Several conclusions and recommendations on software patent reform published in the FTC's recent report seek to restore a proper balance of interests between competition and current patent policy. The 315-page report summarizes the results of extensive Hearings held by the US Federal Trade Commission and the DOJ during 2002. "The Hearings took place over 24 days, and involved more than 300 panelists, including business representatives from large and small firms, and the independent inventor community; leading patent and antitrust organizations; leading antitrust and patent practitioners; and leading scholars in economics and antitrust and patent law. In addition, the FTC received about 100 written submissions."

The FTC report observes that questionable patents can deter or raise the costs of innovation, and that in industries with incremental innovation such as computer hardware and software, questionable patents can increase 'defensive patenting' and licensing complications, "creating a 'patent thicket' of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology."

The FTC recommends the creation of a new administrative procedure "that will make it easier for firms to challenge a patent's validity at the US Patent and Trademark Office (PTO), without having to raise an expensive and time-consuming federal court challenge. It also recommends allowing courts to find patents invalid based on the mere preponderance of the evidence, without having to find that clear and convincing evidence compels that result. The current standard of 'clear and convincing evidence' undermines courts' ability to weed out questionable patents. This is especially troubling, since certain PTO procedures and rules tend to favor the issuance of patents. The FTC recommends tightening certain legal standards used to evaluate whether a patent is 'obvious'. In appropriate circumstances, the FTC will ask the PTO Director to reexamine questionable patents that raise competitive concerns."

Bibliographic Information

• Executive Summary: To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy. October 2003. 18 pages. "This report by the Federal Trade Commission (FTC) discusses and makes recommendations for the patent system to maintain a proper balance with competition law and policy. A second joint report (forthcoming), by the FTC and the Antitrust Division of the Department of Justice (DOJ), will discuss and make recommendations for antitrust to maintain a proper balance with the patent system..."

• To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy. A Report by the Federal Trade Commission. October 2003. 315 pages. Appendices: Appendix A - Contributors to FTC/DOJ Hearings; Appendix B - Public Comments; Appendix C - Glossary of Patent Terms; Appendix D - Selected Federal Statutes. Contributions from: Susan S. DeSanti (Deputy General Counsel for Policy Studies, Office of the General Counsel), William E. Cohen (Assistant General Counsel for Policy Studies, Office of the General Counsel), Gail F. Levine (Deputy Assistant General Counsel for Policy Studies, Office of the General Counsel), Hillary J. Greene (Project Director for Intellectual Property, Office of the General Counsel), Matthew Bye (Attorney, Policy Studies, Office of General Counsel), Michael S. Wroblewski (Assistant General Counsel for Policy Studies, Office of the General Counsel), Robin Moore (formerly Attorney, Policy Studies, Office of General Counsel), Michael Barnett (formerly Attorney, Policy Studies, Office of General Counsel), Nicole Gorham (Legal Assistant, Policy Studies, Office of General Counsel), Cecile Kohrs (Legal Assistant, Policy Studies, Office of General Counsel), David Scheffman (formerly Director, Bureau of Economics), Mark Frankena (Associate Director for Competition Analysis, Bureau of Economics), Roy Levy (Economist, Economic Policy Analysis, Bureau of Economics), Alden F. Abbott (Assistant Director for Policy and Evaluation, Bureau of Competition), Suzanne Michel (Special Counsel for Intellectual Property, Bureau of Competition), Paige Pidano (formerly Legal Assistant, Bureau of Competition), Karina Lubell (formerly Legal Assistant, Bureau of Competition)

Background to the Federal Trade Commission Report

The Executive Summary document references the FTC/DOJ Hearings which examined the 'Balance of Competition and Patent Law and Policy.'

"To examine the current balance of competition and patent law and policy, the FTC and the DOJ held Hearings from February through November 2002. The Hearings took place over 24 days, and involved more than 300 panelists, including business representatives from large and small firms, and the independent inventor community; leading patent and antitrust organizations; leading antitrust and patent practitioners; and leading scholars in economics and antitrust and patent law. In addition, the FTC received about 100 written submissions. Business representatives were mostly from high-tech industries: pharmaceuticals, biotechnology, computer hardware and software, and the Internet. This report discusses Hearings testimony and independent research, and explains the Commission's conclusions about and recommendations for the patent system..."

FTC Report Conclusions

The report published by the Federal Trade Commission presented four principal conclusions, summarized here.

• Modifications Are Needed: The Report concludes that "although most of the patent system works well, some modifications are needed to maintain a proper balance of competition and patent law and policy."

  Through testimony delivered in the hearings, "many participants in and observers of the patent system expressed significant concerns that, in some ways, the patent system is out of balance with competition policy. Poor patent quality and legal standards and procedures that inadvertently may have anticompetitive effects can cause unwarranted market power and can unjustifiably increase costs. Such effects can hamper competition that otherwise would stimulate innovation. This report makes several recommendations for the legal standards, procedures, and institutions of the patent system to address such concerns..."

• Questionable Patents Harm Innovation: "A poor quality or questionable patent is one that is likely invalid or contains claims that are likely overly broad. Hearings participants raised concerns about the number of questionable patents issued."

  • Questionable patents can deter or raise the costs of innovation. "One firm's questionable patent may lead its competitor to forgo R&D in the areas that the patent improperly covers. For example, firms in the biotech industry reported that they avoid infringing questionable patents and therefore will refrain from entering or continuing with a particular field of research that such patents appear to cover. Such effects deter market entry and follow-on innovation by competitors and increase the potential for the holder of a questionable patent to suppress competition..."

  • In industries with incremental innovation, questionable patents can increase 'defensive patenting' and licensing complications.

    "In some industries, such as computer hardware and software, firms can require access to dozens, hundreds, or even thousands of patents to produce just one commercial product. One industry representative from a computer hardware firm reported that more than '90,000 patents generally related to microprocessors are held by more than 10,000 parties.' Many of these patents overlap, with each patent blocking several others. This tends to create a 'patent thicket' -- that is, a 'dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology.'

    "Much of this thicket of overlapping patent rights results from the nature of the technology; computer hardware and software contain an incredibly large number of incremental innovations. Moreover, as more and more patents issue on incremental inventions, firms seek more and more patents to have enough bargaining chips to obtain access to others' overlapping patents. One panelist asserted that the time and money his software company spends on creating and filing these so-called defensive patents, which 'have no [...] innovative value in and of themselves,' could have been better spent on developing new technologies..."

  • Recommendations [are needed/supplied] to improve patent quality and minimize anticompetitive costs of the patent system. "The FTC's recommendations focus first on procedures and presumptions used in challenging questionable patents, because such challenges are more likely to involve patents of competitive significance..."

• Other Concerns about Patent Laws and Procedures: The Report concluded that "in addition to questionable patents, other portions of the patent system (patent laws and procedures) raise competitive concerns..."

• FTC Role in Improving Communication: The Report stated a determination that "the FTC will pursue steps to increase communication between antitrust agencies and patent institutions."

  • The FTC Will increase its competition advocacy role through filing amicus briefs in appropriate circumstances. The Commission will renew its commitment to the filing of amicus briefs in important patent cases that can affect competition, as well as in cases at the intersection of patent and antitrust law. When such cases have high stakes for the public, the Commission can serve the public interest by filing amicus briefs to present its perspectives regarding the implications of certain issues for consumer welfare.

  • In appropriate circumstances, the FTC will ask the PTO Director to reexamine questionable patents that raise competitive concerns. A collective action problem may frustrate business challenges to questionable patents. Instead of challenging a patent's validity, many firms may simply license it, because no single firm has the incentive to finance an expensive legal challenge that would benefit all of the affected firms, not just the challenger. An enforcement agency, however, can consider the cost of a questionable patent to an entire industry and to consumers and can solve this coordination problem. In appropriately narrow circumstances, the FTC will do so.

  • The FTC will encourage increased communication between patent institutions and the antitrust agencies. More patents in more industries and with greater breadth are not always the best ways to maximize consumer welfare. A questionable patent can raise costs and prevent competition and innovation that otherwise would benefit consumers. The FTC looks forward to working closely with the PTO and other patent organizations to increase communication and include all parties in discussion and implementation of the FTC's recommendations.

FTC Report Recommendations

1. As the PTO recommends, enact legislation to create a new administrative procedure to allow post-grant review of and opposition to patents. "The FTC recommends an administrative procedure for post-grant review and opposition that allows for meaningful challenges to patent validity short of federal court litigation. To be meaningful, the post-grant review should be allowed to address important patentability issues... An administrative patent judge should preside over the proceeding, which should allow cross-examination and carefully circumscribed discovery, and which should be subject to a time limit and the use of appropriate sanctions authority..."
2. Enact legislation to specify that challenges to the validity of a patent are to be determined based on a 'Preponderance of the Evidence'. "An issued patent is presumed valid. Courts require a firm that challenges a patent to prove its invalidity by 'clear and convincing evidence.' This standard appears unjustified. A plethora of presumptions and procedures tip the scales in favor of the ultimate issuance of a patent, once an application is filed... These circumstances suggest that an overly strong presumption of a patent's validity is inappropriate. Rather, courts should require only a 'preponderance of the evidence' to rebut the presumption of validity.
3. Tighten certain legal standards used to evaluate whether a patent is 'obvious'.
4. Provide adequate funding for the PTO.
5. Modify certain PTO rules and implement portions of the PTO's 21st Century Strategic Plan:
   • Amend PTO regulations to require that, upon the request of the examiner, applicants submit statements of relevance regarding their prior art references.
   • Encourage the use of examiner inquiries under Rule 105 to obtain more complete information, and reformulate Rule 105 to permit reasonable followup.
   • Implement the PTO's recommendation in its 21st Century Strategic Plan that it expand its 'second-pair-of-eyes' review to selected areas.
   • Continue to implement the recognition that the PTO 'forges a balance between the public's interest in intellectual property and each customer's interest in his/her patent and trademark.'
6. Consider possible harm to competition -- along with other possible benefits and costs -- before extending the scope of patentable subject matter.
7. Enact legislation to require publication of all patent applications 18 months after filing.
8. Enact legislation to create intervening or prior user rights to protect parties from infringement allegations that rely on certain patent claims first introduced in a continuing or other similar application.
9. Enact legislation to require, as a predicate for liability for willful infringement, either actual, written notice of infringement from the patentee, or deliberate copying of the patentee's invention, knowing it to be patented.
10. Expand consideration of economic learning and competition policy concerns in patent law decisionmaking.

Subjects Covered in the FTC Hearings

The full schedule is listed on the main index page. A summary:

• Day 1: Welcoming Comments and Keynote Addresses (February 6th, 2002)
• Day 2: Foundational Issues in Patents and Antitrust (February 8th, 2002, 2 concurrent sessions)
• Day 3: Economic Perspectives on Intellectual Property, Competition and Innovation (February 20th, 2002, 2 consecutive sessions)
• Day 4-7: Economic Perspectives and Real-World Experiences with Patents
  • Day 4: Economic Perspectives on Intellectual Property, Competition, and Innovation (February 25th, 2002)
  • Day 5: Economic Perspectives on Intellectual Property, Competition, and Innovation (February 26th, 2002, 2 consecutive sessions)
  • Day 6: Business Perspectives on Patents: Software and the Internet (February 27th, 2002, 2 consecutive sessions)
  • Day 7: Economic and Other Perspectives on Patent Standards and Procedures (February 28th, 2002, 2 consecutive sessions)
• Day 8-9: Business and Other Perspectives on Real-World Experience with Patents (March 19th-20th, 2002)
• Day 10-12: Economic and Other Perspectives on Patent Standards and Procedures (April 9th-11th, 2002)
• Day 13: Patent Pools and Cross-Licensing: When Do They Promote or Harm Competition? (April 17th, 2002)
• Day 14: Standard-Setting Practices: Competition, Innovation and Consumer Welfare (April 18th, 2002)
• Day 15: The Strategic Use of Licensing: Is There Cause for Concern about Unilateral Refusals to Deal?
• Day 16: A Competition View of Patent Settlements (May 2nd, 2002)
• Day 17: Antitrust Analysis of Licensing Practices (May 14th, 2002)
• Day 18-19: An International Comparative Law Perspective on the Relationship Between Competition and Intellectual Property (May 22nd - 23rd, 2002)
• Day 20-21: Trends in Federal Circuit Jurisprudence (July 10th - 11th, 2002)
• Day 22: Competition, Economic, and Business Perspectives on Patent Quality and Institutional Issues: Competitive Concerns, Prior Art, Post-Grant Review, and Litigation (October 25th, 2002)
• Day 23: Competition, Economic, and Business Perspectives on Substantive Patent Law Issues: Non-Obviousness and Other Patentability Criteria (October 30th, 2002)
• Day 24: Antitrust Law and Patent Landscapes (November 6th, 2002)

Related: November 2003 Update on the Eolas '906 Browser Patent

In October 2003, Tim Berners-Lee (Director, World Wide Web Consortium) sent a letter to the Director of the United States Patent and Trademark Office (James E. Rogan, Under Secretary of Commerce for Intellectual Property) appealing for a "reexamination of the '906 patent in order to prevent substantial economic and technical damage to the operation of World Wide Web." The '906 patent granted by the USPTO to the University of California is described as applicable to Java applets, browser plug-ins, ActiveX components, Macromedia Flash, Windows Media Player, and related "embedded program objects." See details in the two news stories: (1) "W3C Presents Prior Art Filing to USPTO and Urges Removal of Eolas Patent" and (2) "W3C Opens Public Discussion Forum on US Patent 5,838,906 and Eolas v. Microsoft."

In a November 11, 2003 weblog "PTO Director Orders Re-Exam for '906 Patent" by Dale Dougherty [O'Reilly Developer Weblogs], it was reported:

"In what could be good news for the Web, the Director of the US Patent and Trademark Office has ordered a re-examination of the '906 patent, which was the subject of a patent infringement lawsuit this summer brought by Eolas against Microsoft. Apparently, the PTO responded to the W3C's request for re-examination, saying 'a substantial outcry from a widespread segment of the affected industry has essentially raised a question of patentability.' This order, issued on October 30, 2003 reviewed the claims and declared that the prior art introduced by Berners-Lee and Raggett raised 'a substantial new question of patentabity.' The order, signed by Steve Kunin, Deputy Commissioner of the US PTO, called for a reexamination of all claims relating to the '906 patent. A patent lawyer that I spoke to said that the quick response by the PTO was unusual, and he thought it was a good sign. He said that the order seemed to give a clear indication of support for the claims against the patent. We'll now have to wait for a patent examiner to examine the evidence in more detail and rule on the patent..."