Any Further Reforms Must Be Directed At U.S. Patent Office Operations (Revised)

Much Patent Reform Has Already Taken Place. Any Further Reforms Must Be Directed At U.S. Patent Office Operations (Revised) By Ron D. Katznelson, Ph.D. Presented at The Perfect Storm of Patent Reform? Fenwick & West Lecture Series Inaugural Symposium, UC Davis School of Law November 7, 2008 1

Content Much Patent Reform Has Already Taken Place Many problems identified by legislative reform proponents are best addressed instead by reforms of PTO operations But not by expanding PTO s rulemaking authority powers PTO to focus on its statutory Job Description and not overstep on the domains of Congress and the Courts Improving PTO s operations and core competencies 2

Much Patent Reform Has Already Taken Place The Courts recently made substantive changes in patent law ebay v. MercExchange (May 15 2006) MedImmune v. Genentech (January 9, 2007) KSR v. Teleflex (April 30, 2007) In Re Seagate Technology (Aug 20, 2007) In Re Bilski (October 30, 2008) Others Many problems identified by legislative reform proponents are best addressed instead by reforms of PTO operations Patent Examination Quality Revise performance metrics Management and examiner incentive structures Major examination resource augmentation (possible fee increases) Congress has a role to play Oversight of PTO reforms 3

PTO s measurable organization goals in key operational areas * have long been improperly implemented Pendency Allowance rate Examiner count system Examination Error Rate * 35 U.S.C. 3(b)(2)(B) (Patent Commissioner s annual performance agreement) 4

Average pendency is not one of the express statutory pendency requirements Rather, key statutory pendency goals are 35 U.S.C. 154(b)(1)(A)(i) First Office Action within 14 months 35 U.S.C. 154(b)(1)(B) Patent grant within 3 years Patent term must be adjusted day-for-day of PTO delays PTO s attempts to control average pendency are often detrimental to Congress goals as expressed in 154(b) While average pendency can be a useful descriptor, setting any specific average pendency goal is arbitrary, as it has no direct connection with objective criteria that determine examination queuing stability 5

Average Patent Application Pendency Average Pendency (months) 40.0 35.0 Historical and Projected USPTO Total Patent Application Pendency FY-2009 Budget Plan 30.0 25.0 Actual FY-2008 Budget Plan 20.0 15.0 Surces: USPTO Annual Reports; USPTO FY 2008, 2009 Budget Requests, (UPR) 10.0 1975 1980 1985 1990 1995 2000 2005 2010 Fiscal Year 6

Loading Ratio 1.50 PTO s patent application disposal capability consistently fails to withstand filing rates, even USPTO's patent application disposition capability consistently fails to withstand application filing rates, even by USPTO's own under PTO s Five-Year own Five-Year Targets Targets Actual USPTO FY-08 Strategic Plan 1.25 1.00 Overloaded Unstable System - Stable System - 0.75 0.50 ρ= λ Loading μ c = Ratio = Number of Applications Filed Number of Applications Disposed PTO s management never articulated or set a goal for achieving a stable queuing system 0.25 0.00 Sources: USPTO Annual Reports, UPR applications filed, allowed and abandoned; USPTO FY-2008 Budget Request 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Fiscal Year 7

PTO Pendencies in FY 2007 PTO s reported average pendency for FY-2007 was 31.9 months. This includes issued and abandoned applications. The study below found an average pendency of 38.6 months for issued patents. Pendency for Issued patents is considerably longer than that of other disposals. It is estimated that disposals other than allowances had an average pendency of less than 30 months. 154(b)(1)(B) Pendency Goal Average pendency = 38.6 months Source:Dennis Crouch, Patently-O February 2007, at http://www.patentlyo.com/patent/2007/02/prosecution_dat.html 8

Patent Term Adjustment Due to PTO Delays This is what really matters Fraction of patents with term adjusted by more than T 1 0.1 Ballooning Patent Term Increases Under 35 USC 154(b) Source: USPTO Patent Issue Data at ftp://ftp.uspto.gov/pub/patdata/ April - 2007 Grants 0.01 April - 2005 Grants September - 2008 Grants April - 2003 Grants 0.001 0 1 2 3 4 5 T - Patent Term Increases Due To USPTO Delays (Years) 9

PTO s Distorted Patent Quality Measures Bad Science in Search of Good Patents * * This tag line complements the title and content of my paper: Bad Science in Search of Bad Patents, Federal Circuit Bar Journal, Vol. 17, No, 1, pp.1-30, (2007). Available at http://works.bepress.com/rkatznelson/1. 10

PTO touts its lowering Allowance Rate as indicative of patent quality improvements From: James A. Toupin, IPO Annual meeting, September 21-23, 2008. 11

But is it really? Note the share of disposals at PTO Disposals 100% 90% 80% 70% 60% Allowances, Terminal Abandonments and RCEs RCEs include CPA, Rule 129, File Wrapper CON. Terminal Abandonment is an abandonment not followed by an RCE Actual Application abandonment rate has not changed much Legend 50% 40% 30% 20% 10% 0% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal Year Terminal Abandonments RCEs Allowances Source: USPTO Sources: PTO Annual Reports, PTO data produced in Tafas v. Dudas (2007),. 12

What is the real story with Requests for Continued Examination? (RCE) RCE is applicant s statutory right under 35 U.S.C. 132(b) for reexamination of rejected application when the applicant believes that the (amended) claims do merit allowance 13

PTO s Decreasing Allowance Rate is Mostly an Illusion. Improper Final Rejections Mostly Defer Allowances to RCE Phase Allowance Rate 100% 90% 80% 70% Applications vs. Requests for Continued Examination Allowance Rates Source : USPTO Annual Reports and Tafas v. Dudas (A07087: Applications; A04573: 2+RCEs) Note the anticorrelation, indicating an allowance exchange Second or later RCEs Disposal Chronology T 1 T T 2 Disposal Allowed 100% Allowed RCE Allowance Rate 50% Pendency T T 1 +T 2 2 60% 50% Applications that PTO sought to limit, are applicants safety valves for securing fair reexamination of unsupported or improper rejections Applications 1999 2000 2001 2002 2003 2004 2005 2006 2007 Disposal T 1 Disposal RCE1 T 2 Allowed RCE2 T 3 33% T 1 +T 2 +T 3 3 Fiscal Year 14

The growth of improper/premature final rejections also results in unprecedented growth in appeals Applications 30,000 25,000 Appeals at USPTO and Appeals Reaching the Board of Patent Appeals and Interference Sources : USPTO BPAI Statistics at http://www.uspto.gov/web/offices/dcom/bpai/index.html; USPTO ICR field with OMB, ICR Reference No: 200809-0651-003; USPTO Response to FOIA Request No. No. 06-146. USPTO Pre-Appeal Presentation, John Love at SDIPLA, (June 6, 2007). 20,000 15,000 10,000 Applications for which Pre-Appeal Briefs or Appeal Appeal conference reviews Briefs were filed find examiner errors five times more often than finding the minimal merit to warrant Appeal Briefs sending the appeal to BPAI 5,000 Appeals Reaching BPAI 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal Year 15

PTO s Decreasing Allowance Rate is Mostly an Expensive Illusion. Because the PTO considers a disposal that is followed by an RCE an abandonment, it results in a reported allowance rate that can be manipulated downwards by issuing poorly supported, or premature, final rejections PTO s incentives to transfer substantive examination into induced RCE prosecution are rooted in its metrics: Obtain early freebee disposals disallowing original applications, thereby reduce reported Allowance Rate Reduce reported Average Pendency by adding early disposals Stop the clock of Patent Term Adjustment. RCE prosecution time is excluded from computing PTO delay under 35 U.S.C. 154(b)(1)(B)(i). Generate an additional RCE filing fee revenue Increase examiner Count towards performance quota. Creates incentives to reject meritorious applications Results in increased filings of RCEs and appeals 16

PTO s Distorted Measures Lead to Counterproductive Incentives Allowance Rate should be eliminated as a quality proxy. The incentives it creates in every level of PTO s management hierarchy only detract from patent quality Average Pendency measures have been abused and should be abandoned as operational metrics. Instead, the statutory and operationally more relevant metrics of Patent Term Adjustment measures and Application Loading Factor should be widely adopted Tailor examiners performance metrics and incentives to align them with the patent statute and quality examination Allotment of examination time in proportion to complexity (claim count, disclosure length and number of references in IDS) Abolish the Count system as a sole measure of examiner workload Permit examiners to specialize in their field. More time allowance for professional development and attending industry conferences and trade shows. 17

The Growing Examination Burdens Per Application Average Number of Claims at Filing 24 20 16 12 8 4 0 Number of Claims Filed in Patent Applications USPTO EPO JPO 1980 1984 1988 1992 1996 2000 2004 YEAR Assign examination resources to match complexity Change examiner production quotas and incentives to reflect actual required burden Hire & train more examiners (fee increase) Source: Ron D. Katznelson, Bad Science in Search of Bad Patents, Federal Circuit Bar Journal, Vol. 17, No, 1, pp.1-30, (2007). Available at http://ssrn.com/abstract=1007629 18

First Step of Improvement: Examination On Request (aka Deferred Examination) Used in many counties such as Canada, Japan and in Europe. Applications are not examined automatically - only upon a specific Request For Examination within a set time-period, say 3 years. If no request is filed within that period, the application is deemed abandoned and is never examined. Proposal for the U.S. provides that any third party may trigger examination after publication of the application. This will prevent a patentee from holding off prosecution of a patent that others find problematic and in need of early patentability resolution. From experience of other patent offices, 10% to 40% of applications are never examined under Examination On Request systems Substantial workload reduction due to applicants voluntary abandonment of obsolete claims prior to the Request For Examination deadline. Under current PTO practice, applications that become obsolete, but receive examination by the PTO, are the worst investment the PTO can make because their obsolescence is unlikely to fetch any renewal fees. 19

Moving To Examination On Request or Deferred Examination Can Immediately Save 20% Workload Percentage of Applications Examined by Patent Offices Examination Rate (%) 100 USPTO EPO 80 60 JPO 40 20 0 1995 1997 1999 2001 2003 2005 Request for Examination Expiration Year Source: Trilateral Patent Offices Annual Reports 20

Continuations and Claims Rules 21

PTO s Enjoined* Rules 1. Limits the number of claims that may be examined in a single application to 5 independent or 25 total claims. Required an Examination Support Document (ESD) when the 5/25 limit is exceeded 2. Limits the number of continuations, RCEs and divisionals - ( 2+1 ). Requires a petition and showing to exceed limits 3. Requirements related to co-pending applications and applications containing patentably indistinct claims * Tafas v. Dudas, 541 F.Supp.2d 805 (E.D. Va. 2008) 22

Joint Distribution of Independent and Dependent Claims in U.S. Patent Applications It is estimated that as of 2007, 30% of pending applications had more than 5 independent or more than 25 total claims. Region shown in dotted mesh. Number of Applications per year Source: USPTO, FY-2004 data, Tafas v. Dudas (2007). See also Figure 3 in the cited source of the next slide (#24). 23

Priority Generation in Continuation Applications Applications Filed in FY 2006 1,000,000 100,000 10,000 Continuation chain distribution at USPTO Continuation Rule Limit Large Entity Small Entity Source: Ron D. Katznelson, Defects In The Economic Impact Analysis Provided By The USPTO For Its New Claims And Continuation Rules, (January 10, 2008). At http://works.bepress.com/rkatznelson/16/ 1,000 100 10 Original Application 0 1 2 3 4 5 6 7 8 9 10+ Continuation/CIP Generation at filing 24

Continuations Are Filed At Progressively Higher Rate For The Last 25 Years Applications 1,000,000 Annual Trends in USPTO Utility Patent Applications Doubling every 14 years 100,000 ORIGINAL Doubling every 6.5 years CONTINUATION DIVISIONAL 10,000 CIP 1,000 1980 1985 1990 1995 2000 2005 Fiscal Year Source: Ron D. Katznelson, Patent Continuations, Product Lifecycle Contraction and the Patent Scope Erosion A New Insight Into Patenting Trends, SCIPLA Spring Seminar, Laguna Niguel, CA, (June 8-10, 2007), available at http://ssrn.com/abstract=1001508. 25

Continuations Are Mostly Filed To Better Match Claims To New Products In The Market # per year 1,000,000 Annual Trends in New Product Introductions 100,000 Trademark Applications 10,000 Patent Continuation Applications Doubling every 6.5 years New Product Announcements on PR NewsWire 1,000 1980 1985 1990 1995 2000 2005 Fiscal Year Source: Ron D. Katznelson, Patent Continuations, Product Lifecycle Contraction and the Patent Scope Erosion A New Insight Into Patenting Trends, SCIPLA Spring Seminar, Laguna Niguel, CA, (June 8-10, 2007), available at http://ssrn.com/abstract=1001508. 26

100 80 60 Historical Decline in Duration of Interval Prior to Competitive Entry for Innovations Sources: Consumer and Producers Goods: R. Agarwal & M. Gort, Journal Of Law & Economics 44(1), p. 161 (2001). Generic Pharmaceuticals: J.A. DiMasi & C. Paquette, Pharmacoeconomics, 22, Suppl. 2, pp. 1, (2004). 'Monopoly' Duration (Years) 40 20 10 8 6 4 2 1 Consumer and Producer Goods The monopoly duration is the initial period of a product life cycle. As product life cycle contracts, so does the monopoly duration. 2.9% reduction per year 3.8% reduction per year Horizontal bar span indicates averaging period over which duration estimates were obtained Generic Pharmaceuticals 10.4% reduction per year Hatch- Waxman Act 1880 1900 1920 1940 1960 1980 2000 Innovation Introduction Year 27

Continuations Filing Growth Rate Exceeds That Of Original Applications Because: Historical product life cycle reduction and the exponential growth in new product introductions necessitate new or amended patent claims in progressively growing fraction of inventions. Product lifecycle reduction over time is accompanied with the grant of patents with progressively diminishing claim scope. Patent continuations are essential for applicants who seek to appropriate equivalent returns from their inventions. RCEs became essential for ensuring proper claim coverage 28

Continuations Important Role During The Pendency Of A Prior Application Claiming one s invention need not end at the original filing date Facilitates presentation of claims based on new market, new development and prior art information Enables improved matching of claims scope and content to actual products in the market place Breaths new life in protecting inventions embedded in products under ever-increasing obsolescence rate Continuations are unique to the US patent system 29

US Patents Issued From Continuations, CIPs and Divisions Have Longer Lifetimes Source: K.A. Moore, Worthless Patents, Berkeley Technology Law Journal. 20(4), p.1521, (Fall 2005) (Table 6). 30

Continuations Help Reduce US Patents Lifetime Erosion Compared to That of Other Nations Survival Rate Percent of patents surviving after renewal payments at the JPO by grant era. Source: Tokyo Institute of Intellectual Property (2006). 1980 s Before 1970 1970 s Half-Life Half Life (Years) 15 14 13 USPTO (From grant date) Patent Life From Filing Date (Years) 12 11 10 9 EPO (From application date) JPO (From grant date) Patent lifetime at the USPTO, EPO and JPO. Half-Life is the patent age at which 50% of the patents are not renewed by their owners. Source: Trilateral Patent Offices (2006). 8 1996 1998 2000 2002 2004 2006 Renewal Year 31

Matching the Quid to the Quo of the Patent Bargain The Patent Bargain Useful Life of Disclosure 20th Century Specification 21st Century Specification Useful Life of Right To Exclude Claims Claims Shrinking product lifecycles and accelerated claim obsolescence increasingly require that grants of exclusive rights under the patent bargain be made in installments. These installments are made in grants of Continuations and CIPs. A patent system that would disallow growing use of Cons/CIPs would be doomed to fail its bargaining role in the 21 st century Time Time 32

Conclusions The US patent system is the best in the world. Reforms and congressional oversight must be directed at the PTO. Do not fix that which is not broken in the US patent system. Fix the US Patent Office. 33

Thank You Ron Katznelson ron@bileveltech.com 34