Patently Restrictive

16 September 2007 (Last Updated September 16th, 2007 18:30)

Controversial changes may be on the way for the US patent system. Mark B Leahey, executive director of the Medical Device Manufacturers Association, outlines the dangers.

The US patent system is facing a number of proposed changes, but the debate continues as the medical technology industry voices its concerns. A white paper released by the California Healthcare Institute (CHI) and information collected by the Medical Device Manufacturers Association (MDMA) have explored these issues further.

Life sciences research is extremely expensive and a particularly difficult market for new competitors. Companies developing the next generation of treatment, therapies and technologies need extra investment. However, this is dependent on a strong, reliable patent system to ensure that these critical innovations remain proprietary for a period of time, especially for new entrants.

Abuses by a few, resulting in large, high-profile damage awards to entities not developing products, have created a public perception that the patent system needs significant reform.

This has led to a number of recent developments that, while potentially eliminating abuses, could have serious implications for the medical technology industry. Three Supreme Court decisions made over the past year are expected to have a huge impact on patents. The medical technology industry believes it is prudent for Congress to consider what effect these decisions are having on patent abuses and on innovation before any new legislation is passed.

MAINTAINING PERSPECTIVE

Even without these cases, it is important to put the perceived abuses in perspective. The highly publicised awards in favour of companies that are not even commercialising technology are not the norm, but are cited by those who would like to destroy the patent system. The median patent award is actually about $3.9m for those that result in a verdict for the plaintiff. This is less than the median cost to litigate a patent suit.

In addition, over 97% of patent cases settle before trial, presumably at values that are lower still. It must also be remembered that the plaintiff does not always win. Patents are sometimes held invalid, unenforceable, or not infringed at summary judgment or at trial. Therefore, prior to considering legislation that will hamper innovation, it is important to maintain a sense of perspective rather than focusing on a few aberrations.

THE EFFECT ON INNOVATION

The Patent Reform Act of 2007 includes provisions that, when combined with the changes that have already taken place, threaten to devastate life sciences investment, and therefore innovation. There are three provisions that are particularly troubling:

1. US Patent and Trademark Office to limit continuations

The US Patent and Trademark Office (USPTO) has made its desire to limit continuation filings clear, despite strong opposition from the patent community. The enhanced rulemaking authority in the Patent Reform Act would allow these limits and significantly reduce the ability of smaller life sciences companies to obtain full patent coverage for their inventions. At an early stage, promising new companies do not have the resources to file claims for every invention disclosed in a patent
application and use continuations to overcome this limitation in resources.

Also, because there is usually a critical window during which an applicant must demonstrate value to prospective investors, there is great pressure to accept quick issuance of narrower claims. The applicant then uses the continuation process to pursue broader protection. Because patents only last 20 years from the earliest filing date, the use of these continuations already comes at a cost for the applicant – a shortened patent life.

The USPTO's stated reason for limiting continuation filings is to reduce backlog. The proper solution to this backlog is to eliminate fee diversion, not filings, thereby allowing the USPTO to apply user fees for the purpose they were provided.

2. Open-ended post-grant oppositions

The second window in the post-grant opposition proceeding will create uncertainty and prohibitive costs for start-up companies. It will also provide an effective vehicle for larger companies to cause smaller companies to spend resources that would have been best used developing the innovative technology. The cost of prosecuting a patent could go from about $20,000 to over $100,000 for even one post-grant opposition period.

Challenges should be limited to re-examination requests. Given the more critical eye being applied by the USPTO's new central re-examination unit, this provides ample opportunity to challenge issued patents.

"Life sciences inventions require years of development, extensive clinical testing and regulatory approval before they can be marketed."

3. An artificial calculation

The proposed reform to apportion damages will also be devastating, as it will artificially reduce the value of patents. The current language looks at all the existing pieces and subtracts those from the total product value for calculating damages.

Even if the patented invention is truly the reason for the sale of an entire product, but from a cost perspective is almost entirely costless to add to the product, the patentee would obtain virtually no royalty. Courts already consider the value of the invention in relation to the product as a whole under the Georgia-Pacific case.

OVERALL IMPACT

Each of these issues creates significant challenges for the life sciences applicant. Taken individually, they make obtaining a patent more complicated and costly. Taken together, they represent dramatic shifts creating incalculable problems for the life sciences community in maintaining essential patent protection for their inventions.

The net effect will reduce the ability to protect innovation and create a chilling effect on the industry. This in turn will result in the public being denied the benefits of life-saving technology that might otherwise have been economically feasible to develop.

The perceived need for these reforms reflects the fundamental difference in business models between industries. Life sciences inventions require years of development, extensive clinical testing and regulatory approval before they can be marketed. In contrast, software, IT and other similar technologies are developed incrementally and commercialised more quickly, with no regulatory delay and frequently much less need for large investment.

Decisions made by the US Supreme Court will seriously affect the rules on patents. The industry believes it is sensible to pause and assess the impact these decisions have not only in controlling any patent abuses, but also ensuring that patents are not so weakened as to stifle innovation.

Any legislation passed today could have negative consequences for medical technology, patient care and fundamental innovations in general. However, Congress must at least address the provisions mentioned to help mitigate the chilling effect on innovation so that medical technology companies continue to attract investment and develop lifesaving products.