|
Testimony Regarding the Patent Term for Biotechnology Inventions
| Printer Friendly |
Testimony of Chuck Ludlam, Vice President for Government Relations,
Biotechnology Industry Organization (BIO)
before the House Subcommittee on courts and Intellectual Property
Regarding the Patent Term for Biotechnology Inventions:
Protecting diligent patent applications
March 25, 1999
Executive Summary
BIO supports amendments to the patent law that, above all, ensure that diligent patent applicants
are not penalized for delays which are beyond their control. BIO has been working in support of
amendments that will preserve the full term of protection for biotechnology inventions for five
years and we now see that with the leadership of the Chairman and members of this Subcommittee
the prospect of these amendments becoming law. The package being proposed by Chairman Coble
and members of this Subcommittee includes amendments that will compensate diligent patent
applicants for time they would lose during the application process, and will make much-needed
enhancements to our patent system to improve its operation. We strongly support this package
of legislation, because we believe it will enable the biotechnology industry to develop cures
and therapies for deadly and disabling diseases.
The proposed legislation has a number of provisions. I will limit my comments today to patent
term restoration for administrative delays, reexamination reform, publication of applications
with provisional rights and patent office reform.
- Patent term restoration. The effective term of a patent is of vital interest to the
biotechnology industry. There may be no industry which is more dependent on an effective term
of protection than the biotechnology industry. Any law that undermines the ability of biotechnology
companies to secure patents with a full term of protection will undermine funding for research on
deadly, disabling and costly diseases. Simply put, capital will not be invested in biotechnology
companies if they are not able to secure an adequate term of protection during which they will be
able recoup the substantial investments needed to develop new products.
- My testimony outlines five specific concepts that must be kept in mind when drafting amendments that will guarantee a full patent term for biotechnology companies and other inventors. These are the concepts found in the Chairman's proposed legislation. They are: (1) when a delay is out of the control of the patent applicant, the applicant does not lose out on patent term; (2) the determination of the amount of patent term extension must be done in an objective, ministerial fashion; (3) patent applicants will not be penalized by electing to appeal Patent Office decisions, including on claim scope; (4) patent applicants will not be penalized by a decision to refile an application or pursue applications that expand on an original disclosure, and (5) patent term extensions cannot be challenged long after a patent issues, and thus patents can be relied upon by their owner for investment and other decisions.
- Publication of applications. We support publication of applications without exception at 18 months from the filing date. We recognize that compromises must be made to address concerns from certain parts of the patent community, but hope that such compromises will not prevent information on new inventions from reaching the public in a timely manner. We support inclusion of protections such as provisional rights and other measures that will prevent third parties from harming the interests of the patent applicant before a patent is granted.
- Patent Office reform. We support efforts to improve the operations of the Patent and Trademark Office. Given our dependence on patent protection, it comes as no surprise that we support any steps that will enhance the operations of the Office, and therefore, the quality of examination of patent applications.
- Reexamination reform. We support enhancement of the current reexamination system to enable more extensive but controlled participation by third parties.
My name is Chuck Ludlam 1 and I am Vice President for Government Relations for BIO. I appreciate the opportunity to appear here today to testify on behalf of the biotechnology industry in support of the patent reform package being proposed by the Chairman.
The Bottom-Line
Patent reform is a critical issue for our industry and for the entire entrepreneurial sector. Our
industry, perhaps more than any other, needs a patent system that functions efficiently and provides
effective and clear rights for an commercially viable and justifiable period. Our products are often
many years from being commercialized, which means that we need patents that cannot be challenged once
investments have been made, and that will yield an effective term of protection.
The current patent system is not living up the tasks before it. We need a Patent and Trademark
Office, and patent procedures, that can produce timely and valid patent grants with a higher degree
of quality than is possible to deliver under the current structure of the Office. We need better and
earlier information on where research is being directed to ensure that we direct our research efforts
and funds intelligently. We also need procedures that give us a chance to vigorously test the validity
of patents without having to resort to litigation in the Federal courts. Most of all, however, we need
a system where we will not be inhibited in our effort to vigorously pursue full patent protection, or
will be penalized by PTO delays in processing our applications.
I believe Chairman Coble appreciates these points. His legislative proposal would address nearly all
of our points of concern with the present regime. We support and commend his efforts over the past few
years to identify sources of concern and address them. We believe his proposals are very well grounded
and deserving of our support. If this legislative package is enacted into law, it will go a long way to
addressing our concerns with the current regime. My comments today will address the points raised by the
legislation that are of particular interest to BIO.
Guaranteeing an Effective Term of Protection for Diligent Applicants
The biotechnology industry and BIO fully support a patent term based on the current system of 20 years
of protection from the filing date of the application. However, we believe it is critically important
to ensure that this system include safeguards that will ensure that diligent patent applicants are not
penalized for delays which are beyond their control. The present law does not address certain situations
where the effective term of protection can be reduced through no fault of the patent applicant. We
believe that the proposals being advanced by Chairman Coble in this draft would deliver the same effective
term as was provided under the old 17 year from grant date system, but would retain the benefit of not
presenting opportunities for late-issue, submarine patents. We wholeheartedly support these amendments.
We believe that these amendments provide real and comprehensive protections for diligent patent applicants.
They ensure that no diligent applicant will ever lose patent term for delays which are beyond their control.
This is the definitive answer to those who argue that the only solution is to return to a guaranteed 17
year minimum patent term from grant. These guarantees against the loss of patent term for diligent
applicants provide incentives for long term investment in research and development in high risk areas
of research like biotechnology.
There may be no industry which is more sensitive to the length of the term of a patent than the
biotechnology industry. The rate of investment in research and development in this industry is higher
than in any other industry. A law which protects the ability of biotechnology companies to secure patent
protection for an effective term as provided in the Chairman's proposal will support investors
and others who provide the funding for research on deadly, disabling and costly diseases. Just as no
one would invest money to improve a building without knowing how long the lease was, capital will not
be invested in biotechnology companies if they are not able to secure a term of protection that will
ensure that they have time to recoup the investments they must make in developing a product for market.
To correct the disincentive for investment in research and development caused by a reduced patent term
and a uncertain patent term, amendments are needed to ensure that delays in issuing patents do not
penalize diligent patent applicants. BIO has identified the key considerations that are essential
to maximize the benefit of the patent laws for the biotechnology industry and finds that all of
them are addressed in the Chairman's bill.
Patents and Capital Formation
To understand our industry's position on the patent term issue and what we consider the key concerns,
one must understand one simple fact about the biotechnology industry; most of our firms fund research
on deadly and disabling diseases from equity capital, not revenue from product sales. Without
investors taking the risk of buying the stock of our companies, much of our vital research would
end.
In most industries, banks can finance the operation of a business, by securing the debt with equipment,
by taking a security interest in receivables, or by taking an interest in a revenue stream. None of these
assets are typically present in a biotech company. Equipment, has very little secondary market, and is a
small fraction of the cost of doing business, and biotech companies sell few products and therefore
cannot sell interest in revenue streams or receivables.
In the absence of these assets, biotech companies are forced to sell equity to raise capital. For a
biotech company to raise money in the equity market clear indications about how that money will be
spent and how money will be made in the future are needed. A decision on buying a piece of a business
is dependent on calculating a value of the company, which in turn is estimated based upon how much
money a company will make, when it will make it, and for how long it will make that money. This value
is then discounted into net present value and discounted for risk. The biotechnology industry exists
because the astronomical sunk costs are followed by sales of goods with high margins. Margins in the
biotechnology industry are protected by patents, and consequently, patents are a pre-requisite for
raising equity capital. As the value is dependent upon how long the patent protects the margins an
uncertain patent term, adds additional risk which in turn discounts the value of the enterprise and
decreases the amount of money that can be raised.
Without adequate protection for biotechnology inventions, investors will not provide capital to fund
research as the future value will be overwhelmed by the costs. There is substantial risk and expense
associated with biotechnology research and investors need to know that the inventions of our companies
cannot be pirated by our competitors. Therefore, less patent protection means less biomedical research.
A June 1994 report by Dr. David H. Austin of Resources for the Future 2 specifically documents the vital
economic importance of intellectual property protection and its relationship to research expenditures,
including the value of patents, and their effect on competing companies and on the biotechnology
industry in particular.
The results of Dr. Austin's study indicate that there is a significant reaction in the stock market
when certain broad types of patents issue. When a patent is listed in the Wall Street Journal, it
positively affects the value of the stock for the company receiving the patent, and negatively
affects the stock price of competitors to that company. The report found that there is a positive
correlation between stock price, when a patent is filed and issued, and research and development
expenditures. In addition, the report indicates that the granting of an important patent appears
to raise the net value of the entire industry.
Key Elements for an Effective Patent Term
The importance of predictability and length of patent term to this industry results in five central
issues that we hope are considered when evaluating the prospect for recovery of lost patent term.
They are that:
- when a delay is not within the control of the patent applicant, the applicant does not see patent term erosion;
- the determination of the amount of patent term extension must be done in an objective, ministerial fashion not susceptible itself to delays and complications, and not subject to challenges by third parties;
- patent applicants will not be penalized by being subjected to a choice between loss of effective term of protection or of concessions on claim scope when the Patent Office fails to grant patents or claims of appropriate scope;
- a decision to continue to prosecute an application will not require the applicant to abandon his ability to recover any measure of patent term restoration, due to an essentially ministerial step; and
- patent term extensions must not be subject to change long after the patent issues, and thus can be relied upon by the company for investment and other decisions.
The Chairman's draft legislation addresses to a varying degree each of these considerations.
1. No patent term erosion because of delays outside the control of the patentee
Applicants for patents on biotechnology inventions from the National Institutes of Health, university
and foundation grantees of NIH, independent research foundations, and the biotechnology and
pharmaceutical industries experience unusually long administrative delays in the processing of
patent applications at the PTO. Although the PTO has taken steps to address some of the causes of
these problems, pendency as measured by the PTO has yet to be reduced by these steps. The PTO
actually reported an increase in pendency of applications within the biotechnology group last year
compared to the previous year. Although BIO applauds the significant steps that the PTO's biotechnology
group has taken to speed the issuance of patents these steps have not yet helped eliminate the delays.
Comparing current law to the pre-GATT 17 year patent term reveals biotechnology inventors see a
decreased effective patent term. Professor Lemely from the University of Texas School of Law studied
the effect of the GATT changes on the patent term. Although Professor Lemley did not make any
conclusions regarding the patent term of biotechnology inventions (one way or the other), the data
presented in his paper makes it quite clear that biotechnology industry would have patents that loose
patent term. 3 Professor Lemley states:
Under the old law, the biotechnology patents had an average term of 6077 days, the average time
spent in prosecution was 1,599 days giving the average 5,706 days of protection under the new law.
4
The one year loss in patent term (6077 days old law-5706 days under the new law= a loss of 371 days)
understates the facts. We anticipate that a large percent of patent applicants will lose an even
larger portion of the patent term. This net loss of patent term will hit an industry which may be
the most dependent on patent protection and where the loss of patent term will be especially
devastating.
Although the loss of a year of patent term would be significant to any industry the averaging of
patent term understates the problem of the erosion of patent term for some BIO member companies.
Biotechnology companies are small. The small size is often reflected in that there entire
research and drug development program is protected by just a couple patents. The small number
of patents that protect a given companies research means that a decrease in one patent term is
not offset by other longer patent terms in other patents and, therefore, a large decrease in
even a small fraction of the patents will necessarily limit these companies ability to do
important research towards cures of devastating and disabling diseases.
There must be protection against this loss of patent term. A mechanism must be in place to
insure, in an objective fashion, that the patentee can control the patent term. Caps on these
recoveries act in direct contradiction to these goals as in some instance they incent the delay
by those who benefit from a patent not issuing. There is absolutely no reason based on
principle which justifies these parties losing patent term when the PTO is in control of the
patent application throughout this period. It would be patently unfair and confiscatory to
reduce their patent term simply because they were involved in protracted processes such as
interferences or appeals.
This issue is addressed decisively in the Chairman's bill. Diligent applicants are given
day-for-day compensation for time lost due to PTO delays that are beyond the applicant's control.
2. Determination of patent term extension must be done in an objective fashion and through a
simple, ministerial review process that is not susceptible of abuse
The determination of the extension must be objective, speedy and not subject to complex procedures
or legal challenges. With a discretionary, subjective standard there will always be substantial
interpretation required to determine the equities in an individual case. Lots of paper will be
exchanged between applicants and the PTO, and the PTO would have to justify its determinations
in writing. And, since many of the decisions would be made under a discretionary, subjective
standard, patent term restoration calculations would be a routinely litigated event. This is a
nightmare both for the PTO and for applicants.
The key issue for compensation for delays, is whether applicants are losing patent term for
reasons which are beyond their control. An objective standard eliminates this uncertainty.
One suggestion has been made that the compensation could be computed by a mechanism like a
chess clock.
Chess clocks have two clocks, one for each player. There is a mechanism to ensure that only
one clock will be running at any given time. The clock which is running is the clock for the
player who must make the next move. When he or she makes the move, he or she taps the mechanism
to stop his or her own clock and start the other player's clock. The importance of this analogy
is simple It is only fair for the PTO to be under some pressure to complete action on an
application. It should not be only the applicant who feels the pressure. Such a system
provides balanced system of incentives and safeguards to ensure that both parties proceed
expeditiously to process a patent. It is unfair if the only party which feels the pressure
is the applicant.
It is not also fair for the PTO to be the judge of when delays warrant patent term recoupment.
There is a powerful reason to include this objective definition in the legislation, not leave it
to regulations. Given the controversy over the patent term, it is essential that we provide
statutory assurances that the diligent patent applicant will be compensated for unusual administrative
delay, not assurances from the Commissioner or directives in the legislative history regarding
regulations which would be issued to implement a vague, subjective, statutory standard.
As cast in the draft legislation, the procedures governing calculation of patent term appear
to follow this suggested structure. However, there are a number of provisions that we believe
should be improved. In particular, we believe that the legislation should direct the
Commissioner to establish a simple determination process for the length of patent term extensions,
after which the patent will be granted without the possibility of delay or complication. That
process should be performed incident to the issuance of the patent, and should not itself susceptible
to challenge before a patent is granted. The ministerial calculation of a patent term extension
should be conducted by the Office, notified to the applicant, and not subject to a formal appeal
before the patent is granted. Once a patent is granted, the patent owner should be given the option
of appealing a final determination by the Office on the length of a patent term extension through
an appeal to an appropriate court. The determination process thus would be similar to the conduct
of a petition, with the exception that a final determination by the Commissioner will not be
appealable by the patent owner prior to the issuance of the patent. This process will ensure
that the process of issuing patents will not be unduly delayed or complicated. Of course, in
no instance would it be appropriate to permit a third party to interfere in the determination
process for a patent term extension before the patent has been granted.
To achieve these changes, we believe it is necessary to rework the final section concerning
procedures for the determination and appeal of patent term extensions. We would be pleased
to offer suggestions on this issue.
3. Patent applicants have the right to challenge the PTO's determination of patent scope
without patent term erosion
As important as patents are to this industry it is important to remember that not all patents
are of equal value. The PTO and an applicant might agree that a invention is patentable, but
may not agree about the scope of a patent. A patent drawn to a narrow invention may be of
little to no use in protecting the invention in commerce. For instance in the biotechnology
industry, proteins are often patented that contain over 1000 amino acids, where almost each
one of these amino acids can be changed without an effect on the protein If a patent is
drawn so narrowly that it only protects an exact sequence the patent may have zero value
in commerce. Although it is important that applicants not be allowed to game the system
in order to extend patent term it is also important that legitimate patent disagreements
provide for patent tem compensation. It is important that recoupment of patent term does
not require that each and every decision adverse to the applicant need to be overturned by
the court for applicant to earn an extension as the presence of one improper rejection is
sufficient to delay the issuance of a patent.
The Chairman's bill decisively addresses this issue by providing compensation for delays
due to appeals forced on the applicant by negative determinations by the PTO on patentability,
including those on scope or enablement of claims that are ultimately shown to have been made
in error.
4. Decision to refile must not erode patent term
Frequently, it is more expeditious to continue prosecution of a patent application before
the PTO examiner rather than giving up or filing an appeal. This continued prosecution
may result in better focused claims of agreed scope being allowed to issue without adversely
affecting the ability of the patent applicant to pursue broader claims that are still in
dispute. For this reason it is important to provide mechanisms for rolling over extensions
justified by one case into a subsequently filed or continued application where the same
invention is being prosecuted.
These amendments are particularly important to protect patent applications which were
filed prior to June 8, 1995, the effective date for this provision. Millions of dollars
have been invested in the inventions with respect to which these patent applications have
been filed. It is not fair to change the rules of the game in mid-stream and potentially
reduce the patent term which these applicants expected prior to the enactment of the GATT
20 year term. Applicants were given advance notice of the June 8 date and many of them
filed continuing applications, but this is not sufficient to ensure that they will receive
a 17 year term from grant. In lieu of providing a guaranteed 17 year minimum term providing
for extensions can be rolled over into future filed applications without loss of patent term
due to actions of the PTO. review.
The Chairman's bill decisively addresses this issue as well by providing that refiled applications
do not adversely affect the compensation provisions.
5. Patent term extensions are not subject to change long after the patent issues.
As definiteness and length are key to providing the basis for an investment decision it
is important for patent term extensions to provide that definitiveness. It would minimize
the entire value of the patent extensions for start-up companies if patent terms can be
challenged 15 years after the patent was granted. At that point, all the investment decisions
have been made. Closing the door to challenges by third parties is thus essential to ensure
that the investment and evaluation process for patents not be prejudiced by late in the term
attacks on patent term extension determinations.
We are concerned that determinations on patent term extension not be subject to challenges
by third parties, unless that third party has a demonstrable interest in not only the patent
at issue, but also the implications of the patent term extension determination by the Commissioner.
We would strongly advocate precluding challenges to patent term extension determinations
except where a third party has been subjected to an infringement action (or demonstrable
threat thereof), and the party challenging the determination be prepared to demonstrate that
the Commissioner was grossly negligent in making his determination on the patent term extension.
The Chairman's proposal requires some changes to effect these proposals, and we would be pleased
to offer suggestions in this regard.
Publication of Patent Applications
BIO is an industry that is dependent on early dissemination of scientific and technical
information. In the majority of our member companies and associations, the rule is
publish or perish. This is not a theory, it is the way our companies work. Indeed,
given the speculative and risky nature of product development in our field, the absence
of timely patent information acts to impose serious and unnecessary risks for investors.
Recognizing these points, we are strong supporters of a simple publication system under
which all patent applications would be published 18 months after their effective filing date.
We do not see the negative implications that have been raised by some against such a rule.
In fact, when coupled with provisional right, we believe a publication system offers small
businesses and inventors a valuable asset for marketing their inventions and technology.
We recognize, however, that there are concerns, and that solutions must be developed to
address those concerns. We would have preferred a solution that would address applications
on a case-by-case basis, rather than carve out a rule that permits an entire class of
applicants to avoid publication prior to grant, regardless of the circumstances involved
or the duration of the period of examination. Given the late stage of the legislative
process, however, we are prepared to work within the general structure arrived at by
the Chairman that permits those applicants that do not file abroad in any country, or
whose applications will not been published in another country, to defer the publication
of their applications for some period beyond 18 months. Having said this, we would
strongly recommend the Chairman to include an ultimate deadline after which the application
will be published, without condition. We would strongly oppose any option under which
the ultimate deadline could be deferred. A suitable deadline would be 36 months from
the effective filing date of the application. By that point in the prosecution of an
application, the vast majority of applicants will have received a very clear picture
of the patentability of their inventions from the PTO.
There are two other issues that we believe need to be addressed in the publication
section of the Chairman's draft.
First, we have heard concerns from many small business and independent inventors over
the potential risks associated with publication. One of these concerns is that a better
situated party with more money and resources would be able to file an application after a
first applicant has had their application published, invoke an interference proceeding
and potentially win that proceeding due to their deeper pockets. We do not believe that
type of situation is likely to arise with any discernable frequency, given the criteria
that must be established to provoke and subsequently prevail in an interference proceeding.
However, to foreclose that possibility, we would favor a simple rule that would preclude
any party from establishing a date of prior invention where that party could not establish
an effective filing date or a date of reduction to practice for the invention prior to the
date that an application claiming that invention is published by another. This anti-derivation
rule would be an effective measure that gives additional comfort to patent applicants who have
had their applications published.
Second, we believe that the formulation in the bill of a test for provisional rights that
requires comparison of published and patented claims for "substantial identity" will prove
difficult in practice and add to the cost and complexity of litigation. We would prefer
a simpler rule that would involve a proof of infringement of both the published claim and
the patented claim. Concerns about adequate notice to third parties are addressed by the
requirement of actual notice of the application as a condition for recovery of provisional
remedies. Additional measures could be added to the notice provision to address concerns
about adequate advance notice of potential liability. Such a change would be vastly preferable
to a new concept of proving two claims to be "substantially identical."
Patent Office Reform
The Chairman's draft proposes to establish the Patent and Trademark Office as an independent
Federal agency subject to the policy direction of the Secretary of Commerce. We would support
this formulation, or any other one, that gives the PTO sufficient autonomy and freedom to
conduct its operations as any modern corporation does. Doing so, and keeping the PTO under
the general policy direction of the Administration, would represent the best combination of
oversight and autonomy that can be crafted.
We believe the Chairman's draft will ensure that the policy direction provided by the Secretary
of Commerce will not operate in fact to complicate the day-to-day operations of the Office.
We would oppose a policy oversight role for the Secretary of Commerce that would permit individual
patent grant determinations to be subjected to a case-by-case review by some party outside of
the PTO. The general policy direction that could come from the Secretary should be just that
general direction, not specific guidance in specific cases. We also believe that the PTO should
retain its long history of having expertise in intellectual property policy matters, and for
this reason, would support a formulation of the legislation that would ensure that the PTO itself
be capable of advancing domestic and international policy matters pertaining to the patents,
trademarks and other forms of intellectual property.
Reexamination Reform
The cost of patent litigation today can be staggering. In many instances, small businesses,
of which BIO is largely composed, face the daunting task of patent litigation long before that
company can expect to become profitable, or for that matter, even have product to commercialize.
Measures that will reduce the cost and complexity of patent litigation, thus, must be identified.
We believe that modifying the reexamination process may be one such step.
We generally supportive of proposals to modify reexamination proceedings to permit more extensive
participation by third parties without raising the possibility of making the proceedings overly
complicated or susceptible to abuse. It is important that any reexamination provision will not
permit third parties to convert reexamination proceedings into full-blown patent invalidity trials
before the PTO.
We would support a prohibition on the Commissioner finding a substantial new question of
patentability which is the precursor to the initiation of a reexamination proceeding
in those instances where the same prior art had been considered in a prior reexamination
proceeding initiated by a third party requester, even if it is a different third party.
This should be the logical effect of a previous reexamination proceeding, but by making it
a statutory preclusion, it would remove the possibility of "repeat" reexaminations based on
the same prior art.
We also believe it may be advisable to impose an overall time limit on the PTO's conduct of
a reexamination proceeding. Under current law reexamination proceedings are to be conducted
with special dispatch. The law could clarify the meaning of special dispatch to impose an
overall time period for the proceeding before the PTO. Imposing a finite period during which
the reexamination is to be conducted will help foreclose the possibility of reexamination
proceedings dragging out over an extended period.
Conclusion
The Chairman and this Subcommittee have demonstrated their understanding of the importance of
patents for biotechnology inventions. They have led the way in strengthening patent protection
for our innovative industry. They can now lead the way in promoting reform of our patent system
to advance our collective interests.
With the adoption of the proposed amendments, there is no longer any need to measure patent term
using the old 17 year term from grant. Such a minimum term might be the simple solution, but
safeguards for diligent patent applicants achieve the same result and are functionally equivalent.
The additional benefits of the Chairman's proposed package of reforms would complement the proposals
on patent reform that would prevent any diligent patent applicant from losing any period of their
patent term.
We strongly support your efforts, Mr. Chairman, and look forward to working with you to pass this
long overdue and much needed reform package.
1 Mr. Ludlam has served as BIO's Vice President for Government Relations since BIO was
founded in July, 1993. Prior to this he served as legal counsel to House and Senate Committees and
Subcommittees from 1975-1979 and 1982-1983, counsel to the White House from 1979-1981, and trial
attorney at the Federal Trade Commission from 1972-1975.
2 "Estimating Patent Value and Rivalry Effects: An Event Study of Biotechnology Patents,"
Dr. David H. Austin, Fellow at Resources for the Future (RFF) (Washington, D.C.), Discussion Paper
94-36 (June 1994).
3 Volume 22, American Intellectual Property Law Association Quarterly Journal (Nov. 1995).
4 See page 32. Professor Lemley suggests that because of the new law the prosecution times
will be reduced by 20% under the new law. Professor Lemley's data still indicates the average biotechnology
patent will still lose patent term.

|