Patents: A New Direction

5 July 2009 (Last Updated July 5th, 2009 18:30)

Copying, counterfeiting and lack of property rights have made the West wary of working with Chinese manufacturers. However, all that could change as legislation becomes more strict and countries work together. Meanwhile, the US and EU are seeing regulatory changes of their own, explains Thomas C Novelli of the MDMA.

Patents: A New Direction

The intricacies and ever-changing dynamics of patent law in emerging medical devices markets have been discussed at length. As device markets become more complex and more innovations are produced, legislative and regulatory systems need to adapt to the changing marketplace in order to preserve and protect one of the most valued commodities for medical device manufacturers: intellectual property. How governments choose to structure these laws and regulations, while in flux, is ultimately indicative of the value placed on intellectual property and, consequently, property rights.

Nevertheless, the adequate protection of intellectual property is critical for the sustained viability of the medical device industry, especially in emerging markets. Device manufacturers have to contend with patent law and intellectual property protection in a developing market; here, the focus is specifically on China. There are also ongoing concerns about potential changes to patent law in already established markets, including the EU and the US.

As emerging markets struggle and attempt to develop and strengthen their patent laws, established markets are paying close attention. This is particularly true of the emerging market in China; a dynamic device marketplace with a rapidly expanding population. China is worthy of observation for several reasons.

First, more established medical device markets, particularly in the US and the EU, view China as a strong growth market. Device companies in these areas look to China as the next platform for expanding their market shares in numerous therapeutic areas. In doing so, they have to contend with loosely monitored patent laws and uncertainty about the protection of their patents. Secondly, and not necessarily mutually exclusive with the first point, device manufacturers are sprouting up in these countries at a rapid pace. There are a unique set of challenges for China in the evolution of its patent law. Accordingly, many established manufacturers in the EU and US also have concerns.

"The adequate protection of intellectual property is critical for the sustained viability of the medical device industry, especially in emerging markets."

While patent laws in China present challenges to device manufacturers, existing and proposed laws in the US and the EU also threaten to challenge patent holders, and perhaps create greater difficulties down the road. The US, for instance, is proposing to make the most significant patent reforms to its system in over 50 years. These proposals not only pose significant challenges for US-based manufacturers, but also provide potential opportunities for device counterfeiters. The effects of these changes and laws are widespread, and can be particularly harmful to small device manufacturers.

China: promising or problematic?

Most foreign manufacturers view the Chinese device market as one with potentially limitless opportunity in the short term. In 2007, it is approximated that the market size of the device market was slightly above $11bn. By 2012, it is expected that this number will increase to over $20bn annually. Recent state initiatives have also increased interest for manufacturers, such as those that have sought to expand healthcare coverage for rural populations in China. This potential had sparked significant interest from investors and manufacturers to expand in the Chinese market.

While this rate of growth is staggering, foreign device manufacturers have tended to precede with caution due to uncertainty in the patent protection laws governing intellectual property in China. For many years China, at least in the view of many developed markets, was viewed as the "wild west" when it came to patent protection. Piracy and counterfeiting, while still present, were practically the norm in some parts of the country.

Foreign device manufacturers attending trade exhibitions would often report of Chinese engineers blatantly "reverse engineering" their product designs. According to some companies, Chinese engineers would attend trade exhibitions and attempt to sketch product designs on scrap paper, often right in front of the exhibitors. Why would such a blatant attempt occur in the first place? Because patent infringers knew that no real remedies existed for patent holders. Moreover, the products could easily be counterfeited and resold at a reduced cost.

While still occurring in some parts of China, this patent problem is less prevalent these days. With the explosion of the Chinese economy, as well as the population, lawmakers have come to the realisation that authentic and necessary changes were needed to garner the respect of the world community. An important first step took place in 2001 with China joining the World Trade Organization. Since then, the government has taken the initiative to crack down on infringement and counterfeit products.

However, challenges still remain, in part related to allegations of unfair practices in the Chinese patent office and the systematic differences between patent systems. For instance, for US-based manufacturers, China is a "first to file" country for patent applications, whereas the US is a "first to invent". Progress has been made but more work is likely needed.

US changes, EU problems

While the China patent system is evolving, most agree that the patent systems in the EU and the US have "evolved". Still, there is criticism of both systems by inventors.

The US finds itself in a potentially monumental place regarding its patent laws. For a few years now, lawmakers have contended with changing the underlying structure of US patent laws; a body of law that has not been dramatically altered in over 50 years. Like all dramatic change, stakeholders, especially device manufacturers, are preparing for potentially devastating consequences.

The Patent Reform Act of 2009 is under review by the United States Congress. One potentially consequential provision relates to awarding of damages in infringement cases. In short, the proposal seeks to dramatically modify how damages are awarded in patent infringement cases. In this proposed scheme, damages would be assessed based on only the incremental value of the patent and not the total economic value that an innovator's patent could bring to an existing patent and/or product.

This rationale to drastically modify how damages are awarded in infringement cases is based on the assumption that the current methodology allows for disproportionate and frivolous awards. These highly publicised awards in favour of companies that are not even commercialising technology are not the norm, but are cited by those in support of the modifications. In reality, the median patent award is 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. Over 97% of patent cases settle before trial, presumably at even lower values.

"The US is proposing to make the most significant patent reforms in over 50 years."

A second costly provision in the legislation deals with the post-grant review process. Post-grant review allows parties to challenge the validity of a patent after it has been granted. The initial language in the Patent Reform Act also does not adequately address this issue in the patent process. The post-grant review provisions create an open-ended process to unjustifiably challenge patent validity. It becomes a vehicle for large, well-financed competitors to quash competition by subjecting smaller companies, many with disruptive technologies, to a continuous challenge of the validity of a patent after it has been granted.

Large competitors possess enough resources to sustain a legal challenge without end. In such cases, a smaller patent holder does usually stand a chance to sustain such a challenge.

The post-grant review process in the EU is also especially problematic. Smaller companies often complain of the open-ended process in the EU patent system and the serial challenges by larger, better financed competitors. In the end, it is not always innovation that prevails.

Proceed with caution

Innovation in the medical device industry will continue to remain vibrant as long as innovators, and investors, have a reasonable and adequate assurance that their intellectual property will be protected by law. As many have experienced in China, a weak patent system lends itself to significant level of product counterfeiting and fraud.

Device manufacturers are left to contemplate whether the benefits of investing and commercialising in the Chinese market are worth the risks. The answer will likely be yes, but most will proceed cautiously.

Proposed changes in the US also seek to change the intellectual property landscape. While device companies face patent issues like an open-ended post-grant review system in the EU, they are hoping that the US does not employ a similar approach. Moreover, they want to ensure that the system does not make it easier and cheaper to infringe on their patents.