Any Further Reforms Must Be Directed At U.S. Patent Office Operations (Revised)

1

Much Patent Reform Has Already Taken Place

.

Any Further Reforms Must Be

Directed At U.S. Patent Office

Operations

(Revised)

By Ron D. Katznelson, Ph.D.

Presented at

“The Perfect Storm of Patent Reform?”

Fenwick & West Lecture Series Inaugural Symposium,

UC Davis School of Law

2

Content

¾

Much Patent Reform Has Already Taken Place

¾

Many problems identified by legislative reform

proponents are best addressed instead by reforms

of PTO operations

¾

But not by expanding PTO’s rulemaking authority

powers

•

PTO to focus on its statutory “Job Description” and not

overstep on the domains of Congress and the Courts

¾

Improving PTO’s operations and core

competencies

3

Much Patent Reform Has Already Taken Place

¾

The Courts recently made substantive changes in patent law

•

eBay v. MercExchange (May 15 2006)

•

MedImmune v. Genentech (January 9, 2007)

•

KSR v. Teleflex (April 30, 2007)

•

In Re Seagate Technology (Aug 20, 2007)

•

In Re Bilski (October 30, 2008)

•

Others

¾

Many problems identified by legislative reform proponents are

best addressed instead by reforms of PTO operations

•

Patent Examination Quality

•

Revise performance metrics

•

Management and examiner incentive structures

•

Major examination resource augmentation (possible fee increases)

4

PTO’s “measurable organization goals in

key operational areas”* have long been

improperly implemented

¾

Pendency

¾

Allowance rate

¾

Examiner count system

¾

Examination Error Rate

5

Average pendency is not one of the express

statutory pendency requirements

¾

Rather, key statutory pendency goals are

•

35 U.S.C. § 154(b)(1)(A)(i) – First Office Action within 14 months

•

35 U.S.C. § 154(b)(1)(B) – Patent grant within 3 years

•

Patent term must be adjusted day-for-day of PTO delays

¾

PTO’s attempts to control

average

pendency are often

detrimental to Congress’ goals as expressed in § 154(b)

¾

While average pendency can be a useful descriptor, setting

any specific average pendency goal is arbitrary, as it has no

direct connection with objective criteria that determine

6

Average Patent Application Pendency

Historical and Projected USPTO Total Patent Application Pendency

10.0 15.0 20.0 25.0 30.0 35.0 40.0 1975 1980 1985 1990 1995 2000 2005 2010 Fiscal Year Average Pendency (months) Actual FY-2009 Budget Plan FY-2008 Budget Plan

7

USPTO's patent application disposition capability consistently fails to withstand application filing rates, even by USPTO's own

Five-Year Targets 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Fiscal Year Stable System - Overloaded Unstable System - Loading

Ratio

Sources: USPTO Annual Reports, UPR applications filed, allowed and abandoned;

USPTO FY-2008 Budget Request

Number of Applications Filed Loading

Ratio _{Number of Applications Disposed}

c

λ

ρ = = = μ

Actual USPTO FY-08 Strategic Plan

PTO’s patent application disposal capability

consistently fails to withstand filing rates, even

under PTO’s own Five-Year Targets

PTO’s management never articulated or set a

goal for achieving a stable queuing system

8

PTO Pendencies in FY 2007

Source:Dennis Crouch, Patently-O February 2007, at http://www.patentlyo.com/patent/2007/02/prosecution_dat.html

PTO’s reported average pendency for FY-2007 was 31.9 months. This includes issued and abandoned applications. The study below found an average pendency of 38.6 months for issued patents. Pendency for Issued patents is considerably longer than that of other

disposals. It is estimated that disposals other than allowances had an average pendency of less than 30 months.

Average pendency = 38.6 months § 154(b)(1)(B) Pendency Goal

9

Patent Term Adjustment Due to PTO Delays

This is what really matters

Ballooning Patent Term Increases

Under 35 USC §154(b) 0.001 0.01 0.1 1 0 1 2 3 4 5

T - Patent Term Increases Due To USPTO Delays (Years)

Fraction of patents with term adjusted by more than T

April - 2007 Grants

April - 2005 Grants

Source: USPTO Patent Issue Data at ftp://ftp.uspto.gov/pub/patdata/

September - 2008 Grants

April - 2003 Grants

10

PTO’s Distorted “Patent Quality”

Measures

Bad Science in Search of “Good” Patents

*

* This tag line complements the title and content of my paper:

Bad Science in Search of “Bad” Patents, Federal Circuit Bar Journal, Vol. 17, No, 1, pp.1-30, (2007). Available at http://works.bepress.com/rkatznelson/1 .

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From: James A. Toupin, IPO Annual meeting, September 21-23, 2008.

PTO touts its lowering Allowance Rate as indicative of patent quality improvements

12

Allowances, Terminal Abandonments and RCEs

RCEs include CPA, Rule 129, File Wrapper CON.

Terminal Abandonment is an abandonment not followed by an RCE

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal Year Legend Terminal Abandonments RCEs Allowances Source: USPTO

But is it really? Note the share of disposals at PTO

Actual Application abandonment

rate has not changed

much

Sources: PTO Annual Reports, PTO data produced in Tafas v. Dudas (2007), .

13

What is the real story with Requests

for Continued Examination? (RCE)

¾

RCE is applicant’s statutory right under 35 U.S.C. §

132(b) for reexamination of rejected application when

the applicant believes that the (amended) claims do

merit allowance

14

PTO’s “Decreasing” Allowance Rate is Mostly an Illusion.

Improper Final Rejections Mostly Defer Allowances to RCE Phase

Applications vs. Requests for Continued Examination Allowance Rates 50% 60% 70% 80% 90% 100% 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal Year Allowance Rate

Second or later RCEs

Applications

Source: USPTO Annual Reports

and Tafas v. Dudas (A07087: Applications; A04573: 2+RCEs)

T T₁ RCE RCE1 RCE2 Allowed Allowed Allowed T₂ T₂ T₁ T₃ Disposal Disposal Disposal A llo wa nce Rate P e ndency 100% 50% 33% T T₁+T₂+T₃ 3 T₁+T₂ 2 Disposal Chronology

Applications that PTO sought to limit, are applicants’ safety valves for

securing fair reexamination of unsupported or improper rejections Note the anticorrelation,

indicating an allowance “exchange”

15

Appeals at USPTO and Appeals Reaching the Board of Patent Appeals and Interference

0 5,000 10,000 15,000 20,000 25,000 30,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Applications Appeal Briefs

Appeals Reaching BPAI

Sources : USPTO BPAI Statistics at http://www.uspto.gov/web/offices/dcom/bpai/index.html; USPTO ICR field with OMB, ICR Reference No: 200809-0651-003;

USPTO Response to FOIA Request No. No. 06-146.

USPTO Pre-Appeal Presentation, John Love at SDIPLA, (June 6, 2007).

Applications for which Pre-Appeal Briefs or Appeal Briefs were filed

The growth of improper/premature final rejections

also results in unprecedented growth in appeals

Appeal conference reviews find examiner errors five times more often than finding the minimal merit to warrant sending the appeal to BPAI

16

PTO’s “Decreasing” Allowance Rate is Mostly an

Expensive Illusion.

¾

Because the PTO considers a disposal that is followed by an RCE an

abandonment, it results in a reported allowance rate that can be

manipulated downwards by issuing poorly supported, or premature,

final rejections

¾

PTO’s incentives to “transfer” substantive examination into induced

RCE prosecution are rooted in its metrics:

•

Obtain early “freebee” disposals disallowing original applications,

thereby reduce reported “Allowance” Rate

•

Reduce reported Average Pendency by adding early disposals

•

“Stop the clock” of Patent Term Adjustment. RCE prosecution time is

excluded from computing PTO delay under 35 U.S.C. §154(b)(1)(B)(i).

•

Generate an additional RCE filing fee revenue

•

Increase examiner “Count” towards performance quota.

¾

Creates incentives to reject meritorious applications

¾

Results in increased filings of RCEs and appeals

17

PTO’s Distorted Measures Lead to

Counterproductive Incentives

¾

Allowance Rate

should be eliminated as a “quality” proxy. The

incentives it creates in every level of PTO’s management hierarchy

only detract from patent quality

¾

Average Pendency

measures have been abused and should be

abandoned as operational metrics. Instead, the statutory and

operationally more relevant metrics of Patent Term Adjustment

measures and Application Loading Factor should be widely adopted

¾

Tailor examiners’ performance metrics and incentives to align them

with the patent statute and quality examination

•

Allotment of examination time in proportion to complexity (claim count,

disclosure length and number of references in IDS)

•

Abolish the “Count” system as a sole measure of examiner workload

•

Permit examiners to specialize in their field. More time allowance for

professional development and attending industry conferences and trade shows.

18 1980 1984 1988 1992 1996 2000 2004 YEAR 0 4 8 12 16 20 24

Number of Claims Filed in Patent Applications

Average Number of Claims at Filing

USPTO

EPO

JPO

The Growing Examination Burdens Per Application

¾

Assign examination

resources to match

complexity

¾

Change examiner

production quotas

and incentives to

reflect actual

required burden

¾

Hire & train more

examiners (fee

increase)

Source: Ron D. Katznelson, Bad Science in Search of “Bad” Patents, Federal Circuit Bar Journal, Vol. 17, No, 1, pp.1-30, (2007) . Available at http://ssrn.com/abstract=1007629

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First Step of Improvement:

Examination On Request

(aka Deferred Examination)

¾ Used in many counties such as Canada, Japan and in Europe.

¾ Applications are not examined automatically - only upon a specific Request

For Examination within a set time-period, say 3 years.

¾ If no request is filed within that period, the application is deemed

abandoned and is never examined.

¾ Proposal for the U.S. provides that any third party may trigger examination

after publication of the application.

•

This will prevent a patentee from holding off prosecution of a patent that others find problematic and in need of early patentability resolution.

¾ From experience of other patent offices, 10% to 40% of applications are

never examined under Examination On Request systems

¾ Substantial workload reduction due to applicants’ voluntary abandonment

of obsolete claims prior to the Request For Examination deadline.

¾ Under current PTO practice, applications that become obsolete, but receive

examination by the PTO, are the worst investment the PTO can make because their obsolescence is unlikely to fetch any renewal fees.

20

Moving To ‘Examination On Request’ or ‘Deferred

Examination’ Can Immediately Save 20% Workload

Percentage of Applications Examined by Patent Offices

0 20 40 60 80 100 1995 1997 1999 2001 2003 2005

Request for Examination Expiration Year

Examination Rate (%)

USPTO

EPO

JPO

21

Continuations and Claims Rules

22

PTO’s Enjoined* Rules

1.

Limits the number of

claims

that may be examined

in a single application to 5 independent or 25 total

claims. Required an Examination Support

Document (ESD) when the

5/25

limit is exceeded

2.

Limits the number of

continuations

,

RCEs

and

divisionals

- (“2+1”). Requires a petition and

showing to exceed limits

3.

Requirements related to

co-pending applications

and

applications containing patentably indistinct

claims

23

Joint Distribution of Independent and Dependent

Claims in U.S. Patent Applications

It is estimated that as of 2007, 30% of pending applications had more than 5 independent or more than 25 total claims. Region shown in dotted mesh.

Source: USPTO, FY-2004 data,

Tafas v. Dudas (2007) . See also

Figure 3 in the cited source of the next slide (#24).

Number of Applications per

24

Priority Generation in Continuation Applications

Continuation chain distribution at USPTO

10 100 1,000 10,000 100,000 1,000,000 0 1 2 3 4 5 6 7 8 9 10+

Continuation/CIP Generation at filing

Large Entity Small Entity

Applications Filed in FY 2006

Continuation Rule Limit

Original Application

Source: Ron D. Katznelson, “Defects In The Economic Impact Analysis Provided By The USPTO For Its New Claims And Continuation Rules”, (January 10, 2008). At http://works.bepress.com/rkatznelson/16/

25

Continuations Are Filed At Progressively

Higher Rate For The Last 25 Years

Annual Trends in USPTO Utility Patent Applications

CONTINUATION DIVISIONAL CIP ORIGINAL 1,000 10,000 100,000 1,000,000 1980 1985 1990 1995 2000 2005 Fiscal Year Applications Doubling every 6.5 years Doubling every 14 years

Source: Ron D. Katznelson, Patent Continuations, Product Lifecycle Contraction and the Patent Scope Erosion – A New Insight Into Patenting Trends, SCIPLA Spring Seminar, Laguna Niguel, CA, (June 8 - 10, 2007), available at http://ssrn.com/abstract=1001508.

26

Continuations Are Mostly Filed To Better Match

Claims To New Products In The Market

Annual Trends in New Product Introductions

1,000 10,000 100,000 1,000,000 1980 1985 1990 1995 2000 2005 Fiscal Year # per year Doubling every 6.5 years Trademark Applications New Product Announcements on PR NewsWire Patent Continuation Applications

Source: Ron D. Katznelson, Patent Continuations, Product Lifecycle Contraction and the Patent Scope Erosion – A New Insight Into Patenting Trends, SCIPLA Spring Seminar, Laguna Niguel, CA, (June 8 - 10, 2007), available at http://ssrn.com/abstract=1001508.

27

1880 1900 1920 1940 1960 1980 2000

Innovation Introduction Year

1 10 100 2 4 6 8 20 40 60 80 'Monopoly' Du ration (Y ea rs)

Historical Decline in Duration of Interval Prior to Competitive Entry for Innovations

Hatch-Waxman Act Generic Pharmaceuticals Consumer and Producer Goods 2.9% reduction per year 10.4% reduction per year 3.8% reduction per year

Horizontal bar span indicates averaging period over which duration estimates were obtained

Sources:

Consumer and Producers Goods: R. Agarwal & M. Gort, Journal Of Law & Economics 44(1), p. 161 (2001). Generic Pharmaceuticals: J.A. DiMasi & C. Paquette, Pharmacoeconomics, 22, Suppl. 2, pp. 1, (2004).

The ‘monopoly’

duration is the initial period of a product life cycle. As product life cycle contracts, so does the monopoly duration.

28

Continuations Filing Growth Rate Exceeds

That Of Original Applications Because:

¾

Historical product life cycle reduction and the

exponential growth in new product introductions

necessitate new or amended patent claims in

progressively growing fraction of inventions.

¾

Product lifecycle reduction over time is accompanied

with the grant of patents with progressively diminishing

claim scope.

¾

Patent continuations are essential for applicants who seek

to appropriate equivalent returns from their inventions.

¾

RCEs became essential for ensuring proper claim

coverage

29

Continuations’ Important Role During

The Pendency Of A Prior Application

¾

Claiming one’s invention need not end at the

original filing date

¾

Facilitates presentation of claims based on new

market, new development and prior art

information

¾

Enables improved matching of claims’ scope and

content to actual products in the market place

¾

“Breaths new life” in protecting inventions

embedded in products under

ever-increasing

obsolescence rate

30

US Patents Issued From Continuations, CIPs and

Divisions Have Longer Lifetimes

¾ Source: K.A. Moore, Worthless Patents, Berkeley Technology Law Journal. 20(4), p.1521, (Fall 2005) (Table 6).

31

Continuations Help Reduce US Patents’ Lifetime

Erosion Compared to That of Other Nations

Percent of patents surviving after renewal payments at the JPO by grant era. Source: Tokyo Institute of Intellectual Property (2006).

Patent lifetime at the USPTO, EPO and JPO. Half-Life is the patent age at which 50% of the patents are not renewed by their owners. Source: Trilateral Patent Offices (2006).

Patent Life From Filing Date (Years) Before 1970 1970’s 1980’s Survival Rate Half-Life 8 9 10 11 12 13 14 15 1996 1998 2000 2002 2004 2006 EPO

(From application date)

JPO (From grant date)

USPTO (From grant date)

Renewal Year Half Life

32

Matching the Quid to the Quo of the Patent Bargain

¾

Shrinking product lifecycles and accelerated claim obsolescence

increasingly require that grants of exclusive rights under the

patent bargain be made in installments. These installments are

made in grants of “Continuations” and “CIPs”.

¾

A patent system that would disallow growing use of Cons/CIPs

would be doomed to fail its bargaining role in the 21

st

century

Specification Claims Specification Claims 20th Century 21st Century The Patent Bargain Useful Life of Disclosure Useful Life of Right To Exclude Time Time

33

Conclusions

¾

The US patent system is the best in the

world.

¾

Reforms and congressional oversight

must be directed at the PTO.

¾

Do not fix that which is not broken in

the US patent system. Fix the US

Patent Office.

34

Thank You

Ron Katznelson