Is It Time To Reinvent The Patent System?

In 1990, a little-known inventor named Gilbert P. Hyatt stunned the semiconductor industry when he won a 20-year battle for the patent on the basic microprocessor. On Nov. 6, Hyatt announced a licensing deal with North American Philips Corp., a unit of the Dutch electronics giant. Philips paid Hyatt an undisclosed cash sum in exchange for the rights to his basic microprocessor patent and 22 others. Its expectation: to earn more than $100 million by exploiting Hyatt's patent portfolio for the next 17 years.

It's the kind of Cinderella story Americans love -- the obscure, lone inventor prevailing over industry giants. But Hyatt's tale isn't so clear-cut. It has come to symbolize a patent system that many companies now believe needs to be revamped. Critics charge that the patent system is bogging down in litigation and confusion over patent rights and that it can be marred by long delays in granting patents, such as Hyatt's, that can turn an entire industry on its head.

In the meantime, some U. S. executives worry that foreign competitors are gaining an edge by winning more and more patents, which the companies can then use to try to establish dominance in a world market. "The interest in gaining intellectual property rights is increasing at an unbelievable pace," says James W. Gillman, general patent counsel for Motorola Inc., noting that Japanese companies have sharply increased their patent filings in Japan over the past five years. "We view this as a competitive threat."

'MOCKERY.' Ironically, changes in U. S. patent laws a decade ago are a partial cause for the current situation. Worried about the country's waning technological edge, Congress established the U. S. Court of Appeals for the Federal Circuit to hear all patent appeals. In case after case, the court ruled in favor of patent holders. Other courts began handing out larger damage awards and sometimes shut down competitors with injunctions. This has strengthened the rights of patent holders and made patents -- even marginal ones -- more valuable.

Yet the measures may now be eroding U. S. competitiveness rather than strengthening it. Patent litigation has soared 52% from 1980 to 1990, diverting management's attention from more productive pursuits. Over the same period, the number of patents issued has ballooned by 46% as the pace of innovation quickens and as companies and inventors try to protect their inventions and win potentially lucrative licenses. "There was a time when we used to feel that each patent that was filed did make a contribution," says Robert W. Kastenmeier, former head of the subcommittee of the House Judiciary Committee that extent, this may be based on the idea that in the U. S. a person can claim to be the first inventor." The reason, Schroeder explains, is that the inventor in the U. S. may be tempted to license the patent or to take his time developing a product, knowing the system will support him later. But the first-to-file system spurs innovators to file for patents faster, speeding the progression from idea to finished product.

COSTLY QUESTS. Another reason is that companies may be spending lots of energy just trying to figure out who was first. Many biotech companies are chasing a class of molecules called colony-stimulating factors (CSF) that can increase the count of certain blood cells. Immunex Corp. already has a product called GM-CSF on the market. But because five companies, including Immunex, were working on the same molecules in 1984 and 1985, they have been involved for years in "interference" proceedings at the patent office designed to sort out which inventor was first. "What's happening in biotechnology is that the examiners are incapable of distinguishing between conflicting broad claims," charges Scott Hallquist, Immunex' chief patent counsel. He says the companies have each spent at least $2 million in these proceedings so far.

Legal bills are only part of the expense. Drug companies may be sinking millions of dollars into R&D yet still not know their patent position. Genetics Institute Inc. in Cambridge, Mass., bet heavily on winning a patent war -- and lost. In 1987, GI got a patent on a purified human form of erythropoietin (EPO), a protein that stimulates red-blood-cell production. Later the same year, Amgen Inc. in Thousand Oaks, Calif., got a patent on the genetically engineered version. EPO royalties were going to turn GI profitable in the second quarter this year, ending 11 years of losses. But after a four-year battle, the patent appeals court last spring sided with Amgen. The ruling forced GI to stop making EPO in the U. S. GI's stock plummeted on the news, stalling its ability to raise new capital. In September, GI sold a 60% stake in itself to American Home Products Corp.

Companies with huge patent portfolios are now more aggressive than ever about enforcing them. Since 1986, Texas Instruments Inc. has received $911 million in royalties by going after chip and computer rivals on various fronts. For the past two years, TI has generated more profit on nearly $300 million of royalties from enforcing patents than from its basic business operations.

Companies such as TI are criticized for relying on patent royalties rather than producing new products. "TI would be better off spending its energies fixing their product line," says Wilfred J. Corrigan, CEO of LSI Logic Corp., in Milpitas, Calif., one of five semiconductor makers sued by TI for infringement. TI denies it uses patents as a crutch. "If companies are using our intellectual property for free, certainly they're better off if they can continue to use it for free," says Richard J. Agnich, TI's general counsel. "But we would like them to pay."

UNDERSTAFFED. Some of the blame for the contention and the confusion can be laid at the doorstep of the U. S. Patent & Trademark Office. Since the first patent was awarded 201 years ago, the patent office has granted more than 5 million patents. The office has been plagued with setbacks in its attempt to replace its antiquated shoe-box-sized files with a sophisticated computer system, although recent studies show it is now on track.

Gerald Goldberg, chief of the patent office's computer-related branch, says he could do a better job with more resources. His staff of 185 examiners handles about 10,000 pending patents -- without a comprehensive computer data base. "It's very difficult for us to say if certain software is new or old," he says.

In contrast, the European Patent Office's computerized system verifies instantly if a patent application has been filed for any invention almost anywhere on the Continent. Japan just installed a $1 billion computer system to speed patent filings (box, page 111).

Despite flaws, the U. S. patent system has strong defenders. Many domestic companies favor the first-to-invent system because it gives them an edge. A U. S. patent cannot be rejected or overturned because someone shows up claiming to have invented it first outside the U. S. "The U. S. system is not functioning improperly or ineffectually," says Patent Commissioner Harry F. Manbeck Jr. "We wouldn't make any changes were it not necessary to compromise."

The nature of those compromises is a key part of the drive for patent reform. The World Intellectual Property Organization and trade negotiators are working to "harmonize" the world's patent laws. The U. S. patent office and many American companies now appear willing to switch to first-to-file and end the secrecy of patent applications in exchange for broader protection for new drugs and faster examinations elsewhere.

That would be a good start. Making the world's patent laws more uniform will help companies work in all markets. For the U. S., first-to-file and disclosure will bring more certainty to the patent system and get ideas into the public domain faster. And that may encourage U. S. companies to become more aggressive in developing and marketing products based on their ideas. That's something the Japanese patented years ago.

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