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Patents: Is Stronger Better? [Rush Transcript; Federal News Service]

Speaker: Keith Maskus, Stanford Calderwood Professor of Economics, University of Colorado at Boulder
Presider: Douglas Holtz-Eakin, Director of the Maurice R. Greenberg Center for Geoeconomic Studies, Paul A. Volcker Chair in International Economics, Council on Foreign Relations
Introductory Speaker: Aimee Carter, Washington Director of Corporate Affairs, Council on Foreign Relations
November 28, 2006
Council on Foreign Relations

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AIMEE CARTER: I think we’ll go ahead and get started. I think I’ve met most of you all. I’m Aimee Carter, the Washington director of Corporate Affairs for the Council on Foreign Relations. I wanted to welcome you today. Thanks for coming in this morning.

And I wanted to introduce Doug Holtz-Eakin, who is the director of our Maurice Greenberg Center for Geoeconomic Studies.

Doug?

DOUGLAS HOLTZ-EAKIN: Thank you, Aimee, and welcome. I appreciate you taking the time to come this morning and have a little discussion about Mr. Maskus’ paper about patents and stronger better. I am the head of the geoeconomics center, so I get important jobs like reminding you of the rules. The rules are a little bit this morning in that this will be on the record. However, they will identical in other respects because we ask you to turn off all electronic devices that will beep or otherwise interrupt the conversation, and we promise to both start and end on time.

Let me just say a few words about the background for the paper. The geoeconomics center’s mandate is to look at those issues which lie at the intersection of both the economic policy and traditional council areas of foreign policy and strategic interests. There probably is nothing that is better suited for that then thinking about technologies and development of new technologies, the economic policy environment in which this—(off mike)—developed. It also fits nicely into what is called our program in The Future of American Competitiveness, and anyone who studies growth and development knows that innovation is at the heart of the ability to sell goods on open markets at a fair price.

So we are pleased that Professor Maskus will do this for us. He is the Stanford Calderwood—is that your official title?—professor Economics at the University of Colorado at Boulder. He’s also occasionally there. He spends the fall in Munich—(laughter)—and he spends the spring in Beijing. So we’re pleased he’s going to spend a morning in Washington—(laughter). I’ll hand it over to him for a couple minutes of remarks, and then, we’ll have a discussion.

Keith.

KEITH MASKUS: Okay, thanks, Doug. Well, let me thank everyone for spending their morning here. I really appreciate that. Twenty minutes will go by quickly, so I’ll try to summarize things the best I can. Just so you know, my own background for any of you—I’m sure most of you are not terribly familiar with what I write about—but I do write quite often about intellectual property as an international economic issue, trade issue, economic development issue. I have tried most of my career in this area to stay out of the policy realm as much as possible, trying to just be analytical about these things. But when the council asked me if I’d be willing to write something on the U.S. patent system and competitiveness, it seemed to be an opportunity to me to at least make a couple of points.

And so that’s how this report is organized—to try to make two essential points; one of which will be quite familiar to you since you all, I’m sure, are veterans of the patent reform laws or wars, I should say, here in Washington, the other perhaps not as familiar to you.

The first point, of course, is that there are increasing over long period difficulties in the efficiency, I would say, of the American patent system. The complaints are fairly well known. The report spends some time on this, but just to overview very quickly, much of this comes from philosophy that states that more patent protection is always better for innovation, and in some contexts that’s true, but in—it’s certainly not true in all contexts.

And so consequently, this philosophy that strengthening patent protection in the United States will always generate more innovation, I think, has gotten itself into a position where in important technologies it’s raising road blocks to additional technology. Now, where this problem arises, of course, would be in diluted standards in terms of what actually are novel and not obvious new inventions in certain technologies.

The expansion of patent eligibility to new technologies, which is not in itself a bad thing at all, but in conjunction with problems at the patent office in terms of weak funding and inability to investigate prior—(word inaudible)—art terribly well, it does generate a proliferation of patents with multiple claims, broad coverage, perhaps excessively broad coverage, and raises transaction costs and uncertainties about what the underlying boundaries of protection are within particular patents.

And then, combine that with a judicial presumption that the inventor’s rights should be protected very strongly within the courts—which in itself is not, again, a bad idea—but nevertheless, when you combine all of these things, it does generate quite a lot of leverage for patent holders to engage in certain problems that may be anti-competitive within the system, if nothing else raising litigation costs quite dramatically.

So the results, I think—and most economists who look at this, I think, are pretty much in agreement with this point—is a high-cost system that’s increasing out of balance, may not be generating much innovation even though it’s generating incentives for taking out more patents, and this is becoming in some ways an increasing tax on innovation. So as a matter of competitiveness, this becomes an issue in terms of the comparison of the American system to the rest of the world.

So partly what the report does as well is talk about the patent regimes and some other major competitors. I’ll come back to that in a moment.

So the second basic point is that there are problems also with the U.S. approach to international patent policy conceived of as trade policy. Now, there are certainly good reasons why the United States should be insisting on effective protection of intellectual property around the world, and ultimately what this conclusion—this report concludes is that there should be an emphasis shift, but nevertheless towards better enforcement of American rights in protecting technology abroad.

But the way that this has emerged as a trade policy issue comes about in a couple of ways. One is the high-level efforts at harmonization within WIPO, within TRIPS itself, have worked to some degree but not terribly well in terms of generating real harmonization of patent standards, even among the developed countries I think in large part because many of these developed economies—besides the fact that legal regimes are different—are a bit weary about adopting U.S.-style patent standards and regimes into their own systems. And then, there is this issue of the TRIPS-plus agenda that USTR emphasizes in its intellectual property chapters and free trade agreements with especially small and poor developing countries.

Again, I have always written in what—in my analysis of intellectual property rights and as a development issue that developing countries really are hampered by a weak intellectual property environment themselves, and I think I can give you lots of examples of this. For example, in China, in Vietnam, Indonesia, Egypt, Lebanon, places I’ve done work, that local companies are really restricted in their ability to build markets by facing problems with piracy and infringement in their own economies. That’s an issue in development economics that really does require a lot of work with the political economy of those countries to try to get them beyond this problem of thinking that intellectual property protection may be anti-development.

But the TRIPS-plus agenda to me is something beyond that in that it really does ask the developing countries, many of them rather poor, to establish standards within the—especially the patent regime in pharmaceuticals and biotechnology—that probably don’t give enough regard to development issues. And the result of that, I think, is predictable. It does generate a fair amount of resentment within many of these countries about the United States as an excessive demander in the IP area and raises opposition to the free trade agreements themselves. I’m not sure that the TRIPS-plus standards can really be effectively implemented and enforced in many of these countries, which means—in conjunction with the small markets that we’re talking about—the innovation benefits are not likely to be very large.

And then this insistence on these very strong restrictions or requirements within the patent area also, I think, have demonstrably made it more likely that the larger developing countries with which the United States would like to have some agreements—like Brazil, increasingly some of the countries in Asia—have become more wary about achieving bilateral agreements because of this issue. So I think there’s a cost that’s being paid in terms of trade policy and foreign relations policy.

So what the report then does is to go through arguments about these issues. And we don’t need to spend a lot of time on those, particularly the ones about the patent regime are, I think, well known to all of you—although there may be some perspective provided in the report that you haven’t thought much about. And then also on the international dimension, which I will spend a little bit more time on here in my remarks, I think.

The report ultimately, then, makes a series of recommendations about policy changes. And let me just briefly overview those, and we’ll come back to them in a couple of minutes.

One is to reform procedures at the U.S. Patent Office and some of the requirements and limitations on how patents can be opposed or prior art can be submitted prior to a grant being made, and things of that nature that I think, again, you’re familiar with. And also some reform in the judicial approaches to really strong inventor rights.

Next would be, at the international level, to be—to relax somewhat the emphasis on strict harmonization and reemphasize more of a coordinated approach towards patent standards among the developed countries, and then to significantly de-emphasize the TRIPS-plus agenda. Now I know that that’s pretty controversial, but it is, of course, also controversial within the developing world, and there’s a trade-off to be made there.

Now, all of that suggests disarming, if you will, if that’s the right word, the American approach to trade policy and intellectual property. And clearly, that will cause problems among those who would like to see strong global protection. So I think, probably, it makes sense to both compensate the intellectual property holders, but also as a matter of simple trade policy, to do a better job of trying to hold the major developing countries more accountable for the obligations they’ve made in terms of implementing and enforcing the standards for patents in particular, but also the other forms of intellectual property.

China, of course, comes up most readily here. China has engaged in an extensive form of patent law reform, and now has patent systems that are fully consistent with TRIPS—maybe at the margin that’s debatable, but largely consistent with TRIPS—and in some ways even more rigorous than TRIPS. But nevertheless, as you know, the inability of international companies to enforce their patent rights—in China in particular, but in other countries as well—has raised real problems about the more rapid loss of technology than one might have guessed would happen otherwise. And so consequently, we would argue—or I would argue in this paper—I do argue in this paper for a coordinated, multilateral effort to try to hold China and possibly other developing countries, middle-income developing countries, more responsible for, or more accountable for, their inability or unwillingness to enforce their intellectual property obligations. And how would that happen? Well, I’ll talk about that a little bit later, but it does come down ultimately to a coordinated multilateral WTO complaint about this issue.

Well, since I have only about 10-or-so minutes, I guess—is that right—let me try to go through a few of the arguments in this paper. And I’ll try to organize these comments around three main claims.

One, again this is not new to anyone here, there is, I think, a pretty urgent need for patent reform in the United States. Now of course there are a number of legislative proposals out there, two major ones—one in the House, one in the Senate—which are talked about a bit in the report. I think those legislative proposals would go a long way towards making the American system more flexible and more based on rewarding real innovation, rather than providing incentives for litigation like the current system does. But I don’t think they go far enough, so I talk about what else might be done in this context.

But much of that part of the report discusses where these problems arise in the American patent system when altogether generating exploding litigation costs. We all know about the BlackBerry case. That’s just sort of the tip of the iceberg in electronic technologies. We all know about the crustless peanut butter sandwich patent case, which I think is also the tip of the iceberg reflecting—

MR. HOLTZ-EAKIN : We should have served those! (Laughter.)

MASKUS:—reflecting a real dilution of patent standards and examination procedures within the patent office. So I think this is an increasing problem.

So also is there an increasing problem with what we call in the literature “patent thickets,” in which sometimes-conflicting multiple claims on complex technologies generate real transactions costs—within biotechnology, within information technology, semiconductors—to try to be able to do your research.

Now, there is a solution, of course, in this problem, especially: this has been worked out in semiconductors and information technology, patent pools, patent licensing agreements, which in many ways are reasonably efficient. But they do raise problems. For one, it’s not hard to demonstrate that the structure of the patent system in the United States generates within those kinds of sequential, dynamic, inter-related technologies, firms have an incentive to engage in a patent race—an “arms race,” if you will where they sort of generate more patents than really they would otherwise. And all the firms would be better off if they took out fewer. But the fact is, that means that the larger companies, who can generate really large patent portfolios, both get more rents from their patents—which is in itself not a bad thing—and can trade their patents with other large companies. But it does ultimately serve as an entry barrier for smaller companies to those industries.

And I think it is at least a worrisome issue as far as innovation is concerned. And, of course, the BlackBerry case demonstrates—it’s just one case, but there are others. The problem may be that firms could prefer not to commercialize their patents, and try to earn money through litigation against firms that invent independently or might even have been prior users of a technology. And in the United States, the legal ability to do that is bolstered by judicial presumptionability of patents, the inability to oppose patents in an effective way and so on.

So I think, next point, this means that the U.S. system is increasingly costly for innovation relative to other major competitor nations. Now, the report would have been far too long had we gone through several of these countries. And there’s a very brief description of the systems in the European Union, Canada and China to try to make this point. And rather than go through details, I’ll just talk, as I say, briefly about the European Union, where this is, I think, probably the only area of business regulation I can think of—major area of business regulation I can think of where economists would argue that the EU system is more efficient than the American system in terms of encouraging innovation and dynamic competition.

What is different there is a somewhat warier approach to what actually can be patented, particularly in the area of business methods patents. And I don’t argue with this report that per se software and business methods patents shouldn’t exist. I think there are reasons why you might want to protect those technologies. But the way the Americans do it, with the patent examination procedures and the strong embedded inventors’ rights, does raise more problems than I think it generates—it solves. Within the European Union, a warier approach to those kinds of patents, and of course, better procedures or more effective procedures for pre-grant prior art submission and post-grant opposition.

The report also talks a little bit about China. As I said a few minutes ago, China basically has a set of laws that are TRIPS consistent. These laws do provide the Chinese government with considerably more flexibility than the American regime does in terms of trying to limit market power in the Chinese market. Not necessarily a good thing for them to be doing this, but the real problem in China, I think, is not laws. I think most international companies, if the laws were enforced in China, if the patent laws were enforced in China effectively, would find them perfectly reasonable and transparent. But the real problem is that these laws just aren’t very well enforced or they’re enforced in a sort of discriminatory way or selective way that can be disadvantageous for technology providers.

Despite that, lots of technology piles into China through trade, through investment, through licensing agreements. And to date, or until recently, much of that has been sort of second-tier, mature technologies rather than front-tier technologies. As China improves its enforcement, if it improves its enforcement, presumably there would be more of the front-tier technology being transferred. And that’s an issue, I think, but nevertheless, American companies and European countries and Japanese companies surely would gain from better effort to enforce their rights within China.

Now, the U.S. response, it seems to me, the strategic trade policy response to having its own system becoming increasingly rigid, if that’s the word, and also having the position of being a very major intellectual property exporter, has been to try at the international level to establish a high-level global harmonization agenda, first through patent standards and procedures within WIPO or elsewhere. That hasn’t worked very well, as I’ve said, so far. There are some good reasons for the major developed countries, the patent offices in those countries to coordinate on patent applications and grants in order to try to reduce transactions costs, but strict harmonization is not likely to happen, I think.

And then, of course, secondly, the United States has been shifting away from the WTO approach, the TRIPS approach, to these bilateral FTAs and TRIPS-plus requirements, which I’ve already discussed a little bit. These elements can be very controversial in the countries that negotiate the agreements. It held up the Colombia agreement, or example, until something could be done within Colombia to try to minimize the opposition from the Health minister. I believe it can be argued that Brazil and a few other countries have said they’re not interested in a free-trade agreement or an FTAA in part—in large part because of these kinds of issues. So this means there are broader concerns about what the ultimate objectives and effects of trade policy in the intellectual property are with bilateral free trade agreements.

Again, I don’t argue in the report that developing countries should just ignore their intellectual property obligations. Far from it. And I think many of them are harming themselves by not having laws and especially enforcing laws that would be beneficial for their own development prospects. But this emphasis of trade policy on TRIPS-plus, I think, isn’t necessarily the right kind of approach.

So, suggested reforms and then I’ll stop. There is, of course, the House bill and the Senate bill that would make changes in patent rules in the United States and procedures. But I think these reforms should include—now of course, I’m a university professor, an academic, far removed from the kinds of day-to-day problems that would arise in trying to get these sorts of reforms through, so I’ll just tell you what makes sense to me as an economist, recognizing that there are all kinds of questions that would arise here.

One is some kind of restatement of the need for more rigorous standards of novelty and non-obviousness in the Patent Office, which could be done through a congressional statement, I would think, shifting, as everybody talks about, to a “first to file” system, an 18-month publication system for all patent applications.

Permitting third parties to submit prior art, without argumentation but just to submit the prior art, prior to a grant being made. So between the time of publication of the grant application—sorry, publication of the application and the grant being made, to establish a robust post-grant opposition system within 12 months of the grant.

More funding for the Patent Office, especially in order to have a reexamination procedure by second and independent examiners in certain key technologies, especially involving software and business methods patents.

To significantly reduce any presumption that preliminary injunctions should be issued in patent infringement cases, and replace that with a standard that considers all relevant business factors and requires some standard of irreparable harm to the patentee that can’t be compensated monetarily.

To limit the grounds for finding willful infringement. I think you’re all familiar with the problems that willful infringement raises in the American litigation system. To consider initiating a legitimate prior-use defense, with certain safeguards on that.

And then this is something new. I haven’t seen this from anybody else, but this actually happens within the EPO. And talking to people there, they seem to think it works pretty well. To consider some kind of competition advocacy office at the PTO, kind of like you have in the Federal Trade Commission and the Justice Department. That basically means having a small staff of economists who would think about whether particular patents should be issued on legal grounds, but whether they should be at least flagged in some way for potential impacts on competition.

International reforms. Some attempt for mutual coordination and recognition of patents across the developed countries to lower transactions cost. That’s essentially what is going on at WIPO now, I think, since the SPLT really hasn’t worked for the global community. Some limited convergence in patent standards among countries at similar development levels—I discuss this in the report a little bit. And then to de-emphasize TRIPS-plus in the free trade agreements in poor countries in favor of a more—a broader emphasis on having the TRIPS standards in place, but better enforcement.

So finally, how to get a consensus on this. Again, this is an economist speaking from several thousand miles away, so I don’t know how sensible this is going to work—will be. But to get pharmaceutical industries, biotechnology industries, the chemical industries, and so on, at least partly on board here, they clearly are not interested, I’m sure—you tell me—on de-emphasizing the TRIPS-plus approach. Something needs to be done to improve their situation, and more generally for IPX orders from the United States. So I suggest a focus on improving enforcement.

A good reason for doing that is just within developing countries themselves, there are political economy reasons why those countries do not invest a lot of resources in enforcement, and trying to get them beyond the political economy arguments against enforcement is an important and interesting thing that one can try to do.

So what I propose is basically an enforcement emphasis that’s based on two principles—one a carrot and one a stick, if you will. The carrot is to invest quite a bit more among the OECD countries to expand technical and financial assistance for patent reforms, and especially intellectual property enforcement in the major developing countries. In fact, that could be paid for with a small fee on international patent applications and trademark applications at WIPO. WIPO is sort of both interested and not interested in this approach. They like the idea of having higher fees that they can get their hands on, but the idea is not to let them get their hands on these fees but, rather, to funnel them in other ways. And secondly, to recognize that because even that kind of assistance will not make a large difference, except for over some period of time, there may need to be an external threat. So I argue in the paper for holding major developing countries more responsible for their unwillingness to enforce intellectual property rights.

And the obvious case here is China, which has achieved a position that makes it a substantial competitor in technological terms. It is now becoming a large exporter of technology and intellectual property. But nevertheless, its companies are still operating in an environment where it’s quite easy to expropriate—or misappropriate the technological information provided to it by international companies. And even though the government, the federal government, the central government in China has made a number of attempts to try to change the laws and some sporadic enforcement efforts, the system is still pretty dismal, it seems to me.

So how would you go about this? I argue in the paper for a coordinated WTO complaint involving the United States, the European Union and Japan, that would try to just figure out whether the TRIPS language on the requirements to enforce intellectual property rights actually can be litigated within the WTO. I think they can be. I think that the statement is fairly clear on this. And the reason why a coordinated WTO case makes sense to me is, well, for one, it shares the costs of the case. It raises the leverage that the complaining countries would have with the recipient country. And maybe most importantly in this context, protects the United States from being seen as a solitary actor.

So let me just finish—I think I’ve gone too long—but just stating that, you know, I was asked by the council to try and write something about the IP system and innovative problems that the United States may be facing. I don’t mean to leave you with the presumption that I think the system is entirely broken. I think there are changes that can be made in the patent system that would make it more supportive of innovation and competitiveness. But the United States remains a major source of innovation, and that’s something that we need to support and to nurture.

But I do think the sort of international trade policy emphasis on prior art law-making rather than holding people responsible for their obligations has not really been very successful.

Okay, I’ll stop with that.

HOLTZ-EAKIN: Well thank you. I think from those remarks you can see the nature of accomplishment in this CSR. We ask people to take an impossibly large topic—(laughter)—condense it to 6,500 words, present it to a general audience, and say something striking at the same time, and then we ask them to do it on a heroic timetable.

So we really appreciate it.

And I’d like to open it up for any questions people might have.

Questions? Comments?

QUESTIONER STEVE HOFMAN: Well, my name is Steve Hofman, and I’m a council member, but I also—truth in advertising—advise a company called Walker Digital, which is in the business method patent and other patent development areas. And we’ve been living with a second set of eyes on business method patents for some time now. So the recommendation to do that I would suggest is one that the patent office has implemented some time ago.

I think that many of your recommendations make a lot of sense, particularly with regard to the—improving the way in which the patent office can do its business. And we’ve been strong supporters of many of these in the past.

But I would like you to speak, if you could, a little bit to the notion of what has been the historical balance in the patent system. Economists argue all the time for efficiencies, and I think that we wouldn’t have a constitutional representative democracy if efficiency were the only standard that would be imposed upon us. Sometimes inefficiencies are rather good things. And I would argue that in the area of patents, particularly given the imbalance that exists between resources between, say, large companies and various innovators, and this has historically been the case. I was mentioning to Peter Harter earlier that I just finished reading a book by a friend of mine, Evan Schwartz, about the battle in the area of television innovation between Sarnoff and Farnsworth in the 1920s, and many of the same issues that we’re hearing debated today were very fully at the center of that particular debate.

But this issue of the balance I think is a significant one and a critical one, and I don’t think it’s just about efficiency because, you know, the definition of efficiency also is in the eye of the beholder; it’s where you sit. If you’re sitting at some—you know, one of your recommendations has to do with the willful infringement issue. And that’s been a pretty big deterrent to the potential for bad behavior, and that’s an element in the balance that I think would alter the balance significantly.

So anyway, that’s a long comment. I’d just ask you to speak to this question of the balance and how you view it. I mean, do you really think it’s gotten so out of whack? Is the system so broken that we need to make these kinds of significant changes?

MASKUS: Well, that’s what I wrote, so I do think that. (Laughter.) I’m aware—or I’m sensitive to the fact that much of the opposition to these kinds of reforms comes from small inventors, which I guess is what you’re really thinking about in terms of this balance question.

QUESTIONER HOFMAN: Yes.

MASKUS: Because it is the case that large companies have (no ?) resources of all kinds to try to (revamp the ?) system, and small companies do.

The surprising thing to economists who look at this, about that particular issue is that the evidence, such as it is, suggests that the system is relatively more costly as it exists now for representing the interests of small companies than large companies. And so I think—I mean, I’m not the person who does these kinds of studies. People like Josh Lerner and others who really do innovation studies would suggest that the kinds of imbalance I have been talking about in the system actually have had the effect of deterring innovation and real registration of new technologies by small companies that have entered new markets.

Plus, the litigation costs can be so substantial that it simply can’t be absorbed by smaller companies. And so I think I would argue that many of the changes that are advocated here and by others who look at this—that kind of question would actually be better for new inventors and small inventors than the system we have as it exists now.

The willful infringement thing—I wish I could tell you that there is systematic, strong evidence either way on this. I mean, mostly, this point about willful infringement is made on the basis of these stories you hear that say that, you know—universities, for example, they’re now telling—some universities are telling their scientists, don’t be reading patent applications for exactly this reason. I mean, you hear the same thing about companies as well.

And so, as it exists now, that particular standard seems to work against rapid diffusion of new information rather than in favor of it. So that’s the nature of this imbalance I’m worried about. But I can understand that there are certainly differences of opinion.

MR. : Well, I would just suggest that there is no shortage of capital to support innovation in small organizations and to take on the costs of litigation, if that’s part of the deal. But I also, in my own experience, have had more conversations than I care to recall in which, you know, executives or officers in big companies basically look you in the eye and say, you know, write your check and sue me. And that’s their position. And that’s—

HOLTZ-EAKIN (?) MASKUS: Is this large companies to the smaller ones or the other way around?

MR. HOFMAN : Large companies to—no, large companies to the small companies. You know, it’s—that’s their view.

HOLTZ-EAKIN (?) MASKUS: So that’s an argument in favor of keeping the system as it is now or not?

MR. HOFMAN : Well, I think it’s an argument that—I mean, I think that the argument is that we have a balance in the system. And there are inefficiencies, but we are an innovative society, and before we make major changes in that balance, I think that we need to be a lot more careful about which directions we’re going in.

PETER HARTER: Well, I’ll add to that as a person involved in patent reform in the past two years in the U.S. and observing things overseas, especially in China. Peter Harter, Intellectual Ventures, and my company, based in Seattle, Washington, does two things. We invest in an invention. We acquire patents from universities, government labs, defunct companies, independent vendors, all comers. And we also invent. We have a laboratory with a growing number of scientists both internally and externally. I dare say the invention side of the business is growing far more than the acquisition side. I have to say, acquisition is not a good business. A lot of people are in that. So think of us like a Qualcomm or a (university ?) multitransfer office or even IBM, for example, of making inventions and then license them out—LASIK Eye Surgery—who here has LASIK Eye Surgery? Anyone?

MR. : (Laughs.) No.

HARTER: It’s amazing. Usually—LASIK Eye Surgery—that was an invention of IBM Labs. They obviously are not in the eye surgery business, but they licensed it out, and it’s creating great benefits. So we’re all for patents as an asset class to be licensed, and others can make something good of those patents.

I would say in terms of patent reform legislation the past two years, it is a narrow set of oligarchs in high tech. And I say this as someone who spent 10 years in Silicon Valley working for companies like Netscape and (the boom ?), and so my view is much longer than the company I currently work for. So you see large, dominant companies like a SISCO, an Oracle or a Dell, Hewlett-Packard and a few financial services firms which seem to be wavering, and then a collection of academics who were funded by a narrow set of foundations and individuals—(inaudible)—and they have cast a spell over the—(inaudible)—to say the system’s broken, to say that too strong, to say all these nasty things, when in fact you see the intangible economy of our country—and this is something I was surprised I didn’t see in your paper as I quickly scanned it during your remarks—that there’s no mention of the growth in revenue to our economy of a surplus in patent royalties.

China refers to this problem as the Qualcomm tax. They have to pay patent royalties to Qualcomm for the very valuable high technology chip technologies—(inaudible). And I’m sure China would love to have their own standard and have their own product and export that product around the world and have us pay China patent royalties, and they are probably going to do that, which is great. Patent royalties are a good thing for any country. But we should account for the positive side of how the patent systems work.

There are problems, without a doubt. And I think a lot of inventors who talk—a lot of prominent inventors who have made lots of money licensing their patents and (fortunately or unfortunately ?) have had to litigate—I’ve talked to these individuals, and they are underscored, independent vendors. They are iconoclast in their opinions. They think—some of them—(inaudible)—some think that there are too many patent—(inaudible)—that they would agree with some of the points of your paper. I, frankly, don’t have an opinion as to what is too many, what are too few. It’s a Goldilocks kind of situation—is it just right? I think the point in your paper about China is a good point. (Inaudible)—there’s a lot of groundswell in Congress. A recent report from Mike Wessel, a commissioner of the U.S.-China Security and Economic Review Commission—(this enters ?) in the press release—talked about 40 plus recommendations of Congress; the commissioners had a top 10 list in their press release, and the number one recommendation was stronger IP enforcement. So you hit on a great theme there. It certainly will be a hot topic in the next two years (coming ?) up to the ‘08 elections.

A few other comments on the paper—I’m not sure—have you published this yet?

MASKUS: Yes.

HARTER: You may need to print a correction because in the first paragraph there’s a mistake on page 5. You say NPT; it’s actually NTP, and that mistake is three times in the first paragraph. I didn’t see a further recurrence of that misspelling of the name.

MR. HOLTZ-EAKIN : That blame lies with me.

HARTER: But I have no involvement in that company. I have followed that case because the case has kind of shaped patent reform—(inaudible)—case. What is often not talked about here is NTP and the inventor, Tom Campana, of Illinois. He ran a company, operated a push e-mail system on a paging network. Remember pagers in the ‘80s? Well, that was pretty big business at the time, and he lost the paging network in the late ‘80s. Then, Telecom and AT&T wanted to buy it. AT&T had a laptop computer called the Safari. They wanted a license of push e-mail software onto the Safari computer, and they demonstrated his push e-mail technology on their wireless laptop at—(word inaudible)—in Las Vegas, I believe, in October 1990, years before RIM ever was a company.

And the fact that NTP came and went because of their competitive issues—they were too early or there was no market for push e-mail—this is pre-Internet—who knows. But you see lots of companies—and Mark is going to shout at me across the table here—but a lot of companies compete and fail but still assert their patents, and the lawsuit from a company that rarely ever sues, I think, is Amazon, is over there—old company, Prodigy, which was funded by Sears, CBS and IBM—an e-commerce mall akin to Amazon. Yet this was in the ‘80s, on Bulletin Board System network, not Internet network. They tried to convert to Internet. (I’m a big geek ?), remember these things. And they tried to negotiate a patent license (because ?) Amazon’s—(inaudible)—already invented in the areas of business methods and software. And guess where I end up litigating? Eastern District of Texas.

So I think it’d be useful in the paper to talk about both sides, at least in these (exceptional ?) cases. The other case you mentioned was—a lot of people mentioned the Smuckers thing. We looked into that and testified in the Senate that—turns out that patent was worth tens of millions of dollars given the large nature of school lunch programs, and the PTO system actually worked. They invalidated the patent through the examination. The other controversial patent of the swingset, the father who filed for the patent, when he was pushed, he never filed for the patent again and this went away. He just threw it away, basically. So the system actually takes care of these celebrity patents.

I think patent reform suffers from the reliance on a diet of anecdotes and not enough empirical data.

In your oral remarks, more incentives, but no new innovations, and two, real barriers to innovation. We need to have empirical data, not anecdotes, to back up those claims. I think Steve Hofman’s points and others will say that litigation is expensive, and we don’t litigate. We’ve been sued, haven’t sued. Maybe in time it’ll occur to us, but I think we can talk about the positive side of patents in America because patent reform needs to be balanced in that regard. It’s too often focused on the negatives. Because if people wonder why those big companies are trying to change the system further to their advantage when in fact big companies have the upper hand in litigation—they can afford lawyers and fight things for 10 years—the small business, the small inventor, they can’t afford that.

So I think you made many good points in your report, but there are some things here that we should engage in dialogues down the road.

MR. MASKUS : Well, all of those are very good points, and I wish there were better and more systematic empirical evidence. And there are some studies about things like litigation costs that are—that do, I think, establish the rather dramatic increase in the number of patent litigation lawsuits, the cost of those suits per case.

MR. : They track the rise in patents granted. Over the past two years, they see a slight decrease, but there’s a lot of debate as to whether it’s a trend or just a cycle.

MR. : Yeah, and there are also some studies about whether this is really disadvantageous to small companies versus large companies, and I think the answer to that is it just depends on the circumstances.

MR. : And to be fair to that, the Small Business Administration Office of Advocacy has had reports saying that some 40-44 percent patents go to small businesses, but when you pry into that data—that’s why—(inaudible)—is really important in this debate—we don’t know if that’s really all independent vendors, small businesses, universities, what that 44 percent really represents, and what we have is now roughly four to five years out of date, so there needs to be a new study on small business innovation.

HOLTZ-EAKIN: Marcus.

MARCUS WILLIAMS (IBM Corporation): Mark Williams, IBM. I have a question about the—what you described as the TRIPS-plus agenda and bilaterals. You know, with the collapse of the Doha Round, I think most—my understanding of U.S. trade policy is that if there is going to be any liberalization it’s going to be through the bilateral agreements. You indicated that Brazil—if I understood you right—that Brazil is not interested in a bilateral in part or large part because of the kind of measures we seek to negotiate on IP rights.

Can you expand on that particular point, and why do you say that? And what are the—just expand on—more on the implications of that particular point.

MASKUS: Well, I’m sure that Brazil’s wariness about a free trade with the Americas or a more specific one the United States reflects many things, not just this, but in the area TRIPS-plus part of the requirements or the expectations that trade policy for the United States has are things that would be quite different from the way the Brazilians have organized their own public health system. Now, for better or worse, you can think about the Brazilian public health system and whether it sort of overbalances things in favor of patient rights and low-cost drugs relative to innovation in drugs. But that’s their health policy system.

So they have quite rigorous policies on compulsory licensing subject to the TRIPS limitations on that. They permit parallel importation, and the period of time—again, I’m not that familiar where we all with these things—but the period of time within which confidential test data (is protected ?), do you know what it is in Brazil? It’s not long, I’m sure, but—

MR. : It’s under five years, I think.

MASKUS: So these are things that the United States would certainly negotiate on quite strongly with Brazil. Now, Brazil would have a quite a bit more leverage in a negotiation with the United States than, say, Ecuador or Colombia, but nevertheless, I think those health policies are so ingrained in the Brazilian policy and society that they would not be willing to undertake these kinds of obligations. Maybe you have a different view of this.

So I think the point I’m making here—and this comes from talking to a couple of Brazilian policymakers and reading a bit from the Brazilian press—is that as long as their expectation is that there would be a similar intellectual property chapter in any free trade agreement with the Americas, this would significantly reduce their interest in such an agreement.

And tell me if I’m wrong on this, because I very well might be wrong on this point, but I think the Brazilians, unlike maybe Peru, if they were, in fact, to negotiate an agreement that said—a free trade agreement with the United States that said that as an obligation within the free trade agreement, countries will not permit parallel importation or reimportation of prescription drugs, brand-name, patented drugs, then the Brazilians, unlike Ecuador and Peru, might actually hold the United States to that obligation. So that if the United States Congress decided that what it wanted to do was to permit reimportation, it would be restrained from doing so under the terms of the—is that right?

MR. : Probably so.

MASKUS: That might actually be true with already the agreements we have, although it’s hard for me to imagine Peru actually insisting on that. Instead, I think they would renegotiate on their own ability to reimport drugs. But in the case of a large agreement with Brazil or China or somebody like that, that could very well be an issue.

HARTER: I’d be remiss in pointing out that—we talked a lot about the great importance of obviousness. In a few hours, the Supreme Court will hear the oral argument in the obviousness case of KSR versus Teleflex, KSR being an auto parts manufacturer in Canada, and Teleflex an auto parts manufacturer in Pennsylvania. And that’s at 11 a.m. I’m going, after this morning.

MR. : What is the nature of the case?

MR. HARTER : A lot of companies filed on many sides of the issue. IBM filed neutrally. We filed—(inaudible)—side with the inventor, Teleflex, who built a gas pedal that used electronic sensors to move the pedal up and out for drivers who are shorter or just customized the—it’s an incremental invasion.

I think the difficulty about the case is a lot of inventors and patenters feel that the invention at stake isn’t that great, so how do you cozy up to an invention? But the issue is a very important one; what is the standard to determine non-obviousness? When does something not merit a patent, and especially when you combine two things like prior art, gas pedals around for a long time, and you combine them? And there’s some new innovation here, but how big of a patent should it be?

So the narrow issue today before the court is, has the appeals court court called the Federal Circuit, which is about 25 years old, has it gone off and created a whole new standard of obviousness which deviates from Supreme Court precedent and the statute created by Congress. We’re seeing a lot of patent cases being raised on the issue has this Federal Circuit gone crazy, like the 9 th Circuit in California, have they gone off the reservation. So a lot of this is institutional today, not so much the substantive patent law.

But we’ll see what happens. I suspect the Supreme Court will come down with some kind of ruling which will tighten the standard, as it did in the eBay case. They’ll tell the federal circuit, not so fast.

MR. : That’s certainly (what they do quite a bit ?).

MASKUS: Yeah.

MR. : Keith, I think your proposal about having a greater enforcement is one that most people involved in international trade and have concerns about intellectual property rights protection have embraced. I think perhaps through the benefit of being several thousand miles away from Washington, you can come up with that as a solution, but the practical matter here in Washington is, though, that USTR has been struggling for some time now to come up with THE winnable case in China that would validate the position that the USG has taken and U.S. industries have taken about the importance of patent and intellectual property rights protection in China.

And I think that trying to get a case that would possibly be embraced by the U.S., the EU and Japan will be the thing that—(inaudible)—that case even more difficult. We’ve been on the cusp of 301 cases—or WTO cases several times now, and the USTR, I think wisely, has backed off because I’m not sure that the facts would have allowed us to win the case, and I think no one wants a case that’s going to lose the first time through. I think that would set an awful precedent. So your solution there is one that might be very, very difficult to achieve, to get the three major trading partners to come together.

MASKUS: The problem is that the TRIPS law on this—or TRIPS language on this is too vague? Or—

QUESTIONER: Well, I would say—you know, I’m here representing Abbott Laboratories, but I’ve been involved in this as a government negotiator as well in this process and trying to get companies to come forward. I mean, you referred—you know, you thought the U.S. would have the benefit of having the Europeans and the Japanese alongside of us as we went forward with the case. But the case still has to be on the basis of some industry or some firm’s grievance. And getting a company to come forward and take the risk of what that retaliation potentially could mean for them is a considerable undertaking, and most companies are not willing to risk that, even though the losses might be somewhat considerable in China. But the potential retaliation—or belief that there would be retaliation is a sufficient barrier that, so far, no one’s been wont to cross the line.

MASKUS (?): Most of this has talked about a broad non-enforcement case which is very difficult to win because you have to show a clear pattern, and that requires a lot more evidence than companies have been known to put out there.

QUESTIONER: But I like, you know, the emphasis on the counterfeiting and enforcement. But I think structuring the case around the three major trading partners in the WTO might be more theoretical than something that can be practically achieved.

QUESTIONER TOMOKI SAWAI: My name is Tomoki Sawai. I’m from Japan Patent Office. You mentioned Patent Reform Act. We are very interested in the patent discussion of the Patent Reform Act at the Congress, and how the influence of the election, Democrats’ victory.

MASKUS: Probably there are people in this room who know this much better than I! (Laughter.)

My inclination is to think that because Senator Leahy will be now once again the chairman of the Senate Judiciary Committee, and he is one of the sponsors of the Senate bill, it’s become more likely that it will at least be reported out a bill onto the floor of the Senate and go from there.

What can I say about the president? I mean, if it gets through Congress—

MR. : He’ll sign.

MASKUS: He will sign, I suspect?

MR. : I think so.

MASKUS: That would be my guess, if only because he’s only vetoed one bill in six years!

But no. I think that surely there are people within his administration who recognize that there are some gains to be had here.

MR. HOFMAN : I wouldn’t assume that it gets signed, by the way. The instruction has always been from the Republican leadership that no bill can come to the floor unless there’s a consensus in industry. And I think that view is shared by the White House. And so if there remains a lack of consensus, even if the Democrats decide to bring the bill, for whatever set of reasons they have, I’m not convinced that the administration would be supportive. At the end of the day there has to be a consensus, and that’s always been the barrier.

WESSEL: I think there’s also a fairly major conflict that will come in this coming Congress, trade—I should point out not only did I serve on the U.S.-China Commission, but I was general counsel for Gephardt for 21 years and did all of his trade policy, so I have some experience in these trade battles.

This was the first election where trade really penetrated in a number of congressional elections with up to 25 races where trade ads were run. And there is tremendous lack of confidence in our trade policies, intellectual property being an important one where the lack of enforcement in China is viewed as a major competitive issue for the outsourcing and transference of production to China. And there is a perceived split within the technology industry between the very large companies, many of whom through use of global sourcing and other issues have moved some production to China, whether to serve the market or use it as a platform, versus smaller companies, many of whom are viewed as innovating here in our market and creating jobs here. So there is a looming split, I think, that will—that has not been as apparent in the patent/intellectual property debate that’s going to be this broader competitiveness issue. And I think that split is going to be much more apparent in the coming Congress.

MR. HARTER : High tech is not monolithic on patent reform. Those Oracles and Dells and HPs are on one side, but the Qualcomms and Texas Instruments and other high-tech manufacturing companies are clearly on the patent-owner side and the inventor side, small-business side. So I think we’re going to see some different camps break out in the new Congress.

HOLTZ-EAKIN: Time has expired, so I want to give Keith the last word, and then we’ll call it a close.

MASKUS: Well thank you for all of these comments. I’ll do what I can to try to take account of them, if there’s an opportunity. I’m not sure about that.

I really do appreciate all of this. I think what it shows is just how difficult this issue really is. And I think that the council’s interest—tell me if I’m wrong about this—is in trying to put out one statement about these problems, and at least one “expert’s” views of how they might be resolved or at least move forward. So in that context, I’m happy enough with the report. But nevertheless, I realize that this is just one element of the debate and it’s not going to resolve the issue, I’m sure of that.

MR. : (Off mike)—undertaking. Thank you.

HOLTZ-EAKIN: Oh, we thank you and—(applause). We’re adjourned.

 

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