BIO's testimony on patent reform to maximize innovation in the biotechnology industry

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:

1. when a delay is not within the control of the patent applicant, the applicant does not see patent term erosion;
2. 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;
3. 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;
4. 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
5. 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.