(Note: This was a term paper I wrote for an MBA class in 2012. I recently ran across it in my files and thought it would be a good addition to my blog. Enjoy!)
An Overview of the U.S. Patent System
David M. H. Workman
Introduction
A Patent is a
form of legal protection for an invention, allowing the patent holder to have
exclusive rights to make, use, or sell the invention for a specific period of
time (typically either 14 or 20 years in the U.S., depending on the type of
patent).
To secure a
patent, a Patent Application is
submitted to the U.S. Patent and Trademark Office (USPTO); the application
consists of two major elements: a description
of the invention, and certain claims (which
define the scope of protections desired under the patent application). The USPTO may grant the patent for the
invention, but allow or disallow each of the claims individually. “Broad”
claims mean that the applicant is asking for the invention to be protected in a
wide range of uses, and are more likely to be rejected (and if allowed, are
more likely to be challenged by competitors). “Narrow” claims mean that the
invention has very focused and well defined commercial applications, which are
less likely to be challenged.
For a patent
application to be approved, it must meet a certain bar for (1) Novelty, (2)
Non-Obviousness, and (3) either Utility, Distinctiveness, or Ornamentality
(depending on whether it is a “Utility”, “Plant”, or “Design” patent,
respectively). The USPTO reviews the patent application to ensure that the
patent, and each of the claims, meets the bar for each criterion.
During the
application process, the patent may be rejected if “prior art” (i.e. any
published diagrams or descriptions which show that the invention is not
original) is found by the USPTO, or if any aspect of the invention was publicly
disclosed by the inventor before the filing date. Even after the patent has
been granted, others may challenge the validity of the patent (or any of the individual
claims) if prior art is presented which is proven to have been publicly available
before the application date.
Patents cover
an amazingly diverse range of ideas – from describing the optimal radius of the
bend in a wire paper clip, to what is arguably the most important invention of
our age: the development of the silicon bipolar transistor (Shockley, Bardeen,
and Brattain, 1947).
Ownership, Transfer of Ownership, and Licensing of Patents
Patents are
classified as “personal property” which may be sold, mortgaged, and even passed
to the heirs of a deceased inventor. Transfer of ownership is accomplished by
an “assignment” to another party, which gives the new owner all the rights and
protections as if they had applied for the patent themselves; patent holders
can also retain ownership but license certain “rights” to the patent on either an
exclusive or non-exclusive basis.
Unlike the
process in many other countries, patents in the U.S. are only granted to the
individual inventors, not to corporate entities. However, many U.S. employment agreements
stipulate that the company will own any inventions made by an employee in the
normal course of work; because of this, the initial patent application is often
filed with an automatic assignment to the employer. As such, there is little
functional difference between the U.S. and other countries that allow a
corporation to apply for a patent directly.
Once a patent
is issued, assignment is a simple process of transferring title from one owner
to another. In addition to granting
patents, the USPTO also acts as a title registry for recording patent
assignments.
Patent
licensing, on the other hand, does not require registration and can take many
forms. The “Licensor” (owner) of a patent will grant certain rights to the
“Licensee” in exchange for payment or other consideration. Payment structures
range from lump sum payments to “per unit” arrangements (where the licensee
pays a royalty based on the number of units sold). Instead of cash payments, patents
are frequently licensed in trade with other patents (which are known as
“cross-licensing agreements”).
An exclusive
license agreement means that the licensor and licensee are the only two parties
that would be allowed to capitalize on the invention (i.e. the licensor
promises not to license the patent to other parties). A non-exclusive agreement
means that the patent holder can license the technology to many competing
companies at once. Some agreements may also stipulate that the licensee can
“sub-license” the patent to others.
Patents may be
“pooled” together and licensed in a single agreement. To manufacture a Blu-Ray
disc player, for example, would normally require licensing over 100
technologies from 27 different companies. But this can be easily accomplished
with a single license agreement via the “One-Blue” patent pool, which has a
fixed $9.00 per unit fee for all patents needed to manufacture a Blu-Ray player.
While patent
license agreements range from very simple to very complex, the main idea is
that the patent holder promises not to
sue the other party for using the invention. As such, disagreements that arise after a
patent has been licensed typically fall into the realm of “breach of contract”
rather than “patent violation”.
Defensive Publication
Oftentimes, an
inventor wants to immediately put their invention into the public domain – either
because of altruistic ideals or because it would not be economical to defend
the patent in the prevailing legal environment. Defensive Publication is a
strategy whereby an inventor publicizes all aspects of the invention in a
public forum. With widespread availability of “prior art”, this strategy
ensures that no one else will be able to patent the idea.
Pharmaceutical Patents
The majority
of inventions can be commercialized fairly quickly, and the additional
investment required to commercialize a product, over and above routine product
development costs, is typically relatively small. Products in the Biotechnology
and Pharmaceutical industry are the primary exception, as FDA approval is
required to ensure the safety and efficacy of these products before they can be
sold to the public. FDA approval for a new drug requires a substantial amount
of pre-clinical research and then three phases of clinical trials, which in
total costs between $750 million and one billion dollars – and can take upwards
of ten years.
Since the
patent is only valid for 20 years from the date of filing, the ten years it
takes for research and clinical trials means that the company needs to recoup
their investment in the remaining ten years, which results in very expensive
drugs for the relatively short period that they are “on patent”.
Critics of
current patent law have argued that for pharmaceutical patents, the twenty year
term should not start until regulatory approval is granted. This could
substantially lower the cost of new drugs – but with the side effect that they
would still cost more than generics for a longer period of time.
Many people
take the opposing view, saying that pharmaceutical patents make drugs more
expensive overall, and they should not be patentable. However, there is no
doubt that without patents or other forms of legal protection on the large
investment required to gain FDA approval, the medicines in question would never
have gotten developed in the first place.
Other patent issues in the current
business environment
The primary intention of a patent is to “allow the
patent holder to have exclusive rights to make, use, or sell the invention for
a specific period of time”. However, patent
laws are written so that in reality the patent owner has “the right to exclude others from making,
using, or selling the invention”.
While the
difference in wording is subtle, the impact on the business environment is
tremendous. From a competitive standpoint, not caring about the “exclusive
rights to use” an invention but having the right to “exclude others from
utilizing” said invention has given rise to a business entity commonly referred
to as a “patent pirate”.
A patent
pirate (or patent troll) is a person or company who acquires patents with no
intention to manufacture or market the patented invention (a “non-operating
entity” without concern for their rights to utilize the patent); their only
wish is to “exclude others” who may be infringing on the patent. This exclusion
allows them to negotiate settlements for amounts that are far out of line of what
the patent would normally be licensed for.
In cases of
patent infringement, one remedy available to a patent holder is an injunction
(a court order requiring the infringer to stop manufacturing, using, or selling
products utilizing the patented invention). Under the threat of an injunction,
a patent pirate can extort large amounts of money out of the infringing company
no matter how incidental the
violation might be.
One highly
publicized case of patent piracy was NTP, Inc. vs. Research In Motion, Ltd (United
States District Court for the Eastern District of Virginia, 2000). NTP had acquired
patents from a bankrupt company, Telefind Corp, and subsequently sued Research
in Motion (makers of the popular Blackberry mobile phone) for patent
infringement. Although industry experts
estimated that the value of the patents in question – even under extremely
unfavorable licensing terms – was no more than $25 million, NTP used the threat
of injunction (which would have shut down RIM’s entire global service for the
Blackberry) to secure a judgment of $612.5 million (including interest,
penalties, and punitive damages).
Another example
was InterTrust vs. Microsoft (U.S. District Court for the Northern District of
California, 2001), regarding patents for Digital Rights Management (DRM)
software. The infringement was
considered to be incidental by patent analysts, but InterTrust rejected all
reasonable licensing offers and leveraged the threat of injunction against the
Windows Operating System, Microsoft Office, and the Windows Media Player as a
bargaining tool. In 2004 the two parties reached an out of court settlement, whereby
Microsoft paid $440 Million for non-exclusive rights to a subset of the
InterTrust patents.
When
questioned about the seemingly outrageous amount, Brad Smith (senior vice president
and general counsel of Microsoft) was quoted as saying “We still maintain there
was no infringement. The agreement reflects our desire to avoid a preliminary
injunction, during which time shipments of products which make up 85% of our
revenue would be disrupted.”
Other
companies that have fallen victim to so-called patent pirates include Apple,
Motorola, and Google.
Many critics
of current patent law promote the idea that a “non-operating entity” (a company
that has no intention of marketing or commercializing products based on a
patented invention) should only receive reasonable license fees, as they have
no competitive products in the marketplace and therefor have no profits which
are “at risk” of being damaged. Alternate proposals include eliminating damages
if the violation started before the current owner acquired the patent (meaning
that the prior owner didn’t care about the infringement, so implied rights are
“grandfathered in”).
Should software be patentable?
The InterTrust
vs. Microsoft case brings up a larger issue of software patents. When it comes to patents, software has its
own unique set of issues.
Many USPTO applications
for software patents are considered to be “trivial” routines that in and of
themselves are just solutions to a problem – any competent software engineer
could solve the problem if assigned to work on a project that required a
solution to that particular problem.
Because of
this, companies that develop competing products in parallel will oftentimes
develop different solution to the same problem. “Company A” might think it’s
just a few lines of code not worthy of a second thought while “Company B” might
decide to patent their implementation. The line between “obviousness” and
“non-obviousness” gets very blurry. This results in frequent cases of
“incidental violation”, since it is impossible for a company to check every
line of code to see if it might be infringing on someone else’s patent. In many
of these cases, it’s not the actual invention that gets fought in court, but
how broadly the claims are written
and how they might apply to an independently developed solution to the same
problem.
In addition,
patents are occasionally granted for software routines that really should be
classified as “mathematical algorithms”. Such routines are supposed to be
exempt from patent protection as the general rule is that algorithms actually
exist in nature and are only “discovered” rather than “invented.”
A very strong
argument has been made that software is only a set of instructions for a general
purpose microprocessor, which is the device that is actually doing the work.
This argument says that the only truly patentable software is for routines that
the modern day processor is incapable of doing using its pre-programmed
instruction set. To make the software work, a new hardware device would be required
to support the new instructions – and it’s the hardware that is the patentable item.
Another issue
with software patents is that the examination process is too slow. The design cycle of modern software is very
short, and oftentimes the product is obsolete before the patent is even issued.
One proposed
solution to many of these problems would be to utilize “trade secrets” and
“copyrights” rather than patents for protection of commercial software. This
idea, which has many vocal supporters, means that the lines of code themselves
would be copyrighted. Using someone else’s code would be an infringement on
their copyright (or a violation of trade secrets in the case of an employee
taking code with them to a new company), but a completely different software
implementation of the same idea would be allowed.
Conclusion
The entire U.S.
legal system is based on a philosophy of adaptability to change. Changes in
society, technology, and our economy have been the impetus for updates to large
sections of our laws – especially as they relate to business (development of
the Uniform Commercial Code, for example).
There is no
doubt that patents have had a tremendously positive effect on our society; the
ability to protect inventions via patents has been a major component of our
economic growth over the past century, as it encourages inventors to put forth
the effort and ingenuity to design products that can become successful in the
marketplace.
However, there
is growing evidence that some portions of the legal underpinning of our patent
system are in need of shoring up in order to continue to be effective in the
modern business world.
In addition, this
modern business world is global but patents are territorial by the nature of
their legal protections. Applying for patents in every region is problematic
and an invention might pass the bar for “uniqueness” in one country, but not in
another. Many countries have insufficient legal protections, and lack enforcement
of the laws they do have in place. The
World Trade Organization (WTO) has made strides in this area, but more work is
required.
In order to
adapt to an increasingly global and interconnected environment, the USPTO will
need to address these issues and continue to work with other countries and the
WTO to provide a global environment that continues to promote investment in new
technologies. History has shown that innovation and invention provides the
economic growth needed for an economy to thrive, and protection of these
inventions requires vigilance and vigorous enforcement of the laws.
References:
Smith and Robersons Business Law, 15th Edition – pages 827 – 829
One-Blue patent pool, http://www.one-blue.com
Microsoft Press Pass, Statements by Brad Smith
US Patent Trademark Office glossary of Patent Terms, http://www.uspto.gov/main/glossary/index.html
About.com article on Patent Assignments, http://inventors.about.com/od/licensingmarketing/a/patent_licensin.htm
General Patent Corporation article on Patent Licensing, http://www.generalpatent.com/services/patent-licensing
Understanding How Damages Are Determined in Patent Litigation - Arnold B. Silverman, partner at Eckert Seamans Cherin & Mellott, http://www.tms.org/pubs/journals/JOM/matters/matters-9311.html
Patents, Copyright, and Software - Ben Klemens, Brookings Institution Press, 2005
Wikipedia articles on: Patent, Patentability, Assignment_(law), Claim_(patent), Patent_troll, criticism_of_Patents, Software_patent_debate