this has been debunked for their flawed methodology or extreme overstatement of the facts.[16]

Conclusion

The EC’s proposed SPC waiver provisions are a cure far worse than the disease. The policy debate around this subject boils down to whether Europe wants a strong or a weak health care system for its citizens. The purported goals advanced by special interest tactics certainly sound noble: more competition, lower prices. In fact, the opposite ignoble result is an inevitable undermining of the incentives for the discovery and development new medicines.

The EC should reconsider the proposed waiver for many reasons. The current SPC system offers a successful twenty-year-plus track record. It respects the balance between patients and the medicines innovation ecosystem. The waiver will directly stifle innovation in the guise of fostering competition, as well as dampen the future of innovative medicines and harm the European economy. One must conclude that the SPC waiver should be reconsidered for the sake of the public health and future well-being of the European citizenry.

[1] https://www.scientificamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b/.

[2] Erika Lietzan, The Drug Innovation Paradox, 83 Missouri Law Review 39 at 78-79 (2018) (describing the U.S. regime), available at https://ssrn.com/abstract=2948604.

[3] Id. at 59 (“Through the 1970s, as the modern new drug premarket paradigm took shape, scholars and policymakers became aware of diminishing effective patent life. Because inventors typically file active ingredient patent applications before clinical testing starts, these patents tend to issue before or during the trials. At the time, a patent lasted for seventeen years from issuance. Today, it generally lasts for twenty years from the filing of the patent application. In either case, a significant portion of the term of an active ingredient patent may lapse before FDA approves the marketing application. This shortens the period of time that the drug sponsor may exploit the invention in the market while enjoying patent rights.”).

[4] Id.

[5] Malwina Mejer, 25 years of SPC protection for medicinal products in Europe: Insights and challenges (May 2017), available at https://ec.europa.eu/info/publications/25-years-spc-protection-medicinal-products-europe-insights-and-challenges_en.

[6] The European Medicines Agency (EMA) explains that “[a] biosimilar is a biological medicine highly similar to another already approved biological medicine (the ‘reference medicine’). Biosimilars are approved according to the same standards of pharmaceutical quality, safety and efficacy that apply to all biological medicines. The European Medicines Agency (EMA) is responsible for evaluating the majority of applications to market biosimilars in the European Union (EU). Biological medicines offer treatment options for patients with chronic and often disabling conditions such as diabetes, autoimmune disease and cancers.” Available at https://www.ema.europa.eu/en/human-regulatory/overview/biosimilar-medicines-overview.

[7] Nathalie Moll, Betting on innovation, the case for the SPC, available at https://www.efpia.eu/news-events/the-efpia-view/blog-articles/betting-on-innovation-the-case-for-the-spc/.

[8] The European Medicines Agency (EMA) notes that “[a]bout 30 million people living in the European Union (EU) suffer from a rare disease. The [EMA] plays a central role in facilitating the development and authorization of medicines for rare diseases, which are termed ‘orphan medicines’ in the medical world.” Available at https://www.ema.europa.eu/en/human-regulatory/overview/orphan-designation.

[9] http://www.pharmexec.com/counterfeit-drugs-cost-europe-more-10-billion-year.

[10] https://www.ihealthcareanalyst.com/european-pharmaceutical-industry-recent-trends-statistics/.

[11] https://efpia.eu/news-events/the-efpia-view/statements-press-releases/efpia-statement-on-the-implementation-of-the-spc-manufacturing-waiver/.

[12] https://www.ihealthcareanalyst.com/european-pharmaceutical-industry-recent-trends-statistics/.

[13] http://ecipe.org/blog/ec-spc/; https://www.medicinesforeurope.com/newsroom/.

[14] Kevin Madigan & Adam Mossoff, Turning Gold Into Lead: How Patent Eligibility Doctrine is Undermining U.S. Leadership in Innovation, 24 Geo. Mason L. Rev. 939 (2017) (“We believe these are sensible provisions to avoid weakening Europe’s IP framework further, particularly in today’s context of intense global competition for pharmaceutical research and development investment.”), available https://ssrn.com/abstract=2943431.

[15] See, e.g., Philip Stevens, The European Commission’s pharmaceutical innovation incentives review is at risk of serious overreach, available at http://ecipe.org/blog/ec-spc/.

[16] Sussell et al, Reconsidering the economic impact of the EU manufacturing and export provisions, J. of Generic Medicines, 1-17. (citing arithmetic error and providing a counter factual analysis of the unit, job, SME, and economic benefits in a recent generic industry study praising the SPC waiver proposal).